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Week in Review: May 27, 2017

Sat, 27/05/2017 - 04:00
By: Mises Institute
Week in Review image

The Trump administration released its 2018 budget this week. Once again we saw the media try to play up decreases in proposed spending as a form of draconian cuts, ignoring the fact that Trump's plan still reflects a significant increase in federal programs. Rather than trying to decentralize America's bloated welfare state, the Trump budget would continue to pile up debt and the ever growing problem of unfunded liabilities. 

While Washington will eventually have to face the consequences of ignoring the laws of economics, there is still reason for optimism. While there may not be political solutions to the problems facing the world, they can still be found in the market.

On Mises Weekends, Jeff is joined by Patrick Newman, a Mises Institute scholar, professor at Florida Gulf Coast University, and the editor of a Rothbard manuscript dating to the 1970s entitled Roots of the Modern State, which we will release as a book later this year. Jeff and Patrick discuss Rotbhard's views on the progressive era and how it shaped America, including the puritanical impulses of leaders such as Wilson, Taft, and the Roosevelts, as well as the self-interested motivations behind the then-burgeoning intellectual-business partnership. Tune in for a great conversation about Rothbard's unique analysis of this critical time in US history.

Dr. Newman will be speaking about the new Rothbard book at our 35th Anniversary Celebration! Other speakers include Judge Andrew P. Napolitano, Hans-Hermann Hoppe, David Stockman, Guido Hülsmann, Tom Woods, and many others.

You won't want to miss it! Register today.

And in case you missed them, here are this weeks Mises Wire articles, covering a wide array of topics including libertarianism, the cult of collectivism, what is the source of real wealth, the eye-care industry wants a monopoly, bitcoin, and the Trump budget.

Categories: Current Affairs

How Not to Study the State

Sat, 27/05/2017 - 04:00
By: Jacob A. Miller

My most memorable high school experience occurred on the first day of my senior year. I was sitting in an Advanced Placement US Government class when the teacher posed a simple question to the students. It was a question intended to set the course in motion, and get us fledgling statecraft scholars thinking.

The question was, “what is government?”

My hand was in the air before he completed the sentence. (I had prepared an answer in anticipation of the course.) Holding on to my holster full of knowledge garnered from my proudly self-described “intellectually avant-garde” internet musings, I said, “Governments (i.e., states in this case) are those organizations that have monopolized the use of force over any given geographical region.”

I then felt embarrassment as my passionate answer was struck down by laughter from the class. My teacher looked down at the floor, unsure how to respond. He had obviously never heard such an answer before, and recovered by reverting back to his conventional train of thought and answering the question as he had been conditioned to: “Governments” he said, “are simply those institutions that make policy.”

I do not remember what he said next. Though I do remember what I was thinking, or rather, what I was feeling.

And I was feeling frustrated and unsatisfied.

My teacher was wrong; the class was wrong. Indeed, I felt my answer was more than appropriate; or, at least more appropriate than the “correct” response — according to the teacher — which was simply: “Government makes policy.” This didn’t answer the underlying question about the nature of government, but specified a function of government. In fact, my teacher was failing to follow the traditional guidelines of credible civics educators around the world. My definition was not extrapolated from some strange corner of the internet, but from famous sociologist Max Weber’s book, Politics as a Vocation. In the book, Weber discussed the concept that states are no different than regular organizations — people coming together with a common goal. But what sets states apart is their assertion of a “monopoly on violence.”

RELATED: "Theories of the State" by Franz Oppenheimer

It is unclear whether that classroom incident was a failure on the part of the teacher or the course itself. However, upon examining the course syllabus (as well as the syllabus for the sister class, “AP Comparative Politics”) on the college board website, it becomes evident that there is no mention of the “definition of government” (only definitions of more basic topics such as the “study of government” and “democracy” and “federalism”), and the only mention of Max Weber is his views on bureaucracy.

In reality, the AP program was designed to give high school students a chance to earn college credits, and therefore, this was designed as a college course by college educators! Therefore, it is likely that this problem extends to entry level college civics courses. Additionally, most high school students will never take an AP government course, or any political science course for that matter. These factors contribute to a population that is ignorant about the nature of states, and their relationship to each person who is subject to the state’s monopoly power. 

Thus, discussions concerning the fundamentals of governments are largely nonexistent. When the topic indeed arises among students who take a critical view, such views are stigmatized — labeled as “deviant thinking.” If we really want to allow our students to think critically about those who have authority over them, the intellectually lazy approach that is currently taken in government classes (namely, AP government courses) must end now. 

Categories: Current Affairs

The Eye-Care Industry Wants Big Government to Crush the Competition

Sat, 27/05/2017 - 04:00
By: Jonathan Lee

Big Eye is watching you. For more than a decade, lobbyists from Johnson & Johnson (J&J), which controls over 40 percent of the contact lens market as a result of their cozy relationship with optometrists, and the American Optometric Association (AOA), which represents nearly 40,000 optometrists nationwide, have been fighting to create an artificial monopoly in the eye care industry. By inundating bureaucrats with large pieces of state and federal legislation, AOA and J&J hope to eliminate competition through regulatory capture.

Eye care professionals are unique in that they are some of the only professionals that sell what they also prescribe. In truth, optometry — unlike ophthalmology, which is composed of true medical doctors — is a dying industry. Most optometrists cannot do much other than measure prescription strength and fit lenses. They sell lenses in their shops and rely on those sales — and the kickbacks they receive from the big lens brands — as a means of keeping their shops open.

For years, J&J and the AOA have been trying to pass federal legislation called the Contact Lens Consumer Health Protection Act (CLCHPA), better known as “the Cassidy Bill,” which would essentially allow eye-care professionals to block contact lens sales from any third-party vendors that pose a market share risk. But this bill has failed miserably and has failed to be called for a roll call vote.

Now in their attempts to eliminate competition, Big Eye has moved on to target the fields of telehealth and telemedicine — online and digital forms of prescription-making that have radically changed how individuals access their doctors. Twenty-first century smartphone and tablet apps like Opternative allow consumers to measure their prescription strength from the comfort of their own homes, where a board-certified ophthalmologist then signs off on it to close the deal. Thanks to this technology, consumers now only have to go to the brick-and-mortar eye office once every two years for a comprehensive eye health exam rather than every single time a lens refill is needed.

Of course, Big Eye is afraid that this new technology will take away their customers, so they are doing everything in their power to get it outlawed.

Although these lobbyists have been fighting a losing battle thus far, they are certainly not giving up. Recently, Big Eye entered Connecticut and Rhode Island, trying to pass pieces of legislation that would corner the market by eliminating access to telemedicine. Led by Rep. Kevin Ryan in Connecticut and Sen. Frank Ciccone/Rep. Rob Jacquard in Rhode Island, the bills — one of which passed the House in Rhode Island — use tricky language. These bills argue that telehealth is a “dangerous” technology, and state governments should regulate the market in order to “protect” customers.

Yet there has been no evidence of telehealth’s danger. To say that apps like Opternative is not safe, is like saying that taxis are safer that Ubers. Big Eye is making an argument with smoke and mirrors, using the fear of “new” as the only reason to prevent innovative technology from entering the market.

Instead of fearing the new, legislators should look at telehealth with Uber in context. After Uber entered the market there was an incredible reduction of transportation costs and increase in the supply of available taxis and drivers. Additionally, Uber paved the way for competition in an industry where taxi companies controlled the market through federally created monopolies.

As Christopher Koopman, Matthew D. Mitchell, and Adam D. Thierer, of the Mercatus Center at George Mason University, argue in their paper “The Sharing Economy and Consumer Protection Regulation: The Case for Policy Change,” “[e]ven well-intentioned policies must be judged against real world evidence. … Markets, competition, reputational systems, and ongoing innovation often solve problems better than regulation when we give them a chance to.” In their paper, these economists make a clear argument that regulation is often led by lobbyist groups, like AOA and J&J, in order to create artificial monopolies.

Thankfully, states like South Carolina, New Mexico, and Nevada, have made great steps to protecting the free market in this regard. After vetoing a bill that would prohibit the use of ocular telemedicine, South Carolina governor Nikki Haley said that the bill “uses health practice mandates to stifle competition for the benefit of a single industry … putting us on the leading edge of protectionism, not innovation.”

Similarly, governor of New Mexico, Susana Martinez, explained that HB 364, a bill that would impose jail time on physicians who tried to utilize consumer-based technology, was anti-competitive, and described that “we should explore new technologies and opportunities to expand the availability of services, not prohibit them.”

Even with these successes, governments and policymakers must be adamant in the defense of these fledgling industries. The healthcare lobby will not back down on its fight in Rhode Island, Connecticut, and any other state they may get their hands on. Spending nearly $2 million dollars a year, AOA and J&J have high hopes to control the industry.

Koopman, Mitchell, and Thierer describe this spending as socially costly because it “encourages firms to expend vast amounts of resources — time, money, and effort — to influence regulators…[r]ather than keeping a focus on devising new and innovative ways to create value, entrepreneurs turn their efforts toward devising new ways to acquire these regulatory privileges.” Companies should be focusing on creating good products instead of spending millions to make crony friends.

Legislators need to take note: not only to prevent Big Eye, AOA and J&J from getting their way, but to provide a precedent and standard for future legislation. Feckless legislation prevents innovation. Fearful policymakers feed government-created monopolies. The market has an incredible ability to solve problems, reduce prices, and benefit consumers.

Telehealth is the first step toward a revolutionized future of eye care and health. Big Eye is losing its fight, and will continue to lose its fight as long our representatives stand for the free market and innovation.

Categories: Current Affairs

Patrick Newman: Rothbard vs. The Progressive Era

Fri, 26/05/2017 - 21:00
By: Patrick Newman, Jeff Deist
Patrick Newman on Mises Weekends

More than 20 years after his death, Murray Rothbard continues to publish new books! Our guest Patrick Newman is the editor of a Rothbard manuscript dating to the 1970s entitled Roots of the Modern State, which the Mises Institute will release as a book later this year.

Rothbard's topic is the Progressive Era of the late 19th and early 20th centuries, and he doesn't disappoint. Murray exposes the puritanical impulses of the Roosevelts, Tafts, and Wilsons, along with the self-interested motivations behind the then-burgeoning intellectual-business partnership. Altar and throne, the power centers of previous ages, were replaced by a technocratic elite and the veneer of democracy. Scientism replaced religion, libertarian self-reliance fell to public schooling and labor unions, and statism replaced (relative) laissez-faire.

If you want to understand the roots of modern progressivism, and how the West went wrong, you need to read this book. Professor Patrick Newman, a Mises Institute scholar and assistant professor at Florida Gulf Coast University, joins us to discuss Rothbard's unique analysis of this critical time in US history.

Categories: Current Affairs

Federal Bureaucrat to the Public: Be Afraid!

Fri, 26/05/2017 - 20:00
By: Ryan McMaken

States have always thrived on the fear of the taxpayers, and states have always justified their existence in part on the idea that without the state, we'd all be overrun by barbarians, or murdered by our neighbors. Charles Tilly, a historian of the state, frequently noted that the modern state as we know it, was born out of war, and was created to wage war. War and the state are inseparable. 

Moreover, support for the state is so central to maintaining continued funding and deference to the state's monopoly power, that Randolph Bourne famously went so far as to say that "war is the health of the state."  

By extension, agents of the state — whether elected officials or bureaucrats — fancy themselves as guardians of prosperity and civilization. Without them, they apparently believe, life would be barely worth living. 

Thus, one should hardly be surprised when government bureaucrats spread fear as a means of self-promotion. 

Keeping this tradition alive is Department of Homeland Security John Kelly who recently claimed that people would "never leave the house" if they "knew what I know about terrorism." 

This, incidentally, introduces a new variation on the time-worn they're-coming-to-get-us propaganda that the state has relied on for centuries. Nowadays, we're not even allowed to know what the threat is.

"It's a secret, so just trust us." is the refrain. "They're coming to kill us. We swear it's true."

Kelly then punctuated his comments with an advertisement for the federal government, concluding  

The good news is, for us in America, we have amazing people protecting us every day, DHS, obviously, FBI, fighting the away game is DOD Department of Defense, CIA, NSA, working with these incredible allies we have in Europe and around the world.

What counts as "protecting us every day," is apparently a bit different for Kelly than for more astute observers. 

James Bovard recently described how the FBI has been doing such a great job keeping us safe: 

Before the 9/11 attacks, the FBI dismally failed to connect the dots on suspicious foreigners engaged in domestic aviation training. Though Congress had deluged the FBI with $1.7 billion to upgrade its computers, many FBI agents had old machines incapable of searching the Web or emailing photos. One FBI agent observed that the bureau ethos is that "real men don’t type. ... The computer revolution just passed us by."

The FBI’s pre-9/11 blunders "contributed to the United States becoming, in effect, a sanctuary for radical terrorists," according to a 2002 congressional investigation. (The FBI also lost track of a key informant at the heart of the cabal that detonated a truck bomb beneath the World Trade Center in 1993.)

"Everyone makes mistakes!" Might be what the FBI's-backers claim. True enough. But few organizations get paid 8 billion dollars per year of the taxpayers' money to not stop terrorists.

So, it's unclear what Kelly is referring to in how we'd all be dead were it not for federal agents. 

Perhaps he's referring to the CIA. The same CIA that planned the disastrous Bay of Pigs invasion, and then spent decades paying spies to report on how the Soviet economy is growing impressively, estimating the Soviet economy to be three times the size of what it actually was. The implication, of course, was that the USSR was a powerhouse that could defeat the US in an arms race. 

One can guess what CIA agents were saying at the time: "If you knew what we know about the Soviet economy, you'd never leave the house!" 

RELATED: "The CIA Has Always Been Incompetent"

Kelly also refers to the NSA. This is the same NSA that allowed Edward Snowden to walk off with countless numbers of their own top-secret documents. And its lack of control over its own information enabled this month's malware attack that infected computers in 99 countries. The attack was not stopped by the NSA, of course. 

These are those "amazing people" that keep us safe, according to Kelly.

And then there's the Department of Defense. The centerpiece of a military establishment that hasn't won a major conflict since 1945. The "victory" in Iraq in 1991 wasn't even complete enough to end the economic sanctions imposed on Iraq, however. Those persisted until 2003. 12 years after the first "victory" the US then attacked Iraq again, thus promoting the spread of Islamic extremism and causing a civil war that led to the near-destruction of Iraq's few remaining Christian communities. 

"Before the United States invaded Iraq, Al Qa’ida was on the ropes..." the Brookings institution concluded in 2007. "The invasion of Iraq breathed new life into the organization."

Fortunately for us, the US's most implacable enemy today is ISIS, which has no air force, no navy, and is composed largely of depressed outsiders whose deadliest weapons outside of Iraq and Syria are delivery trucks. 

Of course, it doesn't take an army, or an FBI, or a CIA to stop crazies from driving trucks into crowds on Bastille day, as one did in 2016. It requires that police keep unauthorized trucks off pedestrian malls during festivals. 

Nor are secret police required to keep people from carrying bombs into crowded theaters. Competent security guards can do the trick. The same might be said of maniacs carrying semi-automatic rifles into night clubs

But of course Kelly would likely claim that the government is preventing far greater attacks than these. He just can't tell us what any of them might be, or give any details at all. 

Nevermind, of course, that in situations like this, the burden of proof is always on the government agency that  wants more tax dollars and more power to keep doing what they're doing. The claim of necessary secrecy offers a convenient excuse from having to provide an evidence at all. 

But, there's always enough violence and mayhem in the world to try to convince people that the world is falling apart. Although the chances of being murdered in an American city are at a 50-year low (unless you're in certain neighborhoods of Chicago and Baltimore) many Americans believe crime is worse than ever. Pew has noted that at the homicide rate was cut in half over the past 20 years, Americans persist in the idea that crime is getting worse. 

Moreover, under the Obama administration, the feds claimed that mass-shootings were sweeping the country. In fact, the odds of dying in a mass shooting are so low that they might as well be zero. 

The hysteria over shootings, however, was a convenient justification for the federal government's ongoing attempts to regulate firearms. 

"If you knew what I know about gun violence" Obama might have said. "you'd never leave the house!" 

Creative arithmetic is also being used to justify public fear over terrorism. Kelly's comments invoked this week's massacre in Manchester where 22 people (not including the attacker) were killed. But, if you're worrying about homicides in England, you'd might want to look to street crime instead. After all, in England and Wales, homicides increased by 121 (21 percent) from 2015 to 2016, largely fueled by stabbings and shootings of the traditional variety. 

Unfortunately, many Americans have been trained to believe whatever they're told by higher authorities. The specifics vary according to one's politics. Leftists appear ready to believe whatever some federal bureaucrat says about global warming — provided it fits into the leftwing narrative. 

Rightwingers are primed to believe whatever some government agents says that confirms their narrative about national security.

To illustrate the skepticism one should bring to comments such as those made by Kelly, let's use the same format, and apply it to claims that might be made from across the ideological spectrum:

"If you knew what I know about the state of our lakes and rivers, you'd never drink any water!" said the director of the EPA...

"If you knew what I know about our economy, you'd never trust private industry!" said Senator Elizabeth Warren... 

"If you knew what I know about kidnappings, you'd never let your children out of your sight!" said FBI director... 

"If you knew what I know about global warming, you'd never drive a car again!" said President...

And so on. 

When confronted with a blanket claim that it's obvious to those "in the know" that hysterical fear is warranted, we might be inclined to demand more convincing evidence. But, if what is said just supports our existing biases, then no evidence necessary. The self-serving opinion of a government bureaucrat is all that's required. 

Categories: Current Affairs

What Keeps James Bullard Up at Night

Fri, 26/05/2017 - 11:45
By: C.Jay Engel
Screen Shot 2017-05-25 at 10.48.32 PM.png

I hate to be the bearer of bad news before a three day weekend, but St. Louis Fed President James Bullard informs us that "U.S. prices are now 4.6 percent below the price level path established from 1995 to 2012, when inflation was growing near the Fed's target of 2 percent each year."

This lower than expected price level is deeply "worrisome," for Bullard. 

The delight that the average main-streeter feels upon observation of a store sale, or the general falling of the price of all kinds of electronic devices, is not an emotion shared by our well-educated bureaucrat monetary overlords. Instead, evidence of prices falling below their price level path expectations, is of serious concern.

Now, given the above tragedy, it appears to Bullard that the Fed's rate hike expectations are "overly aggressive." That is, in order to save the United States from the haunting specter of falling costs of living, the Fed may need to remain "accommodative," ever ready to flood more debt into the system. How original.

Categories: Current Affairs

How Washington's Reaction to Trump's Budget Justifies the Rise of Bitcoin

Thu, 25/05/2017 - 21:00
By: Tho Bishop

Earlier this week the Trump administration announced their proposed budget for 2018. The plan bears some striking resemblance to Trump’s first budget attempt in three key ways: it contains some legitimate cuts to a number of government programs, it features increases to America’s irrational war budget, and all together it reflects a significant increase in government spending from current levels. It also has zero chance of passing in Washington, which may be the most significant aspect of the budget.

As soon as details emerged, it was already being torn apart by a web of pundits, think tanks, and politicians. Not because it doesn’t adequately address America’s growing debt bomb, but because it promoted an “extreme” view of austerity. In spite of its refusal to address the trillions in entitlement obligations for Social Security and Medicare, the budget’s modest reductions to Medicaid were deemed “radical.” New York City mayor Bill de Blasio warned that proposed cuts to additional social programs will literally kill children. Meanwhile, the dependably absurd Jennifer Rubin was up in arms because Trump wasn’t spending enough on war.

As such, Republicans in both the House and Senate have made it clear that they aren’t interested in Trump’s “New Foundation for American Greatness.”

In spite of the obvious failings within the Trump budget, it’s hard not to sympathize with his Director of Budget and Management, Mick Mulvaney. In defending the proposed cuts, he told Congress on Thursday:

This is a moral document and here’s the moral side: If I take money from you and have no intention of ever giving it back, that’s not debt — that is theft. If I take money from you and show you how I can pay it back to you — that is debt.

This makes sense in the real world, but not in a city that hasn’t had to worry about paying off its debt in quite some time. By controlling the world’s reserve currency and placing massive entitlement programs off the books, politicians have mastered the art of kicking the can down the road.

Of course, this can’t last forever.

As Jeff Deist noted over the weekend:

In any reasonable, lawful world, spendthrifts are punished. The rest of the world knows America will never get its fiscal house in order. No sane accounting standard would ever permit a government to keep trillions of dollars in entitlement promises off its balance sheet.

If we think about it rationally, this should mean creditors cut us off entirely, or at least demand junk bond interest rates. It should mean haircuts and means testing for Social Security and Medicare. It should mean selling off federal assets, including vast western lands. It should mean significant cuts to the federal budget. But Congress will do none of these things, nor can it.

We’re past the point of political solutions.

This is why, as I’ve noted repeatedly, the most prescient thing Trump said on the campaign trail was suggesting that America was going to end up defaulting on the debt. America IS going to default, just as we have before. The only matter is when, and how.

This could, perhaps, be playing a role in the growing valuation in Bitcoin and other crypto-currencies.

After all, these alternative currencies share the same advantage enjoyed by gold and non-fiat money, by being free of increasingly reckless governments and central bankers. In fact, in recent years we have seen consumers shift to Bitcoin when confronted with a crisis in currency.

For example, when the Indian government banned the use of their largest bank notes, demand for crypto-currency accelerated dramatically in the country. Similarly, as crippling inflation grew in Venezuela, so did the appeal of Bitcoin. It’s also possible that the Bank of Japan’s negative interest rate policy played a role in Bitcoin use becoming so common that the country now accepts it as a form of legal payment.

While it’s difficult to figure out how much of Bitcoin’s extraordinary rise in value is a product of sound economic reasoning — and how much is speculation — it is easy to see that the world is awash in government debt. Just this week, Moody’s downgraded China’s debt for the first time in decades due to concerns about growing its way out of its financial liabilities. Given that reality, and the obvious lack of courage on the part of politicians to tackle these very difficult problems, it’s easy to see how crypto-currencies could become increasingly attractive in the future.

We may be past the point of political solutions, but not market ones.  

Categories: Current Affairs

The Trump Budget: Real Cuts vs. the Media Version of "Cuts"

Thu, 25/05/2017 - 18:45
By: Ryan McMaken

One of the cardinal rules of government accounting and rhetoric is to call ant slowdown in the growth rate of government spending a "cut." This gives the impression that less is being spent when more is being spent. It's just that less is being spent than the government had planned on spending otherwise. 

With the discussion over the Trump budget this week, there's lots of talk of cuts, but it's important to remember that there are absolutely no cuts whatsoever in the actual amount of money the government plans to spend. 

According to the Trump plan, there is a slight decrease in total spending increase compared to what had been planned in the baseline budget. Trump wants to increase spending by 16 percent from 2016 to 2020, while the baseline assumed a 20 percent increase. (See page 35.) Trump plans to increase outlays from from 3.8 trillion to 4.4 trillion, from now until 2020.

That's great and all — I'll believe it when I see it — but let's not be fooled into thinking there's anything going on here that might be called a "cut." 

Meanwhile, of course, the federal government will continue to rack up huge deficits adding to the enormous national debt. 

To make this look less bad, the Trump administration has invented revenue numbers out of thin air that the administration claims will reduce the annual budget deficit to zero dollars ten years from now — in 2027. 

This not only assumes continued robust tax collections — even though tax revenue recently hit an 80-month low — but also assumes there will be no recession in the United State for another decade. 

Good luck with that.

Naturally, one should completely ignore any budget cut that the feds say will happen ten years from now. 

To be fair, when the media and the administration talk about cuts, they are often talking about specific components of the budget, and not the budget overall. 

"$800 billion in Medicaid cuts" blares one CNN headline. 

Really? Where exactly are these cuts? According to page 35 of the Trump budget proposal, Medicaid will increase by 19 percent from 2016 to 2020, rising from $368 billion to $439 billion. 

What they really mean by cuts is this: the Trump administration proposes to increase Medicaid funding by less than what had been proposed earlier in the "baseline" report. In the baseline, Medicaid was supposed to increase by 23 percent from 2016 to 2020. If Trump gets his way with his new budget (which he won't) Medicaid will "only" increase by 19 percent.

Keep in mind this is all hypothetical planning for the future. And, of course, by no definition whatsoever is Medicaid being cut. The budgeted amounts will all increase from 2016 to 2020, and on into the future. 

Nor are there any cuts to Social Security and Medicare by either the real-life definition of "cuts" or the fake DC version of the word. Under Trump's plan, those programs will increase as much as planned in the baseline. Trump wants increases of 25 percent and 19 percent in SS and Medicare, respectively. 

Military spending under Trump will of course increase by more than was planned in the baseline. Trump wants an increase of 14.6 percent in military spending, while the baseline had assumed an increase of 9 percent. In other words, Trump wants 85 billion more in military spending from 2016 to 2020. The baseline had assumed only 55 more. 

RELATED: "Trump Readies a New Pentagon Spending Binge

Trump does propose to do some actual cuts in minor programs. 

Between Medicare, Social Security, and the military, we're looking at about 58 percent of the total federal budget as it was in 2015. We see that Trump wants no cuts there at all. The largest chunk of spending outside this 58 percent is Medicaid, which we also see will increase by 19 percent. 

Real-life cuts are proposed on poverty relief (such as TANF) and other less-famous programs. These actual cuts must happen to the Trump administration can spend more on the military without sizable growth in the total budget figures. 

The Trump plan is, essentially, just a reshuffling of the huge budget to favor certain interest groups, without doing anything at all to actually confront the massive liabilities in the nation's largest entitlement programs. That can will be kicked down the road yet again. 

Nevertheless, if there were any chance of this budget being accepted by Congress, it would represent a tiny bit of progress in the areas of discretionary spending. 

Unfortunately, what's more likely to happen is that, instead of any actual cuts, every interest group will just get more of what it wants. Congress will forget about any of the cuts Trump wants, but will also give him most of the spending increases he wants. This will grow the overall budget. 

Meanwhile, Trump wants tax cuts, which will only mean more deficit spending, and thus more tax increases in real terms.  

This is what we call "business as usual" in Washington. 

Categories: Current Affairs

Education: Free and Compulsory

Thu, 25/05/2017 - 16:30
By: Murray N. Rothbard
 Free and Compulsory

Download the complete audiobook in MP3 format (17 files in a single ZIP). It is also available as an M4B Audiobook file, and on iTunesU and Soundcloud.

What is it about today's school system that so many find unsatisfactory? Why have generations of reformers failed to improve the educational system, and, indeed, caused it to degenerate further and further into an ever declining level of mediocrity?

In this radical and scholarly monograph, Murray N. Rothbard identifies the crucial feature of our educational system that dooms it to fail: at every level, from financing to attendance, the system relies on compulsion instead of voluntary consent. In contrast, a market-based system of schools would adhere to a purely voluntary ethic, financed with private funds, and administered entirely by private enterprise.

This audiobook is made available through the generosity of Mr. Tyler Folger. It is narrated by Graham Wright.

Categories: Current Affairs

Decentralize the Welfare State

Thu, 25/05/2017 - 15:45
By: Ryan McMaken

It has long since become a doctrine of the modern American welfare state that the federal government must be the primary administrators of the nation's so-called safety net. Any attempt to devolve the welfare state to the states is routinely treated as backward and reactionary.

This doctrine remains in place though many US states are far larger and wealthier than many European countries that have welfare states of their own. Naturally, each of these states have economies large enough to manage state-based welfare programs. But, the federal government extracts so many billions of dollars from each state — primarily for the federal welfare state and the military — that states are left without the resources they would need to do their own.

How US States Compare to their European Counterparts

Now, for the sake of argument, let's just assume that every country needs a welfare state, and that it's a good thing.

But even if that's the case, why does Texas need the federal government to have a welfare program? Texas is the size of Australia in both population size and in the overall size of its economy. Australia has a large welfare state of its own (albeit slightly smaller than the US welfare state), so why can't Texas manage its own welfare state with its own resources?

This holds true even for small US states such as Colorado, which has a population similar to that of Norway, and a per capita GDP similar to that of Austria. So, again, this would suggest that Colorado has no need of the US federal government to create and administer its own welfare state.

The same can be said of all other US states.

If we look at a comparison of US states to European countries in terms of per capita GDP, we find that even the poor US states are comparable to member states of the European Union. Mississippi is similar to Portugal, and New Mexico is similar to Spain.

Nevertheless, Americans are regularly told that the welfare states in these foreign countries are well-funded, well-run, generous, and superior to the American welfare state. If the Spaniards, with a per capita GDP similar to New Mexico can allegedly run their own welfare state so well, why can't the New Mexicans be allowed to do the same?

They aren't allowed to do this, of course, because the gatekeepers of leftwing and DC-based opinion would have us believe that New Mexicans, Texans, and Mississippians are too stupid and ideologically incorrect to run a welfare state properly. "Best to keep the power and control in Washington, DC," they might say "so we can make sure the rubes out in flyover country don't screw things up."

One argument the feds will use in this regard is that poor states need to be subsidized by the richer states. Nevertheless, the relative income levels and wealth levels of the states in the US have been converging over time. While it is certainly true that some states are wealthier than others, trends in capital investment are bringing the states closer together.1 

These facts won't be enough to convince Washington to lessen its death grip on the welfare state, though. But, those of us who don't consider people outside of New York and Washington, DC to be members of a lesser species, it strikes one as prudent to leave government social programs to the people who actually live in the communities that are affected by them — and to keep the money closer to the taxpayers who actually pay the bills. Moreover, by breaking up the welfare state into 50 smaller units, the programs will be more responsive to the taxpayers who don't have to time to go to Washington and attempt to compete with the huge national special interests that keep the national welfare state fat and happy. It's a lot easier and cheaper to meet with your state representative than your US Senator.

After all, rather than send billions of tax dollars to Washington, then wait for some DC bureaucrats to spend that money in one's home state — after taking a generous cut for themselves, of course — why not just keep that money where it came from?

Besides, the amount of money that flows from taxpayers to the federal government is far, far larger than the amount of money that goes from taxpayers to the states themselves. This graph shows just how much more money goes straight to the feds rather than to state governments2:

Note that in the case of Texas, Texans pay five times as much in taxes to the federal government than to the state government. In Illinois, residents pay four times as much to the feds as to the state. Even in tax-heavy California, Californians pay more than two-and-a-half times more in taxes to the federal government than to the California government.

A Thought Experiment: A State-based Welfare State

But what if all the states's federal tax revenues — we're completely ignoring state tax revenues — were allowed to stay in the states and were distribute to everyone on public assistance without going through DC first?

Yes, I know some readers will say "let the taxpayers keep it!" Right, I get it. And I agree. But for the sake of argument, let's just assume that money remains in the government's hands. Except we'll cut the feds out of the equation (somewhat).

But how much money are we talking about? And how much money would each state "need" to make payouts to low-income populations?

First, let's look at how much the feds collect from the states overall.3 As one might expect, the IRS's tax collections in each state vary wildly from place to place. They smallest amount is $4.4 billion in Vermont and the largest is $405 billion in California. In medium-sized Colorado, the total is 47 billion. 

Again, all of this ignores the money the states take in themselves through state taxes.

So, we know how much money the residents of each state ship off to the IRS.

We'll also leave the issue of the federal government's massively bloated military funding issue to other articles. (See here and here.) But in this case, we'll take 25 percent of each state's IRS collections as funds for military, foreign affairs, and interest on the deby. Out of the 3.3 trillion total collected from state residents, that leaves $825 billion for spending on military, veterans, the State Department, and foreign affairs.4 It's more than enough for a government that has a navy ten times the size of the world's next-largest navy, and the feds will just have to figure out how to use some of that money to keep paying the interest on the national debt

So, in our model, the feds are awash in money with their $825 billion, and that leaves 75 percent of state IRS collections to the states themselves, or 2.4 trillion total.

All that remains is for each state to dole out what they have to their low-income populations — or they can use it for anything else the voters will let the state legislature get away with. 

Next, we need to figure out how many low-income people are in each state.

To do this, we'll use the total numbers of people in poverty published by the Kaiser Family Foundation. That can be found here. But we can't stop there. In our model, we're giving public assistance only to people who fall below the federal poverty line. That excludes all the non-poor who receive fat Social Security checks every month. In our hypothetical world, the taxpayers won't be subsidizing the Baby Boomers' second homes and annual vacations anymore. 

But, without social security anymore, some elderly will fall below the federal poverty line. To include those, we'll add in these numbers put out by the left-wing Center on Budget and Policy Priorities. 

After we've added all that up, we have an estimate of how many people in poverty are in each state.  The ways the feds measure it, it's not a small number. 

Now, we divide up all those IRS tax collections (minus the 25 percent that goes to the military and interest) and write a check to every person in poverty. Here's the size of the check in each state: 

In some states with high federal tax revenues, low poverty rates, and low numbers of elderly, these numbers are huge. The federal progressive income tax means that states with even a small number of very rich people have much more money to play with. Few billionaires live in West Virginia, for instance. Using this model, Ohio, can hand over a $48,000 check per year to each person in poverty. But even in lower-income states with fewer fewer federal tax revenues and more poverty, States can hand over some pretty big checks. In our model, every single person in poverty gets free money. That's certainly not the way it's done now.

Moreover, keep in mind, this is a per person number. This isn't a household number. There are 2.64 people in the average Mississippi household, where each person in poverty would get a check for $11,800. That means an average household of people in poverty would get checks totaling more than $31,000 or nearly 80 percent of the state's median income. Mississippi, by the way, is a state where the median monthly housing cost is a mere $687.5 

Even in the poor states, we're talking about fairly large amounts that can be distributed to low-income households. And, of course, people in states with low levels of welfare benefits can freely emigrate to states with more generous benefits. 

Some readers at this point will complain that we're ignoring that 14 percent of the budget that goes to all those "miscellaneous" purposes like arts funding, and research. There's nothing to stop the states from spending their shares of the loot on these purposes. After all, not even Massachusetts is going to hand out $72,000 checks to every person in poverty. According to this model, the state could do that. But, it would also have plenty of money to spread around to make sure that starving avant-garde artists get their precious tax-funded arts grants. 


Now, I'm not saying that this is how states should do things were they allowed to keep most of the massive amounts of tax revenue their citizens generate for the federal government. I'm simply pointing out that even the poor states pay vast sums to Washington when that money could simply be distributed in the state from where the money came. Moreover, when we start to look at the sums of tax money produced in each state, we see there is simply no need for the federal government's vast welfare machine. The states and their taxpayers have all the resources necessary for each state to have its own locally-controlled welfare state. 

The question we're then left asking ourselves is this: why is the federal government "necessary" to spread around the welfare checks? 

Many of our readers already know the answer, of course. While most state governments must, by law, have balanced budgets, the federal government can always just resort to massive amounts of deficit spending. The federal government, unlike the states, can also simply print more money to help cover its massive budget shortfalls. As it does. 

This means that federal welfare programs can continually expand regardless of the state of the budget or the economy. 

And, of course, just as a matter of politics, the federal government, having seized the reins of the welfare state decades ago, will never give up this power because the political benefits of having control over the welfare state allow the federal government to collect enormous sums that it can dole out to its friends, especially in the military. Indeed, we see today how the Trump administration is planning to cut down on welfare spending in order to beef up military spending. 

Between the welfare state and the military, the US government enjoys the best of both worlds as both conservatives and leftists fall over each other demanding more government spending for their own pet projects. 

In truth, the welfare state could be decentralized back to the states and we'd still be looking at massive amounts of money that could be spread around low income populations.6 It would also keep a lot of money out of the hands of the Pentagon. Don't expect Congress and its cronies to look kindly on the idea, however. 

  • 1. See this article:

  • 2. IRS collections are found here: State revenues are based on the Census Bureau's survey of state level revenues. This does not include local taxes. 

  • 3. See the IRS web site for totals:

  • 4. The federal government has revenue sources outside the residents of the states. There are customs revenues and remittances from other countries, and revenues from leases on federal lands, etc. So, federal revenues are actually larger than what is discussed here. 

  • 5. According to the Census Bureau. 

  • 6. The military should be decentralized too, of course. As discussed here.

Categories: Current Affairs

Rothbard: These Are the Best Libertarian Educators

Thu, 25/05/2017 - 04:00
By: Joseph T. Salerno

[This article is part of a series of occasional posts which will explore the immense treasure trove of unpublished papers, lectures, memos, correspondence, and notes in the Rothbard Archives at the Mises Institute.]

In 1961, F. A. Harper of the William Volker Fund, and later the founder and president of the Institute for Humane Studies, asked Murray Rothbard to list and opine on the “outstanding libertarian educators of our time.” Rothbard responded in a letter dated July 9, 1961. 

Rothbard construed the term “education” to mean “informal influences as well as formal schooling,” and identified nine outstanding and two “marginal” educators, while dismissing several other prominent candidates. In order to understand Rothbard’s list, we should keep firmly in mind what Rothbard meant by the term “educator” as well as his and Harper’s definition of the word “libertarian.” Harper was not requesting, and Rothbard was not compiling, a list of economists or, more broadly, social scientists whose work greatly contributed to the scientific foundations of liberty. Rather he sought to identify those whose publications, teaching, or activism inspired others to study the science of liberty. Furthermore, although both Harper and Rothbard were themselves proponents of anarcho-capitalism, Rothbard’s list was open to those who had moved beyond the hoary and ad hoc classical laissez-faire prescription to rigorously and consistently quest for a society based on liberty, whether or not their desideratum was a stateless society.     

Rothbard seems to have discussed his choices in order of their importance for him. He listed F. A. Harper himself first, characterizing him as “by far the most important libertarian educator of my acquaintance.” Rothbard cited Harper’s influence in developing an impressive cadre of libertarian students” while teaching at Cornell, e.g., Paul Poirot, Ivan Bierly, W. M. Curtiss, and several others. He also noted that Harper was particularly effective in developing libertarian youth while associated with the Foundation for Economic Education (FEE). Most important for Rothbard, Harper “was the leader of the movement at FEE from old fashioned laissez-faire to pure, 100% libertarianism, a movement which is certainly destined to be one of the most important in the entire history of libertarian thought.”

Frank Chodorov came next on Rothbard’s list, because he too was “eager to expound his libertarian and individualist views to young people, and through the pages of his sterling little magazine analysis.” Ludwig von Mises was the third person Rothbard chose, because of the impact of both his books, especially Human Action, and his NYU seminar. For Rothbard, “Mises’ Human Action ... was an unparalleled revelation of a consistent, unified system of economic, and beyond economic, thought.” In his seminar, Mises imparted “his fully-rounded intellectual system and long experience” to his students, and encouraged any sign of scholarly productivity they displayed. Rothbard thought it “safe to say that almost all the libertarians in the country are disciples of either Harper or Mises.”

Rothbard listed Albert Jay Nock not only because he built “a group of right-wing Georgist disciples,” including Chodorov, but because “his writings (Our Enemy the State, Memoirs of a Superfluous Man) are magnificent libertarian works that are worth fifty volumes by the Frank Knights, etc., for they cut straight to the heart of the nature of the State.” Along with Nock’s works, the works of H. L. Mencken exerted the “unique ‘liberating’ influence of calling a governmental spade a spade.”

Loren “Red” Miller, an early libertarian activist, was highly successful in converting business magnates such as William Volker, Pierre Goodrich, Henry Weaver, and Herbert C. Cornuelle to the libertarian cause. Rothbard listed Rose Lane Wilder and Isabel Patterson for their influential writings, particularly the latter’s The God of the Machine. James M. Rogers was listed “for the great personal success he has reputedly had in industrial personnel education in libertarian ideas and for transforming Rockford, Ill. into a community rife with libertarian ideas.”

We now come to Rothbard’s “marginal inclusions” on the list, F.A. Hayek and Milton Friedman. Hayek is listed as marginal because Rothbard viewed it as “a pretty severe indictment of Hayek, that, in thirty years of teaching at the best universities ... he has not developed one — not one— person who might be called a Hayekian.” Also, Rothbard thought that Hayek was “so far from purist libertarianism that it seems dubious to list him at all.” Rothbard added the interesting speculation that Hayek’s “lack of firmness added to his aloofness and disinterest in students accounts for his failure to develop disciples.” In the end Rothbard includes Hayek in his “second string, or ‘marginal,’ list only because of the great impact made on a broad-gauged public by his Road to Serfdom, certainly the quasi-libertarian best-seller of our time.”

Now, Rothbard’s downgrading of Hayek to marginal should be kept in context. Remember Rothbard was constructing a list of outstanding libertarian educators in the sense described above. Rothbard had great respect for Hayek the economist, developing his own theories of capital and the business cycle in Man, Economy and State on the foundations laid by Hayek’s economic writings of the 1930s. Indeed in his celebratory article on Hayek’s Nobel Prize award, Rothbard referred to Hayek as “the great Austrian free-market economist” and ranked him “as the world's most eminent free-market economist and advocate of the free society.”

The second and final “marginal inclusion” on Rothbard’s list is Milton Friedman. According to Rothbard, Friedman “by force of his intelligence, and his keen interest in students, has become the doyen of the ‘younger Chicago school,’ which has a fine esprit de corps, and which has the best economic writing now being done.” Nevertheless, Friedman does not rank as an “outstanding” libertarian educator because the Chicago school and Friedman are only libertarian in narrowly defined areas.” Note that in 1961, Rothbard respected Friedman as an economist and as an effective educator in the libertarian movement broadly construed, although he had substantial disagreements with much of Chicago-school economics. In 1963, Rothbard’s assessment of Friedman began to change for reasons that will be discussed in a future post. 

Thus Rothbard presented Harper with a list of “eight [sic, nine] ‘first stringers’ and two marginal educators.” Rothbard went on to explain the lack of inclusion of several prominent names. He did not include the anarcho-libertarian Robert LeFevre because Rothbard could not judge what impact LeFevre’s Freedom School was having. He was “tempted” to include R.C. Hoiles, owner and publisher of “purist libertarian” newspapers of the Freedom Newspapers chain, but again he did not know how influential the newspapers were. Nor was Frank Knight included, because for Rothbard, Knight was “so very far from being a libertarian (much farther than Friedman or Hayek) that he must be set down as outside the pale.” Influential Chicago-school economist Henry Simons was nixed because he was “even less libertarian than Knight,” as were former Mises students Fritz Machlup and Gottfried Haberler for having “swung [so far] ‘left.’” Ayn Rand was dismissed because, although “highly influential,” her influence was “preponderantly in the direction of building up an ignorant and fanatic cult.” 

Rothbard closed his letter with thoughts about the “factors” that distinguished all or most of the outstanding libertarian educators listed. These were threefold. Rothbard listed “intelligence” first, without embellishment or comment. The second factor is somewhat surprising: “‘love’ in the broadest [sense], including love for their students and a passion for their subject.” The third attribute of outstanding libertarian educators, according to Rothbard, was “a willingness to be ‘extreme’ in their position.” He identified the defining characteristic of the extremist by contrasting him with the much beloved “moderate.” Wrote Rothbard:  “Despite the fact that the ‘moderate,’ nonextremist is almost always considered to be the truly influential and ‘practical’ person ... the moderate is only hailed by everyone precisely because he doesn’t have any true influence, precisely because he only comforts people in their cherished errors rather than liberates them in the direction of the truth.” 

Like this letter to his libertarian mentor Harper, even the most casual of Rothbard’s thousands of memos and letters, is written in a scintillating style and brims with novel and provocative ideas and insights. We look forward to sharing more of Rothbard’s wit, insight and unparalleled scholarship in future posts in this series. 

Categories: Current Affairs

Wine, Art, and Ferraris: The Bubble in Luxury Goods

Wed, 24/05/2017 - 15:30
By: Mark Thornton

The Bernanke-Yellen bubble is impacting many sectors of the economy. Agriculture land, motor vehicles and auto loans, banking, bonds, contemporary art, corporate stocks, higher education and student loans, mergers and acquisitions, ocean shipping and cruise lines, social media, technology, housing, real estate, and land markets have been noticeably affected.

Credit-fueled bubbles generally have a wide-ranging effect on the economy, but might all this just be a sign of sustainable economic growth?

Possibly, but a long period of ultra low interest rates would indicate otherwise. Interest on savings accounts is practically non-existent, mortgage and auto loans are historically low, and even the junk bond market has experienced a long period of historically low rates. This graph shows the effective yield on BB rated bonds:

Plus, there are tidbits of information that clearly hint that an artificial bubble is upon us.

These three tidbits rest on the Austrian theory that cheap credit not only causes the business cycle and price inflation, but that it also causes a distortion in incomes. Cheap credit is good for the wealthy and high income earners who have collateral and easy access to credit at financial institutions. They also benefit from the resulting higher prices for stock, bonds, land, etc. However, workers in the low and middle income groups, who do not have much collateral or high credit scores, have little access to the cheap credit. They cannot participate in the boom and are harmed by higher prices for things such as houses. This phenomenon of cheap credit benefiting the rich and harming the poor is referred to as the Cantillon effect.

Fine Wines

The price of high-end wines would appear to be in a bubble. Liv-Ex: The Fine Wine Market has several indexes of high priced wine. Most of their indices are at or near all-time highs. The Liv-ex Fine Wine 1000 index tracks 1,000 wines from across the world. This index has doubled since the financial crisis that followed the housing bubble. This is an indication that the highest income people are bidding up the price of fine wine which has an inelastic supply.

A wine related anecdote from the recent past comes from a friend who worked for an auction house. A Chinese bidder won an auction for a case of very fine wine for several thousand dollars above the highest estimate. This winning bidder asked if the auction house could store the wine because he was planning on auctioning it off at a later date. I can tell you that it is hard to turn a profit by flipping at auction because both buyer and seller pay a fee of about 25 percent each on the selling price.

Fine Art

Another area that becomes inflated in a bubble is the art market. Modern and contemporary art has been selling for record amounts. Paintings by “hot,” but relatively unknown artists are also skyrocketing in price. This is all reflected in the value of the major auction firms, such as Christie’s and Sotheby’s. The stock price of Sotheby’s had accurately marked — peaked — at the highest point of the dot-com bubble in 2000 and the housing bubble in 2007. The stock price is approaching the $54 peak reached in 2007. 

It is important to note that the markets for wine and art are not increasing across the board. Lower priced wine and art have generally not increased in price and may have even decreased a little. It is the ultra wealthy that are driving up the high end of these markets.

Luxury Cars

A similar phenomenon can be seen in the market for vehicles. Sales of cars and light trucks have been strong the last few years, with trucks gaining market share at the expense of cars. However, the overall market has been drifting lower over the last year and a half, but that is not true of all sectors. Nine brands are up by more than double digits over the last year. They include Alfa Romeo, Bentley, Ferrari, Jaguar, Maserati, Porsche, Rolls Royce, Tesla, and Volvo. There are 12 standard brands that have seen declines in sales and about a half a dozen brands with small percentage gains, mostly luxury oriented brands.

These tidbits clearly indicate the presence of the Cantillon effect. Austrian economists are often criticized for attacking the use of aggregate statistics, but in this case you can see that taking a look under the hood can be very illuminating.

Categories: Current Affairs

Another Member of Mises Cuba is Now Missing

Wed, 24/05/2017 - 13:30
By: Tho Bishop

Mises Cuba has announced that Nelson Rodríguez Chartrand is missing. The organization believes he was taken by state security forces. 

In February, Ubaldo Herrera Hernandez, another member of Mises Cuba, was arrested by an undercover state agent along with fellow human rights activist Manuel Velazquez Visea. Since then, the two have been charged with additional crimes and placed in the notorious Melena II maximum security prison. Other libertarian activists on the island have been threatened and temporarily detained by Cuban officials.  

Chartrand, an attorney and fierce critic of the Castro regime, was last seen on Monday at 11 pm heading towards the Benjamin Franklin libertarian library. He never made it to the building, the same location where Hernandez and Visea were arrested in February.  Calls placed to hospitals in the area have found no record of Chartrand being admitted. He has also not turned up on any official arrest records.

If Chartrand was taken by state security, it may be in response to recent actions taken by Mises Cuba and other libertarian organizations on the island. Also on Monday night, a new libertarian library was launched in the province of Camaguey. This followed the recent launch of the Cuban Libertarian Party founded earlier this month. Mr. Chartrand’s own article about the launch ominously noted that a state security told a member of the organization “the project will last until the regime allows it.”

As he went on to write:

We will not be overcome by fear. As the Greek saying goes:

"Society grows great when old men plant trees whose shade they know they shall never sit in.” We do not fear reprisals about our bodies, because our ideas will transcend and I will get freedom. We do not dear any attacks against our bodies, because our ideas will transcend and achieve freedom.”

Our hopes and prayers are with the family and friends of Mr. Chartrand, Hernandez, and Visea, as well as with all those willing to risk their safety promoting liberty in communist Cuba.

Tu ne cede malis, sed contra audentior ito.

Categories: Current Affairs

ESPN and the Bursting of the Sports Bubble

Wed, 24/05/2017 - 04:00
By: William L. Anderson

When the cable TV sports giant ESPN announced 100 layoffs recently, including letting go a number of high-profile broadcasters, a lot of people took notice, and well they should: things no longer are business as usual in sports broadcasting, and we are not even at the beginning of the end, and maybe not even the end of the beginning.

Like the slow crashing of the retail sector as online purchase firms like Amazon begin their domination, we are seeing a sea change in sports broadcasting and that is going to mean big changes are down the road not only for ESPN, but for all of the sports entities that depend upon the huge payouts that ESPN provides. To put it mildly, a lot of people are about to see their lives change drastically as consumer choices drive sports broadcasting in a new direction.

Enough with the superlatives. What is happening with ESPN, and why is it important? As Clay Travis of the sports website Outkick the Coverage has been writing for more than a year, the main ESPN business plan, the one that brings in the most revenues to the firm, is doomed to near-extinction, and there is nothing ESPN can do about it. Writes Travis:

In the past five years ESPN has lost 11,346,000 subscribers according to Nielsen data.

If you combine that with ESPN2 and ESPNU subscriber losses this means that ESPN has lost over a billion dollars in cable and satellite revenue just in the past five years, an average of $200 million each year. That total of a billion dollars hits ESPN in the pocketbook not just on a yearly basis, but for every year going forward.

It's gone forever.

Since it began to grow in popularity in the late 1970s, cable (and later, satellite) television has offered its customers coverage with “bundles,” that is different payments allow cable subscribers to expand their viewership as payments increase. For example, a “basic” cable subscription would allow the customers to view, say, 15 channels including the ABC-CBS-NBC-PBS lineup plus other channels such as CNN or Fox. A higher-tier subscription would add other channels, including ESPN and its associated channels and others such as The Food Channel or assorted movie channels.

One problem with bundling, of course, is that subscribers will pay for channels that they rarely or do not watch. For example, I have a basic subscription with Direct TV, but maybe watch 10 channels at most, even though dozens are available. (I don’t include ESPN or any of the other sports channels in my monthly package.)

As technology has improved in telecommunications, the ability of providers to further segment packages has meant that cable and satellite subscribers are able to eliminate the channels they don’t want to watch, and that means that many are unhooking from ESPN. Continues Travis:

ESPN is losing 10,000 subscribers every day so far in 2017. In the past six years they have lost 13 million subscribers and that subscriber loss is escalating each year. That's billions of dollars in lost revenue.

Every year for the next five years ESPN is spending more and bringing in less. You don't have to be Warren Buffett to see that's a business problem. 

He goes on to the heart of the matter:

ESPN is spending over eight billion dollars on sporting rights this year and by 2021 I believe they will be losing money regardless of how many people they fire. ESPN can't fire employees into profitability. It's just not possible. These firings are going to become a yearly thing and they still aren't going to prevent the business from dying. 

True, ESPN, as well as all commercial broadcasters, receive advertising revenue, but advertising alone, along with subscriptions from people who choose to purchase ESPN in their cable/satellite packages, will not be enough for the network to meet its obligations to the various organizations it pays for the rights to broadcast their events. From the National Football League (NFL), to the National Hockey League (NHL), to the National Basketball Association (NBA) to the National Collegiate Athletic Association (NCAA), ESPN has paid billions of dollars, money that is funneled into high athlete salaries, not to mention salaries of coaches, university athletic directors, and, indirectly into the building and maintaining of magnificent sports facilities.

The revenues lost to ESPN are lost forever, and even given the rise of smart phones and Internet streaming, the current state of affairs is unsustainable and the sports landscape is going to change, and the changes will be extensive. It is here that Austrian economics gives us insight into how at least some of the changes will proceed.

Carl Menger, who we know as the “founder” of the Austrian school of economics, in his path-breaking book Principles of Economics in 1871 demonstrated conclusively that the value of the factors of production was based not on costs derived from other costs of production, but rather the value of the factors was imputed via the value consumers placed upon the final goods. This view contradicted the standard British classical view that the value of consumption goods was derived from the value of the factors of production, and it placed Menger in the Pantheon of the early Marginalists.

In laying out his theory, Menger used tobacco and the factors used to produce it. If people suddenly stopped using tobacco, he reasoned, then the value of the factors would change quickly relative to their ability to be transferred to other uses. The more specialized the factor, the greater the change in its value. For example, the land on which tobacco is grown would then be used for other purposes, such as growing corn or wheat, or even pasture for cows or sheep. Highly-specialized tools used only for growing or harvesting tobacco, however, would see a steep drop in value and maybe would have to be abandoned altogether.

What does this have to do with the demise of ESPN? As noted earlier, the network pays billions of dollars for rights to broadcast sports events, and it is unlikely that as ESPN loses the revenues that permit it to pay large sums, other networks will be able to take up that slack. That means the organizations that now receive this money are looking at “haircuts” down the road, which includes the NCAA and collegiate athletic teams.

The ESPN funding allows for the network to broadcast a number of collegiate sports events that ordinarily would not rate enough of an audience, and its large payouts also allow for coaches to receive record-high salaries that would not be possible if these programs depended just on ticket sales and other donations. And while it is tempting to say that “ESPN pays for this,” in reality, it is the consumer of cable/satellite television that ultimately decides the size of the ESPN payouts, and consumers are stating their preferences with their checkbooks, and there is nothing ESPN can do about it.

Without cable/satellite subscribers being willing to pay extra for the sports channels, and without the viewership that draws advertisers, ESPN revenues will fall, and that means that the factors that make up the “product” that appears on ESPN broadcasts also are going to lose value, as long as other networks don’t take up the slack (and it is doubtful they will). Thus, one is looking at a long, steady decline and the world of televised sports is going to have to adjust to the new reality.

Unfortunately, as Travis has pointed out many times, ESPN during this ratings slide has taken a hard turn toward the political left, which has further alienated a lot of conservative viewers. Writes Travis:

As ESPN has lost 10,000 cable and satellite subscribers every day in 2017, seen ratings collapse for all original programming, and recently embarked on the firing of 100 employees as part of a desperate cost cutting move to save its business. The network’s sports media defenders have desperately argued that the network’s embrace of far left wing politics has not had any impact on its collapsing viewership. That’s despite the fact that there have been two different studies that have demonstrated Republican voters have abandoned the network’s original programming in the past year.

In that regard, one can argue that ESPN has done what numerous (and especially elite) colleges and universities have done the past several years: create a hostile atmosphere for white male students all the while wanting them to be paid customers. One cannot both seek to offend and attack the same people one wishes to purchase their services without courting disaster, yet higher education and ESPN are doing just that.

To a certain extent, one can argue that both higher education and ESPN have benefited from “bubble” economies, and as consumer choice becomes directed elsewhere, the bubbles burst. As Carl Menger demonstrated, the bursting of the bubbles will mean that some factor owners will have to receive less pay in order to remain employed, while other factors will have to be transferred to other uses altogether or simply become unemployed. All soothing rhetoric aside, the world of sports broadcasting is going to see major changes in the next decade as consumers have their say.

Categories: Current Affairs

Can Libertarians Have Communal Property?

Tue, 23/05/2017 - 19:30
By: Ryan McMaken

A strange caricature of the laissez-faire liberal (i.e., libertarian) ideology persists. Namely, that libertarians are all required to pursue an individualistic lifestyle in which each person lives on his or her own with few social or economic connections with others. 

This stereotype has been perpetuated for decades by both conservatives and leftwing social democrats looking for a good straw man with which to beat up the more libertarian-minded among them. Recently, for example, Pope Francis singled out the laissez-faire liberal ideology for an attack claiming that liberals (whom he imprecisely calls "neoliberals") are incapable of forming a real community because they shun the idea of anything being done as a communal activity. Specifically, according to Francis, liberalism shuns the idea of doing anything in common because "'common' implies the constriction of at least some individuals." Moreover, this ideology "minimizes the common good ... in the community framework."

If this is true, of course, then these liberals Francis (and a host of other social democratic critics of liberalism) describe, are incapable of living in communities that have any sense of common goals or shared values. 

This has never been true, of course, and we found in this article titled "Must Libertarians be Individualists?," there is no conflict at all between liberalism and communal living

It is entirely consistent with the ideas of liberalism to live in a large extended family, to join a commune, or live in a densely-populated urban setting with others. All that liberals ask is that the decision to live a certain way is made voluntarily and without being coerced. A person commits no illiberal act when he gives away all his possessions to live in a monastery shared with others. There is nothing contrary to liberalism in offering free room and board to strangers or family members. There is no group or individual activity that is verboten by liberalism so long as the participants are cooperating freely. 

"Sure," some critics might say. "Some people might engage in these rare activities like living in a monastery, but these libertarian types are always opposed to any larger application of the theory beyond a tiny commune or family compound." 

What a Totally Voluntary Community Could Look Like

And yet, there is nothing, ideologically speaking, that prevents liberals from building a voluntary community and applying it on a larger scale — perhaps even at the level of an entire city or metropolitan area. At a large scale, we begin to run into problems of monopoly power and practical impediments to exercising choice between the voluntary communities. (For more, see here, here, and here.)

But let's say we wanted to build a voluntary community that could grow and develop over time. What would it look like at it's most basic level? 

As a starting place, we can look to the "covenant community" model used by Hans-Hermann Hoppe which he describes what a totally privatized community could look like: 

All land is privately owned, including all streets, rivers, airports, and harbors. With respect to some pieces of land, the property title may be unrestricted; that is, the owner is permitted to do whatever he pleases with his property as long as he does not physically damage the property of others. With respect to other territories, the property title may be more or less restricted. As is currently the case in some housing developments, the owner may be bound by contractual limitations on what he can do with his property (restrictive covenants, voluntary zoning), which might include residential rather than commercial use [and] no buildings more than four stories high.

And how do such communities form? They can come into being simply when a group of individuals agree to put limitations on their own use of their own property in order to pursue common goals. Hoppe continues: 

You and I, private property owners, may enter and put our property into a restrictive (or protective) covenant. We and others may, if we both deem it beneficial, impose limitations on the future use that each of us is permitted to make with our property. 

As noted by Hoppe, we already see this all the time in "some housing developments." People who voluntarily enter into these types of arrangements — i.e., condominium associations, apartment co-ops, and single-family housing covenants — voluntarily restrict what sorts of activities they may engage in inside and around their homes. For instance, there's good reason to believe that virtually all community covenants in this scenario would prohibit a resident from performing hazardous scientific experiments, cooking meth, or building nuclear bombs inside his home. Owners voluntary submit to restrictions as to what color they can paint their homes, or what sorts of vehicles they can park in the driveway. 

And, as with condominium communities, the residents voluntarily pay fees and dues that build and maintain communally-owned areas such as sidewalks, hallways, swimming pools, and other facilities that are not owned by any single member of the community. No single member of the community can use those facilities however he wants. A member of the group can only use the common areas in a way that has been permitted by the group as a whole.

RELATED: "Conceived in Liberty: The Medieval Communes of Europe" by Guglielmo Piombini

In other words, individual members and households voluntarily limit their own use of property for what we might call "the common good." 

Expanding Beyond Housing

There is no theoretical, ideological, or even practical reason why a community such as this could not be expanded well beyond the limitations of a housing development. (Obviously, in our modern world, many legal obstacles prevent this from happening.) Using this model, however, covenant communities could expand to include commercial real estate such as office buildings, retail shops, and even industrial operations such as a pharmaceutical factory. 

A community such as this would also then need to provide transportation infrastructure so goods can move in and out of the community - which all members would pay fees to pay for. Residents might demand security personnel to patrol the streets, and parks to visit on weekends. 

Moreover, we see that a totally-privately-owned community does not run contrary to notions of the "common good." For the members of the community, having a clean and functional amenities such as recreation facilities and streets are seen to be in the interest of the common good. Having security personnel that serves the entire community is seen as being part of the common good.

Some of these organizations may even organize themselves along "democratic" lines. Just as joint stock companies have elections and elected officers, so too can covenant communities. Depending on the rules and by-laws of the communities, majorities or supermajorities can be used to determine new regulation, new fees, and general governance — just as many private clubs do. 

RELATED: "We Need Less Politics and More Private Governance" by Edward Stringham

"But what about those who are in the minority?" some critics might then complain. "Aren't they being coerced if the vote doesn't go their way? Those who vote with the minority in such case are no more being "coerced" than are stockholders who vote with the losing side at a stockholders meeting. Nor is there any "socialism" provided membership in the community is voluntary. Those owners who feel the organization is being badly run can sell their ownership stake and leave, just as any member of a homeowners association is free to do. Or, members can convince other members to join them in changing policies to better suit their preferences. 

And, we might also note that purchasing land in a community like this need not be the only way to become full members of the community. Many membership models could be employed. Existing members could sponsor outside households for membership, pending the approval of the other members. Anyone with specific skills would also likely obtain inclusion as members with relative ease.

Critics of the voluntary model at this point may still complain that such a society will not give sufficient attention to the poor and destitute. What about people who have no skills? Never mind, apparently, that the modern state-based system around the world has plenty of poor and destitute persons as well. (Thanks to industrialization, trade, and modern markets, poverty is declining worldwide — no thanks to states.) Nevertheless, how do we address the issue of those who who cannot even take care of their daily needs unassisted? 

Just as covenant communities can provide security services, streets, and parks, community residents might also demand some amenities we consider to be characteristic of a "welfare state." Perhaps motivated by both religious beliefs and practical concerns, members want a widows-and-orphans fund designed for temporary relief of owner residents who experience a financially debilitating death in the household. Perhaps residents want to ensure that their own children are surrounded by other educated children, and thus residents demand community schools. Perhaps members of the community feel that the presence of a safety net reduces crime. Or they may may conclude that it is important to minimize the comings and going of members — and thus a widows and orphans fund promotes stability. Or they may simply think that having a shelter for victims of domestic abuse in the community simply makes for a better community. They want it all funded out of the community treasury, just as the roads and the parks are funded. 

Whether or not these services end up being funded by the community's members depend on whether or not a sufficient number of members value them as important to the community. Once accepted by the membership, it is only a matter of time until the community's rules are changed to reflect the values of the members. Naturally, those who find themselves in disagreement over these policies — as with policies over trash collection or sidewalk maintenance — are free to leave. 

Whether or not it is financially wise or prudent to provide these services is a matter for the realms of accounting and economics. If the members of the group conclude they obtain psychic profit from funding schools for all children in the community, it is difficult to say that such services are "wasteful."  These questions, however, are a separate question from whether or not a voluntary covenant community can provide them without violating the property rights of members. So long as the services are approved in a manner in line with the rules and by-laws already agreed to by all members, the services are not in violation of anyone's rights. 

Practical Limitations on What Covenant Communities Can Do

A major difference between covenant communities and states, of course, is that covenant communities such as these are unlikely to provide open-ended non-means-tested welfare programs such as large states like the US do today. The communities we imagine here simply could not afford to do so since such programs require constantly expanding coercive tax collection, and inflationary currency. Covenant communities would be unable to simply print new money at will as modern central banks do, and just hope it all works out in the end. Covenant communities would need to be frugal, responsive, and able to continue to provide quality amenities to members in order to avoid quickly becoming insolvent. They cannot simply raise taxes at will without losing their most productive residents. But, for a prosperous industrialized society that is growing wealthier, the percentage of overall wealth generated that would be necessary to provide basic provisions for the poor would become smaller and smaller over time. 

Nevertheless, contrary to what many critics of laissez-faire liberalism claim, there are no ideological barriers to liberals and other advocates for private property engaging in behavior that encourages collective action, and community directed resources. Many communities do this already for specific purposes, and, philosophically speaking, there is no limit to what these communities can do provided they remain voluntary in nature. 

Categories: Current Affairs

The Death Cult of Collectivism

Tue, 23/05/2017 - 15:45
By: Ludwig von Mises
Mises ISIS2.png

The reproach of individualism is commonly leveled against economics on the basis of an alleged irreconcilable conflict between the interests of society and those of the individual.

Classical and subjectivist economics, it is said, give an undue priority to the interests of the individual over those of society and generally contend, in conscious denial of the facts, that a harmony of interests prevails between them. It would be the task of genuine science to show that the whole is superior to the parts and that the individual has to subordinate himself to, and conduct himself for, the benefit of society and to sacrifice his selfish private interests to the common good.

In the eyes of those who hold this point of view society must appear as a means designed by Providence to attain ends that are hidden from us. The individual must bow to the will of Providence and must sacrifice his own interests so that its will may be done. His greatest duty is obedience. He must subordinate himself to the leaders and live just as they command.

But who, one must ask, is to be the leader? For many want to lead, and, of course, in different directions and toward different goals.

The collectivists, who never cease to pour scorn and derision on the liberal theory of the harmony of interests, pass over in silence the fact that there are various forms of collectivism and that their interests are in irreconcilable conflict. They laud the Middle Ages and its culture of community and solidarity, and with romantic sentimentality they wax ecstatic over the communal associations “in which the individual was included, and in which he was kept warm and protected like fruit in its rind.”1 But they forget that papacy and empire, for example, opposed each other for hundreds of years and that every individual could find himself at any time in the position of having to choose between them. Were the inhabitants of Milan also “kept warm and protected like fruit in its rind” when they had to hand over their city to Frederick Barbarossa? Are there not various factions fighting today on German soil with bitter anger, each of which claims to represent the only true collectivism?

And do not the Marxian socialists, the national socialists, the church, and many other parties approach every individual with the demand: Join us, for you belong in our ranks, and fight to the death the “false” forms of collectivism?

A collectivist social philosophy that did not designate a definite form of collectivism as true and either treat all others as subordinate to it or condemn them as false would be meaningless and vain. It must always tell the individual: Here you have an unquestionably given goal, because an inner voice has revealed it to me; to it you must sacrifice everything else, yourself above all. Fight to victory or death under the banner of this ideal, and concern yourself with nothing else.

Collectivism, in fact, can be stated in no other way than as partisan dogma in which the commitment to a definite ideal and the condemnation of all others are equally necessary. Loyola did not preach just any faith, but that of the Church of Rome. Lagarde did not advocate nationalism, but what he regarded as German nationalism. Church, nation, state in abstracto are concepts of nominalistic science. The collectivists idolize only the one true church, only the “great” nation—the “chosen” people who have been entrusted by Providence with a special mission—only the true state; everything else they condemn.

For that reason all collectivist doctrines are harbingers of irreconcilable hatred and war to the death.

Excerpted from Epistemological Problems of Economics 

  • 1. Sombart, Der proletarische Sozializmus (10th ed.; Jena, 1924), I, 31.

Categories: Current Affairs

Is the Sky Falling?

Tue, 23/05/2017 - 04:15
By: Jeff Deist

[Adapted from a talk at the May 20 Seattle Mises Circle, "House of Cards: Has the US Economy Recovered?"]

I think we can all agree that the state of the economy has little to do with Donald Trump, at least for the moment.

But the stock markets have been riding high since his election, just earlier this week the S&P 500 index reached a record high of 2400, which is 3.5 times its low of 683 in March ’09.

I’m sure some of you are familiar with the term FAANGS that describe five major stocks in that index: Facebook, Apple, Amazon, Netflix, and Google.

What you might not know, and what I didn’t know, is that those five stocks account for virtually all of the S&P gains in the past few months. In fact, the remaining 495 companies have LOST almost as much in market capitalization as the top five have gained.

And then there is the peculiar case of Amazon, which recently celebrated its twentieth anniversary of going public. By every measure, Amazon is a modern blue-chip stock: large, well-established, dominates its sector, and is a household name.

There is just one catch: it doesn’t make money, or at least not much. And its thin profitability is OK with founder Jeff Bezos, who has poured billions into Amazon’s cloud business rather than trying to improve the company’s bottom line.

Maybe Peter Thiel is right: the value of Amazon, or any firm, is the sum of all the money it will make in the future (discounted to its present worth). So at the moment shareholders believe Amazon will make enough profit in the future to justify its $460 billion market capitalization today.

Or maybe it’s wildly overvalued. David Stockman calls it one of the “greatest cash-burn machines ever invented.” Remember, this is a 25-year-old company, not some startup.

Stockman says: “In an honest free market, real investors would never give a quarter-trillion-dollar valuation to a business that refuses to make a profit, never pays a dividend and is a one-percenter at best in the free cash flow department — that is, in the very thing that capitalist enterprises are born to produce.”

The point here is not to pick on Amazon, or any of the tech companies like Facebook and Netflix that may never make much profit. Maybe there really is a new corporate paradigm with a long-term outlook, just like Sony used to have with its 50 year plans.

But there is something unsettling about companies that make their founders and major shareholders rich without generating a profit. David Stockman describes it as a casino rather than a market — everyone has to find the next Amazon to invest in like a horse at the track. But as we see in the S&P 500, there are hundreds of losers for every winner.

Maybe Amazon is an uneasy symbol of what seems artificial and unsustainable about our prosperity. And if the economy seems artificial and unsustainable, maybe that’s because it is artificial and unsustainable.

Whether the sky has fallen, or is falling, or is about to start falling, is more a matter of perspective than objective fact or even measured opinion — with apologies to the people who compile the almost useless GDP figures. Whether the economy is good or bad, growing or crashing, depends very much on whom you ask.

I suspect most people in this room have the good fortune to work in the knowledge economy, to have job or career opportunities or enough personal wealth to see the glass as half-full.

But we shouldn’t ignore the millions of people for whom the sky certainly has fallen:

  • 50- and 60-somethings who lost their jobs after the crash of ’08 and will never again have equivalent income or career prestige;

  • Blue-collar workers across the spectrum, from auto to coal miners to steelworkers;

  • Retirees who lost 40 percent of everything they had in the last stock market crash, and who were too scared to stay in the market;

  • A generation of millennials who may be the first generation in US history to simply accept as the “new normal” having huge amounts of debt and a declining standard of living;

  • A huge number of Americans who simply feel lost in a new economy with constant disruptions, no job security, fewer benefits, who fear outsourcing and offshoring and automation, and who aren’t ready to drop everything and move every three years in a gig economy.

Hopelessness is a severe form of poverty, one that’s spreading higher into middle class reality than at any time since the Great Depression.

So while most of us are big believers in capitalism and free markets and global trade, it’s facile simply to assume everyone else sees things the same way. There are winners and losers, even if the world is getting richer. The sky doesn’t fall for everyone at the same time, and it can fall in slow motion in ways that profoundly affect our grandchildren.

Obviously we can’t know the future, or what the economy will look like in five years or ten years. But let me offer three assertions.

First: the Fed and other central banks can’t make things better, but they sure can make them worse.

Creating new money and credit does not create new goods or services. We shouldn’t care about the quantity of money per se too much; prices can adjust. We should care very much, however, about the quality of money in the economy, the rate at which the supply grows, and the stability and certainty it provides to businesses and individuals trying to plan for the future.

Even the Janet Yellens of the world admit there are limits to monetary policy, and we’ve reached them. Central banks are the primary villains and enablers of our current economic drama, and money cannot be centrally planned any more than wheat production or factory worker wages or oil prices. The effect of central banks on culture and the choices humans make is one of the biggest untold stories of our time.

Second: we don’t really know what things cost.

David Stockman reminds us interest rates are the most important prices in an economy. When you manipulate them, it becomes almost impossible to know the honest price, meaning the true market price, of anything: oil, real estate, tech stocks, bread or milk.

Since about 1980, but especially since 2008, central banks have wildly distorted the global economy. When the cost of money is artificially cheap, lots of business ideas look good on paper. And when safe investments like Treasury bonds and CDs don’t pay much, we’re all forced into chasing yields through riskier investments. Activist central banks are profoundly dangerous for investors and savers. If central bankers stay active in the next few years, through more QE and negative interest rates, that’s a sure sign the emperor has no clothes and central bankers have made a political decision to kick the can down the road.

Third: the laws of economics apply to governments.

We think bubbles apply to stock and real estate, not government policies. But at some point economics applies to governments just as surely as the laws of gravity apply to all of us. Interest rates of just 3.5 percent on Treasury notes will be disastrous for the US federal budget over the next few decades. By the mid-2020s, interest on Treasury debt could exceed defense and entitlements as the single largest annual expenditure by the federal government.

Deficit spending and unpayable entitlements will be the downfall of western governments, the legislatures of which spent the last 100 years creating enormous debt and entitlement bubbles. Social Security and Medicare are certainly examples of slow motion catastrophes; it just took a long time to get here.

In any reasonable, lawful world, spendthrifts are punished. The rest of the world knows America will never get its fiscal house in order. No sane accounting standard would ever permit a government to keep trillions of dollars in entitlement promises off its balance sheet.

If we think about it rationally, this should mean creditors cut us off entirely, or at least demand junk bond interest rates. It should mean haircuts and means testing for Social Security and Medicare. It should mean selling off federal assets, including vast western lands. It should mean significant cuts to the federal budget. But Congress will do none of these things, nor can it. We’re past the point of political solutions.

I’ll close with some good news: we have to remember that “the economy” is 320 million people in the US and seven billion people worldwide, most of whom get up every day hoping to improve their economic circumstance. That motivation is very powerful, and often can overcome even the biggest screw-ups by governments and central banks. Short of outright authoritarianism — which is always possible — humans have a tremendous capacity for improving their material lives.

At least on paper, America still contains the raw materials for success:

  • A currency that for the moment is still the least dirty shirt in the laundry, and in uncertain times a flight to the dollar is still likely;

  • The best universities in the world and a relatively educated workforce;

  • Abundant energy. The Bakken Formation in the Western US means we have two times the amount of oil and three times the amount of natural gas;

  • More farmable land than any other nation: 17 percent of all US land can be farmed;

  • 500 million acres of timber;

  • Two huge oceans act as defense but also provide access to Eastern and European markets;

  • And most of all, a hard to define American sense of optimism which is almost a form of entitlement.

Let me close with a reminder: we believe in liberty, not fate. The sky falls only if we let it.

Categories: Current Affairs

"Priming the Pump" Won't Create Real Wealth

Tue, 23/05/2017 - 04:00
By: Frank Shostak

Once an economy falls into recession many commentators tend to express concern that as a result of the economic slump there are now underutilized capital and labor. Resources that can be used are now made unemployed. It is held that the key factor behind this is an insufficient demand for goods and services.

Once it is accepted that this key factor is associated with insufficient demand these commentators take the view that what is required is to somehow boost overall demand in the economy.

With stronger demand, it is held, idle resources could be employed again. Hence it is recommended that the central bank should adopt a very loose monetary stance in order to strengthen the overall demand for goods and services.

The whole thing appears to be quite simple — boost expenditure on goods and services and this in turn, via the famous Keynesian multiplier, will strengthen overall output in the economy.

This way of thinking is succinctly summarized by Ludwig von Mises,

Here, they say, are plants and farms whose capacity to produce is either not used at all or not to its full extent. Here are piles of unsalable commodities and hosts of unemployed workers. But here are also masses of people who would be lucky if they only could satisfy their wants more amply. All that is lacking is credit. Additional credit would enable the entrepreneurs to resume or to expand production. The unemployed would find jobs again and could buy the products. This reasoning seems plausible. Nonetheless it is utterly wrong.1

What those commentators who advocate monetary pumping to absorb idle resources have overlooked is the fact that these resources have become idle on account of the previous boom brought about by the previous loose monetary policy of the central bank.

As a result of the previous loose monetary stance various non-productive or “bubble” activities, emerged. These activities relied for their continued existence upon the maintenance of that loose monetary policy, which results in the diversion of real wealth from wealth generators toward bubble activities.

A tighter stance of the central bank stops this diversion, thereby reducing the number of marginal, bubble activities and ultimately strengthens the process of wealth generation. Such a stance, however, cannot undo the various misallocations of resources that took place as a result of the prior loose monetary position. The damage that was done cannot be undone in the short term. Once, however, the process of wealth generation gains momentum the expansion in the pool of real wealth permits the absorption of various idle resources.

According to Mises,

Out of the collapse of the boom there is only one way back to a state of affairs in which progressive accumulation of capital safeguards a steady improvement of material well-being: new saving must accumulate the capital goods needed for a harmonious equipment of all branches of production with the capital required. One must provide the capital goods lacking in those branches which were unduly neglected in the boom. Wage rates must drop; people must restrict their consumption temporarily until the capital wasted by malinvestment is restored. Those who dislike these hardships of the readjustment period must abstain in time from credit expansion.2

Furthermore says Mises,

If commodities cannot be sold and workers cannot find jobs, the reason can only be that the prices and wages asked are too high. He who wants to sell his inventories or his capacity to work must reduce his demand until he finds a buyer. Such is the law of the market. Such is the device by means of which the market directs every individual's activities into those lines in which they can best contribute to the satisfaction of the wants of the consumers.3

Commentators are correct in believing that what prevents the expansion of the production and the utilization of idle resources is the lack of credit. There is, however, the need to emphasize that the credit that is lacking is the productive credit — the one that is fully backed by real wealth. The fact that this type of credit is scarce is the outcome of previous episodes of expansionary monetary mischief by the central bank, which resulted in the diversion of wealth from wealth producers to non-wealth producers.

What most commentators advocate is the expansion of credit out of “thin air,” which the central bank is able to set in motion, either by direct monetary injections or via intervention in the money markets to maintain a lower target interest rate. Such commentators advocate the expansion in credit that is not supported by real wealth.

The expansion in unbacked credit not only cannot revitalize the economy but, on the contrary, will set in motion a further weakening of the process of wealth generation.

Any attempt to “revive” economic activity by means of loose monetary policy will resume the diversion of real wealth from wealth generators to non-wealth generators, thereby weakening the process of real wealth generation.

As long as the pool of real wealth is large enough this type of policy might “work” — the central bank policies appear to be working.

Once, however, the pool is stagnant or declining the “music stops” and no amount of central bank liquidity injection is going to “work.” On the contrary, the more aggressive the central bank’s stance in attempting to revive the economy the worse things will get.

One could argue that, irrespective of the reason for the emergence of idle resources, the role of authorities and in particular the central bank is to pursue policies that will make it possible for a greater use of these resources. However, the employment of resources requires an expansion in the pool of real wealth to engage those resources. This, however, requires an increase in real savings.

Without this increase there will not be sufficient means to facilitate the employment of those idle resources. A loose monetary policy that is aimed at boosting demand will not do the trick, for an increase in demand cannot replace the real savings that are required to recruit such resources.

Some commentators are of the view that through loose monetary policies on the part of the central bank the economy can and will take off on its own, just as adding a little water to a pump (i.e., "priming the pump") enables water to be pumped out of a well.

This metaphor is misleading since, as we have seen, without the expansion in real savings no expansion in economic activity can take place. Again, pushing more money and, with it, credit unbacked by real wealth, cannot replace the non-existent capital goods that are required in the expansion of wealth that in turn absorbs the unemployed labor and capital.

  • 1. Ludwig von Mises, Human Action, 3rd rev. ed. (Chicago: Contemporary Books, 1966), p. 577.

  • 2. Ibid., p. 578.

  • 3. Ibid., p. 577.

Categories: Current Affairs

The Drug War: Will the Trump Administration OD on Authoritarianism?

Mon, 22/05/2017 - 18:00
By: Ron Paul

Last week Attorney General Jeff Sessions ordered federal prosecutors in drug cases to seek the maximum penalty authorized by federal mandatory minimum sentencing laws. Sessions’ order represents a setback to the progress made toward restoring compassion and common sense to the sentencing process over the past few years. Sessions’ action also guarantees that many nonviolent drug law offenders will continue spending more time in prison than murderers.

Sessions’ support for mandatory minimums is no surprise, as he has a history of fanatical devotion to the drug war. Sessions’ pro-drug war stance is at odds with the reality of the drug war’s failure. Over forty years after President Nixon declared war on drugs, the government cannot even keep drugs out of prisons!

As was the case with alcohol prohibition, the drug war has empowered criminal gangs and even terrorists to take advantage of the opportunity presented by prohibition to profit by meeting the continued demand for drugs. Drug prohibition enables these criminal enterprises to make profits far above the potential profits if drugs where legalized. Ironically, the so-called “law-and-order” politicians who support the drug war are helping enrich the very criminals they claim to oppose!

The war on drugs also makes street drugs more lethal by incentivizing the creation of more potent and, thus, more dangerous drugs. Of course, even as Sessions himself admits, the war on drugs also leads to increased violence, as drug dealers cannot go to the courts to settle disputes among themselves or with their customers.

Before 9/11, the war on drugs was the go-to excuse used to justify new infringements on liberty. For example, laws limiting our ability to withdraw, or even carry, large sums of cash and laws authorizing civil asset forfeiture were justified by the need to crack down on drug dealers and users. The war on drugs is also the root cause of the criminal justice system’s disparate treatment of minorities and the militarization of local police.

The war on drugs is a war on the Constitution as well. The Constitution does not give the federal government authority to regulate, much less ban, drugs. People who doubt this should ask themselves why it was necessary to amend the Constitution to allow the federal government to criminalize drinking alcohol but not necessary to amend the Constitution to criminalize drug use.

Today, a majority of states have legalized medical marijuana, and a growing number are legalizing recreational marijuana use. Enforcement of federal laws outlawing marijuana in those states is the type of federal interference with state laws that conservatives usually oppose. Hopefully, in this area the Trump administration will exercise restraint and respect state marijuana laws.

Sessions’ announcement was not the only pro-drug war announcement made by the administration this week. President Trump himself, in a meeting with the president of Columbia, promised to continue US intervention in South and Central America to eliminate drug cartels. President Trump, like his attorney general, seems to not understand that the rise of foreign drug cartels, like the rise of domestic drug gangs, is a consequence of US drug policy.

The use of government force to stop adults from putting certain substances into their bodies — whether marijuana, saturated fats, or raw milk — violates the nonaggression principle that is the bedrock of a free society. Therefore, all those who care about protecting individual liberty and limiting government power should support ending the drug war. Those with moral objections to drug use should realize that education and persuasion, carried out through voluntary institutions like churches and schools, is a more moral and effective way to discourage drug use than relying on government force.

Originally published by the Ron Paul Institute. 

Categories: Current Affairs

How Economists Destroyed Pre-World War II Germany

Mon, 22/05/2017 - 16:45
By: Ludwig von Mises
This review of Frank D. Graham’s book, Exchange, Prices and Production in Hyper-Inflation: Germany 1920–23 (Princeton, N.J.: Princeton University Press, 1930) was published in Economica (May 1932).

All the misfortunes from which Europe has suffered in the last two decades have been the inevitable result of the application of the theories which have dominated the social and economic philosophy of the last fifty years. Our troubles are the upshot of much laborious thought. The German inflation, above all, was the outcome of the monetary and banking theory which for many years had obsessed the men who occupied the chairs of economics at the Universities, the men who governed the financial policy of the Reich, and the editors of the most influential newspaper and periodicals.

The central feature of these erroneous theories was a total rejection of the Quantity Theory1 and of all the teachings of the Currency School.2 The empirisch-realistische Volkswirt,3 who distrusted every “theory”—especially theories imported from abroad—was firmly convinced that both the Quantity Theory and the Theories of the Currency School were nothing but an inexplicable blunder committed by Ricardo and his followers. The German Kathedersozialisten4​ did not waste their time on the study of English political economy. Hence they were unaware of the problems which were the subject of the long-lasting controversy between the Banking School and the Currency School. The only source of their knowledge of the matter was the book published in 1862 by Adolph Wagner under the title Theorie der Peel’schen Bankakte. Wagner lacked absolutely the gift of economic ratiocination. He accepted without any criticism all the statements of the Banking School; from his book it was utterly impossible to gather what objections the Currency School had had against the theories of the Banking School.

The other leading authority on monetary and banking problems, Wilhelm Lexis, was still less endowed with the power of economic reasoning. He, like Wagner, was entirely innocent of any understanding of the Ricardian theory of the foreign exchanges—the “purchasing power parity” theory. Each firmly believed that the foreign exchanges are governed by the balance of payments.

Hence would-be economists who owed their education to the teachings of such men were prepared to accept without criticism the doctrines of Knapp and Bendixen, who in the years immediately preceding the outbreak of the war dominated German monetary and banking theory. Knapp, Professor of Political Science at the University of Strasburg, was a trained statistician and had devoted much time in archives to the study of Prussian policy concerning the peasantry. There is not the slightest indication in his writings that he had ever glanced at Ricardo or any other of the British monetary economists. The occasional allusions to Ricardo’s ideas, which one finds in Knapp’s writings, impute to Ricardo opinions which are rather the contrary of what we read in Ricardo’s books and pamphlets. Knapp ignored absolutely the problem of prices. In his view the task of monetary theory is nothing else than the purely formal classification of the various kinds of currency. He had not the slightest idea that government interference in the mechanism of price-making is subject to certain conditions which cannot be controlled simply by governmental decree.

Not less fatal for the formation of German views on monetary theory was the influence of Bendixen, the manager of a mortgage corporation, who, inspired by Knapp, wrote some booklets, which expounded the principles of the Banking School. The most striking feature of Bendixen’s contribution was that, being unfamiliar with monetary literature, he honestly believed he was enunciating something entirely new!

In passing under review the German monetary and banking policy from the outbreak of the war to the catastrophe of 1923, the most startling thing is the absolute ignorance even of the most elementary principles of monetary science on the part of literally all German statesmen, politicians, bankers, journalists, and would-be economists. It is impossible for any foreigner even to realize how boundless this ignorance was. For this reason, in the last three years of the German inflation, some foreigners came to believe that the Germans ruined their own currency of set purpose in order to involve other countries in their own ruin, and to evade the payment of reparations. Such imputation of secret satanism to German policy does it wrong. The only secret of German policy was Germany’s total lack of any acquaintance with economic theory.

Thus Herr Havenstein, the governor of the Reichsbank, honestly believed that the continuous issue of new notes had nothing to do with the rise of commodity prices, wages, and foreign exchanges. This rise he attributed to the machinations of speculators and profiteers and to intrigues on the part of external and internal foes. Such indeed was the general belief. Nobody durst venture to oppose it without incurring the risk of being denounced both as a traitor to his country and as an abettor of profiteering. In the eyes both of the public and of the rulers the only reason why monetary conditions were not healthy was the lamentable indulgence of the government in regard to profiteering. For the restoration of sound currency nothing else seemed to be necessary than a powerful suppression of the egotistic aims of unpatriotic people.

It would be very interesting to show that this attitude was the necessary sequel to the whole system of social and economic philosophy as taught by the school of Schmoller. According to the étatiste outlook of this school, power (Macht) is the deciding factor in social life. That even the most powerful government is not free to do everything, that there exist certain unalterable conditions of human existence insusceptible to the influence of the most powerful intervention, are propositions which it never admitted. The study of economic theory, it said, was useless, for the various systems of theoretical economics all overlooked the fact that governments had the power to alter all conditions. It was ready to admit that the Ricardian system was a faithful description of the state of England at his time, but it denied its applicability to Germany. In the realm of the Electors of Brandenburg and the Kings of Prussia everything was different. It therefore replaced the study of economic theory by the history of Prussian administration in the academic curriculum. It taught that there is nothing important in social life but power, and its notion of power was very materialistic. Power in its eyes was soldiers and guns. It had never understood Hume’s discovery that all government is founded on opinion.

But to trace this evolution would involve writing the entire history of the transition of the German mind from the liberal thought of Goethe, Schiller, and Humboldt to the militarist ideas of Treitschke, Schmoller, and Houston Stewart Chamberlain. It would involve writing the history of the Prussian hegemony of the nation which has been styled the nation of poets and thinkers, and the history of the Reich founded by Bismarck and lost by Wilhelm II. It is obvious that this would exceed the purpose of these lines.

In these circumstances it is easy to understand that the German books dealing with the history of the Inflation Period are for the greater part of little value. They are so full of prejudices, and are often so entirely lacking in the theoretical insight which must necessarily precede all historical description that they cannot even give an adequate picture of the great historical event. For this reason this work by a learned American is all the more welcome. In his Exchange, Prices and Production in Hyper-Inflation: Germany, 1920–1923, Professor F. D. Graham of Princeton University has taken great pains to provide a reliable narrative.

In judging this valuable book we must bear in mind that all the experience of the German inflation brought nothing that could puzzle the theoretical economist. There were many things which were quite inexplicable to the étatiste Volkswirt5​ of the Schmoller type, nay, the whole thing was quite inexplicable to them, but there was nothing that had not been observed and satisfactorily explained by the theorist in previous inflations.

In reading Professor Graham’s historical survey even those who were witnesses of the inflation must again and again be amazed at the incredible incapacity evinced in regard to the monetary problem by all sections of the German nation. For the economist the most astonishing fact is the inadequacy of the Reichsbank’s discount policy. This is Professor Graham’s verdict: “From the early days of the war till the end of June 1922 the Reichsbank rate remained unchanged at 4 per cent.; it was raised to 6 per cent, in July, to 7 per cent, in August, 8 per cent, in September and 10 per cent, in November 1922, to 12 per cent, in January 1923, 19 per cent, in April, 30 per cent, in August and 90 per cent, in September. But these increases were as nothing when measured alongside the progressive lightening in the burden of a loan during the time for which it ran. Though, after September 1923, a bank or private individual had to pay at the rate of 900 per cent, per annum for a loan from the Reichsbank, this was no deterrent to borrowing. It would have been profitable to pay a so-called interest, in reality an insurance, charge, of thousands or even millions of per cents, per annum, since the money in which the loan would be repaid was depreciating at a speed which would have left even rates like these far in the rear. With a 900 per cent, interest rate in September 1923 the Reichsbank was practically giving money away and the same is true of the lower rates in the preceding months when the course of depreciation was not quite so headlong. The policy of the Reichsbank authorities in encouraging the discount of commercial bills that they might thus mitigate the scarcity of credit was but further evidence of the Alice-in-Wonderland determination of the directors of that institution to run ever faster in order to keep up with themselves. The scarcity of credit was due solely to currency depreciation and the cure prescribed was to increase the volume of means of payment!”6

But one should not forget that the Reichsbank was not alone in this folly. The private banks, too, lent money to every speculator who furnished collateral security. It was very easy to get rich by buying shares with the money borrowed from the banks. In this way some acquired big fortunes in a very short time and painlessly. Since then all these much-admired and envied profiteers have lost all that they won, and in many cases even much more—a proof that they were not gifted with great business ability. Indeed, no great business ability was needed to outwit any one of the big German banks. That their managers and directors were really incompetent has been proved by the subsequent failure of the institutions which they governed.

It took years for German business men to understand that the mark was no longer a suitable unit for economic calculations. For a very long time they really believed that the profits, which an account of profit and loss reckoned in Marks showed, were genuine earnings. They did not understand that a computation made in a more stable currency would lead to quite a different result. Of course the business men discovered this truth somewhat earlier than the general public. They then replaced the Markrechnung by the Goldrechnung. This was the beginning of the end. The Mark-currency had perforce to break down when its unrestrainable depreciation could no longer be overlooked.

As long as the inflation was working, socialist labor leaders and the socialists of the chair were all in its favor and taught that not the increase in quantity of money but the unpatriotic behavior of the profiteers was the cause of the depreciation of the Mark. After inflation was over they changed their minds. Now they accuse the “capitalists” of having of set purpose made the inflation to enrich themselves. For the German public mind every misfortune is due to the machinations of the “exploiter class.”

For the economist the German inflation brought some interesting illustrations of his theoretical principles, but no experience which did not conform to them. In this instance monetary and economic theory had nothing new to learn. Of course, the German politico-economic science of the Schmoller-Knapp type had everything to learn from it. But in fact, with the exception of some of the younger men, they have declined to draw the conclusion. Unteachable as they are, they still believe in the theory which attributes changes in the value of a national currency to variations in the national balance of payments. The failure of the policy of inflation they attribute to lack of energy on the part of the government and to lack of patriotism on the part of the people.

Nor has the German politician learned a whit more from the inflation. The government and the Reichsbank both believe that monetary troubles arise from an unfavorable balance of payments, from speculation and from unpatriotic behavior of the capitalist class. They therefore attempt to fight the menace of depreciation of the Reichsmark by controlling dealings in foreign currency and by confiscating German holdings of foreign assets. They do not understand that the only safeguard against the fall of a currency’s value is a policy of rigid restriction. But though the government and the professors have learned nothing, the people have. When the war inflation came nobody in Germany understood what a change in the value of the money unit meant. The business-man and the worker both believed that a rising income in Marks was a real rise of income. They continued to reckon in Marks without any regard to its falling value. The rise of commodity prices they attributed to the scarcity of goods due to the blockade. When the government issued additional notes it could buy with these notes commodities and pay salaries because there was a time lag between this issue and the corresponding rise of prices. The public was ready to accept notes and to keep them because they had not yet realized that they were constantly losing purchasing power. This went on for years. But as they learned that the government was determined not to stop with the further issue of notes and that the increase of their quantity must needs lead to a progressive rise of prices their conduct changed. Everybody became anxious not to keep the money in his pocket. The service which money renders consists in its being the commodity which is saleable at the best terms. By keeping money in his purse everybody is enabled to buy in the most convenient way any commodity he may want one day. But when money loses purchasing power from day to day its retention involves a loss. Whoever gets money, therefore, spends it immediately—even by buying something for which he has no present use and maybe even no future use. In the last days of the inflation the employees got their payment daily. At once they handed it over to their wives and these hurried to spend it as quickly as possible by buying at any rate something or other. Nobody wished to retain money, everybody dropped it like a live coal. When this tendency, which on the Stock Exchange was called Flucht in die Sachwerte—flight into investments in goods—became general, so that even the least business-like people adopted it, the end was at hand. The Mark broke down. The government gained no further advantage by issuing notes because the depreciation then outran the increase.

A nation which has experienced inflation till its final breakdown will not submit to a second experiment of this type until the memory of the previous one has faded. No German government could succeed in the attempt to inflate the currency by issues in favor of the Treasury as long as the men and women are still alive who have been the witnesses and victims of the 1923 inflation. Made overcautious by what they suffered, at the very outset of the inflation they would start a panic. The rise of prices would be out of all proportion to the increase in the quantity of paper money; it would anticipate the expected increase of notes. The more money the government issued, the less it would be able to buy. The higher the salaries the civil servants and the soldiers drew, the less goods would they be able to purchase. So the government would fail in the endeavor to ameliorate its financial position by issuing notes. From the point of view of officialdom, inflation would be nugatory.

The economist might urge that this lesson could have been learned at a lower cost from theory than from experience. Had the German people paid more attention to the teachings of economic theory they could have learned all these things without having to pay so dearly. This is a melancholy comment to have to make after the event.

But in any case the monetary history of the last three lustrums in Germany and many other European countries proves that no nation can afford to treat economic theory with contempt.

  • 1. [The Quantity Theory says that the general price level is primarily a function of the money supply—Ed.]

  • 2. [As Mises understood it both the British Currency School and the British Banking School, broadly speaking, were advocates of central banking. The Currency School, however, advocated rules for the expansion of money and credit with some theorists even favoring 100% specie reserves. The Banking School advocated a discretionary central banking policy with few or no rules concerning money and credit expansion—Ed.]

  • 3. [Translated as empiricist-relativist political economist—Ed.]

  • 4. [Members of the “Younger” German Historical School who used their university positions as vehicles to advocate political intervention and reform in the economy. These professors were called “academic socialists” or “socialists of the chair”—Ed.]

  • 5. [Translated as a political economist who advocates total control of all economic planning as a function of the government—Ed.]

  • 6. Cf. p. 65 of Graham’s book.

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