Cronyism and Corporatism: Recent Episodes
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Articles showing the harmful effects of cronyism and corporatism on government and the working of a country's economy.
While progressives blame climate change for the deadly Lahaina fire, government created the conditions for the blaze and then helped set it.
Original Article: "Thanks to Government, Maui's Lahaina Fire Became a Deadly Conflagration"
The possible bankruptcy of Thames Water Company in Great Britain brings to mind the heady days 40 years ago when Margaret Thatcher's government was privatizing state-owned enterprises, including TW. Not all privatization stories have happy endings.
Original Article: "Thatcher's New Style of Government"
Many conservatives, in trying to steer the USA away from "wokeism," fail to understand that their “national greatness” schemes are just as harmful.
Original Article: ""National Greatness" Is Not the Appropriate Response to "Wokeism""
Matthew Mohlman joins Good Money with Tho Bishop to discuss his work with Monument Ventures. Matthew and Tho discuss the need to build better alternatives to woke financial institutions, and the limit of political solutions to address the problem.
Join Bob Murphy, Patrick Newman, Jonathan Newman, and Murray Sabrin in November for a Mises Circle in Ft. Meyers, FL on The White House, the Fed, and the Economy. Use promo code Tampa23 for $10 off registration.
Matthew's Article on JPMorgan's Progressive, Anti-Faith Agenda: Mises.org/GM21aOn Politically-Motivated 'De-Banking': Mises.org/GM21bVivek Ramaswamy on ESG: Mises.org/GM21cMonument Ventures: Mises.org/GM21dGood Money listeners can order a special $5 book bundle that includes How To Think About the Economy and What Has Government Done to Our Money? with free shipping using promo code "GoodMoney" at Mises.org/Good
Receive a free subscription to The Austrian magazine at Mises.org/Magazine
On this episode of Good Money with Tho Bishop, Connor O'Keeffe joins the show to talk about his recent work on the Mises Wire. Tho and Connor discuss the role government incompetency played in the horrific tragedy of the Maui wildfires, as well as the bankruptcy of one of America's largest trucking companies.
Join Bob Murphy, Patrick Newman, Jonathan Newman, and Murray Sabrin in November for a Mises Circle in Ft. Meyers, FL on The White House, the Fed, and the Economy. Use promo code Tampa23 for $10 off registration.
Connor's Article on the Maui Fires: Mises.org/GM20a Connor's Article on Trucking and Labor Laws: Mises.org/GM20b
Good Money listeners can order a special $5 book bundle that includes How To Think About the Economy and What Has Government Done to Our Money? with free shipping using promo code "GoodMoney" at Mises.org/Good
Receive a free subscription to The Austrian magazine at Mises.org/Magazine
Recorded in Windham, New Hampshire, on August 20, 2023.
Special thanks to Joe and Tracy Matarese for making this event possible.
Recorded in Windham, New Hampshire, on August 20, 2023.
Special thanks to Joe and Tracy Matarese for making this event possible.
Michael Rectenwald talks with Paul Gottfried about Paleoconservatism, the left, Wokism, the identity and ethos of the ruling elite, and decentralization.
Join us in Nashville on September 23rd for a no-holds-barred discussion against the regime. Use code "Rekt23" for $45 off admission: Mises.org/Nashville23
When it comes to the debt ceiling, political parties are irrelevant, and the recent debt ceiling drama, was little more than a sham.
Original Article: "The Debt Ceiling Debate Was Pure Theater"
On this episode of Radio Rothbard, Ryan McMaken and Tho Bishop are joined by Econ Bro, the founder of Nigerian Liberty, which offers seminars in Austrian economics in Nigeria. The three discuss the inflation crisis in Nigeria, the cultural consequences of rising prices in the country, and the costs of the state capture of its petrol industry.
To learn more about Nigerian Liberty, visit NigerianLiberty.com.
View Econ Bro's Substack at econbro.substack.com.
Be sure to follow Radio Rothbard at Mises.org/RadioRothbard.
New Radio Rothbard mugs are now available at the Mises Store. Get yours at Mises.org/RothMug
PROMO CODE: RothPod for 20% off
President Biden makes the false claim that wind- and solar-generated electricity are cheaper than power generated from coal and oil.
Original Article: "Wind and Solar Are NOT Cheaper than Coal and Oil"
According to progressive elites, it is terrorism if consumers boycott businesses because of their leftist policies.
Original Article: "Is Boycotting Target a Legitimate Protest or an Act of Terrorism?"
The political passion for "social justice" is creating a larger free-rider problem and a problem of injustice.
Original Article: "Social Justice and the Free-Rider Problem"
Do woke tech firms have monopoly power?
Download lecture slides at Mises.org/MU23_PPT_20.
Recorded at the Mises Institute in Auburn, Alabama, on 26 July 2023.
It's fitting that the G7 recently met in Hiroshima because the policies they are following are blowing up the world economy.
Original Article: "The G7 in Hiroshima: The Latest Attempt to Impose a Unipolar World"
On this week's episode, Mark summarizes the many problems with EVs, and focuses on two consequences funded by taxpayer subsidy. Large, overpriced, long range vehicles have been subsidized at the expense of more efficient technological applications. These EVs are significantly heavier compared to their fossil fuel counterparts (which have engines and gas tanks). These heavier vehicles create greater crash risks for passengers and pedestrians. Failure to disclose such issues reveals some uncomfortable truths about the political elites who drive this agenda onto the American people.
Be sure to follow Minor Issues at Mises.org/MinorIssues.
South Africa is suffering from rolling blackouts and other power outages. These could be avoided if the government would permit competition in electricity markets.
Original Article: "Licensing Laws Deepen South Africa's Electricity Crisis"
In today's progressive climate, sexual assault charges are easy to make and hard to refute, even when they are demonstrably false.
Original Article: "Demonizing Men with False Data on Sexual Abuse"
Some conservatives are upset because the new best-selling beer is owned by the same company that owns the beleaguered Bud Lite. Actually, they should have no problem with that.
Original Article: "Do Boycotts Really Work? Another Look at the Bud Light Situation"
The latest round of wildfires in Canada has brought out the usual statist demands that we ban fossil fuels, but in the real world fossil fuels protect people from climate-related disasters.
Original Article: "Fossil Fuels Enable Us to Better Fight Fires and Other Environmental Disasters"
The State of California, unable to unionize fast food workers, now is trying to create workers councils that will set labor policies for fast food restaurants.
This will not end well.Original Article: "Leviathan Is on the Menu"
Despite "concerns" about increasing federal debt, in the end Republican legislators have gone along with whatever the ruling elites want. The Limit, Save and Grow Act of 2023 is more of the same.
Original Article: "Republicans Fail on the Debt Ceiling in 2023"
Contrary to the still-enduring myth about Republican budget cutting, there is no correlation whatsoever between Republican control of DC and the trajectory of federal spending.
Original Article: "The Republican Debt-Ceiling "Deal" Is Exactly What We Expected"
With the appointment of Linda Yaccarino as Twitter's new CEO, Elon Musk is trying to appease woke advertisers to bring up his company's revenues. This will not end well.
Original Article: "The Woke Cartel and Twitter's New CEO"
Radical environmentalists have convinced people that we are doomed if we continue to use fossil fuels. We are doomed if we stop using them.
Original Article: "Energy and Economic Efficiency: The Market versus the Politicization of Our Energy Futures"
We are familiar with the five stages of grief. However, it is not a stretch to apply those stages to what is happening to the banking system. Right now, we are in the second stage: anger.
Original Article: "The Five Stages of Bank Failure Grief"
Noam Chomsky's latest offering—a series of interviews—presents the best (and worst) of one of America's premier public intellectuals.
Original Article: "There's No Place like Noam"
President Biden recently claimed that "trickle-down economics" doesn't work but transferring wealth from taxpayers to politically connected people is the real trickle-down economics.
Original Article: "Government Redistribution Is the REAL Trickle-Down Economics"
In this episode of Radio Rothbard, Ryan McMaken and Tho Bishop take a revisionist Rothbardian lens to American history. Was the American revolution a good thing? Was Andrew Jackson better than Thomas Jefferson? Does a historical narrative really matter? Tune in for this and more!
New Radio Rothbard mugs are now available at the Mises Store. Get yours at Mises.org/RothMug
PROMO CODE: RothPod for 20% off
American corporations are lavishing billions of dollars on leftist groups in the name of "equity." But many of them also are donating to even more questionable people and causes.
Original Article: "The Putrid Underbelly of Woke Capitalism"
In their attempts to remake the economy, progressive elites are pushing ESG. What they forget is that the economy runs on real things, not ideology.
Original Article: "ESG: Another Fraudulent Hustle That Progressive Elites Have Foisted on the Economy"
Recorded in Birmingham, Alabama on April 22, 2023.
From the Mises Institute's recent event in Birmingham, Alabama dedicated to the global threat of "The Great Reset".
On Sunday morning, March 12, Treasury Secretary Janet Yellen told CBS there would be no bailouts. Later in the day the Fed declared quantitative easing to infinity and beyond.
What’s going on?
Quite simply, the Fed is willing to overpay for debt (again). They call it the Bank Term Funding Program (BTFP), and as far as one can tell, its dollar value is limitless. The term sheet reads:
Program: To provide liquidity to U.S. depository institutions, each Federal Reserve Bank would make advances to eligible borrowers, taking as collateral certain types of securities.
And who is eligible?
Any U.S. federally insured depository institution (including a bank, savings association, or credit union) or US branch or agency of a foreign bank…
Basically everyone (i.e., not you or main street, just financial institutions) can take part in this legal counterfeiting operation.
So what’s being traded for newly created Federal Reserve notes?
Eligible collateral includes any collateral eligible for purchase by the Federal Reserve Banks in open market operations … provided that such collateral was owned by the borrower as of March 12, 2023.
Meaning: Practically any bank can exchange US Treasury (or even mortgage-backed securities, should they have held any on their books) with the Federal Reserve.
This program will be offered for one year at no charge to banks, and of course with no recourse!
The Fed explains:
Recourse: Advances made under the Program are made with recourse beyond the pledged collateral to the eligible borrower.
Now here’s the rub:
Collateral Valuation: The collateral valuation will be par value. Margin will be 100% of par value.
Therefore, if Wells Fargo or Bank of America owns US debt that is trading at fifty cents on the dollar, they can trade it with the Fed which will pay one dollar. In theory, it’s only an unrealized and temporary loss for the Fed because once the debt comes due, it will be paid in full. So the Fed won’t suffer a loss, nor will the bank.
The Fed will purposely pay an amount above market value on debt held by banks. The banks will receive this newly created money and get rid of their unrealized losses. Afterward, the banks will have to do something with this new money, such as buy more debt. We can only guess, but whatever the banks do with the money, it will most certainly be highly lucrative for them, push asset prices up, and further erode whatever is left of the middle class. It will also offer a new way for banks to make even riskier bets that will land them in more trouble in the future.
It is theft, a moral hazard, anti-capitalistic, and even antagonistic to those forced to pay taxes and work for a living. But still more questions remain, specifically: How large is this program? Are we talking a few billions or trillions of dollars? At one extreme, this program serves as a confidence booster more than anything; it’s public messaging. Very few banks will accept the generous offer. But it will provide public assurance that the Fed will insure deposits, keep banks from panic selling bonds at a loss, and quell any ideas of a bank run.
If this is the case, then the Fed has bought a little more time until the next panic sets in.
At the other extreme, every bank in America lines up to receive free money from America’s central bank. The Fed will eventually expand its balance sheet by trillions of dollars more, and they’ll tell us that it would have been worse if it weren’t for the Fed.
As for the Fed’s commitment to reducing the balance sheet, we’ll know the answer to this soon enough! Few things are certain at the moment, but it sure is a good day to be a banker.
What if the world’s states were to come together and create a single world currency? From a purely economic point of view, there would be significant advantages if every nation didn’t operate with its own money but with the same currency. Not only for an individual economy, but for the world economy as a whole, the optimal number of currencies is one. Let’s take a look.
The decisive factor is how this single world currency comes about, and who issues it. In a free market for money—in a natural process—a single world currency would emerge from the voluntary agreements of the market participants: the money demanders would decide which commodity they want to use as money. It is impossible to predict with certainty what the outcome of the free choice of currency would be; after all, it resembles a discovery procedure whose outcome is not known in advance. However, it can be assumed that a commodity currency would be created, that gold or possibly a cryptounit would be chosen as the money base.
However, if states monopolize money production, a single world currency cannot develop through voluntary decision-making. In 2023, several national fiat currencies coexist. But this is not a stable equilibrium. Rather, here too, there is a tendency to create a single world currency—because it is optimal for everyone in the world to trade and calculate with the same currency. This is what democratic socialism takes advantage of.
Creating a single world currency is a means to an end for democratic socialism. Its adherents recognize that a single world state cannot be established directly. The national resistance that would have to be overcome is too great. The detour, the indirect way, by which democratic socialism can achieve its goal is by creating a single world currency under state control. The eurozone can serve as a “model” for this process. We’ve seen nations voluntarily give up their monetary sovereignty and accept a single fiat currency that is issued by a supranational central bank. Within the eurozone, money is no longer controlled by individual national parliaments.
The shared euro currency creates major problems in and between the participating countries. But the forced euro marriage has not yet been through the “divorce courts” because of the high costs of a euro exit and also because the democratic socialists fight any attempts to withdraw from the euro with all political means available to them. The problems created by the single currency are increasingly forcing participating countries into communization. As part of the eurozone, some nations must pay for the national debts of others, and the cost of saving ailing banks from collapse is borne by all taxpayers and money users.
All of the problems of imposing one fiat money across many nation-states only became apparent after the euro community was locked into place—the potential problems received little or no attention beforehand. From the outset, it was not economic rationality that inspired the euro, but political endeavors that can be traced back, unsurprisingly, to politics, namely the ideology of democratic socialism. The end of national monetary sovereignty and the adoption of the euro were promoted in public by emphasizing the peace and prosperity effects of a single currency.
In light of the experience gained with the “euro experiment,” the question arises: What are the consequences of creating a single fiat world currency? A state-controlled world currency would bring with it all the negative characteristics and problems of national fiat currencies, and it would cause economic, political, and cultural damage that would eclipse that from national fiat currencies.
What every single state that has fallen victim to democratic socialism wants is also what a community of states wants: to control the production of money and to expand the money supply at will in order to secure and expand its rule. It is a logical step for the states to merge their own fiat currencies into a fiat world currency—especially for small and medium-sized states, whose financial leeway is considerably increased as a result.
The fact that a fiat currency and not a commodity money has been chosen is virtually self-explanatory: the national currencies are already fiat money, and fiat money is the type of money that states prefer because it can be multiplied at any time and in any quantity at the lowest cost.
If the national states agree to accept a single fiat currency issued by a world central bank, then the money users will no longer have any choice or escape options. They will be at the mercy of a fiat world money. The world central bank will not have to fear that dissatisfied users of its money will “migrate” to other currencies because there will be no other currencies anymore. And because the single fiat world currency will have no competition, it will also become a plaything of political interests. Above all, the states will encourage the world central bank to pursue a monetary policy through which they can finance themselves as cheaply as possible with credit.
After all, debt financing is particularly attractive to every state: the possibility of easy borrowing is a very important motive for states to adopt a fiat world currency. Unlike with taxation, savers usually give their money voluntarily to the state, because they expect it to be repaid to them plus interest. A world central bank has a free hand to set the market interest rate as it sees fit. It does not have to fear that capital will migrate away from an extremely low market interest rate—after all, the interest rate that it determines will prevail all over the world.
A world central bank, which has a monopoly on the fiat world money, facilitates the worldwide debt economy to an extent probably still unknown. The relatively bad state debtors—i.e., those who have so far only been able to finance themselves at relatively high interest rates—particularly benefit from a single fiat world currency. If there is only one currency left in the world, there will be a single large, transparent, and liquid capital market in which there will be no exchange rate fluctuations, which helps to reduce credit costs. The improved debt opportunities in such a market favor the expansion of state influence and thus promote the nationalization of the economy and society.
A single currency will put governments in a favorable position to buy votes. The states will lure voters with money, and more and more citizens and entrepreneurs will become transfer recipients and beneficiaries of the state. They will benefit from state-financed jobs, social benefits, and contracts. States’ involvement in economic and social life will increase. The culture of collectivism will be promoted, and individualism will be repressed. What is left of the free market economy will inevitably give way to a command economy in which states play a decisive role in determining who produces what, when, and where. Although this transformation is already progressing under national fiat currencies, it will be uninhibited under a global fiat currency.
With a single fiat world currency, it will be possible for a world central bank to set an artificial boom in motion worldwide and to protect itself from a bust for a long time. Thanks to the global currency, the boom will affect all the world’s economies: the prices in all labor and factor markets will be distorted—after all, there will no longer be any exchange rate movements between the economies that could shield a region from the monetary policies in other regions; all economies will thus be “monetarily aligned.”
Companies and investors will continue to favor some regions of the world over others, just as investors in the eurozone see the “northern countries” as less risky than the “southern countries” and the “northern countries” continue to be the most attractive region for investors within the eurozone. If, however, the economic developments of the participating nation-states vary too much, the world central bank can be expected to take political countermeasures: it will support weaker countries. For example, it will buy up weak countries’ government and bank bonds; the eurozone’s many “rescue policies” are an example of this eventuality.
In this way, the world central bank will weaken or eliminate the market’s remaining corrective forces, which could put an end to the boom. The boom set in motion by the world bank will therefore be able to last a long time. However, the longer the boom lasts, the greater the damage (overconsumption and bad investments) will be. And the longer the boom progresses, the greater the costs of the corrective crisis will be, which will intensify the political incentives to keep the boom going by any means—after all, states shy away from recession and unemployment and the associated social and political consequences.
In order to avert the corrective crisis, the states will continue to intervene in the market with bans and prohibitions, laws, price controls, subsidies, and labor and expenditure programs. Above all, however, they will make use of the world central bank. If it is politically desired, the world bank will keep any stumbling debtor afloat with newly created money and delay the arrival of the crash. This leads to the question: Will a single fiat world currency be more inflationary than national fiat currencies? The answer is yes.
States’ primary goal with a single fiat world currency is to be able to pursue a controlled inflationary policy with as little punishment as possible. Controlled inflation benefits states and politically connected groups.
However, even under a uniform fiat world currency, there are limits to inflationary policy. The world central bank does not have to reckon with the fact that money users will switch from its fiat money to other currencies when inflation is high, as there will be no other currencies left. But if the inflation of the fiat world currency is too high, its users will lose confidence in it. In an extreme case (hyperinflation) people will start to escape from the fiat world money by taking desperate measures. They will no longer want to use the money at all, and this could seal the fate of the fiat world money.
Of crucial importance for the inflation of the fiat world currency is which forces gain the upper hand in the decision-making body of the world central bank. There are two possible scenarios. In the first case, the governments of the states have a direct influence on the world central bank. In democracies, rulers are known to have short-term goals: their power is only temporary. Therefore, they are anxious to maximize their income during their term of office. Those in power do not participate in the long-term prosperity of the community and consequently have no great interest in making decisions that maintain or increase its net present value beyond their term. In other words, the cow is not milked but slaughtered. Inflation will be comparatively high in this case.
In the second case, the decision-makers on the council of the world central bank are closely connected to those in the financial sector and big business. Such a world central bank council’s interest is that its “product,” its currency, remains permanently marketable. It will not frivolously jeopardize the world currency by implementing an exaggerated inflation policy. The world central bank council would therefore not want to slaughter the cow but milk it for as long as possible. In this case, an oligarchic democracy will prevail in the world central bank council.
In this scenario there is a high probability that the world central bank will above all serve the special interests to which the council oligarchs are closely linked (these are, of course, big banks and big businesses). The interests of the general public take a back seat and are only taken into account if they do not jeopardize the continuation of the world central bank’s special-interest monetary policy. The world central bank will therefore endeavor to keep inflation from becoming too high so that the population does not become dissatisfied and rebel.
Under a self-referential oligarchic democracy, in which councilmen recruit their own successors, the fiat world money is even granted a particularly long stay. The oligarchs will make every effort to ensure that the fiat world money system can continue to exist for as long as possible, that crises, when they occur, are tackled in such a way that the fiat world currency does not suffer and a “flight from money” is avoided.
In view of the overindebtedness problem that fiat money necessarily creates, we cannot exclude the possibility of negative interest rates. Under a policy of negative interest rates, the central bank might set the interest rate at, say, −4 percent per year. This means that a bank balance of €100.00 is reduced to €96.00 one year later and after ten years is only €66.48. What harms the saver benefits the debtor, who makes a profit by taking out a loan! Savers and investors will not tolerate this. Wishing to avoid the losses, they will go to the bank and demand that their assets be paid out in cash and coins. Therefore, as long as there is cash, the effectiveness of a negative interest rate policy is limited.
However, a world central bank can easily enforce the abolition of cash by shutting down cash production. Without cash, the money is “trapped” in bank accounts and can no longer be withdrawn from the banking sector. The negative interest rate policy can then be implemented unchecked. Money holders no longer have the opportunity to evade the devaluation of money and savings. Individual states welcome the abolition of cash for another reason: they will be able to track the financial dispositions of citizens and companies, who will only be able to make payments electronically: banks will be required to provide full information on the payments and financial assets of bank customers at all times. As a result, the taxation possibilities of states will be increased immensely.
As long as there is still cash, there are limits to taxation: if market participants feel that the tax burden is too high, they can carry out their transactions anonymously with cash. This in turn encourages states not to tax citizens and businesses too heavily. But when the taxpayers no longer have this alternative because there is no more cash, the political reluctance which still stands in the way of increased taxation in a world with cash decreases. And if the financial privacy of citizens and businesses is lost, states can easily subject citizens and businesses to full monitoring.
A global central bank will undertake the supervision of the banking and financial sector. It will want to prescribe how commercial banks operate; for example, what liquidity and capital requirements they must meet and how they must assess their credit risks. The world central bank will also want to decide whether and under what circumstances failing banks will be aided or allowed to close. The right of national governments to have their say will increasingly dwindle in favor of the supranational world central bank and supranational supervisory authorities and bodies. The consequences will be far reaching.
The pressure for a body of regulation to which all banking and financial enterprises are subject will increase—and will come from the large and powerful interest groups. National or regional peculiarities will not be taken into account if the large and powerful interest groups have asserted themselves in the political negotiation of the regulatory provisions. For many small countries, this will force far-reaching adjustments—not only in their banking and financial economies but also in their production structures. There will be winners and losers in this process: adjustment costs will be higher for some regions and lower for others. This will create conflicts of interest between the nation-states.
A fiat currency used by people in many countries will fuel further conflicts. It is well known that the expansion of the money supply means that a few are made better off at the expense of many others: the first recipients are the beneficiaries, the late recipients, the disadvantaged. This is already resulting in disputes in nation-states that are relatively homogeneous in terms of culture, language, and tradition. The conflicts over redistribution will become even more acute when the effects of redistribution are felt across borders, when people in one country realize that they are being bled in favor of people in another country.
A world central bank has a free hand to set the world interest rate at will. Not only can it keep it artificially low to set a boom in motion and keep it going for a long time, but it can also bring about a negative world interest rate, a political “solution” to the overindebtedness problem caused by a fiat world money. Another motive for forcing world interest rates into negative territory is the democratic socialists’ desire to better steer and control the economy and society, or to shatter what is left of the free market economy.
The fact that this is possible with a negative interest rate policy becomes apparent when one considers the consequences of a negative interest rate for the credit market. Commercial banks receive credit from the world central bank at, say, −2 percent, on the condition that they lend the money to consumers and companies. If they borrow €100 at −2 percent and lend the money at −1 percent, their profit is €1. Under these circumstances the demand for credit grows enormously: after all, everyone wants to profit from the negative interest rate loans.
The world central bank must ration the loans so that the creation of credit and money does not get out of hand. It is no longer the market interest rate that balances supply and demand, but the world central bank, which gives a certain amount of credit and allocates it. But what criteria should be used to allocate the loans? Should all those who ask for loans get them too? Or should labor-intensive economic sectors be preferred? Or should the loans go only to sunrise industries? Or should weakening branches of industry be supported with additional loans? Or should the south get more than the north?
The world central bank has a decisive influence on who can finance and produce what, when, and where. Like a central planning authority, it—or the interest groups who control it— determines the fate of the economies in all the regions of the world: which industries are promoted or pushed back; which economies grow stronger and which weaker; which banks are allowed to survive in which countries and which are not. Welcome to the centrally planned economy! However, a negative interest rate policy would not be possible in the long term; it would lead to the end of the division of labor in the economy.
First, lowering the interest rate inflates the prices of existing assets: stocks, houses, and land— everything becomes more expensive. The lower the interest rate, the higher the present value of future payments and thus also the market prices of the assets. The speculative bubble, which is inflated, initially provides investors with high returns. At the same time, the outlook for future returns deteriorates. The reason? Zero and negative interest rates cause the prices of stocks, houses, etc., to rise until the expected yield that these asset classes promise has approached the low or negative interest rate set by the central bank. In extreme cases, the expected market returns will fall to or even below the zero line.
But once the world central bank has pushed all returns to or below the zero line, the free market economy (or what is left of it) is on the verge of collapse. Without a positive market interest rate, without the prospect of a positive return, saving and investing cease: after all, every consumer and entrepreneur has a positive originary interest rate. And when there is no more return to earn, there is no more saving and investment, only consumption. The economy based on the division of labor comes to a standstill. Replacement and expansion investments fail to materialize, capital consumption begins, and the modern economy falls back into a primitive subsistence economy. An extreme example. Or is it?
The very process by which the world central bank lowers the world market interest rate to or below zero (something it can do as a monopolist of money production) is extremely problematic. It artificially pushes people’s time preferences up. As Friedrich Nietzsche put it, there is a “revaluation of all values,” a devaluation of the future. The here and now is made even more important than tomorrow. The consequences are far reaching. Life on credit is promoted. The virtue of thrift goes out of fashion. “Permanent debt” becomes morally acceptable. Achieving short-term goals becomes more important to people than achieving longer-term goals. The willingness to achieve decreases, because, compared to the disutility of labor, leisure time rises even higher in value. Divorce also becomes more attractive as a “solution” to marital problems; efforts to overcome relationship difficulties are increasingly shunned. The quality of education suffers: if the here and now is so important, then we will also spend less time cultivating and maturing for the future. Morals decay: consideration and manners are costly activities in interpersonal relationships and often only pay off in the long term. Aesthetics degenerate: it is easy for passing fads to find buyers; breaking away from “proven classics” is made easier. A world central bank that issues fiat money has decivilizing consequences worldwide.
The idea that states could remain sovereign and independent once they participate in the fiat world money system is illusory. If the same money is used in different countries, this will help to make the best possible use of the efficiency potential offered by the international division of labor. The commodity and factor financial markets of the national economies will increasingly dovetail. And the closer the ties between those markets, the stronger will be the incentive of the nation-states to surrender sovereignty to supranational authorities. This applies both to economically good times—then the willingness to share, to make compromises, is relatively high—and to economically bad times— then a way out of the economic problems is seen in moving closer together, in jointly pursued “emergency policies.”
A fiat world currency promotes political centralization. The “urge” to establish a unified government, a world state, is strengthened, especially under the ideological leadership of democratic socialism. If economic and financial ties become ever tighter, why not create a single world state that can more effectively implement the desired policies—such as policies for prevention of economic and financial crises as well as tax fraud, environmental protection, counterterrorism, etc.? The world central bank, which issues the fiat world currency, becomes a particularly sought-after political power and control center in this concentration process.
Drawing on Robert Michel’s iron law of oligarchy, it is to be expected that a relatively small, assertive group of people which originates from the party and government structures of the participating states will try to put the world central bank under its control and make it serviceable for its own purposes. Against this background, it would be unrealistic for something to emerge that could be described as a “democratic world central bank.”
The representatives of the participating states may initially endeavor to “chain” the world central bank—i.e., to design the rules and regulations to which the world central bank is subject in such a way as to prevent abuse of power. However, what happens in the hierarchy of parties also happens in the hierarchy of a community of states: the most determined, tireless, ruthless, and relentless advocates of democratic socialism prevail. The aim of the oligarchy will be to make the world central bank serviceable and, above all, to enable the creation of a world government, a world state, which democratic socialism must necessarily strive for.
A world state, equipped with its own global fiat money monopoly, would open a dark chapter in the history of humankind and lead to a civilizational catastrophe. The world state would have no competitors to fear. No one could escape from it. Emigration would be impossible; the world state would be everywhere. The hope that the expansion of the power of the world state could be effectively curbed by democratic electoral acts would prove to be illusory as soon as oligarchization set in—and this is to be expected, of course, as already impressively illustrated by the expansionist drive of the nation-states in recent decades.
It is downright absurd to think that a world state with its own fiat world currency would not sooner or later mutate into a totalitarian tyrant.
But are there perhaps good forces that could challenge the money monopoly and thereby effectively prevent the ideas of world money and a world state from being put into practice? One possible good force is technological disruption, which could revolutionize the global monetary system or show people that better money than that offered by states is both necessary and possible. There is no doubt that cryptocurrencies hold such potential for disruption.
Technological Disruption: CryptocurrenciesThe cryptounit bitcoin holds out the prospect of something revolutionary: money created in the free market, money the production and use of which the state has no access to. The transactions carried out with it are anonymous; outsiders do not know who paid or who received the payment. It is money that cannot be multiplied at will, whose quantity is finite, that knows no national borders, and that can be used unhindered worldwide. This is possible because bitcoin is based on a special form of electronic data processing and storage: blockchain technology (distributed ledger technology), which can also be described as a decentralized account book.
Think through the consequences if such a “denationalized” form of money should actually prevail in practice. The state could no longer tax its citizens as before. It would lack information on the labor and capital incomes of citizens and enterprises and their total wealth. The only option left to the state would be to tax the assets in the “real world”—such as houses, land, works of art, etc. It could try to levy a “poll tax”: a tax in which everyone pays the same absolute tax amount— regardless of the personal circumstances of the taxpayers, such as income, wealth, ability to achieve, and so on. But would that be practicable? Could it be enforced? This is doubtful.
The state could also no longer simply borrow money. In a cryptocurrency world, who would give credit to the state? The state would have to justify the expectation that it would use the borrowed money productively to service its debt. But as we know, the state is not in a position to do this and is in a much worse position than private companies. So even if the state could obtain credit, it would have to pay a comparatively high interest rate, severely restricting its scope for credit financing.
In view of cryptocurrency’s financial disempowerment of the state, the question arises: Could the state as we know it today still exist at all, could it still mobilize enough supporters and gather them behind it? After all, the fantasies of redistribution and enrichment that today drive many voters into the arms of political parties and ideologies would disappear into thin air. The state would no longer function as a redistribution machine; it basically would have little or no money to finance political promises. Cryptocurrencies, therefore, have the potential to herald the end of the state as we know it today.
The transition from the national fiat currencies to a cryptocurrency created in the free market would have consequences for the existing fiat monetary system and the production and employment structure it has created.
However, bitcoin has not yet developed to the point where it could be a perfect substitute for fiat currencies. For example, the performance of the bitcoin network is not yet high enough. Another problem with bitcoin transactions is finality. In modern fiat cash payment systems, there is a clearly identifiable point in time at which a payment is legally and de facto completed, and from that point on, the money transferred can be used immediately. However, distributed ledger technology consensus techniques (such as proof of work) only allow relative finality, and this is undoubtedly detrimental to the money user (because blocks added to the blockchain can subsequently become invalid by resolving forks).
The transaction costs are also of great importance regarding whether bitcoin can assert itself as a universally used means of payment. In the recent past, there have been major fluctuations in this area. In addition, the time taken to process a transaction has also fluctuated considerably at times, which may be disadvantageous in view of the emergence of instant payment options for fiat money.
Another important aspect is the question of the “intermediary.” Bitcoin is designed to enable intermediary-free transactions between participants. But do the market participants really want intermediary-free money? What if there are problems? If someone made a mistake and transferred one hundred bitcoins instead of one, he cannot reverse the transaction. And nobody can help him! The fact that many hold their bitcoins in trading venues and not in their private digital wallets suggests that even in a world of cryptocurrencies there is a demand for intermediaries offering services such as storage and security of private keys.
As soon as intermediaries come into play, the transaction chain is no longer limited to the digital world, but reaches the real world. At the interface between the digital and the real world, a trustworthy entity is required. Just think of credit transactions. They cannot be performed unseen and anonymously. Payment defaults can happen here, and therefore the lender wants to know who the borrower is, what credit quality he has, and what collateral he provides. But if the bridge is built from the digital to the real world, the cryptomoney inevitably finds itself in the crosshairs of the state. However, this bridge will ultimately be necessary, because in modern economies with a division of labor, money must have the capacity for intermediation.
It is safe to assume that technology will continue to make progress, and that it will remove many remaining obstacles. However, it can also be expected that the state will make every effort to discourage a free market for money by reducing the competitiveness of alternative money media such as precious metals and cryptounits vis-à-vis fiat money through tax measures (such as turnover and capital gains taxes). As long as this is the case, it will be difficult even for money that is better in all other respects to assert itself.
Therefore, technical superiority alone will not be sufficient to help free market money—whether in the form of gold, silver, or cryptounits—achieve a breakthrough. In addition, and above all, it will be necessary for people to demand their right to self-determination in the choice of money or to recognize the need to make use of it. Ludwig von Mises has cited the “sound-money principle” in this context: “The sound-money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system.” And he continues: “It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.”
These words make it clear that in order for a free market for money to become possible, quite a substantial change must take place in people’s minds. We must turn away from democratic socialism, from all socialist-collectivist false doctrines, from their state glorifying delusion, and no longer listen to socialist appeals to envy and resentment. This can only be achieved through better insight, acceptance of better ideas, and logical thinking. Admittedly, this is a difficult undertaking, but it is not hopeless. Especially since there is a logical alternative to democratic socialism: the private law society with a free market for money.
A Free Market for MoneyA free market for money means two things. On the one hand, those demanding money can freely choose what they want to use as money—for transaction and saving purposes. On the other hand, every market participant has the freedom to try to offer his fellow human beings a good to demand voluntarily as money. But wouldn’t that lead straight to “money chaos”? Wouldn’t hundreds, maybe even thousands of types of money circulate and thus make financial calculation impossible in the economy? And wouldn’t that undermine the efficiency of the economy? This concern is unfounded.
The money demander plays the decisive role. In a free market for money, anyone who asks for money will, out of self-interest, ask for a good that has the greatest possible marketability, a good that is recognized by its trading partners as the generally accepted medium of exchange. What do you offer the baker? It is best to offer something that the baker can use to buy shoes from a cobbler or shirts from a tailor. In a free market for money, people will demand as money a good that finds the widest acceptance, which is regarded by the largest number of people as a medium of exchange. The choice of the good that serves as money is based on the wishes of the trading partners.
But what if Mrs. A offers colorfully printed paper slips and says that these are “good money”? The answer is that no one would accept her paper slips as money. Why not? Quite simple: you wouldn’t know what these colorful notes are worth, or what you could get for them in exchange. That’s why no one would demand them as money. This is exactly what Mises has shown with his regression theorem: money must arise from a good that already has a nonmonetary market value before it is used as money. This is not the case for colorful and arbitrarily printed paper slips. They would not be able to compete against other goods such as gold and silver.
In a free market for money, people will demand a good that possesses the physical qualities that “good money” must have: be scarce, storable, transportable, divisible, malleable, and transferable and be regarded as valuable. If we take into account currency history, it seems quite probable that money would still be chosen in the form of precious metals—notably gold and silver—today. But cryptounits could also possibly assert themselves as money in the future. The choice people will ultimately make in a free market for money cannot be predicted with certainty.
Precious metals as money is an improvement compared to unbacked fiat money. No one has to carry jangling coins around in their pockets. The use of gold and silver can be digitalized. All kinds of payments that are common today could be carried out easily and problem-free with gold and silver. If cash is desired, precious metal coins can circulate or banknotes can be used that can be exchanged 100 percent for physical gold at the storage facility that issued the banknotes. Cashless payment transactions are also possible in the usual way when using gold money: bank transfer, direct debit, crossed check, payments by credit and debit card, mobile payment, bills of exchange, etc.
In a free market for money, in which a good that cannot be multiplied at will (by granting credit) is chosen as money, the credit market can exercise its intended function undisturbed: the supply of and demand for savings create a market interest rate that ensures that sufficient savings are available to make investments. This puts an end to the chronic economic disruptions of boom and bust caused by the issuance of fiat money. Because the banking business is not inflationary, the nonmarket (antisocial) redistributive effects of fiat money cease.
In a free market for money, there is no central bank and no state supervisory or regulatory authorities. All that is necessary for the functioning of a free market for money is a functioning legal order, which ensures that the contracting parties fulfill their obligations and that infringements of contractual agreements are effectively sanctioned: for example, that the stored commodity money is not embezzled, that banknotes can be exchanged for the money base at face value at any time. In order to guarantee that contractual obligations are fulfilled, there is no need for state monopolies of law. Jurisprudence and law enforcement can also be organized in the free market.
A free market money system—with free choice of money and bank freedom—is not a national but an international concept. If trade takes place internationally, across national borders, the market participants select the good to use as money with the same calculation as is used at the national level. Every user of money has an economic incentive to demand as money that good which he thinks is the most attractive means of exchange from his trading partner’s point of view. The idea of a free market for money is thus global in the truest sense of the word: just as free trade knows no national borders, a free market for money extends globally.
A free market for money is incompatible with the state as we know it today; namely, as a territorial compulsory monopolist with ultimate power of decision over all conflicts in its territory. There is no question that a free market for money requires far-reaching changes in people’s thinking. This insight was formulated by Mises in 1923:
The belief that a sound monetary system can once again be attained without making substantial changes in economic policy is a serious error. What is needed first and foremost is to renounce all inflationist fallacies. This renunciation cannot last, however, if it is not firmly grounded on a full and complete divorce of ideology from all imperialist, militarist, protectionist, statist, and socialist ideas.
The Private Law SocietyThe alternative to the state, in its present form, is the private law society. It is characterized by the fact that the same rules apply to all people always and everywhere: that everyone has self-ownership and that everyone has ownership of external goods acquired lawfully—i.e., nonaggressively. And since the same law applies to everyone, there is no public law apart from private law. A private law society is by no means synonymous with anarchy. Far from it! Rather, the private law society is characterized by a very clear distinction between mine and yours, and violations of property are punishable and sanctioned.
In a private legal system, security is offered in the free market. On the supply side, there are insurance companies that offer security services (insurance against theft, personal protection, etc.) in competition with other companies. In insurance contracts, the security service is specified precisely and the mutual rights and obligations are contractually laid down (such as the exclusion of negligence by the insured from compensation in the event of damage). The insurance contracts specify independent conciliation bodies—which also compete with each other for customers who pay voluntarily—to be called upon in the event of a dispute between the policyholder and the insurer.
Under competitive conditions, it is to be expected that prices for insurance coverage and dispute resolution will fall (while they will rise chronically in today’s state-monopolized security and legal apparatus). And it is not only that the insurance services in the free market for security are more geared to the customer’s wishes (in terms of scope and pricing); peaceableness and conflict avoidance are also promoted. Those who demonstrably behave well and are friendly toward their fellow human beings represent a smaller risk and are rewarded with comparatively low insurance premiums.
Since an insurance company is contractually obliged to indemnify the policyholder in the event of a loss (e.g., burglary), it will make a great deal of effort to prevent the occurrence of a loss. And if the damage has nevertheless occurred, the insurance company will do everything in its power to track down the perpetrator and make him liable; otherwise, it will have to pay the compensation, which in turn will reduce its profit. The free market for security discourages crime because potential perpetrators face highly efficient private insurance providers and police agencies. Such insurance and legal contracts can be established not only nationally, but of course also internationally, for private households as well as companies.
In a private law society, a free market for money is a natural phenomenon in the truest sense of the word: a free market for money is people’s right to self-determination when choosing money. The voluntary agreement of the people involved in the global division of labor would result in a single world currency. A freely chosen world currency differs categorically from a single fiat world currency, which is the passion of democratic socialists. A world currency chosen in a free market for money would literally be economically and ethically good money, which best serves humankind and best promotes the peaceful and cooperative coexistence of people in this world.
The ChallengeUnderstanding and practicing economics is the key to destroying the foundations of the driving force of democratic socialism, which for decades has been working toward establishing a world state with a world currency and has already made considerable progress along this path. Bad experiences, undesirable developments, and crises will not be able to deprive democratic socialism of its power and overcome it. This can only be achieved by insight into better ideas, and by the struggle of arguments of reason. The Global Currency Plot is meant as a contribution to help the better ideas prevail.
Recorded in Birmingham, Alabama on April 22, 2023.
From the Mises Institute's recent event in Birmingham, Alabama dedicated to the global threat of "The Great Reset".
Bob is joined by guest Peter St. Onge to discuss how SVB's CEO, as well as Bernie Madoff, had key positions advising the Fed and SEC. Then they discuss how we should think about central banks losing money.
How the SEC was Charmed by Madoff: Mises.org/HAP389a
Bob's Understanding Money Mechanics: Mises.org/HAP389b
Collusion was a way of life with state-chartered enterprises. Little has changed, as firms with political connections still gain profits from their collusion with the state.
Original Article: "The Theory and Practice of Conspiracy"
This Audio Mises Wire is generously sponsored by Christopher Condon.
If we have learned anything from hundreds of years of government oppression and atrocities, one thing is certain: government isn't our friend.
Original Article: "Government Is as Government Does"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Two "distinguished" healthcare analysts have examined the medical system in the USA and conclude that the REAL problem is . . . large hospitals. Dale Steinreich applies economic analysis to their claims.
Original Article: "Are Large Hospitals the Problem with US Healthcare?"
This Audio Mises Wire is generously sponsored by Christopher Condon.
President Biden's call for more protectionism isn't aimed improving the US economy. Instead, it is about creating a war-footing autarky.
Original Article: "Readying the War State: Biden Recommits to Protectionism in the SOTU"
This Audio Mises Wire is generously sponsored by Christopher Condon.
As the Biden administration continues to inflate the dollar, other nations are questioning the existence of the petrodollar.
Original Article: "Saudi Arabia’s Quandary: The End of the Petrodollar"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Canadian political, academic, and media elites "worry" that democracy in that country may be under attack. Actually, democracy works all too well there.
Original Article: "Is Democracy under Attack in Canada? No, but It Should Be"
This Audio Mises Wire is generously sponsored by Christopher Condon.
It is easy to dismiss Chinese advancements in electric vehicles as the result of government subsidies, but private entrepreneurship also is playing a major role.
Original Article: "China's Emerging Global Leadership Isn't Just the Result of Subsidies: Entrepreneurship Still Matters in This Market"
This Audio Mises Wire is generously sponsored by Christopher Condon.
When we see real bipartisan action in Congress, it usually is for the worst.
Original Article: "Why You Should Fear "Bipartisan" Agreements in Congress"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The president's SOTU speech has become an annual presentation of a new set of White House lies. But official Washington believes it is worse to publicly boo false statements than to make them.
Original Article: "Decorum Propels DC Deceit"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Contrary to the claim that taxpayer subsidies for higher education provide great social benefits, these subsidies actually are a wealth transfer from the less-well-off to wealthy people.
Original Article: "Subsidizing Higher Education Is Not Creating Widespread External Benefits"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The empty shopping mall: a story of how government actions created a huge malinvestment in western Pennsylvania.
Original Article: "Empty Malls and Shopping Centers: How Government Fuels Malinvestments"
This Audio Mises Wire is generously sponsored by Christopher Condon.
On this week's Radio Rothbard, Ryan McMaken and Tho Bishop celebrate World Economic Forum week by discussing the Managerial Revolution. While James Burnham's disinterest in economics made his criticism of capitalism cringey, modern financialization has manipulated the profit and loss mechanisms that any fan of his work can appreciate. Also, what is the lasting impact of the political capture of corporate power? Will the next crisis allow for a needed re-evaluation of insidious neoliberalism, or will "hypercapitalism" get the blame? Tune in for this and more on the latest episode.
Recommended Reading"The Fed Is a Purely Political Institution, and It's Definitely Not a Bank" by Ryan McMaken: Mises.org/RR_117_A
"Financialization: Why the Financial Sector Now Rules the Global Economy" by Ryan McMaken: Mises.org/RR_117_B
Be sure to follow Radio Rothbard at Mises.org/RadioRothbard.
Does the regulatory system help guarantee safe and effective drugs? Does the system protect drug consumers? Court cases tell us otherwise.
Original Article: "The FDA and the Courts Fail to Truly Discipline the Pharmaceutical Industry for Exploiting the Mentally Ill"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Relatively free trade and capital mobilization have greatly raised living standards in recent years. Yet those that call themselves globalists are less interested in trade than in unipolar political power, pushing violent, disastrous schemes.
Original Article: "Globalization, Not Globalism: Free Trade versus Destructive Statist Ideology"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Forty years ago, American politicians claimed that Japanese economic success was due to government economic planning. Unfortunately, the myth of industrial policy never seems to die, no matter how many times it is discredited.
Original Article: "Industrial Policy Did Not Bring Prosperity to Asia"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Two days before Christmas, 1913, the infamous "creature from Jekyll Island," the Federal Reserve System, was birthed into our body politic. It has been devouring the economy ever since.
Original Article: "Woodrow Wilson's Christmas Grift of 1913"
This Audio Mises Wire is generously sponsored by Christopher Condon.
In the name of "protecting workers," progressive legislators put people out of work. For their own good, of course.
Original Article: "Leviathan Devours Free Range Entrepreneurs"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Should there be vaccine mandates to deal with covid? Progressive authorities say one thing, but the data say another.
Original Article: "United Kingdom Mortality Data by Age Group and Vaccination Status: Looking at Vaccine Effectiveness"
This Audio Mises Wire is generously sponsored by Christopher Condon.
While high-quality automobiles and other manufactured goods are being produced in the Southeast, northeastern states like New York are falling behind, thanks to progressive governance.
Original Article: "Economic Progress and Economic Decay: North versus South"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Politicians calling for student loan forgiveness or free college tuition have failed to understand the larger consequences of unlimited student lending. Henry Hazlitt would have understood.
Original Article: "College Loans and Hazlitt's Lesson: Ignoring the Larger Picture"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Many investors forget that when the easy money is flowing, financial mediocrities and even outright frauds can be made to look like legitimate geniuses.
Original Article: "How Easy Money Fueled the FTX Crypto Collapse"
This Audio Mises Wire is generously sponsored by Christopher Condon.
On this episode of Radio Rothbard, Ryan McMaken and Tho Bishop look at conman Sam Bankman-Fried, the scam of FTX, and how regime legitimacy has fueled several fraudulent companies with unprofitable business practices.
Did post-2008 monetary policy fuel a bubble in "effective altruism?" Do examples like Elon Musk's restructuring of Twitter offer an illustration of what Big Tech firms will have to do to survive in a time of less-than-easy money, or will the regime bailout out the corporate extensions of techno-managerialism? What killed Silicon Valley's once-promising techno-libertarian style? Ryan and Tho look at this and more on this episode of Radio Rothbard.
Looking for Christmas gifts? Use promo code ROTHPOD for a 20% discount on select books featured on Radio Rothbard. Or, use code MURRAYCHRISTMAS for a special 10% discount on select new Mises apparel: Mises.org/RR_109_Store
Recommended Reading "How Easy Money Fueled the FTX Crypto Collapse" by Ryan McMaken: Mises.org/RR_109_A
"Sound Money Is Our Best Hope Against the Monopolists' Threat" by Brendan Brown: Mises.org/RR_109_B
"How Fiat Money Enriches the Unproductive" by George Ford Smith: Mises.org/RR_109_C
"Without Easy Money, the Tech Sector Faces Layoffs and Losses" by Ryan McMaken: Mises.org/RR_109_D
"The Housing Boom Is Already Over. The Housing Shortage Will Continue." by Ryan McMaken: Mises.org/RR_109_E
"Will the FTX Scandal Bring Down 'Crypto'?" by Jeff Deist and Bob Murphy (video): Mises.org/RR_109_F
Be sure to follow Radio Rothbard at Mises.org/RadioRothbard.
While both the Left and Right celebrate the government's new drive to subsidize American microchip manufacturing, we should remember that political "investments" always result in crony capitalist disasters.
Original Article: "American Chip "Independence": Protectionism by Another Name"
This Audio Mises Wire is generously sponsored by Christopher Condon. '
As "decarbonize agriculture" becomes the watchword, powerful multinational agriculture firms have embraced the 2030 UN agenda. Their actions will result in widespread hunger.
Original Article: "Multinational Agrichemical Corporations and the Great Food Transformation"
This Audio Mises Wire is generously sponsored by Christopher Condon. '
As inflation advances and the economy slowly implodes, we also learn valuable lessons.
Original Article: "The Economy Is a Mess: What Lessons Will We Learn?"
This Audio Mises Wire is generously sponsored by Christopher Condon. '
While Elon Musk says he will bring free speech back to Twitter, the forces of statism will not be still. The jury is out on how successful Musk's experiment will be.
Original Article: "Changing of the Guard: Can Musk Deliver on His Promises for Free Speech and Information?"
This Audio Mises Wire is generously sponsored by Christopher Condon. '
On this episode of Radio Rothbard, Ryan McMaken and Tho Bishop look at the Alex Jones verdict and the weaponization of defamation law. Now that Twitter is under Elon Musk's control, will the regime increasingly turn to the court system to crack down on the "dangers" posed by "misinformation"?
Use promo code ROTHPOD for a 20% discount on Ryan McMaken's new book Breaking Away: The Case for Secession, Radical Decentralization, and Smaller Polities: Mises.org/RR_105_Book
Recommended Reading "The Alex Jones Verdict Shows the Danger of Defamation Laws" by Ryan McMaken: Mises.org/RR_105_A
"Modern Information Control: State Intervention and Mistakes to Avoid by Kelly Offield: Mises.org/RR_105_B
"Florida's Social Media Anticensorship Law and the Court's Tortured Legal Logic" by Tate Fegley: Mises.org/RR_105_C
Be sure to follow Radio Rothbard at Mises.org/RadioRothbard.
President Biden's recent student loan forgiveness initiative only exacerbates the real problem: the cost of a college education, thanks to government intervention, is outrageously high.
Original Article: "Student Loan Forgiveness Treats the Symptom, Not the Disease"
This Audio Mises Wire is generously sponsored by Christopher Condon. '
One doubts that the so-called Inflation Reduction Act will reduce inflation. However, it will wreak havoc on the US economy with its lethal mix of taxes, regulations, subsidies, and outright crony capitalism.
Original Article: "The Inflation Reduction Act: Another Unfair and Unjustified State Intervention"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Argentina is synonymous with hyperinflation, but apparently its voters have not had enough.
Original Article: "Déjà Vu: Argentines Once Again are Voting for More Inflation While Remaining in Denial"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Economists often deplore the corruption in developing countries, but when institutions are corrupt, don't expect people to have the incentive to be honest.
Original Article: "When Honesty Is Disincentivized, Don't Be Surprised That Trickery Abounds"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Like many modern "conservatives," F.H. Buckley believes that America's future is conservative governance with a helping of government intervention, tariffs, and regulation.
Original Article: "Review: Progressive Conservatism: How Republicans Will Become America’s Natural Governing Party"
This Audio Mises Wire is generously sponsored by Christopher Condon.
While the antimarket and antilibertarian forces are strong, it is easy to forget that free market advocates also have a powerful set of tools.
Original Article: "Taking Stock of the Assets We Have (and We Have a Lot of Them)"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Do these characteristics give rise to monopoly power?
Download the slides from this lecture at Mises.org/MU22_PPT_20.
Recorded at the Mises Institute in Auburn, Alabama, on 27 July 2022.
The New York Times claims that the "administrative state"—that is, governance by unelected bureaucrats—protects our country and enhances democracy.
Original Article: "Turns Out the Elites Like the Administrative State Better than Democracy"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The Davos crowd sold globalization as a way to bring nations together. Unfortunately, by insisting on political conformity, the globalists have set the world on fire.
Original Article: "Instead of Uniting the World, Globalization Has Set Nation against Nation"
This Audio Mises Wire is generously sponsored by Christopher Condon.
In this episode of Radio Rothbard, Ryan McMaken and Tho Bishop discuss recent inflation news, broader chaos in financial markets, and another round of funding for Ukraine.
Recommended Reading "Inflation Up, Wages Down as Biden Passes the Buck to the Do-Nothing Fed" by Ryan McMaken: Mises.org/RR_81_A
"From El Salvador to Africa, the Next Currency War Pits Populists against Bankers" by Tho Bishop: Mises.org/RR_81_B
"Biden: Inflation Is Everybody’s Fault but Mine" by Ryan McMaken: Mises.org/RR_81_C
"Noninterventionism Is Not Isolationism: The US Government Should Stop Arming Ukraine" by Daniel Martin: Mises.org/RR_81_D
"Forget What the 'Experts' Claim about Deflation: It Strengthens the Economy" by Frank Shostak: Mises.org/RR_81_E
Be sure to follow Radio Rothbard at Mises.org/RadioRothbard.
The patent system in pharmaceuticals incentivizes firms to game the system for monopoly profits.
Original Article: "Postcovid America: Racked by Inflation, Americans Pay Too Much for Drugs"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Michael Rectenwald takes on the progressive canard of "socialism for the rich, capitalism for the poor," in which the government protects the wealthy but throws everyone else to the tender mercies of rapacious capitalism.
Original Article: "The Great Reset VII: Capitalism for the Rich and Socialism for the Poor"
This Audio Mises Wire is generously sponsored by Christopher Condon.
History is a clash between the forces of liberty and the proponents of power. In Cronyism, Patrick Newman offers a compelling and important narrative on the early days of the American republic, and the rise of a Federal regime that conquers a nation conceived in liberty.
Narrated by Scott R. Pollack
Download the complete audiobook (17 MP3 files) in one ZIP file here. This audiobook is also available on Soundcloud, Google Podcasts, Apple Podcasts, Spotify, and via RSS. Purchase the Audiobook on MP3-CD and Audible/Amazon, or paperback at the Mises Store.
Introduction to Cronyism: Liberty versus Power in Early America, 1607–1849. Narrated by Scott R. Pollack
This week, Jeff and Bob discuss oil prices. Why are gas prices spiking in the US, and what are D.C. politicians planning for oil companies?
Includes an introduction by Tom Woods. Recorded in Lake Jackson, Texas, on December 4, 2021.
Ron Paul's two campaigns for president (2008 and 2012) were watershed moments for liberty-minded people around the world. The "Ron Paul Revolution"—centered around his undiluted message of peace, property, and markets—changed the way millions thought about the American empire and the American financial system. Dr. Paul's focus on central banking and foreign policy caught politicians and pundits off guard, forcing them to scramble for explanations of our Middle East policy and Soviet-style central planning at the Fed. Politics in America has not been the same since the "Giuliani moment" and "End the Fed." The Ron Paul Revolution was both a political and cultural phenomenon.
Patrick Newman is a fellow at the Mises Institute who have just published his new book. He talks about Rothbard's approach to history, whether the US revolution was libertarian, and the proper way to interpret Andrew Jackson.
Mentioned in the Episode and Other Links of Interest: Patrick Newman’s new book Cronyism: Liberty vs. Power in Early America, 1607-1849Patrick’s previous appearance on ep. 49 of the Bob Murphy ShowDan Sanchez’s article on Andrew Jackson’s fight with Nicholas Biddle over the Second Bank of the United StatesBob’s review of MMT (including Andrew Jackson’s payoff of the federal debt)The YouTube version of this interview For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on Apple Podcasts, Google Podcasts, Stitcher, Spotify, and via RSS.
Includes an introduction by Jeff Deist and audience question and answer period. Recorded in St. Petersburg, Florida on October 21, 2021.
Find Dr. Newman's new book, Cronyism: Liberty versus Power in Early America, 1607–1849: Mises.org/CronyismBook
The weekend revolves around a discussion of strategy. Nearly 25 years ago, Professor Hans-Hermann Hoppe delivered his famous "What Must Be Done" speech on the pressing topic of how—and whether—to engage the state. Today his prescription for a bottom-up ideological revolution beginning at the local level rings more true than ever. With Hoppe's admonitions in mind, all of our speakers and panels will consider three vital questions: Where are we? How Bad is it? And what should we do now?
Was Adam Smith the founder of modern economics? Not so, says Murray Rothbard in his staggering two-volume An Austrian Perspective on the History of Economic Thought. Dr. Patrick Newman joins the show for a look at Rothbard's treatment of economics before Smith—from the Ancient Greeks all the way to the Scottish Enlightenment—and his take no prisoners revisionist approach. Jeff Deist and Dr. Newman cover Aristotle and Plato, Aquinas, Protestants and Catholics in the Middle Ages, Spanish Scholastics, Mercantilists, French Physiocrats and Turgot, and the criminally underappreciated Richard Cantillon. If you're a fan of economics and non-bowdlerized history, don't miss this!
Additional Resources Read Rothbard's important work: Mises.org/APHET
Find out more about Dr. Newman's new book: Mises.org/CronyismBook
From the Introduction to Cronyism: Liberty versus Power in Early America, 1607–1849.
The present book is an economic and political history of early America, describing government policies and their effects on marketplace activity. In particular, it is a history of cronyism: when the government passes policies to benefit special-interest politicians, bureaucrats, businesses, and other groups at the expense of the general public. Examples include a central bank’s selective credit expansion, discriminatory taxes and regulations, business subsidies, territorial acquisitions, and other foreign policy maneuvers, and new constitutions. The rewards of cronyism take the form of monetary gains, particularly increased incomes and profits for individuals and businesses, or psychic gains from greater power and authority. The government’s claim that it passed legislation to enhance public welfare is only a thin veneer for privileges and redistribution.
Special-interest legislation is inherent in the very nature of government. On the free market, the network of voluntary exchanges, all activity is based on individual liberty and results in mutually beneficial outcomes. The competitive profit and loss mechanism incentivizes individuals to produce goods and services that consumers desire. However, the government, the legitimated monopoly of power, lacks this mechanism and produces outcomes that are harmful to society. The incentive structure is different: unlike the Invisible Hand of the market, individuals that control the coercive Visible Hand are encouraged to pass legislation that benefits themselves at the expense of others. The stronger the government, the more lucrative the rewards. To control the government machinery is to control the levers of cronyism.
Researchers have analyzed American special privileges before, but their studies focus on individual cases in select time periods that remain unintegrated into an overarching narrative. There is still a need for an overview of cronyism that covers the motivations behind and development of relevant policies, their effects on the economy, and the critical attempts to reform the system. To achieve this goal, I utilize the “Liberty versus Power” theory, developed by Murray Rothbard in his five-volume Conceived in Liberty series. It contains three core components.
First, history is a clash between the forces of liberty, or those in favor of individual decision making and the market allocating resources, and the proponents of power, the factions that support coercion and government organization of production. Libertarians want to reduce government power to limit cronyism while statists strive for the opposite. Favoritism is limited when a substantial interest with an ideological and pecuniary incentive to promote freedom exists. Otherwise, only clashing groups that want to control power mitigates special privileges. The liberty and power forces, with a spectrum in between, continually define the evolution of a government’s interference with the free society. When liberty triumphs overpower, cronyism is reduced; when the opposite occurs, privileges increase.
Second, those who control the government’s power are corrupted over time. To quote Lord Acton, “power tends to corrupt and absolute power corrupts absolutely.” I define corruption as the willingness of government officials to push for interventions that benefit themselves and other favored interests. Coercion and the use of force increases the ability to dispense favors, which incentivizes its occurrence. While there is often a strong moral element to corruption, my primary focus is the increased inducement to secure special-interest policies. Lord Acton’s famous quote can be modified accordingly: “power tends to incentivize cronyism and absolute power incentivizes cronyism absolutely.” Cronyism is due to the corrupting nature of government power and only by eliminating it can society destroy such favoritism.
Third, reforms that eliminate restrictions and redistributions are difficult to achieve because they require smaller government. This can only be accomplished through an outside amputation of power, particularly secession, or a change in the administrative leadership that internally dismantles the government’s power. The problem with reform, internal or external, is that any attempt requires laissez-faire proponents to use the coercive structure to enact their preferred policies. However, power tends to corrupt, which means that the previous advocates of freedom ineluctably start to pass their own special privileges. Radicals lose sight of their original goals, moderates stress the need to compromise with the opposition, and political office increases the incentive to provide favors to supporters. Soon the temptation to grant cronyism becomes irresistible. While in office, the libertarian faction transforms into a new coalition indistinguishable from the former statist party.
My thesis is the following: in early American history, special privileges increased in a staggered fashion and the Liberty versus Power theory explains this evolution. A majority of the population adhered to a basic libertarian ideology while the remainder supported big government. When the interventionist parties, i.e., the Federalists, National Republicans, and Whigs, secured control, cronyism shot upwards. When the people elected the reform parties—the Anti-federalists, Republicans, and Democrats—cronyism declined before increasing due to the corrupting nature of power. The ultimate driver of privileges on both sides was the insatiable urge to create an empire, a territorially vast and influential country. Statists wanted to replicate the European empires that easily facilitated cronyism. In stark contrast, libertarians envisioned their empire consisting of small independent governments that shared classical-liberal values. However, power and the lure of territorial acquisition corrupted the libertarian parties into creating the same belligerent empires they previously weakened.
Therefore, cronyism increased in a nonlinear fashion. To prove my thesis, I describe the history of special-interest legislation over the backdrop of political history. My narrative concentrates on the motivations of the major “players,” or America’s “Great Men”— the politicians and businessmen involved in the legislative process— and their attempts at reform. As a result, my work is “a throwback to a traditional approach to politics, focusing on elections, parties, and the maneuvering of elite white males in government.”
By utilizing the Liberty versus Power theory and a political narrative that stresses the Great Man perspective, I have intentionally made this work “old fashioned,” and deservedly so, given that the goal is to accurately study American cronyism.
Patrick Newman at Mises University [[{"fid":"125272","view_mode":"full","fields":{"format":"full","alignment":"center"},"type":"media","field_deltas":{"1":{"format":"full","alignment":"center"}},"attributes":{"class":"media-element file-full media-wysiwyg-align-center","data-delta":"1"}}]]
Patrick Newman on the Human Action Podcast [[{"fid":"125598","view_mode":"full","fields":{"format":"full","alignment":"center"},"type":"media","field_deltas":{"2":{"format":"full","alignment":"center"}},"attributes":{"class":"media-element file-full media-wysiwyg-align-center","data-delta":"2"}}]]
Download the slides from this lecture at Mises.org/MU21_PPT_21.
Recorded at the Mises Institute in Auburn, Alabama, on 21 July 2021.
"The cronies and their government pals are increasingly exposed. As the co-founder of the Free Market Medical Association, I am filled with optimism watching the growth and acceptance of market discipline in this industry."
A new world of medical entrepreneurship is growing. Concierge and cash-only practices, walk-in cash clinics, medical tourism, and cost-sharing plans are just a few of the ways free-market approaches are changing the landscape. Our expert speakers will discuss several of these developments, and more.
Recorded in Salem, New Hampshire, on June 17, 2021.
Free market advocates long ago figured out that the monied classes of bankers and Wall Street operatives were exploiting the "little people" to prop up the fortunes of what is now the billionaire class. The scam is alive and well today.
Original Article: "The Plutocrats of Wall Street and Silicon Valley Are Scamming America"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
The GameStop saga—can we call it an insurrection?—wants easy heroes and villains. Both are available.
Original Article: "Playing Games with Stocks"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
If Punjabi farmers had been portrayed as affluent, the media would view them as greedy entrepreneurs. But leveraging the political capital of perceived powerlessness has allowed them to obscure their true status as rent seekers.
Original Article: ""India's Farming Reform: A Lesson in Interest Group Politics"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Professor Patrick Newman, known for his incredible work editing Murray Rothbard's The Progressive Era and Conceived in Liberty, just finished a staggering new historical work titled Cronyism: Liberty vs. Power in Early America. Newman joins the show to give us a preview of this tour de force book, which chronicles the special interests and state favoritism embedded in US society almost from the start. The Rothbardian analysis of "liberty vs. power" informs Newman's approach throughout, and history buffs will want to get their hands on this book immediately upon release later in 2021. You will never see the American colonies, revolution, Constitution, or great men like Hamilton, Madison, and Jefferson the same way after reading this book.
Help the Mises Institute publish Cronyism: Liberty vs. Power in Early America by Dr. Patrick Newman at Mises.org/Cronyism.
Read Rothbard's The Progressive Era at Mises.org/ProgEra
Dr. Mark Thornton joins the show to discuss what might just be Murray Rothbard's best book on money and banking: The Case Against the Fed. Written not long before his untimely death, this work is nothing less than a master class on the history of money: the sordid players and interests behind the creation of the Federal Reserve bank; the workings of demand deposits and fractional reserve, inflationism, and the monetary mechanics behind it all. The final pages of the short and penetrating book are especially fascinating, as Rothbard lays out a process for unwinding the Fed and paying off its liabilities using the federal government physical gold holding. End the Fed starts with understanding the Fed, and this book is vital for any lay reader.
Find the online version of the book at Mises.org/RothbardFed
Surprise! An audit of Pennsylvania's covid lockdowns reveals the process lacked any legal consistency or transparency. Yet Pennsylvania's health bureaucrats have used these arbitrary rules to crush the state's entrepreneurs.
Original Article: "Pennsylvania's Lockdown Rules Were Arbitrary, Inconsistent, and Political"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Will Biden/Harris be a transformative administration?
Original Article: "What Biden/Harris Will Do"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
It is partly an attempt to erase the Trump movement from the pages of history, but it is also an attempt to silence criticism of the emerging political consensus in the coming Biden era that may come from progressive or antiwar circles.
Original Article: "The "War On Terror" Comes Home"
Narrated by George Pickering.
Managerialism, not socialism or capitalism, dominated the West in the latter half of the 20th century. Nobody explained this better than James Burnham in his seminal 1941 book The Managerial Revolution: What is Happening in the World. Burnham challenges both Marxist orthodoxy on class (exploitation happens without capitalism) and libertarian orthodoxy on market firms (managerial control overtakes "owners"). This is hugely important book, and prescient to put it mildly: Burnham's thesis explains both the populist Trump revolution and the Deep State response. To understand modern politics and bureaucracy, and especially the DC Beltway, you need to read this book.
Edward Welsch, editor of Chronicles magazine, joins Jeff Deist for a thorough discussion of Burnham and his most influential work.
Watch Dan McCarthy on the history of Burnham at Mises.org/McCarthyBurnham
Read Samuel Francis's review of James Burnham's works at Mises.org/FrancisBurnham
A dirty secret of congressional military spending is that when the government allocates billions in spending, unnecessary, wasteful, and parochial interests quickly find their way into the legislation.
Original Article: "Trump’s NDAA Veto Threat Should Force a Conversation on Defense Spending".
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Useful goods and services, and the productive resources needed to create useful goods and services, are wealth. Money is not wealth, and creating more money without first creating wealth is a big problem.
Original Article: "Stop Confusing Money with Wealth"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Twenty years ago, it looked like Chile was well on its way to joining the world's small club of developed countries. But this path looks less and less likely as Chile abandons its commitment to freedom and markets.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Original Article: "Chile Won't Become a Developed Country If It Doesn't Change Course".
Governments that redistribute wealth and regulate our daily lives are inherently corrupt. We cheapen the word "corruption" when we reserve it for just a few politicians who break the arbitrary rules.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Most Everything Governments Do Should Be Regarded as 'Corrupt'".
Dr. Damian Carabello discusses the depths insurance companies go to make sure they end up on top.
SHOW NOTES Damian Carabello, MD: Twitter
Anish Koka long read on surprise billing
Damian Carabello “Let’s end surprise billing without a Trojan horse” blog on KevinMD about the problems with benchmarking.
Twitter thread on the history of Ingenix
Andy Slavitt’s involvement with health insurance fraud case
Watch the episode on YouTube
There are two kinds of inequality. One develops as societies innovate and become more productive. The other kind results from government corruption and intervention.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Growth and Income Inequality in Africa".
Kodak's newly announced $765 million loan is just another case of DC picking winners and losers.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Swamponomics: Trump's Fed Pick, a Kodak Moment, and GDP Misinformation".
As 20 million Americans fall into unemployment, no crisis is so big that anyone in Washington would think of cutting military spending, including dollars spent on military gear for cops.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Who Profits from Militarizing the Police?".
June 5 marks the one hundredth anniversary of the Jones Act, a law passed to protect the domestic water transportation industry from outside competition.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "The Jones Act: 100 Years of Failed Protectionism".
Tho Bishop joins David Gornoski on A Neighbor's Choice to discuss China's actions and the US government's attacks against small businesses.
Rob Bradley is the world’s leading expert in energy economics in the Austrian tradition. His treatise Oil, Gas, and Government is the definitive record of U.S. government intervention in the oil and gas markets. Rob chose Murray Rothbard as the chair for his dissertation in Political Economy. At one point in his career, Rob served as a speechwriter for Ken Lay, CEO of Enron, which afforded Rob a firsthand view of the skullduggery that would later be wrongly blamed on capitalism.
For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
Jeff Deist joins David Gornoski to respond to billionaire hedge fund manager Ray Dalio's recent interview on 60 Minutes. Jeff discusses the self-serving nature of billionaires like Dalio's lamenting the "failings" of capitalism.
Silicon Valley used to be a hotbed of libertarian thought, a place where innovation mattered more than government. Today, companies like Twitter and Facebook serve as de facto editors, banning users like Alex Jones for "wrong-think." Google dominates search, but may steer search results. And Amazon serves nefarious clients like the NSA with its cloud infrastructure. And all of them employ plenty of lobbyists to avoid the kind of government anti-trust suit Microsoft faced nearly 20 years ago.
Libertarians oppose regulation, but also oppose censorship and politically correct culling of opinion. Dr. Peter Klein recently addressed these topics and more, in a talk illustrating how the technology sector has drastically changed in recent years—and how tech firms evolved into media companies focused on influence instead of innovation. He argues that social-media companies put on a public facade of being private and free of government influence, but behind the scenes they really lobby for protection against competition.
Dr. Yuri Maltsev is a Soviet expatriate who worked as an economist in the Gorbachev era of "reforms." He makes the strong case against what he terms "Crony Socialism," detailing how politics, bureaucracy, and self-dealing monetary planners work against the cause of greater peace and prosperity. Recorded in Fort Worth, Texas, on 2 June 2018. Includes an introduction by Jeff Deist.
Nomi Prins is a Wall Street veteran and expert on central bank mischief. Her books All The President's Bankers and Collusion: How Central Bankers Rigged the World detail the cronyism and secret dealing of central banks, making the case against unchecked power in the hands of an elite class of bankers and their revolving-door clients at the Treasury and Fed. Recorded in Fort Worth, Texas, on 2 June 2018. Includes an introduction by Jeff Deist.
Daniel McAdams of the Ron Paul Institute speaks on the vital subject of "Military Keynesianism"—the unholy alliance among defense contractors, foreign policy mouthpieces, and think tanks that work together to create ongoing demand for war armaments, always keeping the American people alarmed and ready for the next military intervention. Recorded in Fort Worth, Texas, on 2 June 2018. Includes an introduction by Jeff Deist.
The Henry Hazlitt Memorial Lecture, sponsored by Hunter Lewis. Presented at the Austrian Economics Research Conference at the Mises Institute in Auburn, Alabama, on 23 March 2018.
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 15, "Herbert Hoover and the Myth of Laissez-faire".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 6, "1896: The Collapse of the Third Party System and of Laissez-faire Politics".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 14, "The Federal Reserve as a Cartelization Device: The Early Years, 1913–1930".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 14, "The Federal Reserve as a Cartelization Device: The Early Years, 1913–1930".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 13, "World War I as Fulfillment: Power and the Intellectuals".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 14, "The Federal Reserve as a Cartelization Device: The Early Years, 1913–1930".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 3, "Attempts at Monopoly in American Industry".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 3, "Attempts at Monopoly in American Industry".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 3, "Attempts at Monopoly in American Industry".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 7, "Theodore Roosevelt: The First Progressive, Part I".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 13, "World War I as Fulfillment: Power and the Intellectuals".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 13, "World War I as Fulfillment: Power and the Intellectuals".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 2, "Regulating the Railroads".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 2, "Regulating the Railroads".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 13, "World War I as Fulfillment: Power and the Intellectuals".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 11, "Origins of the Welfare State in America".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 11, "Origins of the Welfare State in America".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 14, "The Federal Reserve as a Cartelization Device: The Early Years, 1913–1930".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 14, "The Federal Reserve as a Cartelization Device: The Early Years, 1913–1930".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 14, "The Federal Reserve as a Cartelization Device: The Early Years, 1913–1930".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
Rothbard’s power-elite historical analysis shows how big business, big unions, and big government conspired to cartelize industries in order to further their own interests. Programs and agencies started in the Progressive Era have a destructive legacy that has carried on for a century.
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright. The full text is available online here.
Download the complete audio book (74 MP3 files) in one ZIP file here. This audiobook is also available on Soundcloud, Apple Podcasts, Google Podcasts, and via RSS.
From Chapter 13, "World War I as Fulfillment: Power and the Intellectuals".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 12, "War Collectivism in World War I".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 11, "Origins of the Welfare State in America".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 11, "Origins of the Welfare State in America".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 10, "The Progressive Era and the Family".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 9, "The National Civic Federation: Big Business Organized for Progressivism".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 6, "1896: The Collapse of the Third Party System and of Laissez-faire Politics".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 7, "Theodore Roosevelt: The First Progressive, Part I".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 7, "Theodore Roosevelt: The First Progressive, Part I".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 8, "Theodore Roosevelt: The First Progressive, Part II".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 11, "Origins of the Welfare State in America".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 11, "Origins of the Welfare State in America".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 14, "The Federal Reserve as a Cartelization Device: The Early Years, 1913–1930".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 14, "The Federal Reserve as a Cartelization Device: The Early Years, 1913–1930".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 14, "The Federal Reserve as a Cartelization Device: The Early Years, 1913–1930".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 9, "The National Civic Federation: Big Business Organized for Progressivism".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 7, "Theodore Roosevelt: The First Progressive, Part I".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 3, "Attempts at Monopoly in American Industry".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 4, "The Third Party System: Pietists vs. Liturgicals".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 4, "The Third Party System: Pietists vs. Liturgicals".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 5, "The Democratic Triumph of 1892".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 8, "Theodore Roosevelt: The First Progressive, Part II".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 9, "The National Civic Federation: Big Business Organized for Progressivism".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 3, "Attempts at Monopoly in American Industry".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 1, "Railroads: The First Big Business and the Failure of the Cartels".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 1, "Railroads: The First Big Business and the Failure of the Cartels".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 1, "Railroads: The First Big Business and the Failure of the Cartels".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 9, "The National Civic Federation: Big Business Organized for Progressivism".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 13, "World War I as Fulfillment: Power and the Intellectuals".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 13, "World War I as Fulfillment: Power and the Intellectuals".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 9, "The National Civic Federation: Big Business Organized for Progressivism".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 13, "World War I as Fulfillment: Power and the Intellectuals".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 14, "The Federal Reserve as a Cartelization Device: The Early Years, 1913–1930".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 14, "The Federal Reserve as a Cartelization Device: The Early Years, 1913–1930".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 6, "1896: The Collapse of the Third Party System and of Laissez-faire Politics".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 8, "Theodore Roosevelt: The First Progressive, Part II".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 9, "The National Civic Federation: Big Business Organized for Progressivism".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 10, "The Progressive Era and the Family".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 10, "The Progressive Era and the Family".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 10, "The Progressive Era and the Family".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 10, "The Progressive Era and the Family".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 11, "Origins of the Welfare State in America".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 12, "War Collectivism in World War I".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 7, "Theodore Roosevelt: The First Progressive, Part I".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 3, "Attempts at Monopoly in American Industry".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 15, "Herbert Hoover and the Myth of Laissez-faire".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 12, "War Collectivism in World War I".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 4, "The Third Party System: Pietists vs. Liturgicals".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 4, "The Third Party System: Pietists vs. Liturgicals".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 5, "The Democratic Triumph of 1892".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
From Chapter 9, "The National Civic Federation: Big Business Organized for Progressivism".
This audiobook is made available through the generosity of Mr. Tyler Folger. Narrated by Graham Wright.
In this course, Professor Patrick Newman walks students through the highlights and major themes of Murray Rothbard’s recently published book, The Progressive Era. Rothbard’s power-elite historical analysis shows how big business, big unions, and big government conspired to cartelize industries in order to further their own interests. Programs and agencies started in the Progressive Era have a destructive legacy that has carried on for a century.
Patrick Newman, in addition to being a professor and former Mises Summer Research Fellow, is also editor of this previously unpublished Rothbard gem. Patrick discusses not only the book's content but also Rothbard’s methods of historical analysis and other related materials.
This online course is free, and is designed to be taken along with reading Murray Rothbard's previously unpublished work, The Progressive Era. You can order a paperback or hardcover copy of The Progressive Era from the Mises Bookstore or access the ebook for free. Please consider a donation to help support the creation of more courses!
The global controversy over video game loot boxes is now over a year old, and shows no signs of abating. In fact, quite the opposite: consumer outrage continues to grow, and governments around the world are increasingly interested in regulating the use of loot boxes and other microtransactions. Several US states have proposed legislation to restrict the marketing and sale of games containing loot boxes, and although none of these proposals has come to fruition, other regions have been more successful in extending the visible hand of government over video games. Most notably, Belgium and the Netherlands have taken steps to eliminate loot boxes, and various other countries are launching investigations and public hearings to examine the problem.
But what exactly is the problem? If you’ve played a game in the past few years, then you’ll likely have run afoul of microtransactions, small payments for in-game content. These payments aren’t especially controversial as such, but gamers tend to take offense when purchases can be made for content that provides a competitive edge, such as better loadouts for multiplayer matches. In the eyes of some, this is simply “paying to win,” and violates the spirit of fair competition.
Especially controversial are loot boxes, microtransactions based on chance. In addition to the fairness issue, the ability to use real-world currency to pay for randomized content also carries important psychological and regulatory implications, especially relating to addiction and gambling. It’s because of these problems that governments are considering various interventions. The gambling question is mainly a legal issue that varies depending on the game and on the region in which it’s sold, and there is no one-size-fits-all answer to it. Similarly, there is no serious empirical evidence yet to support the claim that loot boxes are addictive or psychologically equivalent to gambling. Yet sadly, public policy is rarely based on evidence, and the push for regulation continues, despite flimsy foundations. Gamers, for their part, seem perfectly happy encouraging government to take action against developers and publishers that incorporate loot boxes into their products.
The Economic Rationale for Microtransactions What are needed most in this discussion are economic studies of microtransaction models, and of the arguments for regulation. I have taken some steps in this direction in a new paper that discusses how both regulators and the game industry itself have reacted to the loot box controversy (see here). Much more needs to be done to study microtransactions, but this is as good a place as any to start.
The main conclusion of my paper is that there are economic reasons for companies to rely more on revenue from DLC, skins, loot boxes, and so on, and furthermore, that there is evidence the industry has taken the loot box fiasco seriously and is changing in response. Although I do not make this point explicitly in the paper, one further implication is that government intervention is unnecessary, because market regulation is quicker, more effective, and doesn’t disrupt competition.
Contrary to popular belief, microtransactions are not a get-rich-quick scheme invented by greedy businesses: the reality is more complicated. In particular, microtransactions allow developers to overcome growing production costs. AAA game development is expensive, and costs are ballooning, especially due to factors like the increased need for persistent customer support, server upkeep, licensing and other intellectual property-related issues, and basic software and hardware expenses. At the same time, the market is saturated, gamers have many alternatives, and attention spans (and thus, the shelf-lives of games) are growing shorter. The upshot is that it’s far more difficult than it was a few years or decades ago for a AAA title to turn a profit based solely on its sticker price.
Microtransactions and loot boxes have emerged as potential solutions. I say “potential” because they’re just that: solutions that are still being tested in the market. This is exactly what entrepreneurs do, of course: experiment with different ways of doing business to see which ones do the best job of serving consumers. Although microtransactions are already quite lucrative for the industry, the backlash they’ve caused among consumers also shows they are quite costly. In other words, the market is already doing a good job of “punishing” the poor judgments of companies like EA that rely excessively on these revenue models. In fact, at the beginning of the controversy in November 2017, EA removed loot boxes from Star Wars: Battlefront II before it was officially released — about as early as possible, given the circumstances. The publisher’s latest offering, Battlefield V, employs a system in which real money can only be used for cosmetic content.
Are Developers Willing to Change? Other developers have faced similar problems as EA, and are experimenting with their own solutions. For example, in response to customer complaints, Middle Earth: Shadow of War and Quake Champions removed their loot boxes after release. Forza Motorsport 7 also removed loot boxes by allowing players to buy specific items directly in an in-game shop: the gimmick is that the shop’s inventory changes every few minutes, thus keeping an element of risk, but effectively transferring it away from the gamer. Other games like Forza Horizon 4 avoid the accusation of gambling by removing the ability to use real money to pay for the in-game currency used in microtransactions.
A variety of other responses have appeared as well. Apple, whose app store is a major distribution platform, has revised its terms and conditions to require games to disclose loot box odds up front so that players know exactly what they’re being offered. This is now a common tactic, and developers have independently revealed loot box odds for titles like Overwatch, FIFA 19, and Rocket League.
Self-regulatory bodies like the Entertainment Software Rating Board (ESRB) are also working to allay fears of exposing children to addictive or costly game mechanics. The ESRB has adjusted its ratings system so that games with microtransactions are now marked as containing “in-game purchases” so that parents have a clearer idea of what their children are playing. In Europe, the PEGI system has adopted a similar policy. The ESRB has also launched a new website to help educate parents about the meaning of its ratings system, and how parents can better safeguard their children. It’s notable that many of these changes are being made by people and organizations that do not agree loot boxes are psychologically dangerous, deceptive, or illegal gambling. Yet that’s the beauty of the market: consumers ultimately get what they want, and entrepreneurs either provide it or go bust.
The Looming Threat of Regulation Although the loot box controversy is ongoing, and may prove to be in its early days, changes throughout the past year indicate that the prospects for meaningful self-regulation are bright. After all, self-regulation is basically another way to talk about regulation by consumers, who still wield considerable influence in the industry, and are making their opinions heard (loudly).
However, the future of gaming is not entirely rosy. One of the more disturbing features of this controversy has been the willingness of gamers to use government to get what they want. Typically, gamers and developers have been united in opposition against regulation, as they were, for example, in the 1990s controversies about potential links between games and violence. In those debates, players were adamant that government not be allowed to censor content. Yet when it comes to microtransactions, gamers appear all-too-eager to demand public solutions to what are little more than poor business decisions. This is a different and more dangerous kind of threat than the one posed by, say, over-zealous politicians using topical legislation to generate forgettable election-season soundbites for donors. Microtransactions are generating more persistent and serious interest, and some commentators believe this is a watershed moment when the game industry will be forced to accept regulatory oversight. One thing is certain: if consumers and regulators continue their joint venture against the industry, and if the industry fails to placate them, it won’t remain independent for long.
How prevalent has political corruption been over recorded history—and how did it originate? Quite an inkling as to its prevalence and origin can be found in a book written by H. J. Haskell and published by Alfred A. Knopf in 1939. The book is The New Deal in Old Rome.
Haskell, a newspaperman with the Kansas City Star, was both puzzled and inspired in the late 1930s when he and his wife drove across the Pont du Gard, the stone bridge and aqueduct that soars 165 feet above the river bed near Avignon in southern France. This triumph of engineering and architecture was built by the Romans some two millennia earlier. It still stands, mute testimony to the genius of Rome. Yet it raises the question: What happened to the glory that was Rome?
The magnificent Pont du Gard cast a spell on Haskell. Perhaps the spell was of the same sort that fascinated Edward Gibbon when he walked along Hadrian’s Wall, which demarcates the northern boundary and defense line of Roman Britain. Gibbon went on to write The Decline and Fall of the Roman Empire, the first volume appearing in 1776.
Back to Haskell. He reflected on the possible meaning of the Pont du Gard and asked himself: Just what kind of a civilization had created such an awesome, durable, and most beautiful structure, survived a thousand years, and then disappeared? And, pondered the American journalist further, why the disappearance? Back in the United States, Haskell discussed these questions with Katharine Dayton, a friend and playwright.
The time was the Great Depression, the heyday of the New Deal, of massive interventionist measures following in the wake of Federal Reserve expansion and contraction of the money supply in the late 1920s and early 1930s, and of failed Hoover Administration programs—most notably the Agricultural Marketing Act of 1929, the Smoot-Hawley Tariff of 1930, and the Reconstruction Finance Corporation of 1932. But now a num ber of New Deal programs had also backfired. The depression dragged on, even though FDR and his New Deal won in 1936 by a larger majority than in 1932. Severe unemployment persisted year after year and even escalated in 1938.
Miss Dayton told Haskell of her conversation with eminent antiquity historian and archeologist James Breasted shortly before he died. She had inquired if he had discovered any New Deals in the ancient world. He responded: “Yes, my dear, I’ve dug up at least a dozen.”
Hence the reference to the New Deal in the title of Haskell’s book. In it he argued, as had Gibbon, that it was not the strength of the Germanic invaders that sank Rome but the Eternal City’s moral and economic corruption. The corruption arose, Haskell held, from a pattern of majoritarianism (popularism) and interventionism (widespread government interference in a market system).
Such interference is seen in the Roman equivalents of, in New Deal terms, a Farm Debt Conciliation Committee, a Resettlement Administration, a Public Works Administration, a Food Relief Administration, a Home Owners Loan Corporation, an Ever-Normal Granary, and so on.
This potpourri of interventionist measures is frequently shorthanded by historians of Rome as “bread and circuses.” It pushed Rome, Haskell held, into amorality, further intervention, more corruption, bouts of inflation, and eventually into a totalitarian state—all contributing to Rome’s decline and fall.
Amorality? Note how Mises similarly plays on “the standards of morality” in commenting on Rome in Human Action:
The marvelous civilization of antiquity perished because it did not adjust its moral code and its legal system to the requirements of the market economy. A social order is doomed if the actions which its normal functioning requires are rejected by the standards of morality, are declared illegal by the laws of the country, and are prosecuted as criminal by the courts and the police. The Roman Empire crumbled to dust because it lacked the spirit of liberalism and free enterprise. The policy of intervention-ism and its political corollary, the Fuhrer principle, decomposed the mighty empire as they will by necessity always disintegrate and destroy any social entity.
A Tuneless How-to MessageNewspaperman Haskell observed that much amorality if not immorality was involved in Roman majoritarianism and interventionism. In this vein, see his references to the Handbook on Politics by Quintus Cicero, younger brother of the great Marcus Cicero (B.C. 106-43), leader in the Roman Senate. Marcus was running for the Roman consulship in the latter days of the Roman Republic, and Quintus evidently figured his brother was too principled, too unschooled in the devious ways of politics, to make a winning race. Hence while his blunt handbook was dedicated to Marcus Cicero (just as Machiavelli later dedicated his similar handbook on politics, The Prince, to Lorenzo de Medici of Florence), its how-to message seems timeless—relevant to machine politicians today, some 2,000 years later—as well as conducive to corruption.
Look, said Quintus to his brother. As a senator and leading attorney, with many successful cases to your credit, remind your clients of your brilliant services and collect your political I.O.U.’s. Too, since citizens in outlying districts also vote, best swing around the circuit, greet your rural constituents, wish them happiness, caring families, long lives, good health, good crops, and, of course, urge them to vote.
And, of course, with urban citizens as well, kiss babies, embrace old ladies, smile in public, shake hands, slap backs, tell stories, and, above all (or underneath all), gather votes—the politician’s raison d’être. Tell the citizens, in the city and in the outlying regions, that they are the salt of the earth, the strength of the country, God’s chosen people. Tell them anything.
Let them personally know, Marcus, how highly you admire them and value their counsel, their friendship, their affection—and their vote. That is, fawn on the voters, butter them up, play the game. As Quintus wrote for his brother, as quoted by Haskell: “One has great need of a flattering manner, which, wrong and discreditable though it may be in other walks of life, is indispensable in seeking office.”
Another thing, Quintus went on, don’t be overly conscientious or careful in your electioneering. Be generous, even lavish, with pledges of booty, bounty, jobs, contracts, public works—f favors you can bestow once in office. “Human nature being what it is, all men prefer a false promise to a flat refusal. At the worst the man to whom you have lied may be angry. That risk, if you make a promise, is uncertain and deferred, and it affects only a few. But if you refuse you are sure to offend many, and that at once.”
Quintus covered all the angles. He wrote: Again, dear Brother Marcus, no need to be reserved or above questioning the honesty and integrity of your opposition. Your rivals for office are certain to resort to bribery and other underhanded tricks. Right? Hence fight fire with fire, Quintus counseled. Try bribery yourself, buy off your enemies, convert them into allies. Too, why not try scandal? “Contrive, if possible,” said Quintus, “to get some new scandal started against your rivals for crime or immorality or corruption, according to their characters.”
This last idea struck home. Catiline, the key rival of Marcus Cicero in the election, was apparently making illicit payments to voters and key officials. But in Senate speeches Cicero went beyond such peccadilloes and accused Catiline of crime after crime, outrage after outrage, including murder, adultery, attempted massacre, attempted incest, and marriage to a daughter whom he had fathered with a mistress. Demanded Cicero: “Quo usque, Catilina, abutere patientia nostra? [How long, Catiline, will you abuse our patience?]” The accusations, however wild, fell on receptive ears. Catiline lost the election.
The More Things Change ...Now, what was really going on here two millennia ago of relevance to us in our own age of political corruption and rather unlimited government? Consider. Cicero’s election campaign was all part of a universal game that goes to this hour, a bidding war, a slander war between rival parties and candidates, with each party and candidate trying to out-promise and out-denigrate the other, while the wooed and all-too-frequently- grasping voters swoon over the adoration and public loot showered or to be showered on them.
Historically parties and candidates have long resorted to a campaign strategy of half-truths if not calculated deceptions, artifices, illusions, and other stratagems that many voters, then and now, only half understand and half suspect of hood-winkery. But many if not most of the electorate are nonetheless tantalized and corrupted by an election campaign—political gladiators skewering the reputations of their opponents, the temptation of something for nothing, the longing for certainty in an uncertain existence, the wish for security in an insecure world. Many a voter echoes the thought of Oscar Wilde: “I can resist everything except temptation.”
So today’s campaign tantalizers and tantalizees are part and parcel of the story of corruption. They are not basically different from political contests of yesteryear. Fanfare and knowing winks persist, accompanied by standard political charisma and oratorical flair, by cascades of rhetoric and bombast, by political conventions complete with campaign buttons, ribbons, flags, bunting, and balloons, by parades of marching bands and shiny open cars topped off with the smiling candidates waving at adoring multitudes along a parade route.
All this classic showmanship is at once benumbing and mesmerizing, if not confusing, to the electorate. But it is also, on the whole, enthralling, persuasive, and enveloping. As are the political slogans: “Carthage Must Be Destroyed.” “A Chicken in .Every Pot.” “Death to the Huns.” “Reunite the Two Germanies.” “Peace and Prosperity.” “Veni, Vidi, Vici.” “Workers of the World, Unite.” “Tippecanoe and Tyler Too.” “A New Deal.” “The Square Deal.” “The New Freedom.” “The European Community.” “The Worker’s Paradise.” “A New Beginning.” “Greater Asia’s Co-Prosper-ity Sphere.”
For then in the time of Cicero and now on the eve of a millennium, do candidates tell the truth, the whole truth, and nothing but the truth? Do the voters themselves really believe all that campaign rhetoric and bombast? Many, perhaps most, obviously do. But quite a few of them nudge each other in the ribs and wink an eye. As Haskell commented on the electioneering goings-on in Ancient Rome: “Probably Cicero would have been sur prised to know that his election charges [against Catiline] would be taken seriously by posterity.”
Haskell concluded his book with an appendix of interventions, of campaign promises, and ploys that went wrong. He called it a “Chronology of Roman New Deal Measures and Other Economic Experiments.” Some highlights:
367 B.C.—Licinius Stolo: moratorium on debts.
357 B.C.—Maximum interest rate set at 81/3 percent.
342 B.C.—Interest abolished to favor debtors; law soon ignored.
217 B.C.—Monetary devaluation to meet financial stringency in second war with Carthage.
133-121 B.C.—The Gracchi: Resettlement Administration; Public Works Administration; Ever-Normal Granary; two-price system for wheat, sold by the government at 32 cents a bushel (1939 equivalent), well below the market price, to those willing to stand in line.
58 B.C.—Wheat furnished free as a dole. 49-44 B.C.—Julius Caesar: panic in Rome when Caesar crosses Rubicon; flight of capital; collapse in real estate. Remedies: debts scaled down on basis of prewar values; Resettlement Administration, 80,000 taken off relief and settled away from Rome; relief rolls cut in half with means test (320,000 to 150,000); anti-hoarding measures, with compulsory investment in Italian land; Public Works Administration, work on roads, public buildings, reclamation projects.
29-9 B.C.—Augustus: more extensive Public Works Administration projects; large soldier bonuses; easy- money policy from spoils of Egypt and large coinage of gold and silver from government mines; rising prices; relief rolls, which had expanded after Julius Caesar’s death, cut from 320,000 to 200,000.
91 A.D.—Domitian: Agricultural Adjustment Administration, half of provincial vineyards destroyed to stop overproduction of wine.
97-106 A.D.—Nerva and Trajan: Farm Credit Administration, with loans to farmers at half the market rate; government aid to children of poor families; senators required to invest one-third of their wealth in Italian land.
117-211 A.D.—Hadrian and successors: extravagant spending on public works by central government and cities, followed later by heavy expenditures for wars, exhausting both reserves and tax resources.
212-273 A.D.—Heavy taxation and inflation, demoralization of business, breakdown of the middle class.
27 A.D.—Aurelian: relief extended, with bread substituted for wheat and addition of free pork, olive oil, and salt; right to relief made hereditary. Ruinous taxes; galloping inflation.
284-476 A.D.—Diocletian and successors: spiraling taxation; inflation from overvalued currency with skyrocketing prices; Diocletian’s ill-fated edict of 301 A.D. mandating wage and price controls under pain of death; totalitarian state; collapse of agricultural production; invasion of Germanic tribes; relocation of capital; end of Western Empire.
The push of Roman intervention and corruption is matched by the surge of Roman inflation. And that surge is reflected in the decline of silver content in the Roman coin of circulation, the denarius, from practically pure silver (save for a hardening agent) in the rule of Augustus (44 B.C.-14 A.D.) to practically pure copper (with just a wash of silver) by the role of Diocletian (284-305 A.D.)
Originally published as The Taproots of Political Corruption in The Freeman Dec 1990.
[This is a transcript of a talk given June 17, 2021, at the Mises Institute’s Medical Freedom Summit in Salem, New Hampshire.]
On behalf of everyone at the Surgery Center of Oklahoma and the Free Market Medical Association, thank you for the opportunity to speak to you today.
Just over twenty-four years ago the operation of the Surgery Center of Oklahoma began with a simple mission: deliver the highest quality of care at a reasonable and disclosed price. We fancied ourselves free marketeers, not aware of how far we had yet to go to accurately claim this title. Our mission was the opposite mission of the hospitals where we had previously worked. Then, as now, hospitals are focused almost exclusively on revenue, many times inflicting surprise and bankrupting bills on their victims. As physicians working in these hospital systems, we were unwitting accessories to these crimes. We intended to operate our facility differently, intending to serve as both medical and financial advocates for our patients. The Surgery Center of Oklahoma is now viewed as a model of medical services delivered free market style partly because of this simple mission, but more recently due to posting all-inclusive pricing online and the effects this move has imposed on the medical and surgical market. I’d like to begin by describing the state of the industry at the time we decided to walk away from it.
I’d become convinced by the early 1990s that government had no money it had not first stolen and to accept government payment was to receive stolen property. In 1993, three years after I started my anesthesia practice, I therefore stopped accepting government money and stopped filing Medicare claims. I treated Medicare patients outside of the Medicare scheme and usually free of charge. When I began practicing in 1990, Medicare paid me about $1,100 for the anesthesia services required for an open-heart surgery. In 1992, this payment was cut in half. A year later that amount was cut in half. The last two payments I received from Medicare were as follows: $285 for a six-hour cardiac anesthetic and $78 for the anesthesia services required for a knee replacement. These fees had been imposed through a mechanism referred to as the resource-based relative value scale, more appropriately called the Rosemary’s baby of healthcare. According to the folks at Harvard who gave birth to this creature, every physician service had a price and they knew what those prices were. I had read enough about economics by this time to know that this imposed pricing was not personal, as punishing as it seemed. Prices are signals, after all, and Medicare was sending me a signal regarding what they thought the service I provided was worth, or they meant to intentionally cull the ranks. I felt obligated to respond with a rational signal of my own and as I’ve mentioned, I quit participating in their scheme. I still had much to learn about pricing, but I did notice that underpriced services became scarce and overpriced services became abundant.
Private insurance carriers seized on the fear created by this deep slashing of physician fees, drastically reducing the amounts they paid to physicians. Hospitals, not about to allow a crisis to go to waste, cashed in on their opportunity to cheaply purchase physician practices. To legitimize their bold strategy, hospitals cranked up their propaganda machine, proclaiming loudly then as they do now that they were going broke. Hospitals flush with cash even laid off critical nursing staff to justify this narrative. I’ve always found it interesting that hospital emergency rooms, the supposed primary source of their financial woes, always seem to have a building crane out front. Who builds on to their loss leader? And yet the lack of paying patients in the emergency room was part of the poor-mouthing narrative in the early ’90s, just as it was during the debates leading up to the un-Affordable Care Act.
To further bolster this bankrupt-hospital narrative, physicians and surgeons were told there was no money to buy the equipment and supplies they needed. It was becoming increasingly obvious that it was time to get out. I had no desire to be controlled by the rising administrator class. The only choice for me was to find a way to practice outside of the hospital environment, no longer an accessory to the hospital’s financial crimes against patients.
The Golden Rule and the concept of mutually beneficial exchange is a large part of what drove me to become a physician. While the vast majority of physicians embrace honest and mutually beneficial exchange, it turns out that the vast majority of hospitals do not. Hospital commerce is the equivalent of a financial drive-by shooting, particularly commerce conducted by the not for profit systems. I believed then as I do now that a facility owned and controlled by the physicians who work there was the model most likely to ensure that patients were not financially brutalized. My great-uncle was the only physician in a small Oklahoma town for years, living in the top floor of his house, the bottom floor serving as his clinic and the town’s hospital. He was completely accountable for the entirety of what his patients were charged. He could do everything about what they were charged, including charge them nothing, and this he did regularly. Dr. Walter Bayes was a hero in the town of Chickasha and very well to do. Ownership of the facility or institution by doctors was the rule until government intervention in the 1950s and ’60s made this model more difficult. The explosion of hospital charges in the 1990s, at the same time they claimed they were going broke, created an opportunity for physicians to once again own facilities and demonstrate the superiority of the model. This disintermediated model was superior, as it allowed for the elimination of the greediest profit seeker from the equation: the not-for-profit hospital.
In April of 1997 Dr. Steve Lantier and I walked away from our hospital anesthesia practices and opened the facility thirty days later with ten surgeons with whom we had a good working relationship. We had no idea if we would break even, make money, or go broke trying. We had no pro forma. We had no business experience. All we knew was that hospitals were awful and inefficient places charging patients gigantic prices. The opportunity seemed obvious. Our faith in this dream and in the idea that if you are cheaper and better you will beat the competition formed the basis of our business plan. We also decided that we would never accept a dime of government money, and to this day never have.
The first week we were open, we received a call from a patient who had a breast mass she wanted removed, and she wanted to know how much we would charge her, as she had no insurance. This was the call we had all hoped for, the reason we had opened, and yet I had no idea how to answer her question. I placed her on hold and called our general surgeon and asked him how much he wanted for his fee. He had no idea. I told him to pick a fee or, like a Harvard professor, I’d pick one for him. He said $500. I thought this was very reasonable so I hung up on him before he had a chance to reconsider. As an anesthesiologist, I basically bill for my time and I knew this surgery would take twenty or thirty minutes. The facility supplies were minimal. I was about to take her off hold when I realized she would want to know if she had cancer. I called a pathologist friend and asked him how much he wanted to examine the specimen. He had no idea. I pressed for an answer. Twenty-eight dollars for the pathology. I informed the patient that our price was $1,900. “For what?” she asked. “For everything,” I said. She said, “That’s funny. The hospital down the street from you wanted $19,000 for the facility fee alone.” I knew we were on the right track when after the case and the supply cost was tallied, we’d made a profit. Had the pathology fees that apply to the examination of breast masses not increased, our price would be the same now as it was in 1997, but alas it is now $2,365. Only three other fees have increased since we began quoting them over the phone in 1997.
Word spread and many uninsured patients came to our facility, along with patients with high-deductible health plans and HSAs [health savings accounts]. Most of the Division I athletes had their surgery at our facility, and our reputation in the community grew more solid every day. Dr. Lantier and I were both trained in pediatric anesthesia and particularly enjoyed this part of our practice. Nothing better builds the practice of an anesthesiologist than the careful anesthetic treatment of someone’s child. The area hospitals hated us because patients could buy their surgeries at our facility for less than their insurance deductible at the hospitals. Paradoxically, no insurance companies would work with us. We would not understand any of this until much later, when our posted prices clarified this for us. We were very busy and very successful, early on. Within six months, I was distributing sizeable profits to the partners monthly, while usually charging one-tenth what the hospitals were charging for the same service. We added to our “quote over the phone” price list every week, so patients could have an answer to their price question immediately.
It was no surprise to us that the hospitals were the first to attack us. They attacked us directly by attempting to ban physician ownership of facilities in the state. This was done under the banner of trauma care, the hospitals falsely claiming that if surgeons owned their own facilities, they would not treat trauma patients. No one knew, including me, that when the state legislature created the state trauma task force the underlying mission was to close physician-owned facilities. A Democrat legislator who saw us as an underdog, a champion of the poor, told me with a wink and a nod that I needed to be on this task force, a business-saving favor he and I have since acknowledged. Our facility, and another that had copied our model, were the obvious targets of this task force and surprisingly there was no plan in place if representatives of either of our facilities argued our case in person. Our unexpected invitation and inclusion in this wannabe Star Chamber derailed their plans to ban our existence.
It is worth noting that in our early days Oklahoma Democrat legislators saw us as underdogs. I asked legislators to just leave us alone and to dismiss efforts to hamstring our operation. The Republicans, early champions of their crony hospital pals, now champion our approach, an approach that now receives the bipartisan neglect we desired.
In another direct attack, the big hospitals attempted to pass what became known as the 30 percent law. If passed, a facility had to receive at least 30 percent of its revenue from Medicare, Medicaid, or uncompensated care. Noncompliance was punished by payment of a penalty calculated to equal the degree of failure to comply. Obviously, the state government would be combing through our financial records and assessing a penalty equal to 30 percent of our gross income, since we accepted no government funds. This was aimed squarely at our facility. Once again, a Democrat, Representative Fred Stanley, used his muscle to ensure that this legislation went nowhere. This law was debated in public forums, to some of which I was invited to speak. In one heated exchange, a normally tight-lipped hospital executive asked me how much of our surgery center’s revenue was uncompensated care. I was confused by his question, meant by him to be a devastating rebuttal to my remarks, but, haunted by the insanity of his question, began to wonder if he had misspoken. Was uncompensated care a revenue item? Most people would think that uncompensated care is care delivered for which no compensation is received. Not true, it turns out.
In another attack, the state health department was weaponized by the big hospitals in an attempt to secure the medical records of all patients treated at our facility in the year 2000. After they attempted to invalidate our operating license for failure to comply, we sued them only to discover they lacked the statutory authority to seize these records. Their surrender is framed on the wall of my office.
Because patients could pay the entirety of the cost of their care for less than their deductible and copay at in-network area hospitals, the insurance companies, paying us out of network, received intense pressure from the area hospitals for this lost business. Likely threatened with retaliation in the form of higher prices billed to the insurance companies by these hospitals, the insurance groups began stacking deductibles, a process where patients going out of network had to meet their in-network deductible, then start again at “zero” to accumulate any out-of-network benefit. This deductible stacking put our facility out of financial reach of most patients who were insured who would otherwise rather pay us directly. Our waiting room was empty, and we faced closure. Up until this point we had grown so rapidly that we had built the large facility we now occupy, and fortunately paid for its construction without debt. This brand-new facility was now without patients. The timing of this deductible stacking could not have been worse.
Keep in mind that our reputation was unsurpassed. We were cheaper and we were better than any other venue. In an unfettered market, there should have been a line around the block. Why had the insurance companies been complicit in this savage attack? Wouldn’t they benefit from higher quality and lower prices?
I decided to post our prices online. We had our list of “over the phone prices,” after all. It was a matter of launching a website, ensuring the surgeons were satisfied with their fees, and posting the prices. All of our prices were determined using the following method: I asked the surgeon how much they wanted, then added a price for anesthesia service based primarily on time. The facility portion was priced as time and materials. The rest is addition, not algebra, for those who say this can’t be done. I have increased only three prices since we began quoting them over the phone in 1997 and have lowered many more. I posted these prices in 2009 with three goals in mind: make ourselves more known to those with sticker shock; start a price war; and better understand the scams at work that had emptied our waiting room. We’ve accomplished these goals and more.
The first patients to arrive after we posted prices were Canadians. This was instructive, as these patients had so-called insurance coverage. There was no access, however, to the care that many of them required. The most common story then as now for the Canadians was a patient waiting two years to see a gynecologist for a hysterectomy to stop their bleeding, bleeding usually so severe that intermittent transfusions were required. For $8,000, which covers the facility, surgeon, anesthesia, pathology, and an overnight stay at the surgery center, Canadians can end their nightmare. The first question a Canadian asks when they call us is how long they’ll have to wait. Our answer that there is no waiting time is met with disbelief. A Canadian friend of mine has told me the old joke that no Canadian is truly content unless standing in line. You should know that there are Harriet Tubman–like brokers who help Canadians cross the border, finding for them affordable medical solutions essentially unavailable in Canada. The Canadian system is working proof that bureaucratic rationing is a murderous disaster, whatever flaws market naysayers can conjure up about market allocation of resources. Millions of Canadians have discovered that the only single payer upon which they can truly rely is themselves.
Uninsured Americans responded to the website shortly after the Canadians, many traveling from faraway places like Wisconsin and Alaska. While there are many examples of money saved uninsured individuals, one that sticks out is the patient from Georgia who required a urologic procedure, and who had received a quote of $40,000, just for the facility charge. A friend had told him about our facility and after he confirmed that our all-inclusive price was $4,000, he informed his urologist he was traveling to Oklahoma City. Having lost another patient to us the previous month, the urologist contacted the hospital and told them something had to be done, as their price quotes were causing him to lose patients. The hospital matched our price and the patient stayed in Georgia. The patient later told me that we had saved him $36,000 and we hadn’t even performed his surgery. I like to think about what patients do with the money they didn’t unnecessarily spend on an overpriced surgery. Self-funded companies, about which I’ll have more to say later, discovered our facility, and fast-forwarding to today, about three hundred employers from all fifty states now pay 100 percent of the employee’s bill and travel expense to undergo surgery at our facility.
Business was slow, however, after first launching the website in 2009. Why didn’t everyone want to buy cheaper and better? Why wouldn’t insurance companies want to buy from us? What was this business about uncompensated care? The answers to these questions were revealed following my introduction to Jay Kempton, the first to refer his self-funded clients to us and who later suggested we launch the FMMA [Free Market Medical Association]. If uncompensated care was a revenue item, how was this calculated? It turns out that hospitals need all the red ink they can find to justify the fiction of their not-for-profit status. If a hospital charges $100,000 and only collects $20,000, their books show that they lost $80,000. This fictitious loss performs two functions. First, it helps maintain their not-for-profit fiction, providing the justification needed to eliminate their tax burden. Second, this loss number forms the basis for a kickback the hospitals are paid by Uncle Sam to the extent they claim these losses. To be clear, hospitals receive federal payments based on the charged amounts they claim to not collect. Or as I like to say, hospitals are paid even when they aren’t paid. This is the revenue of uncompensated care, also known as disproportionate share hospital payments. The more they charge and don’t collect, the more they make, basically. This is why there is a crane building on to every emergency room in the country. This also explains how hospitals can claim they are going broke on paper while purchasing television ads during the Super Bowl and buying out their competitors and physician practices.
Why would insurance companies go along with this? Why would an insurance company play along, discounting $100,000 bills to $20,000? Insurance companies sell access to their networks based on the strength of their ability to apply discounts. The larger the discount, the more marketable selling access to the discounting network becomes. The ERISA [Employee Retirement Income Security Act] lawyer Cori Cook frequently poses the following question: “If I tell you I’ll sell you my house for 50 percent off, what should be your next question?” Everywhere but in the medical industry, the answer is obviously “50 percent off what?” “We give bigger discounts” is the phrase commonly used by brokers peddling whatever insurance plan is paying them the highest commissions. There is another reason the insurance companies love the high initial charge from the hospital and play along. “Claims repricing” is the phrase frequently used in the industry to describe this discounting of hospital charges. Think of insurance companies as claims repricers who charge for this service. It is standard for an insurance company to charge an employer health plan a percentage of the discount they achieve on a hospital bill. It is not hard to see that the higher the initial hospital charge, the more the insurance company makes repricing the claims. Unknown to most employers is the fact that hospital pricing and discounts are prenegotiated, so no discount actually exists. I’ve been told it is not uncommon for an insurance company representative to ask a hospital to charge more for a service so the repricing commission paid to the insurance company is maximized. Claims repricing represents an opportunity foregone when prices are posted for all to see, another reason the insurance companies want nothing to do with my facility.
While big hospitals and insurance companies and Big Pharma and many others deserve all the thumping they get, it is important to acknowledge that none of their theft is possible without the favors auctioned to them in Washington, and that Uncle Sam always drives the getaway car. High prices and sporadic quality have been the result not of the failure of the free market, but of the absence of the free market. To quote Hans Hoppe, “markets deliver goods and governments deliver bads.” Nowhere is this more evident than in the medical industry. Everything people in this country hate about the medical industry is the “bads” that government has delivered. Some “bads” are those which under the banner of patient safety or consumer protection regulate the smaller innovators out of business, usually in the form of requirements or conditions which only the most gigantic cronies can endure. The medical loss ratio, part of the un-Affordable Care Act, is an example. While a requirement that no more than 30 percent of an insurance company’s revenue can be spent on administrative duties is a requirement with which the giant insurance companies could comply, the smaller companies were annihilated. It is no mistake that there are now just four or five medical insurance carriers.
There are many more examples of federal “bads.” The un-Affordable Care Act gained the endorsement of the American Hospital Association only after they secured a ban on the construction or expansion of physician-owned hospitals. Here are more “bads” you may not know. Medicare pays hospitals multiples of what they pay for the very same service rendered in a surgery center. Medicare pays more for physician services when the physician is employed by a hospital. This discrimination against physicians in private practice has driven many physicians into the arms of hospitals happy to gobble up their practices. In addition, the AMA [American Medical Association], to which I do not belong, is paid by Uncle Sam to inflict the most indecipherable payment codes on physicians, and doctors unsupported by a large staff of decoders are placed at an obvious disadvantage. You can now see why hospitals and insurance companies are resistant to price transparency. Uncle Sam has played along to maintain the number of crony favors in their inventory.
You know now why I laugh when I’m asked, “Why isn’t this free market movement in your industry more widespread?” It’s astonishing that it exists at all. Its growth is even more remarkable. If you have no insurance, think of yourself as self-funded. You should know that entire companies self-fund for the medical needs of their employees, paying their bills out of operational revenue. They serve as proxy buyers for their employees, as my friend Marty Makary has said. They are responsible for 80 percent of medical bills not paid by government and are therefore large enough in size to make demands that even the dysfunctional cartel can’t ignore. The free market movement’s growth can be attributed largely to the increasing number of these self-funded buyers expecting market discipline from organizations like mine. Cost-sharing ministries are another large buyer, also expecting market-based services. Direct conversations between these buyers and sellers has opened the eyes of many doctors to more sound economic thinking. One of the goals of the Free Market Medical Association has been to promote sound economic thinking, as we believe that flawed thinking, many times by well-intentioned individuals, has led the industry down failed paths. I believe the Surgery Center of Oklahoma is open only because of our economic grounding. Our dedication to the principle of property rights has kept government money out of our facility. We have no contracts with the insurance cronies and display our all-inclusive pricing. For the exchange to be mutually beneficial, for us to earn an honest buck, we’ve had to deliver a service that consumers with a choice value. The idea that value determination is completely consumer and patient generated has been very helpful to our organization. It has, for instance, cleansed our partnership of the notion prevalent in medicine that one should be paid according to their effort, a clear outgrowth of the flawed labor theory of value. Our partnership agreement is an application of time preference, preventing aging partners from embracing the short-sightedness destructive to the firm. Our dedication to a pure free market model, a journey that is still underway, has been our mission and goal, as we knew that maximum consumer and patient benefit would be the result. Other members of the Free Market Medical Association have gained insights critical to the success of their practices by matching their strategies with sound economic principles, for which we have the Mises Institute to thank.
Uninsured patients have found visible pricing. A price war has begun. UCLA copied my website word for word, and not, I think because they embrace free market ideas. The cronies and their government pals are increasingly exposed. As the cofounder of the Free Market Medical Association, I am filled with optimism watching the growth and acceptance of market discipline in the industry. Our theme at the Free Market Medical Association this year is “are you ready for the red pill?,” a message designed to awaken those comatose self-funded buyers who continue to unnecessarily do business with the cartel. As growth in the number of these sticker-shocked buyers continues, entrepreneurs, aware that the industry is finally prepared to reward the more efficient, will work even harder to satisfy demand in this new and honest fashion. The transformation to a more market-based environment has begun and is flourishing, in spite of decades of efforts by the state to prevent this from happening.
Thank you.
Blue jeans have more in common with drugs than you might think.
One of the more consequential episodes in the history of crony capitalism occurred in 17th and 18th century France. Cheap clothing made from cotton was threatening the rich woolen, linen, and silk manufacturers, so they persuaded the government to ban it. In short order, government agents began spying into homes and coaches and reporting on anyone who dared to wear the new fabric. Thousands of violators of the ban were rounded up and either sent to prison or to ships as galley slaves, which was a death sentence.
In Britain, the same manufacturers demanded a similar ban from the King, but were turned down. As a direct result, Britain launched its industrial revolution by making cheap cotton clothing for the world, and began to get rich, while France stagnated economically. If France had not banned cotton, and had not fallen so far behind Britain economically, Napoleon might have had the money to build a huge fleet and successfully invade Britain. European and world history might have turned out quite differently.
It is easy to recognize and mock the absurdities of crony capitalism in the past, but not always easy to spot it today. For example, we have a replay of the cotton story in contemporary American medicine. It is increasingly recognized that food, supplements, and lifestyle changes are the most potent medicines. But this represents a threat to drug companies, oncologists, and surgeons, and they have enlisted the power of the government to protect their interests.
It is illegal to claim that any substance, even a food, not approved by the Food and Drug Administration (FDA) can cure, control, or even prevent an illness. But approval costs many billions of dollars, so with few exceptions only new to nature molecules, that is, patentable drugs, can be approved. A producer of food or supplements who violates this law will be threatened with massive fines and long jail terms.
In recent years, both walnut and cherry growers have been threatened by the FDA because they dared to share university research that their product had specific health benefits. Other producers have been convicted and put away for decades.
Meanwhile the protected drug and surgery interests charge more and more for products that may do as much harm as good, as you can read in the manufacturer’s own fine print. And the cost of this government protected monopoly, created under the guise of “protecting the public,” puts a lid on both job creation and employee raises while swelling horrific government deficits.
Nor is it only the federal government. State governments are also allied with entrenched medical interests. For example, it is against the law in California for doctors to treat cancer using anything other than drugs, radiation, or surgery. The federal government protects drug companies making vaccines from any legal liability for harm to children, but California also mandates that any child attending public or private school must have had the full schedule of vaccinations. There is even a bill pending there that would gag free speech about vaccines. No wonder drug companies regard vaccines as one of their most promising profit making opportunities.
Like cotton clothing manufacture in centuries past, what might be called natural medicine could be an enormous new American growth industry. Customer interest is so strong, the industry has grown, albeit slowly, despite being legally throttled. There is however little or no prospect that other countries will take the lead, because their governments are even better controlled by bureaucrats allied with medical special interests.
Meanwhile it is still very difficult to educate the public because of the legal barriers. Even President Trump’s White House physician does not know that a score of 20 on a vitamin D test is extremely unhealthy. He reported that the president had passed all his tests with flying colors. A physician trained in natural medicine could set him straight, but he would then no doubt be targeted by his state medical board.
In November 2017, Spaniards learned that the US Secretary of Commerce had decided to tax the import of black olives — between 2.31 and 7.25 percent — because these were being sold below market price. That is, the Trump administration decided the Spaniards were guilty of "dumping" olives.
As usual, the dumping was made possible by domestic subsidies. These came from the funds (nearly 40 percent of total budget) that the European Union (EU) dedicates to its Common Agrarian Policy (CAP). Spain receives more than €5 billion.
According to the EU, the CAP exists to boost agrarian production, thus guaranteeing a certain level of income to the agrarian population, “stabilizing markets,” guaranteeing the security of supplies, and ensuring “reasonable prices.” This interventionist strategy, however, exists to shield a sector that produces less than 2 percent of EU GDP.
The Costs of Tariffs and SubsidiesCAP policy has been problematic. One the one hand, the subsidies have caused a foreign backlash, leading to Trump’s tariff which harms Spanish producers — Spanish companies have lost many contracts with American buyers who have turned to olives from Egypt, Morocco, and Turkey instead). But another side effect of CAP has been harm inflicted on low-income countries that now cannot export their products into Europe.
Thus, thanks to CAP, Spanish industries are on both ends of this anti-trade equation.
The US, however, is hardly a paragon of free trade.
After all, the US Department of Agriculture spends $25 million every year on subsidies for farm businesses, since the approval of 1862 Morrill Act. Some of those subsidies are for insurance, export promotion, and price-loss coverage.
A better approach would be to move more toward a system of virtually no agricultural subsidies at all, as is the case in New Zealand. In 1984, the New Zealand government passed a reform to eliminate farm subsidies. At the beginning, this was a cause for alarm among farmers.
However, the New Zealand agriculture sector has not suffered, and the number of farms has remained constant since the reform. More than 10 percent of the working population is linked to agriculture and around 90 percent of total farm output is exported. Contrary to the EU situation, agriculture represents almost a 7 percent of New Zealand GDP.
We Need Unilateral Free TradeBilateral trade agreements mustn’t be reviewed, but repealed
Bilateral trade agreements like CETA and NAFTA are not a real case of free trade, and apart from being just commercial ties among a series of countries or continental blocks, they tend to promote harmonization of rules and crony capitalism.
RELATED: "The Case for Unilateral Free Trade" by Louis Rouanet
Engaging a “trade war” in the name of free trade as Trump is doing against China — regarding solar panels and European Union agriculture — is not a good solution neither moral nor economically. Americans will suffer.
Instead of slapping new tariffs on olives from Spain, both sides of the Atlantic ought to think about real, unilateral, free trade.
While it is true the US president is wrong to impose new tariffs, the EU establishment is also hypocritical in denouncing “Trump’s protectionism” because the EU maintains its own protectionist policies that are especially damaging to developing economies.
Listen to the Audio Mises Wire version of this article.
A dirty secret of congressional military spending is that when the government allocates billions in spending, unnecessary, wasteful, and parochial interests quickly find their way into the legislation. That’s part of the reason President Trump has drawn the ire of a handful of defense leaders on Capitol Hill for threatening to veto the National Defense Authorization Act (NDAA). Simply put, they don’t want key special interest provisions for their donors and districts held up.
President Trump says that the bill won’t receive his signature unless Congress includes provisions that repeal section 230 of the Communications Decency Act, which provides social media companies immunity from user-posted content. Some believe the president’s move is strategic, while others find it to be political posturing. Irrespective of one’s personal views on Section 230, let’s make one thing clear: the sky is not going to fall from a slight delay in passing the NDAA, as some have suggested.
America’s armed forces still have plenty of funds to conduct their military operations for the foreseeable future, to the extent that some policy analysts argue Washington should make defense spending cuts to free up funding for more pressing needs.
With a delay in authorization looking more likely, now seems like a perfect opportunity for Congress to take a long, hard look at the military waste that it has ignored for far too long.
The release of the 2020 Department of Defense Performance and Accountability Report highlighted nearly $5 billion in improper payments to its civilian workforce in the past year alone. This number may sound astonishing, and it is. That said, it’s just the tip of the fiscal mismanagement iceberg that plagues the same Pentagon which pays ten dollars a gallon for gas during historic declines in oil prices.
Earlier this year, the air force awarded hundreds of millions of dollars for the second phase of a program known as the Launch Service Agreement (LSA). Although it created the initiative to lower the cost of putting military hardware in space, it recently paid SpaceX $147 million more than its competitor’s launch pricing equivalent. Last month, SpaceX’s chief operating officer explained that some of these cost increases came from the company not winning a past government award during the competitive bidding process. In other words, taxpayers received next to nothing for the significantly higher price tag—corporate welfare and crony capitalism at their finest.
No lawmaker would deem these examples of waste acceptable from any other federal agency. The new NDAA that Congress insists must be passed right now is full of ones just like it.
For example, the Senate is pushing to fund the navy well above the branch's request for fleet expansion, allocating $1 billion more for shipbuilding than the navy wanted. Apparently, Congress knows the military’s needs better than the military does itself. Either that or Congress is more attuned and open to the defense industry’s lobbying campaigns.
Additionally, within the NDAA is language surrounding “resiliency,” which is just legislative jargon for preventing waste reduction.
For example, the U.S has over 70,000 personnel permanently stationed across Europe, despite next to no risk of military conflicts. These bases continue to get more expensive to operate, with a 2019 Congressional Budget Office report noting that per-person spending had increased as much as $14,000 per person in recent years. Yet, any talk of cost reduction faces immediate roadblocks from insiders, ensuring that waste-protecting language ends up in the bill.
This year's NDAA features “resiliency” protection for bases that are very much not under threat just to protect contractor spending.
That members of Congress will debate the merits of covid relief spending for individuals here at home but fight to keep wasting hundreds of millions of dollars for nonessential military projects is an absolute disgrace.
Rather than complain about a potential veto, here’s an idea for Congress: use this time to cut out wasteful pork and make the bill stronger. The country’s national security would be much better off because of it.
The release of the House Intelligence Committee’s memo on the FBI’s abuse of the FISA process set off a partisan firestorm. The Democrats warned us beforehand that declassifying the memo would be the end the world as we know it. It was reckless to allow Americans to see this classified material, they said. Agents in the field could be harmed, sources and methods would be compromised, they claimed.
Republicans who had seen the memo claimed that it was far worse than Watergate. They said that mass firings would begin immediately after it became public. They said that the criminality of US government agencies exposed by the memo would shock Americans.
Then it was released and the world did not end. FBI agents have thus far not been fired. Seeing “classified” material did not terrify us, but rather it demonstrated clearly that information is kept from us by claiming it is “classified.”
In the end, both sides got it wrong. Here’s what the memo really shows us:
First, the memo demonstrates that there is a “deep state” that does not want things like elections to threaten its existence. Candidate Trump’s repeated promises to get along with Russia and to re-assess NATO so many years after the end of the Cold War were threatening to a Washington that depends on creating enemies to sustain the fear needed to justify a trillion dollar yearly military budget.
Imagine if candidate Trump had kept his campaign promises when he became President. Without the “Russia threat” and without the “China threat” and without the need to dump billions into NATO, we might actually have reaped a “peace dividend” more than a quarter century after the end of the Cold War. That would have starved the war-promoting military-industrial complex and its network of pro-war “think tanks” that populate the Washington Beltway area.
Second, the memo shows us that neither Republicans nor Democrats really care that much about surveillance abuse when average Americans are the victims. It is clear that the FISA abuse detailed in the memo was well known to Republicans like House Intelligence Committee Chairman Devin Nunes before the memo was actually released. It was likely also well known by Democrats in the House. But both parties suppressed this evidence of FBI abuse of the FISA process until after the FISA Amendments Act could be re-authorized. They didn’t want Americans to know how corrupt the surveillance system really is and how the US has become far too much like East Germany. That might cause more Americans to call up their Representatives and demand that the FISA mass surveillance amendment be allowed to sunset.
Ironically, Chairman Nunes was the biggest cheerleader for the extension of the FISA Amendments even as he knew how terribly the FISA process had been abused!
Finally, hawks on both sides of the aisle in Congress used “Russia-gate” as an excuse to build animosity toward Russia among average Americans. They knew from the classified information that there was no basis for their claims that the Trump Administration was put into office with Moscow’s assistance, but they played along because it served their real goal of keeping the US on war footing and keeping the gravy train rolling.
But don’t worry: the neocons in both parties will soon find another excuse to keep us terrified and ready to flush away a trillion dollars a year on military spending and continue our arguments and new “Cold War” with Russia.
In the meantime, be skeptical of both parties. With few exceptions they are not protecting liberty but promoting its opposite.
Reprinted with permission.
Freedom fighters around the globe are aware of the rise of new and serious attacks against free trade. There are bilateral agreements that "harmonize" regulations and may favor crony capitalism, European agrarian policy tariffs that protect farmers, alt-right and populist nationalists claims against delocalization of companies, and so on.
This short list of examples, reminds us though that protectionism is not only an issue of populist nationalist parties that stem from rivalry among nation states and fear of foreign "enemies." They do not necessarily stem from nationalistic concerns, but may simply be a result of ordinary special interst politics as with the Common Agricultural Policy which which subsidizes European farmers to produce crops which are often grown more cheaply in developing countries.
Unfortunately, many people continue to be unaware of the multitude of lesser cases of commercial protectionism, based on regulations that are designed to benefit guilds or some specific type of commercial interest.
What Is Prtectionism?
A protectionist measure has the aim of shielding a business or indistry from the spontaneous changes in the market that could affect it.
Unhampered markets, as Mises pointed out in The Anti-Capitalist Mentality, rely on market "democracy” because consumers and companies are free to exchange products and services. Thus, each market action is a referendum on the value of each business or industry.
There is no top-down effect, but pure spontaneity built on voluntary actions. However, consumers can change their minds about any specific business at any time. The reasons are diverse: there may be a more cutting-edge product offered elsewhere. Consumers may perceive quality to be higher with competitors. New entrepreneurs may be able to offer lower prices. Some companies may response to these challenges with new innovations of their own. Though others may prefer to do nothing mroe than demand government "protection."
Business "guilds" — to use a European term — have evolved from the status of pre-Christian Roman mutual aid networks to groups of people dedicated to the same craft who seek government-granted monopolies. These government-granted favors gant them a reprieve from teh discipline of the marketplace.
This is the way it works:
First, consumers might become keen on services like BlaBlaCar, AirBnb, Uber, Chicfy, Amovens, SocialCar and Cabify. These services provide what consumers perceive to be less expensive, and often higher-quality, services.
But taxi drivers and hotel owners feel threatened by these new producers, so they seek to outlaw the competition by declaring short-term rental apartments and non-licensed taxi services to be illegal.
Other attempts at outlawing competition include "Sunday shopping bans." In some cases, advocates for the ban are motivated by religious considerations, as in Poland. With the exception of religious case as it has happened recently in Poland, left-wing governments are totally skeptical towards liberalization of shopping in general. In Spain, for instance, governments continue to restrict shopping hours to benefit certain groups of small business owners who don't want to compete with larger businesses that can better provide services seven days per week.
Naturally, these policymakers don't trust the shoppers themselves to shop when it best suits them, or to choose to restrict their shopping to smaller retailers, should they wish.
Ultimately, though, every refusal to liberalize options for consumers faces one unbeatable foe in the form of e-commerce as provided by companies such as Amazon and Zalando. Political restrictions on local merchants will only help to drive even greater profits for e-commerce merchants as shoppers are forced to do business online when stores are closed by law on Sundays. The restrictions only destroy jobs and put obstacles over the growth of brick-and-mortar companies seeking to better serve consumers.
In her book The Big Fat Surprise, Nina Teicholz controversially contends that United States nutritional guidelines have largely contributed to rising levels of heart disease and obesity in the American populace.
Since the American Heart Association (AHA) linked the consumption of saturated fat with heart disease in 1961, government bureaucrats and policymakers have embarked on a low-fat crusade.
Despite this zealous campaigning in favor of low-fat dieting, obesity is rising at alarming rates and heart disease remains one of the leading causes of mortality in the United States.
As inflation rates soar toward 8 percent in the United States, many are feeling the squeeze and will be looking to save money, but one place where price inflation is nothing new in America is drugs. Pharmaceuticals made in the US climbed in price by six times as much as everything else in a decade, reported the Journal of the American Medical Association in 2017.
This is the more tragic because soaring drug costs are driven by specific government policies. If one positive thing is to come out of the growing wave of skepticism toward Big Pharma fomented by the awful response to covid, please let it be that Americans take a second look at healthcare policymaking and demand some changes.
Mylan famously caused a scandal when they increased the price of EpiPen by 450 percent between 2004 and 2016 (adjusted for inflation) while the epinephrine in an EpiPen cost only around a dollar a shot. As the only legal supplier of EpiPen, Mylan could charge the public whatever they wanted.
The excessive authorization of government patents is one of the major drivers of the cost of drugs in the US. A paper in JAMA (2016) claimed market exclusivity was the most important reason why Americans spend more than twice as much per head on drugs as nineteen other industrialized nations. Pfizer, Biogen, Gilead Sciences, Amgem, AbbieVie, Turing Pharmaceutical, Envizo, Valeant Pharmaceuticals, and Jazz Pharmaceuticals (to name a few) have all benefited from price gouging on monopoly healthcare products. Silver and Hyman recount countless examples in Overcharged: Why Americans Pay Too Much for Health Care (2018), at one point writing:
Martin Shkreli, the now-infamous “pharma-bro” … gouged AIDS patients by raising the price of a drug called Daraprim from $13.50 to $750 per pill … Shkreli … revelled in the attention and enjoyed trolling his critics. When he held a charity raffle in which the holder of the winning ticket got to punch him in the face, he boasted of having received an offer of over $78,000.
Patents on drugs are thought to spur innovation, but the reality is that they create industry incentives that actually lower the quality of healthcare available while pushing the price of drugs through the roof. It has been claimed that were there no patent laws and free competition in the pharmaceutical industry, many vital drugs would come within the price range of a simple ibuprofen. The reason for this is that once drugs have been invented, they are relatively inexpensive to manufacture.
In the meantime, the American people are not just being fleeced on drugs over the counter, but also through the tax system by drug companies charging monopoly prices to the government. Pharmaceutical firms know there are millions of people on Medicare and Medicaid who will demand drugs at monopoly rates because they never see the price tag.
This is a grand corporatist scheme that shovels billions of dollars of public money into private hands. For example, in 2014 Gilead Sciences introduced a cure for hepatitis C named Solvadi and marketed it at the astronomical price of $1,000 per pill. The cost of treating every American infected with the disease would have run $268 billion, about similar to the amount that Americans were already spending on all prescription drugs that year. Medicaid budgeted $1.3 billion to pay for Solvadi, but when faced with rationing, Hepatitis C sufferers filed a class action lawsuit in which they accused Medicaid and private providers of violating the law by refusing to cover medicines that were approved by the Food and Drug Administration (FDA). In other words, they expected the government to pay $1,000 per pill!
Even people buying their own drugs end up having to pay prices that are inflated because they are competing as buyers against government and private insurance companies that are willing to shell out for them. To add insult to injury, people are even overcharged on patented drugs that they themselves paid for the research on! One study revealed that over half of the most transformative drugs invented between 1984 and 2009 had their origins in research that was supported by the state. Publicly funded universities and government organizations, like the National Institutes of Health, often lend research staff or funds to private developers.
Far from incentivizing innovation, patents are encouraging companies to fiddle around with already existing treatments instead of developing better ones. Corporations are often allowed to “evergreen” (or “repatent”) their drugs just by tweaking them ever so slightly. For example, the manufacturer of Prilosec, a remedy for heartburn, extended its monopoly by getting a second patent on the pill’s coating, allowing them to remain the exclusive provider of the active ingredient.
It’s no wonder it has been reported that 85 percent of new drugs are no better than the drugs already available! Companies simply withdraw the original drug from the market, forcing physicians to issue the new, more expensive one. The new drug is not qualitatively different from the previous one; it just has a fresh patent. Researchers Robin Feldman and Connie Wang published a study reporting that between 2005 and 2015 at least 74 percent of the drugs associated with new patents in the FDA’s records were not new drugs but existing ones.
When a new disease comes along, it’s arguably far better to treat it with an already existing drug invented to treat other illnesses than to develop a brand new one for it. This is because we know a lot more about the safety profile and side effects of pills that have long been on the market. Patents discourage finding new ways to use older drugs because investors would much rather have the market exclusivity granted by a patent than use a safer drug that is already available in a generic form. This came into focus during the coronavirus pandemic, when already existing treatments were ignored while the medical industry rushed to put out a vaccine that was guaranteed to bring in billions, with the taxpayer footing the bill.
When Dr. Jonas Salk discovered and developed one of the first successful polio vaccines, he was asked who owned the patent, and famously replied, “Well, the people, I would say. Could you patent the sun?”
At that time, however, it took a relatively short time—and a fraction of what it costs now—to bring new treatments to patients. In the past, the competition would have to reverse engineer a drug in order to provide it in a generic form, and this would take some time. Now, it’s mandatory for companies to reveal their pharmaceutical compounds and make their production processes public during the FDA review process. They are not allowed to use trade secrets. This means that by the time the review process is over, other companies already know how to manufacture their drugs. As a consequence of this mandatory, open-book policy, the pharmaceutical industry depends on extreme monopoly prices and patents to recoup research costs that are artificially heightened by the complexity of the FDA’s regulatory system.
Mary Ruwart, former medical researcher and author of the astonishing book Death by Regulation, explains that patents wouldn’t be necessary to ensure that pharmaceutical companies could make a profit if the regulatory system were more reasonable. She writes that between 1962 and 1980, excessive government regulations extended the time it took for a new drug to get from the lab bench to the marketplace from four years to fourteen years. Not only would this increase the cost of bringing drugs to market and increase the price to the consumer, but it would also give the competitors of drug companies plenty of time to copy their work.
The government, in essence, hampers the pharmaceutical industry with the left hand and protects it with the right. Companies complain (somewhat understandably) that their costs are artificially heightened by excessive regulation and that they have no room to make a profit without patents. Especially in an environment where (allegedly) only two out of ten drugs brought to market turn a profit. So, the government has to protect the industry’s bottom line in the interests of the public good. In the end, it’s the public that pays for everything. The research studies, the regulators, the patent protections, the profits; everything is built into the inflated cost of a pill.
There are at least four more reasons to doubt whether patents confer any net benefit in terms of healthcare innovation at all. The first is that patents prevent would-be inventors from mixing recent developments by others with their own “add-on” ingenuities and bringing them to market promptly.
The second is that patents deter companies from researching products similar to those their competitors are researching that may appeal to the same or slightly different demographics, because if they are beaten to securing patent rights by a narrow time margin, all their research spending money is wasted.
The third is that the incentive to secure monopoly rights can serve as a deterrent to sharing research and collaborating in order to keep costs down and preserve profit margins on a final product, because companies are participating in a winner-takes-all system.
The fourth reason is that when one company has a monopoly on the product that serves most people that have a particular condition, there may be little reason to develop drugs for people whom the product does not fit. The research costs will often outweigh the risk of not turning a profit. Let’s take the case of Viagra, which is a very imperfect drug for the treatment of impotence for several reasons. In some people, it causes bad side effects ranging from headaches to stomach pain, and it takes more than an hour to kick in, meaning intercourse must be planned for and cannot happen spontaneously. For most patients suffering from the most severe issues, resulting from nerve damage due to diabetes or prostate cancer surgery, it doesn’t work at all. And for people who need to take it indefinitely, it becomes less effective over time and eventually stops working.
Clearly there are good reasons for other treatments for impotence to be developed, but despite the shortcomings of Viagra, it is only now that the patent on it is fast running out that interest been renewed in developing alternatives. Had the drug not been patented in the first place, other companies would have been looking to find other treatments that could compete with Viagra, and no doubt some of them would be better than it in at least some respects.
One alternative to restricting the supply of healthcare products by giving companies exclusive monopolies on supplying them is to offer prizes to the original creators of new drugs. In 2007, the US federal government offered the prize of a “priority review voucher” (PRV) that a successful drug maker could use to shorten the FDA approval time on a drug for certain neglected diseases. Winners could even sell their vouchers to other drug companies if they wanted. United Therapeutics reportedly received $350 million from another drug manufacturer for the PRV it won for developing a cancer treatment for young children.
This kind of approach could serve as a temporary fix, but really what is called for is a tremendous loosening of regulatory restrictions on drugs and the relaxation or abolition of patent laws. Drugs can be certified as safe and effective by third parties rather than government regulators, in the spirit of Underwriters Laboratories, which is widely trusted give its seal of approval to electrical appliances. This will remove the inevitable temptation for government and insurance companies to jump in bed with Big Pharma to profit at our expense.
Perhaps the greatest lesson to be learned in economics is that public policies have seen and unseen effects. The mastery of such a lesson is what separates the good from the bad economist. “The bad economist,” writes Henry Hazlitt, “sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.”
The same economic reasoning should be applied to intellectual property laws. By joining together not only the seen, but also the unseen consequences of intellectual property laws, we can achieve a solidly ironclad understanding of its impacts on humanity.
Visible Effects of Intellectual Property laws In August 2015, Turing Pharmaceuticals acquired the marketing rights to Daraprim, a life-saving drug used to combat parasitic infections, and became its sole supplier. The next month, it hiked the price of the drug 5,000 percent, from $13.50 a tablet to $750, sparking nationwide protests.
More noticeably than in any other sector, the patent system’s visible effects on the pharmaceutical industry are severely damaging to consumers and free enterprise. According to the Association for Accessible Medicine, “Innovation is critical to the success of the entire pharmaceutical industry. Without innovation there could be no generic pharmaceutical or biosimilar medicines for patients.” Big pharmaceutical corporations, with well-organized lobbying funding, are able to sustain the very monopolistic system that enables their abuse of consumers through high prices. Shielded by the power of the government, for example, Roche/Genentech has had a virtual monopoly on the cancer drug Herceptin since 1985, and AbbVie, which markets the world’s best-selling drug, Humira ($18 billion in global sales in 2017), has filed over 240 patent applications. These data points come from a 2018 report by the Initiative for Medicines, Access and Knowledge (I-MAK), which found that, on average across the top twelve grossing drugs in America
There are 125 patent applications filed and seventy-one granted patents per drug, the majority of which are granted.Prices have increased by 68 percent since 2012, and only one of the top twelve drugs has actually decreased in price.There are thirty-eight years of attempted patent protection that are blocking generic competition sought by drug makers for each of these top-grossing drugs—or nearly double the twenty-year monopoly intended under US patent law.These top-grossing drugs have already been on the US market for fifteen years.Over half of the top twelve drugs in America have more than a hundred attempted patents apiece. These outrageous statistics point ever more strongly toward the notion that intellectual property laws, unnecessary to reward innovation, are merely tools used by crony corporations close to government power to block competition and increase the price of their products.
Sadly, IP is not limited to the pharmaceutical sector, and its monopolistic effects are also heavily felt in the entertainment industry. The artificial monopoly granted and protected by the government leads to a standard “massified culture” and a creative stagnation within the entertainment industry, a phenomenon noted many decades ago by Max Horkheimer and Theodor Adorno, two Frankfurt scholars who missed the critical role played by IP laws in the phenomenon and then wrongly blamed entrepreneurs. It is precisely the blocking of competition, the blocking of free enterprise and entrepreneurial creation, that leads to a “mass cultural industry” dominated by big corporations.
Besides its horrid healthcare consequences and sociological disasters, IP laws also weigh heavily and directly on the taxpayer via the bureaucracy of patent litigation. An incredibly detailed infographic from The Anatomy of a Patent Case draws from varied sources to show the bureaucratic burden of IP laws. It concluded that litigation functions as a tax of about $31 billion dollars per year (maybe as much as $42 billion) and a drag on free enterprise.
Artificial monopolies, the bureaucratic burden, the rage-inducing high prices, and the destruction of creativity are only some visible effects of IP laws. Much worse, however, are its unseen effects.
Unseen Effects of Intellectual Property laws The worldwide call to break the patent on covid-19 vaccines, fueled by the desire to accelerate their distribution, revealed a basic economic truth hidden in plain sight: to limit knowledge is to limit human prosperity. Even key players faced vaccine shortages due to third-party patents, yet virtually no one applied the same logical reasoning to other sectors. If patents on vaccine production limited the production (and subsequently, the distribution) of vaccines, why wouldn’t this apply to any other technological innovation?
Let’s take a step back and look at the logic behind this truth. As economist Jesús Huerta de Soto writes:
Restrictions in the economy are imposed not by objective phenomena or material factors of the outside world (for example, oil reserves), but by human entrepreneurial knowledge (the discovery of a carburetor capable of doubling the efficiency of internal combustion engines would exert the same economic effect as a doubling of all physical oil reserves).
This is because production, the process of transforming inputs into outputs, involves human technique, which, in turn, depends entirely upon the entrepreneurial knowledge being employed. Humans employ a framework of knowledge, devices, and practices in order to produce goods, and entrepreneurs innovate by bringing more productive frameworks of knowledge into the economic reality.
To slow down the development, use, and spread of technical innovation and prevent others from replicating and improving on innovations is to limit human production; it is to act against prosperity itself. While resources are scarce and limited, our growing “fund of experience” allows us to constantly innovate and apply new practical entrepreneurial knowledge. Fencing off said fund is fatally kneecapping humanity’s advancement.
With these lenses, intellectual property comes into focus as a much more hideous and ghastly public policy. The life-saving medicine never produced by entrepreneurs, the hundreds of millions of goods never produced by entrepreneurs worldwide because they were prohibited from using the latest technology, and the millions—perhaps billions—of people never lifted out of poverty, the technology never rolled out to people who desperately need it are only a mere fraction of IP’s unseen effects.
Conclusion With the data laid out, and the sound economic theory explained, we have applied good economic reasoning to achieve an ironclad understanding of the impacts of intellectual property laws on humanity: they are a fatal blow to entrepreneurship, free enterprise, and technological advancement. Their seen and unseen effects impose a terrible cost on humanity, and with virtually no benefit at all, IP laws are perhaps only of use to cronies who wish to prevent competitors from challenging their high prices.
Elon Musk and his corporate empire, much of it financed by taxpayer dollars, is very much in the news. Most of it is not good. And it may be getting worse.
Tesla spends $1 million annually on Washington lobbyists. Its cars are financed by over $280 million in federal tax incentives, including a $7,500 federal tax break and millions more in state rebates and development fees. SpaceX has also received over $5 billion in government support. It has over promised and under delivered. SpaceX rockets, for example, are far less reliable than many of its competitors. This is outlined in reports from December 2017 and January 2018 in which the Department of Defense Inspector General and NASA's Aerospace Safety Advisory Council described a list of security concerns they have with SpaceX, among them 33 significant non-conformities.
Bloomberg Business News reported in November about a Tesla solar factory for which the State of New York paid $750 million based on a commitment to create 1,500 jobs. The factory had been developed for another Musk-run company, SolarCity, which Tesla bought in 2016 in a $2.6 billion deal. SolarCity had been $2.9 billion in debt. Only a relative handful of jobs have been created, and New York officials are expressing dismay. Raymond Walter, a Republican in the New York State Assembly, says he is concerned that the state "has too many eggs in the Tesla basket, which doesn't seem like a very strong basket." John Kaehny, executive director of Reinvent Albany, a nonprofit focused on government accountability, says, "It's a complete hoo-ha! These mega-subsidy deals take place in complete secrecy without scrutiny from the public."
Bloomberg News declares that this is "...a familiar playbook for Musk, start with wild promises followed by product delays, production hell, shareholder anger and finally, hopefully, redemption."
Things, however, may be even worse than they appear. Some are even speculating that Elon Musk, SpaceX and Tesla may be on their way to becoming the new Enron. Enron, the energy giant, employed approximately 20,000 people and claimed revenues of $111 billion at its peak by 2000. As it turned out, Enron used shady accounting practices to hide its losses and report profits which, in fact, did not exist. Andrew Fastow, the chief financial officer, created the scheme to falsify Enron's real financial status. In April 2001, the fraud began to unravel as analysts began to question Enron's numbers. In the end, Enron was found to have losses of $591 million and debt totaling $628 million. Stock prices declined from $90 in 2000 to less than one dollar when the scandal was exposed. Senior managers, who kept selling their stock while encouraging others to continue buying, were convicted of insider trading. In December 2001, the company declared bankruptcy.
In the view of many, Elon Musk has been engaging in similar behavior. A Bloomberg report in November suggests that SpaceX may be less than honest with its numbers, giving a false illusion of profitability. According to Bloomberg , "While SpaceX is burning through cash, disclosures to potential lenders showed the company had positive earnings before interest, taxes, depreciation and amortization of about $270 million for the 12 months through September, people with knowledge of the matter said. But that's because it included amounts that customers had prepaid and because it excluded costs related to non-core research and development...Without those adjustments, earnings were negative, they said.”
According to Bloomberg , "This shouldn't come as a shock. A Wall Street Journal report from a few years ago showed that its profit margins were laser-thin. But if Musk is now going to these lengths to pad SpaceX's books to secure a loan, it appears there's a serious problem."
In the case of Tesla, the Wall Street Journal reports that, "Federal investigators are probing whether Tesla's stated information about production of its Model 3 electric sedans had misled investors about the company's business. Under examination is Tesla's public statements about Model 3 productions as compared to the number of vehicles that were actually built."
Elon Musk and his companies have a very questionable record when it comes to truth and honesty. Overstating prices to qualify for higher state tax credits seems to fit a pattern. According to a recent report in The Oregonian/Oregon Live, "The state of Oregon has recovered $13 million it paid to Tesla for solar power projects, after an investigation conclude the company inflated prices to qualify for higher tax credits."
Whether Elon Musk, Tesla and SpaceX will go the way of Enron is impossible to know, but that they should not be the recipients of taxpayer dollars seems clear. And whatever the future holds, speculation has already begun.
Marketwatch reports: "Is Tesla the next Enron? One hedge fund manager charts a gloomy path. Harris Kupperman of Praetorian Capital recently compared Tesla to one of the biggest falls Wall Street has ever seen."Time will tell, but in the interim, the government should put its cozy relationship with Musk on a long, if not permanent, hiatus.
Despite the ECB’s subsidy of the Eurozone’s banking system, it remains in a sleepwalking state similar to the non-financial, non-crony-capitalist zombified economy. Gone are the heady days of investment banking. There is now a legacy of derivatives and regulators’ fines. Technology has made the over-extended branch network, typical of a European retail bank, a costly white elephant. The market for emptying bank buildings in the towns and villages throughout Europe must be dire, a source of under-provisioned losses. On top of this, the ECB’s interest rate policy has led to lending margins becoming paper-thin.
A negative deposit rate of 0.4% at the ECB has led to negative wholesale (Euribor) money market rates along the yield curve to at least 12 months. This has allowed French banks, for example, to fund Italian government bond positions, stripping out 33 basis points on a “riskless” one-year bond. It’s the peak of collapsed lending margins when even the hare-brained can see the risk is greater than the reward, whatever the regulator says. The entire yield curve is considerably lower than Italian risk implies it should be, given its existing debt obligations, with 10-year Italian government bonds yielding only 2.55%. That’s less than equivalent US Treasuries, the global risk-free standard.
Government bond yields have been and remain considerably reduced through the ECB’s interest rate suppression and its bond-buying programs. The expansion of Eurozone government debt since the Lehman crisis has been about 50% to €9.69 trillion. This expansion, representing €3.1 trillion, compares with the expansion of the Eurosystem’s own balance sheet of €2.8 trillion since 2009. In other words, the expansion of Eurozone government debt has been nearly matched by the ECB’s monetary creation.
Bond prices, such as that of Italian 10-year debt yielding 2.55%, are therefore meaningless in the market sense. This has not been much of an issue so long as asset prices are rising and the global economy is expanding, because monetary inflation will keep the fiat bubble expanding. It is when a credit crisis materializes that the trouble starts. The fiat bubble develops leaks and eventually implodes.
Now that the global economy has stopped expanding and is on the brink of recession, under these changing conditions the monetary, systemic and economic dangers facing the Eurozone are rapidly rising. This is a problem beyond the ability of the ECB to contain. Politicians and their institutions in Brussels seem unaware of the approaching storm, but when they do become aware, they will turn to group-think for protection. Like fish in a tightening bait-ball, they actions are set to accelerate their own demise.
The Start of EU Disintegration There can be no doubt that the ECB has so far only managed to prevent a financial and systemic crisis materializing because of the background of a worldwide monetary and credit expansion inflating financial asset prices. A global background of rising asset values was necessary for the consequences of the Greek financial crisis to be absorbed without destabilizing the whole caboodle. If it had happened during a global credit crisis the outcome would have been different.
Inevitably, at some stage the euro’s purchasing power will begin to fall under the weight of accelerating monetary inflation and the demands from crony-capitalists for a competitive exchange rate. Rising bond yields will be the inevitable outcome, requiring yet more QE from the ECB. It takes little imagination to realize that in an environment of rising bond yields and falling asset values the Italian government and its economy will be exposed to intractable difficulties. The difference from the on-going Greek crisis is Italy’s economy is nearly ten times the size of that of Greece. So far, aided by inflating markets, there has not been a full-blown crisis. In a vicious bond bear market of the scale likely to accompany the next credit crisis, Italy alone could crash the whole Eurosystem.
That could happen by the end of this year, because when things go wrong the pace of calamities usually accelerates. Today, the EU is threatened with Brexit, which at the time of writing is yet to be resolved. But there’s a significant possibility Britain will leave the EU without a comprehensive trade deal and without paying all the money allegedly owed to the EU. The money will have to be made up by the other members, principally by Germany, France, Italy and Spain, being the largest remaining economies. Furthermore, the UK’s economic policy is bound to focus on being a competitive regional entrepôt for global trade, enhancing her economic performance relative to a stultifying EU. Existing political tensions within the EU are certain to escalate as the EU falls behind, and Brussels, hooked on profligacy, for the first time faces budget cuts.
It is becoming increasingly obvious to independent observers that the EU supra-national socializing model is failing structurally, politically, economically and financially. The next credit crisis, which appears to be evolving from the seeds of today’s events, looks set to end the European dream.
The ECB’s zero and negative interest rate policy continues despite the economic upswing. An interest rate hike is not expected before autumn 2019. The extensive purchases of government and corporate bonds will have reached €2,600 billion by the end of the year. The ECB’s financial market supervision as part of the Single Supervisory Mechanism (SSM), which was created in 2014 in response to the crisis, is proliferating. Most recently, ECB vice president Luis de Guindos has expressed the intention to monitor the investment fund sector.
Between 1999 and 2017, the ECB’s total annual expenditure rose from €132 million to €1,086 million. Since 2012, it expanded at an average annual rate of 12.4%. The cost of the ECB’s luxurious new building, amounting to €1.3 billion, is not included in these figures. As a share of the gross domestic product of the eurozone, the total operating expenses of the ECB have grown by 9.2% per year on average over the entire time span (Israel 2018).
Staff and administrative costs, which account for over 90% of total expenditure, have risen by 19.2% per year since 2012. The number of full-time employees has more than doubled since 2012, from 1,638 to 3,384. Average staff costs per employee have increased from €83,364 in 1999 to €158,171 in 2017. This corresponds to 3.6% annually. As shown in the graph, the overall rise in costs is strongly correlated with the ECB’s interest rate cuts. But why is that?
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The economic theory of bureaucracy by William Niskanen (1971) provides an explanatory approach. This theory assumes that administrative institutions want to maximize their budgets to increase their power, their prestige and the career opportunities of their employees. With the outbreak of the European financial and debt crisis, the ECB has indeed gained a central position in the supranational supervision of financial markets in the euro area. Since then, it has directly supervised the 120 largest banks in the euro area and indirectly most others.
At the same time, the ECB influences financial stability via its monetary policy. On the one hand, from 2008 to 2012 the ECB calmed down financial markets through extensive monetary expansion. On the other hand – just like from 2003 to 2007 during the period prior to the great crisis – the cheap money creates the potential for excessive credit growth (Schnabl 2017), which the ECB is now trying to prevent through more regulation and higher capital requirements for banks.
Moreover, the cheap money of the ECB is driving stock and real estate bubbles in the northern eurozone. The potential bursting of these bubbles requires additional regulatory measures to contain risk. As the tightening of regulation has hardly reduced this kind of risk, the ECB at least will be able to claim to have tried to contain the risk, once the bubbles have burst. Finally, ultra-loose monetary policy is depressing interest margins in traditional banking, which, together with the growing costs of regulation, is putting especially small and medium-sized banks in financial distress. The ECB tries to keep track of this process by means of comprehensive stress tests.
In short, while the ECB’s ultra-loose monetary policy creates major risks in the financial system, the ECB’s financial market supervision branch aims or pretends to contain these risks. The growing complexity of this regulation seems to justify not only more staff but also substantial wage increases. The ultra-loose monetary policy can thus also be seen as a major job creation program for central bankers. As European banks – in contrast to US banks – have not recovered since the crisis, the goal of creating financial stability has obviously not been achieved.
It is easy for the ECB to finance its growing expenditure. Other administrative institutions have to apply for a higher budget which has to be granted by some higher authorities, where every euro is being fought for due to scarce resources. In contrast, the ECB is not only politically but also financially independent. It can simply make use of the seigniorage profits from its monetary policy. So, it is no wonder that the ECB’s expenditure is going just as steeply upward as the interest rate is going downward and asset purchase programs are extended.
Originally published at ThinkMarkets
References: Israel, Karl-Friedrich (2018): The Fiat Standard of the Euro Area: Does the Cost-Saving Argument Still Hold Water Today? Working Paper. Available on SSRN.
Niskanen, William A. (1971): Bureaucracy and Representative Government, New Brunswick and London: Transaction Publishers
Schnabl, Gunther (2017): The Failure of ECB Monetary Policy from a Mises/Hayek Perspective. CESifo Working Paper 6388.
Wu, Jing Cynthia and Fan Dora Xia (2017): Time-Varying Lower Bound of Interest Rates in Europe, Chicago Booth Research Paper 2017-06. Data updated in 2018: https://sites.google.com/view/jingcynthiawu/shadow-rates
According to conventional wisdom, one of the prerequisites for a civilized society is a system of government enforced licensing of numerous occupations.
Licensing laws establish the standards (e.g. educational) to be met before people are legally permitted to sell specified services. The government says the safety and wellbeing of consumers impels it to enact these laws, which ensure the superior quality of various products and services purchased by consumers, as compared to what would be available in the absence of such laws.
Unfortunately, legal licensing also creates unemployment and underemployment which disproportionately affects the poor, while producing higher incomes for those employed in the protected occupations, higher prices for consumers , with fewer options available to consumers, thus moving us further away from the government’s stated goal.
Medical Licensing If there could be only one occupation subject to legal licensing, a majority of the public would likely say it should be doctors. However, before the government’s licensure intervention, our ancestors had a different view. In Canadian Medicine, A Study In Restricted Entry (p 125), Ronald Hamowy wrote:
Despite the actions of the College to suppress unregistered physicians, the public continued to firmly oppose prosecution of these practitioners throughout the nineteenth century. Nor did they believe the College and the medical journals when they insisted that their campaign against “quacks” was designed to separate out educated from unqualified physicians.
. . . many, especially poorer, Canadians persisted in consulting unlicensed physicians, whose fees were lower and who appeared no less competent in prescribing medications than did their registered brethren. The profession’s attempt to suppress these doctors was not motivated out of a selfless interest in improving the quality of medical care offered the public, but out of a desire to lessen competition, which would in turn increase their incomes.
For more than two hundred years, economists, including Milton Friedman, have recognized the ulterior motives underlying the imposition of licensure laws. As economist Murray Rothbard wrote (p 1,097):
How much these requirements are designed to “protect” the health of the public, and how much to restrict competition, may be gauged from the fact that giving medical advice free without a license is rarely a legal offense. Only the sale of medical advice requires a license. Since someone may be injured as much, if not more, by free medical advice than by purchased advice, the major purpose of the regulation is clearly to restrict competition rather than to safeguard the public.
Without coercive licensing laws, consumers would consult market-based sources to determine the qualifications of physicians. Hamowy (pp 328, 77) wrote about "certification":
By certification I mean the endorsement, either through examination or by some other method, of medical practitioners by some semi-public or private body that is not legally empowered to restrict entry into the profession nor to prevent the practice of uncertified physicians.
… there is no hard evidence that licensing, as opposed to certification, improves the quality of physician care available to the public; indeed, there is a good deal of evidence that suggests the contrary is true. And doubtless these effects account for why medical licensing laws have originally been enacted at the urging of the profession itself, and have seldom been promoted by the consumers of medical care, their supposed beneficiaries.
As it is in the medical field, so it is with virtually every occupation subject to licensing. Various occupational associations, not consumers, lobby the government to enact new licensing laws or add new restrictions to the current laws.
Recognizing that licensure in the medical field is counterproductive, it should be obvious that all licensure should be abolished. From eyebrow threading, to dog-sitting , to florists, to strippers, to hair braiding, to mowing lawns, there are numerous occupations where licensing serves no other purpose than to provide revenue for the government and benefits for entrenched interests, all at the expense of consumers and job-seekers.
Studies have shown that licensure reduces the quantity of people employed in the licensed occupations, which, because competition has been coercively suppressed, often results in a reduced quality of services offered to the public, which is the exact opposite of what the government promises us.
The Government Doesn’t Practice what it Preaches The government’s lack concern about risks to the public is often exposed by the fact the government frequently ignores its own licensing laws. Nor does the way the laws are enforced convince one that the laws exist to protect consumers. Here are just two examples.
First, in Ontario, all long-term care homes must be licensed or approved, and are subject to regular government inspections. However, the government has scaled back its inspections , including reduced inspections of dining practices “when at least three homes have been sued for alleged mistakes that caused residents to choke to death.” In what appears to be a typical bureaucratic response to one of the choking deaths, the government conducted an investigation and produced a six-page report announcing that “The licensee has failed to [follow proper procedures].” Was the license revoked? No.
Second, an investigation into the deplorable living conditions of a tenant in London, Ontario revealed that City Hall disobeyed its own by-law governing the licensing of residential rental units, as well as the Ontario Residential Tenancies Act .
The government’s hypocrisy – or incompetence - is clearly evident. The word ‘license’ is not synonymous with ‘competence.’
Nor is the word ‘politician.’
It’s one of those stories of the century that somehow never gets treated that way. For an astounding 25 of the past 26 years, the United States has been the leading arms dealer on the planet, at some moments in near monopolistic fashion. Its major weapons-producers, including Boeing, Raytheon, and Lockheed Martin, regularly pour the latest in high-tech arms and munitions into the most explosive areas of the planet with ample assistance from the Pentagon. In recent years, the bulk of those arms have gone to the Greater Middle East. Donald Trump is only the latest American president to preside over a global arms sales bonanza. With remarkable enthusiasm, he’s appointed himself America’s number one weapons salesman and he couldn’t be prouder of the job he’s doing.
Earlier this month, for instance, on the very day Congress was debating whether to end US support for Saudi Arabia’s brutal war in Yemen, Trump engaged in one of his favorite presidential activities: bragging about the economic benefits of the American arms sales he’s been promoting. He was joined in his moment of braggadocio by Saudi Crown Prince Mohammed bin Salman, the chief architect of that war. That grim conflict has killed thousands of civilians through indiscriminate air strikes, while putting millions at risk of death from famine, cholera, and other “natural” disasters caused at least in part by a Saudi-led blockade of that country’s ports.
That Washington-enabled humanitarian crisis provided the backdrop for the Senate’s consideration of a bill co-sponsored by Vermont independent Senator Bernie Sanders, Utah Republican Senator Mike Lee, and Connecticut Democratic Senator Chris Murphy. It was aimed at ending US mid-air refueling of Saudi war planes and Washington’s additional assistance for the Saudi war effort (at least until the war is explicitly authorized by Congress). The bill generated a vigorous debate. In the end, on an issue that wouldn’t have even come to the floor two years ago, an unprecedented 44 senators voted to halt this country’s support for the Saudi war effort. The bill nonetheless went down to defeat and the suffering in Yemen continues.
Debate about the merits of that brutal war was, however, the last thing on the mind of a president who views his bear-hug embrace of the Saudi regime as a straightforward business proposition. He’s so enthusiastic about selling arms to Riyadh that he even brought his very own prop to the White House meeting with bin Salman: a US map highlighting which of the 50 states would benefit most from pending weapons sales to the prince’s country.
You undoubtedly won’t be surprised to learn that Michigan, Ohio, and Florida, the three crucial swing states in the 2016 presidential election, were specially highlighted. His latest stunt only underscored a simple fact of his presidency: Trump's arms sales are meant to promote pork-barrel politics, while pumping up the profits of US weapons manufacturers. As for human rights or human lives, who cares?
To be fair, Donald Trump is hardly the first American president to make it his business to aggressively promote weapons exports. Though seldom a highlighted part of his presidency, Barack Obama proved to be a weapons salesman par excellence. He made more arms offers in his two terms in office than any US president since World War II, including an astounding $115 billion in weapons deals with Saudi Arabia. For the tiny group of us who follow such things, that map of Trump’s only underscored a familiar reality.
On it, in addition to the map linking US jobs and arms transfers to the Saudis, were little boxes that highlighted four specific weapons sales worth tens of billions of dollars. Three of those that included the THAAD missile defense system, C-130 transport planes, P-8 anti-submarine warfare planes, and Bradley armored vehicles were, in fact, completed during the Obama years. So much for Donald Trump’s claim to be a deal maker the likes of which we’ve never seen before. You might, in fact, say that the truest arms race these days is between American presidents, not the United States and other countries. Not only has the US been the world’s top arms exporting nation throughout this century, but last year it sold one and a half times as much weaponry as its closest rival, Russia.
Embracing Lockheed MartinIt’s worth noting that three of those four Saudi deals involved weapons made by Lockheed Martin. Admittedly, Trump’s relationship with Lockheed got off to a rocky start in December 2016 when he tweeted his displeasure over the cost of that company’s F-35 combat aircraft, the most expensive weapons program ever undertaken by the Pentagon. Since then, however, relations between the nation’s largest defense contractor and America’s most self-involved president have warmed considerably.
Before Trump’s May 2017 visit to Saudi Arabia, his son-in-law, Jared Kushner, new best buddy to Mohammed bin Salman, was put in charge of cobbling together a smoke-and-mirrors, wildly exaggerated $100 billion-plus arms package that Trump could announce in Riyadh. What Kushner needed was a list of sales or potential sales that his father-in-law could boast about (even if many of the deals had been made by Obama). So he called Lockheed Martin CEO Marillyn Hewson to ask if she could cut the price of a THAAD anti-missile system that the administration wanted to include in the package. She agreed and the $15 billion THAAD deal — still a huge price tag and the most lucrative sale to the Saudis made by the Trump administration — went forward. To sweeten the pot for the Saudi royals, the Pentagon even waived a $3.5 billion fee normally required by law and designed to reimburse the Treasury for the cost to American taxpayers of developing such a major weapons system. General Joseph Rixey, until recently the director of the Pentagon’s Defense Security Cooperation Agency, which granted that waiver, has since gone directly through Washington’s revolving door and been hired by — you guessed it — Lockheed Martin.
In addition, former Lockheed Martin executive John Rood is now the Trump administration’s undersecretary of defense for policy, where one of his responsibilities will be to weigh in on... don’t be shocked!... major arms deals. In his confirmation hearings, Rood refused to say that he would recuse himself from transactions involving his former employer, for which he was denounced by Senators John McCain and Elizabeth Warren. As Warren asserted in a speech opposing Rood’s appointment,
No taxpayer should have to wonder whether the top policy-makers at the Pentagon are pushing defense products and foreign military sales for reasons other than the protection of the United States of America. ... No American should have to wonder whether the Defense Department is acting to protect the national interests of our nation or the financial interests of the five giant defense contractors.
Still, most senators were unfazed and Rood’s nomination sailed through that body by a vote of 81 to 7. He is now positioned to help smooth the way for any Lockheed Martin deal that might meet with a discouraging word from the Pentagon or State Department officials charged with vetting foreign arms sales.
Arming the PlanetThough Saudi Arabia may be the largest recipient of US arms on the planet, it’s anything but Washington’s only customer. According to the Pentagon’s annual tally of major agreements under the Foreign Military Sales program, the most significant channel for US arms exports, Washington entered into formal agreements to sell weaponry to 130 nations in 2016 (the most recent year for which full data is available). According to a recent report from the Cato Institute, between 2002 and 2016 the United States delivered weaponry to 167 countries — more than 85% of the nations on the planet. The Cato report also notes that, between 1981 and 2010, Washington supplied some form of weaponry to 59% of all nations engaged in high-level conflicts.
In short, Donald Trump has headed down a well-traveled arms superhighway. Every president since Richard Nixon has taken that same road and, in 2010, the Obama administration managed to rack up a record $102 billion in foreign arms offers. In a recent report I wrote for the Security Assistance Monitor at the Center for International Policy, I documented more than $82 billion in arms offers by the Trump administration in 2017 alone, which actually represented a slight increase from the $76 billion in offers made during President Obama’s final year. It was, however, far lower than that 2010 figure, $60 billion of which came from Saudi deals for F-15 combat aircraft, Apache attack helicopters, transport aircraft, and armored vehicles, as well as guns and ammunition.
There have nonetheless been some differences in the approaches of the two administrations in the area of human rights. Under pressure from human rights groups, the Obama administration did, in the end, suspend sales of aircraft to Bahrain and Nigeria, both of whose militaries were significant human rights violators, and also a $1 billion-plus deal for precision-guided bombs to Saudi Arabia. That Saudi suspension represented the first concrete action by the Obama administration to express displeasure with Riyadh’s indiscriminate bombing campaign in Yemen. Conducted largely with US and British supplied aircraft, bombs, and missiles, it has included strikes against hospitals, marketplaces, water treatment facilities, and even a funeral. In keeping with his focus on jobs to the exclusion of humanitarian concerns, Trump reversed all three of the Obama suspensions shortly after taking office.
Fueling Terrorism and InstabilityIn fact, selling weapons to dictatorships and repressive regimes often fuels instability, war, and terrorism, as the American war on terror has vividly demonstrated for the last nearly 17 years. US-supplied arms also have a nasty habit of ending up in the hands of America’s adversaries. At the height of the US intervention in Iraq, for instance, that country’s armed forces lost track of hundreds of thousands of rifles, many of which made their way into the hands of forces resisting the US occupation.
In a similar fashion, when Islamic State militants swept into Iraq in 2014, the Iraqi security forces abandoned billions of dollars worth of American equipment, from small arms to military trucks and armored vehicles. ISIS promptly put them to use against US advisers and the Iraqi security forces as well as tens of thousands of Iraqi civilians. The Taliban, too, has gotten its hands on substantial quantities of US weaponry, either on the battlefield or by buying them at cut-rate, black market prices from corrupt members of the Afghan security forces.
In northern Syria, two US-armed groups are now fighting each other. Turkish forces are facing off against Syrian Kurdish militias that have been among the most effective anti-ISIS fighters and there is even an ongoing risk that US and Turkish forces, NATO allies, may find themselves in direct combat with each other. Far from giving Washington influence over key allies or improving their combat effectiveness, US arms and training often simply spur further conflict and chaos to the detriment of the security of the United States, not to speak of the peace of the world.
In the grim and devolving conflict in Yemen, for instance, all sides possess at least some US weaponry. Saudi Arabia is, of course, the top US arms client and its forces are a catalogue of American weaponry, from planes and anti-tank missiles to cluster bombs, but hundreds of millions of dollars in US military aid were also provided to the forces of Yemeni autocrat Ali Abdullah Saleh during his 30 years of rule before he was driven from power in 2012. Later, however, he joined forces with the Houthi rebels against the Saudi-led intervention, taking large parts of the Yemeni armed forces — and their US-supplied weapons — with him. (He would himself be assassinated by Houthi forces late last year after a falling out.)
Trump’s Plan: Make It Easier on Arms MakersThe Trump administration is poised to release a new policy directive on global arms transfers. A report by Politico, based on interviews with sources at the State Department and a National Security Council (NSC) official, suggests that it will seek to further streamline the process of approving arms sales, in part by increasing the already extensive role of US government personnel in promoting such exports. It will also remove what a National Security Council statement has described as “unreasonable constraints on the ability of our companies to compete.” In keeping with that priority, according to the NSC official, “the administration is intent on ensuring that US industry has every advantage in the global marketplace.”
In January, a Reuters article confirmed this approach, reporting that the forthcoming directive would emphasize arms-sales promotion by US diplomats and other overseas personnel. As one administration official told Reuters, “We want to see those guys, the commercial and military attaches, unfettered to be salesmen for this stuff, to be promoters.”
The Trump administration is also expected to move forward with a plan, stalled as the Obama years ended, to ease controls on the export of US firearms. Gun exports now licensed and scrutinized by the State Department would instead be put under the far-less-stringent jurisdiction of the Commerce Department. Some firearms could then be exported to allies without even a license, reducing the government’s ability to prevent them from reaching criminal networks or the security forces of potential adversaries.
In September 2017, Democratic senators Ben Cardin, Dianne Feinstein, and Patrick Leahy sent a letter to then-Secretary of State Rex Tillerson raising concerns about such a change. As they wrote, “Combat firearms and ammunition are uniquely lethal; they are easily spread and easily modified, and are the primary means of injury, death and destruction in civil and military conflicts throughout the world. As such they should be subjected to more — not less — rigorous export controls and oversight.”
If Trump’s vision of an all-arms-sales-all-the-time foreign policy is realized, he may scale the weapons-dealing heights reached by the Obama administration. As Washington’s arms-dealer-in-chief, he might indeed succeed in selling American weaponry as if there were no tomorrow. Given the known human costs of unbridled arms trafficking, however, such a presidency would also ensure that whatever tomorrow finally arrived would prove far worse than today, unless of course you happen to be a major US arms maker.
Originally published at TomDispatch.com.
With new discussion of regulating and even possibly breaking up social media and tech giants like Facebook and Amazon, or blocking the proposed acquisition of Time Warner by AT&T, antitrust policy is back in current events. Coincidentally, revenge and spite motivations for politicians are also back in political news, given the aftermath of the contentious 2016 presidential election. It has become all too obvious that many Republicans and Democrats are refusing to work with, and even intentionally obstructing, President Donald Trump’s agenda simply because he personally attacked them (and continues to do so). In addition, his runner up and arch-nemesis Hillary Clinton continues to blame everyone except herself for losing the presidential race. It is all too fitting, then, that revenge and spite actually played a role in the origins of the first federal antitrust law, the 1890 Sherman Act.
Historians as well as economists have long analyzed the broader special interest motivations for the Sherman Act. The traditional narrative is that big business Republicans supported antitrust legislation because it would deflect attention away from the true source of many monopolies: the protective tariff. Dead letter and poorly enforced legislation would be of little threat to large businesses while also allowing the tariff to go untouched, and possibly even raised. In his new book titled The Progressive Era, edited by the present writer, Murray Rothbard supported this narrative.
Wrote Rothbard:
“[W]e know that the Sherman Act was rarely used by any of the administrations, and that it sunk into innocuous desuetude by the time of the McKinley administration. That it was designed as a sop to public opinion and to take the heat off the tariff therefore seems likely.”Murray Rothbard, The Progressive Era, ed. Patrick Newman, (Auburn, AL: Ludwig von Mises Institute, 2017), p.228.
But he also mentioned another, more personal motivation: the venerable Senator John Sherman of Ohio, who was an early supporter of antitrust legislation and who the act was named after, pushed for an antitrust law partially as a way of enacting revenge on his political rival, former Michigan Governor Russell Alger. The present writer built off of Rothbard’s insights and recently wrote a paper on this topic titled “Revenge: John Sherman, Russell Alger and the origins of the Sherman Act.”
The story is simple. All his life John Sherman wanted to be president and repeatedly tried to secure the Republican nomination. His last real chance due to his old age was in 1888 when he was the front runner for the nomination. However, once the balloting began at the June convention Sherman was unable to obtain a majority of delegates and eventually lost to dark horse candidate Benjamin Harrison of Indiana. Sherman was furious and much like Hillary Clinton, looked for people to blame besides himself. The main target of his vitriol was Russell Alger who he charged with bribing away southern delegates. After the convention was over Sherman made his accusations public and the controversy festered in the news for months.
Sherman maintained his conviction for years and wrote in his 1895 memoir that “I believe and had, as I thought, conclusive proof that the friends of General Alger substantially purchased the votes of many of the delegates from the southern states who had been instructed by their conventions to vote for me.” Much like Hillary Clinton’s bitter resentment at people who were supposed to vote for her but did not do so, Sherman’s blame game was apparent to his contemporaries. After Sherman’s memoir came out writer Joseph Bishop noted: “John Sherman’s conduct in defeat betrays less fortitude and self-restraint than that of any other candidate we have ever had. He is the first to charge his rivals . . .” and “These extraordinary charges, it should be borne in mind, are not made in the first heat of anger and disappointment, but are set down deliberately in a book and published fully seven years later.”
A major goal of Sherman for the rest of his career, now that he lost his last chance at the presidency, was to deprive the man who he felt denied him his deserved chance. Conveniently for Sherman, an opportunity shortly appeared. Alger had become embroiled in a legal case titled Richardson v. Buhl et al. that was decided by the Michigan Supreme Court on November 15th, 1889. Alger and a business partner loaned money to the Richardson Match Company which was later purchased by the Diamond Match Company, an organization whose purpose was to try and monopolize the friction match market. There was a dispute over payment, and so the interested parties went to court. The Michigan Supreme Court was stacked with rabid antimonopolists and considered it unable to help resolve contracts for any company whose goal was monopoly. After the justices charged Alger with a major role in the formation of the Diamond Match Company (who no doubt realized the political implications for the former Republican governor) they threw the case out of court. Only the minority opinion correctly realized that Alger had little to no involvement in the Diamond Match Company.
Sherman, who was previously interested in antitrust legislation, had seen his prior bills never get out of committee. After the verdict was handed down, at the beginning of the 51st Congress Sherman reintroduced his bill in early December and muscled it through the Senate Finance Committee so he could give a speech on the Senate floor. There, Sherman discussed the bill on March 21st, 1890, and described state court cases that dealt with the threat of various monopolies. He spent an enormous amount of time on a case he called David M. Richardson v. Russell A. Alger et al., quoting multiple paragraphs from the court case right up until the minority opinion. Sherman’s goal was clearly seen by his contemporaries: the antitrust bill was a way of getting payback on Alger because he gave Sherman a visible platform to publicly skewer his rival and sabotage his future presidential chances.
On March 25th, the August New York Times noted:
Of course it was with reluctance that Mr. Sherman directed the attention of the Senate and the country to Gen. Alger’s connection with this “unlawful” combination, and to the fact that the Supreme Court of Gen. Alger’s own State had denounced the organization so emphatically . . . [T]he case, as he said, was “quite a leading one” . . . [I]n 1892 Gen. Alger will scarcely look for support and comfort in those pages of the Congressional Record where this speech may be found.
Most newspapers did not recognize that Sherman lied by rearranging the name of the court case, not quoting the minority opinion, and repeatedly mentioning Alger’s name in his speech. Sherman subtly accused Alger of heavy involvement in the Diamond Match Company when Alger had very little influence. The scandal would hang heavy over Alger, and as a result of this and other issues he never got the Republican nomination. Sherman’s tactic worked.
As the importance of the Sherman Act increased during the Progressive Era the discussion of this motivation disappeared from the record. When it was investigated by modern historians they simply dismissed out of hand the revenge motiveAn important exception was Robert Bradley Jr., “On the origins of the Sherman Antitrust Act,” Cato Journal (1990) 9: 737-742. . Hans Thorelli, author of the acclaimed The Federal Antitrust Policy (1955), snidely wrote “The present writer is unable to believe that such a personal matter would play a part of significance as a factor motivating Sherman with regard to the antitrust bill or, in fact, any other major legislative measure.” The reason? Just because. Instead, Thorelli spent his efforts searching for a loftier more public interested reason.
Today analysts continue to ascribe to politicians noble and public interest motivations for supporting particular pieces of legislation. But the origins of the Sherman Act provide an important reminder that politicians can be partly motivated by revenge, greed, hatred, jealously, and spite. In today’s day and age, when public confidence in their representatives is at an all-time low and people have little trust in government, this should come as no surprise.
Have you ever wondered what you ought to do with the money you make? If so, you aren’t alone.
Recent college graduates, many of whom have had little to no experience in managing an income, find themselves in the awkward position of having to do something with it; that is if we suppose they actually find employment in the first place.
The problem of what to do with the money we make has literally existed for centuries. However, the issue isn’t totally opaque. It doesn’t take a financial genius to know that some portion of income should be — must be — spent on life’s necessities, e.g. food, clothing, and shelter.
But what happens when there’s some money left over?
It’s an odd problem to have. We’re all told that to get rich requires earning more than you spend. The remainder should be saved. But what’s that mean? Cash under the mattress? Leave it in the bank account? Shares of publicly traded stock? Or maybe a mutual fund?
Discussions about what’s best typically revolve around rates of return. Where can my money make the most money? How do I best invest what I earn? After all, “everyone knows” that you can do something better than just hoarding the money. We’re told to “put it to work.” And fair enough, we work hard for our money, shouldn’t our money work hard for us?
Notice the change in language. We’ve gone from the importance of saving to the best way to invest. Is this an innocuous shift?
I want to suggest to you that it’s not. In fact, the focus on investing has a peculiar similarity to the old adage of “missing the forest for the trees.”
The Special Privileges of BanksIn your work, do you have a colleague, boss, or client who just "makes your life easy"?
Society’s financial focus on the investment trees at the expense of the economic forest makes the lives of those in a particular industry especially easy.
That industry is banking.
A banker’s life is made pleasant almost to the point of effortlessness. The language and form of conversations about money facilitate this ease of existence. You see, the foundation of a bank’s profitability consists in the deposits folks like you and I grant to them.
It goes like this, banks make money by charging interest on loans. Banks have a unique, legal privilege to originate loans at a multiple of its deposits. That means that every new dollar in deposits allows a bank to originate more than a dollar in new loans.
See, you might think that banks lend your money. Now, it’s technically impossible to trace what happens to those particular dollars you deposit with a bank. At the end of the day, what matters to a bank is leverage. Banks don’t just lend out the dollars they receive from depositors. Far from it. They take those deposits, multiply by a factor, e.g. 10, and lend out that amount.
So it’s not that banks lend your money. They lend out far more than just “your” money.
How do they do that? What would happen if you or I made a loan to someone else with money that we never received from someone else first? How could such a thing even be possible? Well, for you and I, it’s not possible, at least not legally. Profiting by using money we ourselves created is called counterfeiting and it can come with a prison sentence.
But not for the banks. In the technical language of economics, we call this process of legal counterfeiting “inflation.” The euphemistic definition of “inflation” is “an increase in the quantity of money.” The thorny ethical question as to the origin of that increase is conveniently set aside.
Are you starting to see the forest?
The more deposits a bank has, the more legal counterfeiting (“lending”) it can do. The more “lending” it does, the more interest it will collect. The more interest it collects, the more profitable it becomes. The more profitable it is, the more property over which it can exercise control — like politicians.
How do you receive income? Direct deposit? A paper check? To where is that income destined?
A bank.
How do you imagine bankers feel about that process? It's like asking, “how would you feel about a client or colleague that makes your life easy?” Words like spectacular, tremendous, blessed, fulfilled, and content come to mind. However, the question is a bit off. It’s more like, “how would you feel about a client or colleague who not only makes your life easy, but makes it 10 or 50 times more profitable than it was before?”
This wouldn’t be so bad if you still owned money you deposited in the bank. At least if it was legally yours, you could demand it back whenever you wish. However, it would be in the bank’s interest for the bank to own your deposits. That way, if they were ever to get into a situation where they didn’t have enough money on hand to fulfill your withdrawal request, they could just deny the request.
Unfortunately, you don’t own the money you deposit in a bank. The bank does, and this is reinforced by Dodd-Frank. Of course, banks don’t typically refuse withdrawal requests. If they did, people might object to sending them fresh new deposits. This technicality of legal ownership is an ace up the sleeve of banks. No banker plays that card unless he must.
It’s an ugly forest, isn’t it?
Suppose you don’t keep money in the bank. Your high school teacher, whose financial acumen credentials are unknown, if they exist, has done his duty and you’ve listened. “You should be investing! And start young!”
What sort of business would a bank be if it had no solution for the prudent student of finance? Shares of stock and government bonds, cloaked in a veil of indecipherable financial lingo, buried in stacks of paper, enumerated in eight-point font, dressed up in super official, authoritative language, are available to help you “prepare for your financial future.” A smooth-talking, well-dressed, personal wealth adviser is available to help you select the best option (for whom?).
The hard-working, well-intended bank customer has, by now, been sufficiently (a) mystified and (b) steam-rolled by the opulence and polite manner of the whole experience. Well, the experts know best, right? Better to go with their recommendations, rather than to "go it alone" — or so they say.
Now that the forest is more fully in view, we can discuss some of the features of this business, or racket — depending on which side of the table you sit.
Notice the core around which the banking — and all financial — business revolves. The flow of money. You might think of it as cash flow. This term is typically, and sadly, reserved for discussions about the revenue and expenses of a business. But in reality, the flow of money, or cash flow, is a feature of everyone’s financial experience. The flow of that money, the velocity and direction of it, in particular, is the determining influence behind the form and function of the financial industry.
How does this relate to money?
Consider that money flow is the key ingredient to economic activity just in the way water flow is the key ingredient to biological activity. Money flows through banks just the way water flows through rivers. However, whereas the flow of water is determined by the laws of physics, the flow of money is determined by the choices of men (and women). And unlike nature, where matter is neither created nor destroyed but only transferred, money can be conjured when backed with sufficient force of government through special legal privileges.
The result is a literally unnatural, disproportionate flourishing of economic activity around those institutions where new money is conjured through the exercise of legal privilege. Therefore, it is no wonder that the bankers and money managers are unnaturally, disproportionately wealthy.
With water, man is limited in his capacity to influence its flow. The oceans are vast and water’s flow and erosive power are tremendous. The best we can do to change its flow is a dam here and a levy there, each of which is ultimately at the mercy of a complex atmospheric system.
Man’s odds with affecting the flow of money are categorically different. Man chooses where his money flows. The priestly power of banks rests on the decisions of men. Banks specifically require a stable, relatively predictable flow of new deposits, each kept with the bank — or at least within the banking system — for a stable, relatively predictable length of time.
So long as men remain docile, submissive, and complacent with respect to the banking class’s legal privilege to conjure money where before it did not exist, the economic landscape, in its general form, will remain unchanged.
So long as men refuse to discuss the true nature of the banking business, and prefer instead to leave it to the experts, the chances men will think differently are nil.
The forest is clear. It’s up to you to do something about it.
The Trump administration has announced it plans to raise taxes on Americans in the form of tariffs. On Thursday, the president promised steel and aluminum executives that he would protect them against foreign competition by levying tariffs on both metals in the coming weeks: 25 percent on steel and 10 percent on aluminum. The effect of tariffs will be to impose a higher tax burden on Americans, while increasing the cost of living, and the costs imposed on entrepreneurs using the taxed materials.
For centuries, economists have examined and explained the negative consequences of tariffs. And for more than a century, the economists of the Austrian school have added even more sophisticated and modern arguments against tariffs.
Thus, on the matter of tariffs, there is no need to re-invent the wheel.
After all, Henry Hazlitt in his seminal Economics in One Lesson covered the topic well:
Now let us look at the matter the other way round, and see the effect of imposing a tariff in the first place. Suppose that there had been no tariff on foreign knit goods, that Americans were accustomed to buying foreign sweaters without duty, and that the argument were then put forward that we could bring a sweater industry into existence by imposing a duty of $5 on sweaters.
There would be nothing logically wrong with this argument so far as it went. The cost of British sweaters to the American consumer might thereby be forced so high that American manufacturers would find it profitable to enter the sweater business. But American consumers would be forced to subsidize this industry. On every American sweater they bought they would be forced in effect to pay a tax of $5 which would be collected from them in a higher price by the new sweater industry.
Americans would be employed in a sweater industry who had not previously been employed in a sweater industry. That much is true. But there would be no net addition to the country’s industry or the country’s employment. Because the American consumer had to pay $5 more for the same quality of sweater he would have just that much less left over to buy anything else. He would have to reduce his expenditures by $5 somewhere else. In order that one industry might grow or come into existence, a hundred other industries would have to shrink. In order that 20,000 persons might be employed in a sweater industry, 20,000 fewer persons would be employed elsewhere.
But the new industry would be visible. The number of its employees,the capital invested in it, the market value of its product in terms of dollars, could be easily counted. The neighbors could see the sweater workers going to and from the factory every day. The results would be palpable and direct. But the shrinkage of a hundred other industries, the loss of 20,000 other jobs somewhere else, would not be so easily noticed. It would be impossible for even the cleverest statistician to know precisely what the incidence of the loss of other jobs had been—precisely how many men and women had been laid off from each particular industry, precisely how much business each particular industry had lost—because consumers had to pay more for their sweaters. For a loss spread among all the other productive activities of the country would be comparatively minute for each. It would be impossible for anyone to know precisely how each consumer would have spent his extra $5 if he had been allowed to retain it. The overwhelming majority of the people, therefore, would probably suffer from the optical illusion that the new industry had cost us nothing.
It is important to notice that the new tariff on sweaters would not raise American wages. To be sure, it would enable Americans to work in the sweater industry at approximately the average level of American wages (for workers of their skill), instead of having to compete in that industry at the British level of wages. But there would be no increase of American wages in general as a result of the duty; for, as we have seen, there would be no net increase in the number of jobs provided, no net increase in the demand for goods, and no increase in labor productivity. Labor productivity would, in fact, be reduced as a result of the tariff.
And this brings us to the real effect of a tariff wall. It is not merely that all its visible gains are offset by less obvious but no less real losses. It results, in fact, in a net loss to the country. For contrary to centuries of interested propaganda and disinterested confusion, the tariff reduces the American level of wages. Let us observe more clearly how it does this. We have seen that the added amount which consumers pay for a tariff-protected article leaves them just that much less with which to buy all other articles.
Hazlitt, of course, was a student of Ludwig von Mises, and developed many of Mises's views. Writing on Mises's essays in Interventionism: An Economic Analysis, David Gordon sums up Mises's view:
Tariffs, and similar measures designed to strengthen the nation, "should not be considered as measures of production policy." They aid some citizens at the expense of others; they do not help the economy as a whole. "One might differ as to the advisability of protecting the Prussian Junkers by a tariff on grain imports against the competition of the Canadian farmers who are producing on more fertile soil. But if we advocate a tariff to protect Prussian grain producers, we are not recommending a measure in favor of the production of the supply of grain, but a measure designed to assist the owners of German land at the expense of the German grain consumers. It will never be possible to base an economic system on such assistance privileges,"
Mises here completely explodes the nationalist argument for protective tariffs. Since these measures do not benefit the totality of the nation, they cannot be unambiguously endorsed from a nationalist point of view. Commitment to free trade, then, need not rest on utopian commitment to internationalism, as some suppose. Given the goal of nationalism, protection does not follow.
But does not the tariff supporter have here a counter to deploy against Mises? He may grant Mises's point: a tariff will benefit some citizens at the expense of others. Nevertheless, he may say, the national interest dictates that the tariff be instituted. Aid to certain groups, it may be contended, is in the national interest.
Mises appears to concede something to this rejoinder, but his concession does the protectionist little good. "Whether such an expenditure is justified or not is of no concern for economic evaluation. ... There are undoubtedly cases in which restrictive measures appear justified to most or all of our citizens. But all restrictive measures are fundamentally expenditures. They diminish the supply of productive means available for the supply of other goods."
Mises's "admission" is in fact a devastating counterargument. Tariffs are never defended by their proponents on the grounds that they privilege some at the expense of others within a nation. Quite the contrary, they are alleged to benefit the nation at the expense of foreigners. Absent an account of the national interest with explicit arguments that justify largesse for special interests, the nationalist defense for tariffs fails utterly.
Naturally, Murray Rothbard came to similar conclusions, although he perhaps stated them even more emphatically:
[P]rotectionism is not only nonsense, but dangerous nonsense, destructive of all economic prosperity. We are not, if we were ever, a world ofself,sufficient farmers. The market economy is one vast latticework throughout the world, in which each individual, each region, each country, produces what he or it is best at, most relatively efficient in, and exchanges that product for the goods and services of others. Without the division of labor and the trade based upon that division, the entire world would starve. Coerced restraints on trade-such as protectionism-cripple, hobble, and destroy trade, the source of life and prosperity. Protectionism is simply a plea that consumers, as well as general prosperity, be hurt so as to confer permanent special privilege upon groups of inefficient producers, at the expense of competent firms and of consumers. But it is a peculiarly destructive kind of bailout, because it permanently shackles trade under the cloak of patriotism.
The verdict of sound economics is universal as to tariffs. They cripple economies, reduce the standard of living, and pit some groups against others while offering no advantages for the economy as a whole:
International protectionism, while obviously less destructive than a policy of interpersonal or inter-regional protectionism, would result in precisely the same effect and constitute a sure recipe for America’s further economic decline. To be sure, some American jobs and industries would be saved, but such savings would come at a price. The standard of living and the real income of the American consumers of foreign products would be forcibly reduced. The cost to all U.S. producers who employ the protected industry’s products as their own input factors would be raised, and they would be rendered internationally less competitive. Moreover, what could foreigners do with the money they earned from their U.S. imports? They could either buy American goods, or they could leave it here and invest it, and if their imports were stopped or reduced, they would buy fewer American goods or invest smaller amounts. Hence, as a result of saving a few inefficient American jobs, a far greater number of efficient American jobs would be destroyed or prevented from coming into existence.
~ Hans-Herman Hoppe
American job losses are not the result of freer trade and an excess of imports over exports, but of government policies that prevent capital accumulation in the United States, among them policies that limit imports. An essential part of any economic policy that would truly help to “make America great again” is to avoid preventing imports.
~ George Reisman
The number of jobs in the steel is exceeded many times over in industries making steel products, from automobiles to oil rigs, refrigerators, locomotives, etc., etc. Tariffs that save jobs in the steel industry mean higher steel prices, which in turn means fewer sales of American steel products around the world and losses of far more jobs than are saved.
~ Thomas Sowell
The primary reason for a tariff is that it enables the exploitation of the domestic consumer by a process indistinguishable from sheer robbery.
~ Albert Jay Nock
Thus the new tariff law has resulted in this: The protected industry now makes a high profit to which it is not justly entitled. The average French citizen has been duped out of five francs by his government, and must therefore do without the article or service he would have bought with it. One segment of the economy has profited at the expense of many others. True enough, because of the artificial price increases, new jobs have been created in the protected industry. But what is not seen is the fact that the extra money now spent for iron must necessarily result in reduced spending for other products and services, and thus fewer jobs in those industries. And worst of all, the people have been encouraged to think that robbery is moral if it is legal.
~ Frédéric Bastiat
In the end, some advocates for protectionism resort to the "nuclear option" of claiming that protectionism is necessary for national defense. These arguments are no more convincing, as Lew Rockwell has shown:
Finally, some people claim that propping up the steel industry is necessary because the nation is at war and war requires steel. Thus, American consumers need to be ripped off to support the munitions manufacturers. But notice that the bomb manufacturers themselves must also pay higher prices for steel, so they aren't being helped. Steel tariffs only make it more costly to build the same weapons the U.S. would otherwise produce in absence of the new tax.
As for the war excuse generally, it could also be cited in defense of complete autarky since there's hardly a producer or consumer good in existence that war planners can't find some use for. When policymakers start talking this way, look out. Most hot wars begin in trade wars. Witness the current war on terrorism, which began with a mass murder driven by revenge against persistent U.S. trade sanctions.
Bush's new tariffs create more enemies and antagonize friends at the very time when the U.S. ought to be doing its best to win friends and influence people in the direction of freedom. Let there be no talk of the "fairness" of these tariffs. Here's a better description of them: a shameless act of mass thievery.
We could go on and on, exploring any number of failed justifications for tariffs from the "infant industries" argument to the need to fight foreign "dumping." In the end, though, American taxes represent an attack on American consumers, American taxpayers, and American entrepreneurs. The Trump administration's tariff policy will reduce real incomes and raise the cost of doing business. There is no up side.
The World Wide Web was born in Geneva, Switzerland, in December of 1990. It went live on (now Sir) Tim Berners-Lee’s desktop and promised to provide his organization, CERN, with a non-hierarchical information sharing system.
To Berners-Lee, the web serves as a space for unlimited communication with transformational potential. Yet according to him, it also should remain "open," a term that has come to mean 'regulated at the national level.' Berners-Lee is active in writing and speaking about the dangers of leaving internet service providers free to conduct business as they see fit.
His worries concern the immense power that ISPs have over the web and its users. Many Americans share a fear of these corporations and their alleged plans to play favorites among websites.
Net neutrality advocates typically take the size of ISPs as a given and proceed to argue for their regulation as a way to limit their power. Yet no one questions how these mammoth companies came to be in the first place.
As with many American industries, a handful of ISPs dominate the market, so much so that 67% of American households have two or fewer options when it comes to purchasing internet service, and nearly a third only have one option.
How is it that a few corporations have gained such a high market share within 30 years of Tim Berners-Lee's invention?
Startup ISPs face significant regulatory burdens. Any company that wants to install cable throughout a city or county has to deal with loads of red tape, construction permits, and even FCC regulations on the type of cabling used. ISPs also face reporting requirements that can burden small providers with costs amounting to $40,000 per year.
Most of the regulatory burden originates at the local level, though. ISPs have to negotiate access to public utilities and pay "pole attachment" fees before doing any construction. Local governments see this as a revenue stream, but the inevitable result is higher prices and less competition.
When Kansas City was chosen as the first location for Google Fiber, some scratched their heads. Why not Silicon Valley? The explanation came straight from Google's Vice President of Access Services in his Congressional testimony: "It's clear that investment flows into areas that are less affected by regulation than areas that are dominated by it." Unlike their Californian counterparts, Kansas City officials simply got out of the way.
That's not to say that regulatory challenges are the only hurdles facing would-be ISP providers. There are also the natural costs. Internet cabling runs underground, and even after installation, it must be maintained and serviced. This makes starting an ISP a capital-intensive process. Google, for example, spent between $500 and $650 per home when it built out its fiber network in Kansas City. This investment typically doesn't pay off for several years, so it requires patient capital. And of course, there are the established interests to compete with.
In this case, many of the established interests are telecommunications companies that figured out how to use their existing infrastructure to deliver internet services. This gave them a huge advantage over newcomers and allowed them to rapidly dominate ISP provision. This, in turn, begs the question: why are there so few telecommunications companies?
The answer is simple: a legal monopoly. Namely, AT&T's Bell System, which functioned as "a legally sanctioned, regulated monopoly" from 1913 to 1984.
1913 was a banner year for Progressives, who cheered the ratification of the 16th Amendment and the introduction of the first income tax in US history, created the Federal Reserve System, and set up separate departments for Labor and Commerce.
These developments were ostensibly based on the principle that central authority, wielded by the right people, would improve the lives of the common citizen. It went without saying that the right people were experts — so bankers led the Federal Reserve, railway men led the Interstate Commerce Commission, and so on down the line of new bureaucratic agencies and authorities.
Perhaps unsurprisingly, AT&T executives were eager to achieve government-granted monopoly status in this political climate. In 1907, AT&T president Theodore Vall said that regulation, "provided it is independent, intelligent, considerate, thorough, and just," was an improvement over the market because it offered experts the chance to maximize efficiency.
Talk of efficiency was especially appealing to the champions of Progressivism, and AT&T got its monopoly under the Kingsbury Commitment. It then proceeded to become the biggest telephone company in the world.
In 1984, AT&T negotiated a settlement to an antitrust suit by which the Bell system was dismantled into a smaller AT&T and seven "Baby Bells."
No one calls them Baby Bells anymore. Instead, they have names like Verizon, CenturyLink, and of course AT&T. Other giants like Comcast and Charter benefited from Baby Bell mergers, acquisitions, and customer swaps as well.
The above companies are a testament to the legacy of centralization spawned by Progressive legislation. They are the five biggest ISPs in America, and some of its most hated firms as well.
We still see arguments for regulation being made by AT&T. Chief Executive Randall Stephenson "proposed an 'Internet Bill of Rights' that could help guarantee an open Internet" in full-page ads that ran in the Washington Post and the New York Times recently.
Fact is, if you're a leading telecom company, regulation is bound to help you because it disproportionately burdens smaller competitors and stymies disruptors. As community energy advocates across the Western world have discovered, bureaucratic red tape that was erected to ensure the efficiency of large-scale production is slow to change when a new technology comes along.
So while the debate about net neutrality rages, we should remember that the only reason these companies are so big is because of government regulation. Rather than erect barriers to competition and resort to administrative determinations of "fair" pricing, we should instead allow the pressures of the market to foster innovation. That way, ISPs can follow the lead of energy production and begin the long path toward decentralization.
Recent allegations of improper conduct have been made against former US Secretary of State Hillary Clinton, and current Canadian Prime Minister Justin Trudeau. Both cases, which are unrelated, have raised questions about a conflict-of-interest, which arises when public office holders use their positions for personal gain. These stories about Clinton and Trudeau are nothing more than minor symptoms of a much bigger problem.
Clinton has been accused of “overseeing the sale of 20 percent of America’s uranium supply to Russia” and allegations have “been made that the approval of the sale of Uranium One benefited major donors to the Clinton Foundation.” Donations totaled at least $33.6 million. Trudeau violated “the Conflict of Interest Act when he and members of his family accepted” a trip to the Aga Khan’s private Bahamian island “which left taxpayers on the hook for more than $200,000.” Furthermore, “Trudeau didn’t properly recuse himself on two occasions in May 2016 from sensitive government meetings about the Aga Khan and a $15-million grant to the endowment fund of the Global Centre for Pluralism.”
The real problem is that the government’s definition of conflict-of-interest is far too narrow, thereby ignoring the overwhelming conflict-of-interest which defines the entire relationship between the rulers and the ruled. Thus, there is no discussion about the extent to which government policies enrich special interest groups. Therefore, citizens are unaware that the hidden economic cost they absorb from these policies each year far exceeds their annual tax bill (more on this below).
Harmony of Interests in the Private SectorPrivate businesses do not have legal authority to seize my money, as the government does with taxation. Therefore, these businesses must find a way to persuade me to give them money. If I don’t like the product in one store, I can visit other retailers. When I find a product that satisfies me, I voluntarily hand over my money, and the store clerk voluntarily relinquishes the product. This exchange occurs because I value the product more than the money, and the store owner values the money more than the product. We both benefit. It is a win-win situation. The exchange is an outcome of a harmony of interests, not a conflict-of-interest.
In other words, voluntary exchanges on the free market occur because each party is incentivized to satisfy the interest of the other party. The absence of coercion enables this harmony of interests.
In contrast, forced taxation means taxpayers are forced to satisfy the interests of the government, while the government has no incentive to satisfy the interests of taxpayers. This represents a clear conflict-of-interest. It is a win-lose situation because it is not a voluntary exchange.
The Government’s Excuse, and the Real AgendaThe government says it cannot make all the people happy all the time; that there are always competing interests; that it must balance conflicting interests. This is correct, and that is exactly the point. Only the market can transform conflicting interests into a harmony of interests. The coercive institution of government is designed to avoid the discipline of the market, so that special interest groups may be served at the expense of the interests of the majority. So much for majority rule. As Professors Martin Gilens and Benjamin Page wrote, “The chief predictions of pure theories of Majoritarian Electoral Democracy can be decisively rejected. Not only do ordinary citizens not have uniquely substantial power over policy decisions; they have little or no independent influence on policy at all ...”
Because the government is always forcefully taking and spending large quantities of other people’s money, the inherent conflict-of-interest ensures that corruption is widespread, as various groups purchase favors from the government. Analysis by the Sunlight Foundation revealed the effects of lobbying:
Between 2007 and 2012, 200 of America’s most politically active corporations spent a combined $5.8 billion on federal lobbying and campaign contributions. A year-long analysis by the Sunlight Foundation suggests, however, that what they gave pales compared to what those same corporations got: $4.4 trillion in federal business and support.
After examining 14 million records, including data on campaign contributions, lobbying expenditures, federal budget allocations and spending, we found that, on average, for every dollar spent on influencing politics, the nation’s most politically active corporations received $760 from the government.
The Sunlight Foundation made note of a US Supreme Court decision in 2010, where the majority wrote that corporate spending to influence federal elections would NOT “give rise to corruption or the appearance of corruption.” Canadian authorities also deny any such connection. In Ontario:
Cash-for-access has become the Liberals’ primary fundraising tool. From Ms. Wynne’s February, 2013, swearing-in to the end of 2015, the party held 223 fundraisers, of which 159 were private affairs for 50 or fewer guests. After event costs, the Liberals collected $19.6-million for party coffers.
... Ms. Wynne’s spokeswoman, Jennifer Beaudry, denied that corporate and union leaders who bought access have swayed government decisions. “We have been clear that donations do not influence policy decisions; any suggestion otherwise is completely false,” she said.
It is naïve to believe the ‘authorities’ when they say that the coercive institution of government does not facilitate corruption. Coercion = Corruption! Corporations profit handsomely from government spending decisions, but they also benefit from government regulations which impose restrictions on competition, and the cost to the average citizen is enormous.
Average Citizens Pay a Huge PriceWhen a corporation(s), or an industry, or some other interest group, lobbies government for new regulation, they are the intended beneficiaries, and they usually write the regulations themselves.
Numerous regulations are enacted because the government says it can correct market inefficiencies and protect consumers. Regardless of intent, however, the real effect is to reduce competition for various companies by imposing regulatory costs on all companies within a particular industry. The large company(s) which lobbied for the law can easily absorb these costs, while their smaller competitors and potential start-up companies, lacking the financial wherewithal for regulatory compliance, are often eliminated.
The ‘regulatory compliance costs’ which companies incur is often paid by consumers through higher prices. Estimates in the US and Canada have pegged this cost at a minimum of $3,000 annually, per person. But that’s not the worst of it.
We Pay a Really Huge Price!Even though all firms, large and small, may pass their regulatory compliance costs onto consumers/workers through higher prices/lower wages, small firms operate at a disadvantage. Small firms have fewer employees and a smaller customer base, compared to larger firms. Therefore, the dispersal of compliance costs within small firms can produce larger wage reductions and/or larger price increases, as compared to larger firms. Thus, many small businesses are unable to compete, not because the entrepreneurs, managers, and workers are not good enough, but because they are compelled to obey authoritarian laws favoring firms with more political influence.
Opportunity cost represents lost opportunities for entrepreneurs to create wealth because of the high cost of regulatory compliance. Less competition = less wealth creation, which is reflected in fewer jobs and lower incomes for the 99 percent. Economic growth is severely restricted. What is the cost?
John Dawson (Appalachian State University) and John Seater (North Carolina State University) published a long term study of the effects of US Federal Regulations on economic growth. They say “our estimates indicate that annual output by 2005 is about 28 percent of what it would have been had regulation remained at its 1949 level.” Their sample period ends in 2005, but assuming that the ratio of 28 percent carries forward to 2011, they say that nominal GDP in 2011 would have been $53.9 trillion instead of $15.1 trillion, and
“an annual loss of $38.8 trillion converts to about ... $129,300 per person.”
This means that US citizens were legally denied the opportunity to increase their incomes by an average of $129,300 per person in 2011. Remember, this calculation captures data only at the federal level, and for Canadians, we can assume their opportunity cost would be roughly similar to the US figure (in $CAD). As Laura Jones and Stephen Graf noted in a Fraser Institute report (2001), “Canada and the United States have similar regulatory regimes.” And as Fraser Institute editor Kristin McCahon said, “a lot of productive activity doesn’t happen in Canada because of regulations.”
ConclusionPoliticians, like magicians, are masters of misdirection. Political propaganda assures us that our altruistic government creates countless agencies and regulations for the sole purpose of promoting prosperity for all, while satisfying and protecting the interests of regular citizens (I recently wrote about one such agency). However, as we have seen, far from encouraging economic growth, the government is actually making us poorer. The coercive institution of government severely penalizes regular citizens and lavishly rewards special interest groups. This represents a massive conflict-of-interest.
Beware of the government’s cheerleaders, the mainstream media. Do not be distracted by their feigned contempt for the actions of Clinton and Trudeau and many others like them, who they accuse of engaging in acts of conflict-of-interest which amount to no more than a drop in the bucket. $33.6 million in shady donations to the Clinton Foundation? Who cares? Let’s talk about the amount of wealth which has been surreptitiously denied to regular folks — tens of trillions of dollars annually.
There is a common naïve view among many conservatives — and other supporters of a bloated military establishment — that foreign policy is made as part of a rational process in which foreign threats are assessed, and then requests are made to Congress to fund projects that "keep America safe."
This credulous approach to foreign policy ignores the immense amount of domestic political power wielded by the military and its allies in the private sector. The advocates of this view instead defer to the belief that the military's current drive for ever-more spending and military build-up in Afghanistan is based on revelations about the "real threat" in Afghanistan, and that the military is driven only by a selfless desire to "kill terrorists."
Meanwhile, American policy aimed toward perpetual occupation of Afghanistan has little to do with actual defense of the North American mainland, and much more to do with domestic politics.
Daniel McAdams recently examined the bizarre American preference for occupying Afghanistan while considering Saudi Arabia to be a great "ally":
A gang of radical Saudis attacked the US on 9/11. Their leader, Osama bin Laden, was a CIA favorite when he was fighting the Soviets in Afghanistan. ... Osama's radicals roamed from country to country until they were able to briefly settle in chaotic late 1990s Afghanistan for a time. They plotted the attack on the US from Florida, Germany, and elsewhere. They allegedly had a training camp in Afghanistan. We know from the once-secret 28 pages of the Congressional Intelligence Committee report on 9/11 that they had Saudi state sponsorship.
...Bin Laden's group of Saudis attacked the US on 9/11. Washington's neocons attacked Afghanistan and then Iraq in retaliation, neither of which had much to do with bin Laden or 9/11. Certainly not when compared to the complicity of the Saudi government at the highest levels.
...Sixteen years — and trillions of dollars and thousands of US military lives — later no one knows what the goals are in Afghanistan. Not even Trump, which is why he said tonight that he would no longer discuss our objectives in Afghanistan but instead would just concentrate on "killing terrorists."
This is what American policy amounts to in Afghanistan. No clear objective has ever been stated for the occupation there, while one of the world's biggest sponsors of Islamic terrorism — Saudi Arabia — remains on the Best Friends list.
A More Sober, Realist ViewNevertheless, conservatives and other interventionists stick dogmatically to the claim that more intervention is always better. When specifically confronted with dissenting views from libertarians such as Ron Paul, interventionists invent a caricature of their critics and claim that anyone who disagrees with them is a pie-in-the-sky anarchist utopian who thinks there are no "bad guys" in the world.
In reality, these endless occupations are frequently opposed by foreign policy realists such as Andrew Bacevich and John Mearsheimer to name only two. The realists, of course, set their foreign policy in accordance with increasing actual military defensive capability. Realists are anything but believers in the boundless good will of human beings — and they're certainly not Rothbardians — but they also understand, as Mearsheimer put it, the "basic realist view" is "these interventions [i.e., Iraq and Afghanistan] have not been good for the United States."
Other realists have also recognized the absurdity of comparing the current terrorist threat to past conflicts such as the Cold War. In 2007, Harvey Sapolsky, et al — none of them Rothbardians, to say the least — wrote at World Affairs:
No nation or ideology now menaces American security in the same ways or to the same degree that the Soviet Union and Communism did during the Cold War. Instead, a variety of ethnic, religious, and nationalistic conflicts oceans away from us now obsess our policymakers, even though those conflicts have little to no prospect of spreading our way. To be sure, radical Islamists have attacked Americans at home and abroad, and while these attackers should be hunted down, they do not pose an existential threat, only a difficult and distracting one. Killing or capturing the criminals who attack Americans makes sense; trying to fix the failed states they call home is hopeless and unnecessary. The United States is safer than ever.
This, of course, is not what we hear from the military itself, or from the Republican party. In that case, we hear nearly an endless litany about how the military is near "collapse" and how it has been "gutted" and how, thanks to Obama, the military is now on a shoestring budget. In truth, the military is still funded at Reagan-era Cold War levels.
RELATED: "No, the Military Has Not Withered Away Under Obama" by Ryan McMaken
The Role of Domestic Policy So if the US current spate of military interventions are both damaging and unnecessary, why do these military operations continue unabated?
Part of it, as we've noted, is due to much of the voting public's acceptance of more military spending and more war, provided there aren't large numbers of casualties. There is a reason that no major candidate running for president in 2016 advocated for any significant cut in military spending. Even Donald Trump, who — at the time — claimed to oppose the ongoing occupations, advocated for massive increases in military spending.
With much of the public reliably on the military's side, the debate then boils down to how much of the budget the military industry can wrest from other special interests.
Again, on the side of the military establishment is the large swath of the American population that benefits financially from taxpayer funds being funneled to military spending schemes. These have many economic benefits for certain groups.
It has long been true, for instance, that the US military is a jobs program. As we've noted here are mises.org, military personnel tend to make more money than their peers of similar education levels working the private sector.
But the beneficiaries of an expansive military establishment extend far beyond the people who can be defined as active military personnel.
Sapolsky has noted that, in spite of frequent claims that military personnel make up only one percent of the population, the real number of people whose paychecks rely on military spending is actually much larger:
In fact, more than 1% of Americans are involved in America’s defense. In addition to the two plus million service personnel—the 1.4 million active duty and 800,000 plus in the reserve components—there are 800,000 plus civil service employees of the Department of Defense—people who work in military depots, defense laboratories, shipyards, and contract management offices—and five to six million (the exact number is not known) contract employees—people who build weapon systems, provide support services, and conduct defense related research.
This totals to 3-4% of the adult population. Add spouses and other family members, and you can see that not an insignificant portion of the American population is involved in defense.
In other words, we're looking at more than 12 million Americans who rely on military spending. For comparison's sake, we can note that the the total number of people in the US working in agriculture totals less than 3 million people.
Nor should those 12 million Americans worry that they're not being looked after on Capitol Hill. According to Open Secrets, in 2016 there were more than 752 defense-sector lobbyists working in DC, representing 223 clients.
It's unlikely this total includes state-level politicians who engage in informal lobbying in favor of more military spending in their districts and states. In some states, such as Virginia and Hawaii, military spending is equal in size to more than 12 percent of the state's total GDP. Needless to say, mayors and governors in these areas won't exactly be complaining if the President announced yet another military occupation. Each additional ratcheting up in military action means more training exercises, more weapons testing, more spending by soldiers in the local economy.
Thus, when we hear that a variety of policymakers are united in their call for more military spending, there is no reason at all to assume this is due to some important change in the international environment. It's far more likely that domestic political conditions have changed in such a way that the Pentagon realizes the political situation has swung in its favor.
Certainly, this has been the case with the arrival of the Trump administration. Republicans have long received more funding from defense lobbyists than Democrats, and even before Trump was sworn in, it was assumed that a military spending binge was on the way.
And, in spite of claims that the Trump administration is merely the continuation of the Obama adminsitration's foreign policy, there is good reason to believe that the Trump administration is actually a departure from the Obama years — in a more militaristic direction. While military spending did not actually suffer to any meaningful extent under Obama, some observers believe there was nevertheless an antagonism between the Obama White House and the Pentagon. As Mearsheimer claims here, had the Deep State been less powerful, Obama may have actually been successful in withdrawing from Iraq and Afghanistan. As it was, Obama settled for a rapproachment with Cuba and Iran — two moves that infuriated foreign interventionists.
Are There Any Real Limits on Military Spending? Mearsheimer is speculating here, but even if he's right about what Obama would have preferred to do, how would a drawdown of troops benefit Obama politically?
As a politician, there's actually very little to be gained from military withdrawal. As we've already noted, the political and economic rewards of expanding military spending and operations can be substantial. This is especially true in the modern world when the political downside of military operations is very small.
Historically, the downside of starting a war or sending troops to foreign soil was twofold:
It was expensive.Dead and wounded soldiers were politically damaging. Nowadays, the first problem can be solved with deficit spending, and by inflating the money supply. The financial costs of war are palmed off on future generations who have no say in the current policy debate.
The second issue is now mostly solved as well. While, as McAdams points out, more than 2,000 American lives have been lost in the Afghanistan occupation, that's a total that accumulated over more than a decade. Compared to large military operations of the past, these are very small numbers. Military spending nowadays focuses on producing weapons and material that can be used while minimizing the danger to the American soldiers themselves. The drone program — in which American soldiers drop bombs on children from the safety of a warehouse in North America — is a perfect example of this.
Moreover, when casualties do occur, they are inflicted on volunteers. Nor do these deaths disproportionately fall on poor or minority soldiers. As analyses have shown, poor and minority soldiers tend to volunteer for work in medical and logistical fields. The front-line combat positions tend to go to educated white people.
So, there's no especially damaging political cost to sending more troops to central Asia to conduct yet another occupation. Yes, there will be some deaths, but calculating politicians know that casualties are unlikely to occur in such numbers as to cancel out the political benefits of starting a nice new war.
The Afghanistan EscalationThus, how can anyone be truly surprised that Donald Trump — who once fiercely mocked supporters of the Afghanistan occupation — has now changed his mind. Trump, of course, is a man who apparently is swayed by photographs of mini-skirts rather than by anything resembling serious historical analysis.
As he has become increasingly isolated politically, he has seen an opportunity to shore up his political base with yet another military expansion — one that's likely to come with a lot more spending. Even worse, Trump may become even more bellicose the less popular he becomes. Domestic concerns won't be mentioned in the dominant narrative however. The administration and the Pentagon will invent a justification for why a new war is necessary, and the media, of course, will happily play along.
"We can’t welcome all the misery of the world but we must take our share." This is a maxim whose popularity speaks volumes about our apprehension over poverty and immigration.
This seemingly benevolent vocabulary, however, limits debate. It insists that generous people will welcome more demands on the taxpayer's pocketbooks. The immigrant must be welcomed, they are told. The natives have an obligation of care, which means more and more subsidies in a country where they are also being told to tighten their belts.
But forced solidarity with all of humanity breeds resentment, and supporters of this view forget that solidarity with others flourishes only in the context of elective affinities. That is why the Austrian economist Friedrich Hayek said that, while he was an internationalist in theory, socialism was driving him to become a nationalist in practice.
The "State medical assistance," mainly directed at illegal aliens, is indicative of this trend. Although the total cost does not exceed 1% of the budget of the State, it serves to increase frustration with migrants and the state’s profligacy.
Indeed, an abundant academic literature suggests the existence of a causality between the generosity of social systems and the mistrust of natives toward immigrants. It is therefore not surprising to see the emergence of a movement toward solidarity among natives. Government-imposed charity only works with benefactors who identify with its beneficiaries.
Blaming Europeans for Poverty in the Developing World Altruistic moralizing is therefore the best way to arouse feelings of bitterness among locals. It leads to assimilate foreigners to a horde of parasites whose fate will be to live off the sweat of the “host” society. The exasperation is all the greater as the injunction made to the Europeans to sacrifice themselves is accompanied by a supposed guilt for the poverty of the third world. The setbacks of Africans continue to be blamed on the colonial past and the opulence of the West. The descendants of settlers are called to account for acts they did not commit. Conversely, the responsibility of the African political elite is ignored while their corruption is the main obstacle to the development of the continent.
You do not have to be an expert in development economics to see the absence of a correlation between the colonial past, poverty, and prosperity. In the 1960s, the per capita GDP of South Korea and that of most countries in sub-Saharan Africa were comparable. But in this case, only Korea has established stable institutions that are compatible with the development of a market economy. Similarly, some of the most prosperous places in the world include former colonies such as Hong Kong and Singapore, whose wealth sometimes surpasses that of the former European colonial powers. These successes, however, are ignored by Third Worlders. They contravene the victimization story to which the former colonies are assigned. They also deny the myth of the Western monopoly of opulence that feeds post-colonial resentment, itself tinged with anti-capitalism.
In spite of the assignment to misery and dependence, there is the promise of development through trade. This path is nevertheless ignored by the political class, for whom the salvation of foreign populations resides in assistance. On the external scene, despite its failures, development aid remains the only horizon of the fight against poverty in the South.
Even African leaders no longer adhere to these solutions, as evidenced by their proposed free trade area. 44 of the 55 member states of the African Union signed an agreement in Kigali on 21 March 2018, to reduce the barriers to trade on the continent.
Limiting the Ability to Work Western states — including France and Italy — who make the mistake of “welcoming” refugees by denying them the right to work and trade could therefore be inspired by this philosophy. They would promote their social integration, ease the pressure on public finances and abolish the logic of paternalistic repentance that tarnishes the image of these populations whose thirst for entrepreneurship is yet unmatched. Refugees are indeed the first to apply the famous slogan “Trade, not help!” As long as they are allowed to work.
The work of Alexander Betts and Paul Collier, economists at Oxford University, for example, show that refugees prefer to flee UN-run shelters to work in the informal economy as soon as opportunity presents itself in the countries where they are hosted. When they are allowed to work, as in Uganda, they open businesses and employ indigenous people. It is therefore only up to Europeans to reveal the richness concealed by the apparent misfortune of these industrious populations.
This article originally appeared in French at Le Figaro.
George Monbiot, popular Guardian columnist, beacon light of global environmentalism, is also the kind of progressive who insists on seeing the world as he wishes it were and not as it really is. Wearing these kind of blinders will not help us get a better environment or better world.
In his latest column, Monbiot states that: “The forces that threaten to destroy our wellbeing are… the same everywhere: primarily the lobbying power of big business and big money, which perceive the administrative state as an impediment to their immediate interests.”
This is nonsense. Big business and big money, along with other special interests, such as Big labor and Big law and Big education, and all the other “ Bigs” absolutely love the “administrative state” because they have learned how to control it and use it for their own self-interest.
This is the “ progressive paradox” that Monbiot resolutely ignores: the more the state increases its powers over the economy, the more motivated special interests become to take control of the state in order to thwart genuine market competition. The resulting corruption just gets worse and worse.
Has Monbiot ever considered what persuaded enough voters to hold their noses and choose Trump? It was not that the administrative state provided honest government under the prior administration. Nor was the prior administration making any effort to hold back the power of special interests in Washington.
Two examples will suffice. In the “fiscal cliff” bill, President Obama achieved his long sought objective of increasing taxes on the rich. But in the same bill, passed at midnight, he snuck in subsidies for his own corporate supporters. These subsidies added up to more money than the additional taxes on the rich could possibly generate. In total, taxes on the rich did not really go up. It is just that some money was extracted from some rich people and more was given to others. The green energy subsidies in the Stimulus Bill were similar; they went largely to campaign donors.
Monbiot does not trouble himself with any of this. In his worldview, more government is always better and always better for the environment. What he does not consider is that if progressives had delivered honest government for the past few decades of economic and environmental bubble and bust, Trump would never have been elected, and the particular special interests cheering his dismantlement of environmental protections would never have seized control of the Environmental Protection Agency.
Monbiot even manages to work in a condemnation of Brexit in his article. In his view, Britain leaving the EU will make it more difficult to solve its environmental challenges. But, again, this ignores what led to Brexit. It was the dismantlement of European democratic control of government, along with the deep corruption of the bureaucrats in Brussels, who have for years been selling their flood of minute regulations to the highest special interest bidder, which led to a slight majority of the British people throwing up their hands in disgust and passing Brexit.
Progressives as a group cannot fix a problem they refuse to acknowledge. Monbiot is far from alone in his refusal to face facts.
Elon Musk is at it again. The billionaire tech magnate continues to get richer and richer on the American taxpayer’s dime, highlighting the need to do as Murray Rothbard advised of reassessing the “partnership” of government and business.
At first glance, Elon Musk appears to be a quintessential capitalist success story. The South African born-American technology magnet, lead designer of SpaceX, and product architect of Tesla, Inc. is now ranked 25th on Forbes Magazine’s list of the World’s Most Powerful People, and as of February 2018, Forbes has Musk listed as the 53 rd richest person in the world.
One might conclude that Musk’s staggering wealth was produced via faithful adherence to the timeless and inexorable principles of laissez-faire capitalism, where personal wealth is accrued through the federal government leaving commerce alone and staying outside the affairs of private industry. However, this perception of Elon Musk’s economic independence from government interventionism is largely a fabrication and carefully manufactured distortion since Musk has personally enriched himself through a whole lot of government favoritism and statist interference in the private sector economy.
At this point, Musk has received well over $5 billion in government support. Previous reports have shown over 80 percent of SpaceX’s contracts come right from Uncle Sam. Given that the government is most space contractors’ top customer, this may not seem like a big deal. In fact, last July one Mises Wire columnist argued that Musk is a “mixed hero” because, although living largely off government largesse, he has “successfully [executed]” big ideas that benefit consumers in the “‘really existing’ world.”
To be fair, this characterization may have seemed to be the case last summer, but like all creatures of government, Musk’s so-called successfully executed ideas are already starting to come crashing down.SpaceX’s selling point has always been that it can sell cheaper rockets than those of his competitors, but a new report from the space industry’ inspector general found that SpaceX will soon have staggering 50% price increases “compared to its final CRS-1 mission price.”SpaceX has indicated that the reason it has increased prices is that the company now has a “better understanding of the costs involved after several years of experience with cargo resupply missions.” This just means it overpromised and underdelivered as is typical in the world of government. In recent months, policymakers have also discovered that SpaceX rockets are far less reliable than those of many of its competitors. This was outlined in reports from December 2017 and January 2018 , in which the Department of Defense Inspector General and NASA’s Aerospace Safety Advisory Council described a list of security concerns they have with SpaceX – among them: 33 significant nonconformities.We can only guess that SpaceX would cease to exist in the absence of government. But given the recent history of tumbling sales that have come with the end of governments’ support for electric vehicles, it is almost a certainty with Tesla.As an Asian Review article outlined last November, just months after Hong Kong cut its tax breaks for electric vehicle owners, Tesla sales dropped to near zero. A sharp decline in business also resulted in Denmark as the country undertook its own slashing of government incentives. It is only a matter of time before the same occurs in the United States, where Tesla’s $7,500 tax credit is expected to soon phase out. In fact, Tesla is already the largest short in the entire U.S stock market.
Yet, like a catfish that can’t resist shiny new bait, many American politicians and appropriators, enamored with even a hint of technological wizardry, just can’t say no to wasting taxpayer money on Musk’s latest pet projects that do not deliver as promised.
One can only hope that the public will soon wake up and realize what Murray Rothbard warned of – that government exists “precisely to set up such ‘partnerships,’ for the benefit of both government and business, or rather, of certain business firms and groups that happen to be in political favor.”
Politics is driven by culture, so the sooner the American people wake up to this realization, the sooner a smaller government footprint will result. I won’t hold my breath.
Edward K. Glassman, my long ago Harvard classmate, author of Dow 36,000 (predicting Dow at that level by 2005), and current director of the George W. Bush Institute, extolls our free market medical system at FoxNews this week. The first reader to comment on the article agrees that we have a “ free market” system, but thinks that “ profit based healthcare” should be “outlawed.” Another reader thinks that we actually have “socialized medicine.”
So what do we have? I think the most apt description would be “crony capitalist” medicine, one in which powerful special interests conspire with government officials to create legally mandated monopolies, with the specific goal of thwarting free market competition.
Here is how it actually works:
Most people wonder why there are no visible prices in medicine. You only find out what the charge has been after the service has been delivered. There actually are prices — controlled prices — but you aren’t supposed to know what they are. Each year a committee of the American Medical Association recommends a set of prices to Medicare. The committee is dominated by medical specialists, so specialists tend to do particularly well. Medicare is actually run, not by government, but by private insurance companies, and these companies adopt these prices for private insurance purposes as well. Congress further sweetened this price controlled system for hospitals by requiring Medicare to pay more for the same service if provided by hospital employees. This has inevitably led to local hospitals buying out most of the surrounding private medical practices, which has in turn created local medical service monopolies that feed patients to the hospital for its more costly services.These monopolies are further sweetened for doctors by legally barring nurses, chiropractors, four-year trained naturopathic doctors, and other health professionals from using the full extent of their medical training. In this way, the supply of medical services is constrained, which further raises prices.Notwithstanding all the preceding, it is not the American Medical Association, which is itself financed by a monopoly in medical coding granted by the US government department of Health and Human Services, nor the hospitals, nor the medical doctors as a group that actually run the medical system. The top spot is reserved for the drug companies, which in turn share their largesse with the AMA, doctors, medical journals, media companies, and especially with politicians. In return, drug companies are granted a series of powerful monopolies, monopolies that drive up the cost of medicine and, given the employer role in healthcare, destroy jobs, raises, and economic opportunity as well.First, drug companies claim a legal monopoly when they patent a drug. The drug research may have been done by the government or by a university using government money but it doesn’t matter. The grant of monopoly stands.
Then the drug company takes the patented medication through the FDA approval process (at an average cost of $3 billion over what can easily be a decade). Drug companies do not object to this ordeal, because the stiff price both eliminates any competition from un-patentable treatments and also flows into the salaries of FDA employees, who consequently tend to take a friendly view of drug companies and zealously guard the legal exclusivity of their products.
FDA enforcement includes armed raids and threats of a lifetime in jail for any producer who makes medical claims without permission. Even cherry and walnut growers have been threatened. The agency takes the position that cherry and walnut producers, to make health claims for any of their products, they must first turn them into drugs through the drug approval process, thus driving up prices for all patients.
No, this is not a free market system nor anything remotely close to one. In a genuine free market system, prices reflect the decisions of consumers. Producers who solve significant problems are rewarded with high prices and profits. High prices and profits in turn attract lots of competition. The competition not only prevents monopoly. It also improves quality and very importantly increases supply, which is the only sustainable way to reduce prices. Consumers then get better medicine and ever lower prices. Producers dislike competition, and therefore try to buy government help in manipulating or fixing prices. This is more easily accomplished in medicine, because it can all be done under the guise of government “protecting” consumers when actually the consumers are being fleeced and impoverished.
There are many honest and dedicated medical professionals sincerely devoted to the healing arts. But they are trapped in a system that can more accurately be described as a crony capitalist nightmare.
The death of Robert Mugabe on September 6, 2019, reignited conversations about the future of Zimbabwe. Economist Steve Hanke recently estimated that Zimbabwe’s inflation was at 605 percent, indicating the country is still in a precarious economic situation.
Although a successful coup was launched against Mugabe in late 2017, the residual impact of his thirty-seven years in power is still felt to this day, and the government headed by Emmerson Mnangagwa has shown no signs of willingness to reform the Zimbabwean economy. The euphoria following a regime change often deludes succeeding governments into thinking that they will magically right previous wrongs and bring prosperity to the land. History shows this is often not the case. Mnangagwa and future leaders will have their hands full in trying to get what was once the breadbasket of Africa back on its feet. Understanding how Zimbabwe got to this point is key in trying to extricate the country from its current mess.
From Independent to Radical Land Redistribution Mugabe became an international darling of the Left because of the insurrection his Zimbabwe African National Union – Patriotic Front (ZANU-PF) carried out against Rhodesian prime minister Ian Smith during the Bush Wars. Relentless pressure eventually forced Smith to end white minority rule and change the name of the country to Zimbabwe-Rhodesia in 1979. This was not enough for the insurrectionists, however, who pressed on and eventually compelled the government to call elections in 1980. Robert Mugabe, then the leader of the Zimbabwe African National Union, came out victorious in the 1980s elections for prime minister and instantly renamed the country Zimbabwe. From 1980 to 1987, Mugabe served as prime minister. He later became president and ruled until he was ousted in 2017.
Since he was busy consolidating his rule, Mugabe embarked on gradual intervention in his first few decades in office. However, he always had land reform at the back of his mind and was simply waiting for the right moment to institute it. The Zimbabwean leader met his first roadblock after voters rejected one of his forced land confiscation schemes in 2000. But this did not stop the Zimbabwean demagogue. Mugabe took a radical turn by expropriating the properties of white landowners and giving them to veterans of the Bush Wars or to people who alleged to have veteran status in 2000. Through political and paramilitary means, Mugabe was able to confiscate twenty-three million acres of land without any form of due process or compensation.
Hyperinflation Enters the Picture No economic populist program is complete without its own inflationary agenda. Mugabe was more than willing to turn the Reserve Bank of Zimbabwe into his personal printing press and pursue the most devastating hyperinflationary monetary policy in recent memory. Zimbabwe reached comic book levels of inflation in 2008, when hyperinflation became well established at a peak of 79.6 billion percent. After completely eviscerating the value of the local currency, Zimbabwe effectively “dollarized” and switched to different currencies such as the dollar and the African rand.
To make matters worse, the Zimbabwean government tried to combat inflation in the most futile way possible — by enacting price controls. A policy that has failed from Ancient Rome all the way to contemporary Venezuela, price controls predictably exacerbated already existing shortages and further hastened Zimbabwe’s economic debacle.
By the time Mugabe was deposed in 2017, 70 percent of Zimbabweans lived in poverty, as the country’s economic output had fallen by half since 2000 and inflation had obliterated Zimbabweans’ savings. This was reflected in a 15 percent drop in real per capita income since 1980. Zimbabwe’s vaunted agricultural sector experienced a notable implosion, as agricultural production nosedived by $12 billion from 2000 to 2009, according to a report from the Commercial Farmers Union.
Regime Change Will Not Guarantee Future Success Mugabe’s successor Emmerson Mnangagwa already has his hands full with inflation over 600 percent and public sector unions already demanding dollar-indexed salaries. The road to reform will not be a walk in the park given that Mnangagwa himself is no saint. He is already promoting an agricultural program that doles out subsidies to Sakunda Holdings, a company controlled by Kudakwashe Tagwirei, a known ally of Mnangagwa and the incumbent ZANU-PF party. Although Zimbabwe has left the realm of hyperinflation, it continues to have structural problems that impede market reforms.
This is often the case in developing countries, where the succeeding government — despite all its promises and vows to break free from the preceding government’s corruption — ends up breaking down because of incompetence and corruption in its leadership. Due to the preponderance of Marxist- and Keynesian-inspired ideas, the window of ideological options is quite small for many developing countries. A large portion of high-ranking officials in developing countries have been instructed in these schools of thought at Western universities abroad — where these ideas have not been fully implemented. However, many developing countries are fertile soil for destructive policies such as Keynesian or Marxist populism. Widespread wealth gaps between the politically connected haves and the disconnected have-nots, general ignorance about the implications of interventionism among the public, and a predatory political class that is shielded from popular backlash makes these countries susceptible to mass intervention. When the West can’t implement some of its economically illiterate ideas at home, it finds willing importers in the developing world.
Can Zimbabwe Look to Other Countries for Inspiration? An ominous future awaits the sub-Saharan country. Its neighbor South Africa is going through its own trials and tribulations, as land redistribution has become a major political issue in recent years. The only good news for Zimbabwe is that its neighbor Botswana provides an alternative path to economic prosperity. Botswana has taken an atypical route in economic development by stressing free trade, low foreign aid, and institutions that respect private property. Botswana, along with Chile, appears to be a radical exception rather than the rule in the developing world. Ideally, Zimbabwe would completely depart from the Mugabe legacy and replicate Botswana’s policies.
Suffice to say, nothing short of an economic exorcism is needed in Zimbabwe. Based on what President Mnangagwa has done so far, it doesn’t seem that Zimbabwe is actually serious about making tough reforms.
Almost a decade later, the Federal Reserve this week announced it will begin reversing quantitative easing. Slowly. Very slowly. The balance sheet currently stands at $4.5 trillion and they will begin allowing $10 billion in assets to roll off their sheets next month. Given the unprecedented nature of QE, even this modest reduction has many market observers on edge. Of course, the fallout from the Fed's actions are still being felt, while the Trump Treasury is making threats that it would have disastrous consequences if acted on.
On Mises Weekends, Jeff is joined by Dr. Mark Thornton to get his take on the Fed's actions and what it all means for stock markets, investors, and the US economy. Can quantitative easing, a roundabout form of monetizing debt, actually work? Can monetary policy make us rich? Or are Fed officials just groping in the dark, putting off a day of reckoning?
And in case you missed them, here are this weeks Mises Wire and FedWatch articles, covering a wide array of topics:
There's a Bubble in New York City Taxi Medallions by Doug FrenchThe Agony of the Welfare State, Finnish Style by Joseph T. SalernoWhy is NASA Covering Up Elon Musk's Mistakes? by Drew ArmstrongGovernment Regulation and Crony Capitalism is Keeping Thousands in Florida without Power by Tho BishopIf the Majority Votes to Secede — What About the Minority? by Ryan McMakenMises and Cosmopolitanism by David GordonQuestions Remain as the Fed Finally Begins to Reverse QE by Tho BishopThen Came Nixon by Chris CaltonThe Washington Post's Latest (and Lamest) Attack on the Mises Institute by Ryan McMakenWhat Is the Correct Amount of Money? by Frank ShostakTrump's China-Sanctions Madness Imperils the Dollar by Ryan McMakenLet Catalonia Decide by Jeff DeistPasschendaele: A Century after the Horror by Matthew McCaffreyUS Sanctions Against Venezuela Will Hurt Americans by Ryan McMakenThe World Is Creeping Toward De-Dollarization by Ronald-Peter StöferleCongress Shirks Its Duty on Foreign Policy Yet Again by Ron PaulLudwig von Mises on Collectivist Fallacies and Interventionist Follies by Richard M. EbelingThe Capitalist Revolution by Ludwig von MisesMoney-Supply Growth Drops Again — Falls to 108-Month Low by Ryan McMakenJohnny Appleseed: Land Speculator, Alcholol Dealer, Capitalist by Chris Calton
I recently spent two weeks traveling in the People’s Republic of China (PRC), a vast country with many contrasts: old vs. new, poor vs. rich, traditional vs. modern, East vs. West. While it is a strange experience with many impressions, what’s most striking is the obvious and contradictory economic contrast between wealth and waste.
Chinese city skylines in the economic development zones consist of business district skyscrapers mixed high-rise apartment complexes at least 30 stories high. The latter exist in groups of a dozen or so buildings of identical designs shooting far up into the sky, sometimes placed in the outskirts to facilitate the city’s expansion or change travel patterns according to some (central) master plan for the city.
The boxy skylines are interrupted by vast numbers of tower cranes in the many construction projects that produce more high-rises and skyscrapers at impressive speeds. The city is conquering the countryside and devouring the surroundings much like a swarm of locusts.
This image is one of production, a society experiencing enormous economic growth and wealth creation.
But traveling as the day gives in to night shows a very different picture of these sprawling Chinese cities. While the setting sun makes the tower cranes stand out even more, what is obviously missing is the sign of civilization: artificial lighting. Many of these newly constructed buildings become silhouettes against the sunset that are as dark as a dead tree trunk.
One can stand in the middle of the city watching the glass-and-metal skyscrapers wrapped in neon lighting, as one would expect. Yet among them see many dark shapes of buildings that are empty – if not dead. These buildings are not necessarily new and move-in ready, they are simply uninhabited and unused.
This image is one of wasteful spending and immense economic errors. The contrast is as puzzling as it is scary. It tells us something important about the nature of the recent Chinese economic miracle: that it is fundamentally fake.
The Chinese economy obviously relies very heavily on state-sponsored, state-planned projects such as these constructions of buildings. It probably wouldn’t be much of an exaggeration to say that the Chinese economy is a Keynesian jobs project of outrageous scale, which also means that is as removed from real value creation as any Keynesian undertaking.
The much talked about “One belt, one road” project is the same thing on an international scale. The project aims to recreate the silk road with modern infrastructure, connecting the Far East with Europe via both land and water. Consisting of numerous infrastructure projects in about 60 countries and trade deals to leverage the projects, the OBOR is a political project to connect the East and the West. It is state-planned and state-sponsored, and intended to, at least during the build phase, create projects primarily for Chinese companies abroad (though the immediate effect seems to have been capital outflow). It will most likely boost Chinese GDP, just as intended, and will be a catastrophic failure due to its reliance on planning rather than markets. But as states tend to think of GDP statistics as actual economic growth, rather than as a crude and faulty measure of it, the project may seem like a success at first.
What China teaches us about economics and economic policy is the lesson that is generally not provided in college classrooms: the important distinction within production between value creation and capital consumption. The story of China’s economic development is to a great extent one of unsustainable, centrally planned growth specifically in terms of GDP — but a lack of sustainable value creation, capital accumulation, and entrepreneurship.
Production creates jobs even if what is produced is wasteful infrastructure projects, ghost cities, or only ghost buildings in otherwise inhabited cities. But those jobs only exist for as long as the projects are underway – that is, for as long as there is already created capital available to consume, domestically or attracted from abroad.
Llewellyn H. Rockwell, Jr., is founder and chairman of the Mises Institute in Auburn, Alabama, editor of LewRockwell.com, and author of Fascism versus Capitalism.
Last month, when a host of media outlets began talking about the Trump administration's alleged "battle against breastfeeding," few of them — if any — mentioned the fact that the US federal government continues to subsidize the baby formula industry to the tune of billions of dollars.
[RELATED: "We Don't Need the UN to Regulate Baby Formula" by Ryan McMaken]
A survey of articles — including The New York Times, Foreign Policy, Politico, and The Guardian — on this supposed conspiracy to favor the formula industry did not mention even once that the US's Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) has been a significant source of income for formula companies for decades.
For example, in 2004, government spending on the program totaled nearly 4.8 billion dollars, mostly dedicated to the distribution and subsidization of baby formula. By 2016 this total had increased to 6.5 billion. As of 2014, more than 8 million Americans were covered by the program.
While US and British pundits complain that the US refuses to sign off on UN regulations that bar advertising and free samples from formula companies, they ignore the fact that the US government is "provid[ing] more than half of the formula that is used in the US."
Now, one does not need a lot of formal training in economics to understand that when a product is being this heavily subsidized, it is going to be used by customers far more than would be the case in the absence of the subsidy. Lindsay Gartman Baker has noted that just as formula companies were beginning to see threats from revived interest in "natural" child feeding methods, the formula industry was buoyed by the new federal WIC program: "[WIC] was introduced and essentially subsidized a large fraction of the U.S. demand for infant formula, and thereby arguably increased that demand."
Empirical evidence has shown that WIC does not just "arguably" increase the demand for formula. It's effects on demand and prices have already been frequently observed. According to George Kent in The International Breastfeeding Journal:
The retail price of formula is high. Significantly, the retail price is higher where WIC is most active. Grocers and other merchants know that WIC will cover the retail price of formula sold through WIC vouchers, so they are motivated to push the price up. The pattern is well documented. This also allows the wholesale price to creep up. Even if these price increments were relatively modest, added up across the country, they would produce a significant increase in cash flow to the manufacturers over what they could have obtained in a genuinely competitive market.
WIC's involvement produces upward pressure on retail prices. This does not affect WIC clients immediately and directly, but it does mean the price is pressed upward for those who are not WIC clients. There is in a way a cross subsidy, with non-WIC clients helping to fund formula supplies for WIC clients.
In other words, the presence of WIC drives up prices for all parents who are unable or unwilling to breastfeed. Middle-income families, for instance, will pay more for formula than they would in a competitive market because demand is so heavily subsidized by the government. And even people on WIC eventually pay more since, "Families get free formula from WIC for only a limited time. They must face the inflated retail prices when they leave the WIC program."
It is impossible to say how many mothers would use formula in the absence of the WIC program, but, at least among lower-income households, it's a safe bet that the number would be far lower. Indeed, as Baker, observes, just when higher-income and more-educated mothers were turning back to breastfeeding in the 1970s, lower-income mothers embraced breastfeeding more slowly. It's very likely the ease of obtaining "free" formula was a significant factor.
Essentially, the WIC program functions as a huge "free samples" scheme paid for by taxpayers and non-subsidized users of formula.
When we look at the history of government meddling in dairy prices, the story becomes even more convoluted. Historically, the federal government has funded a dairy price support program to ensure that the price of dairy — the main ingredient in most baby formula — does not fall below a certain level. (Market prices have been sufficiently high so as not to trigger price support actions since 2009. Should prices fall, programs are in place to purchase dairy products such as powdered milk, butter, and cheese "at support prices.)See: https://www.ers.usda.gov/topics/animal-products/dairy/policy.aspx and http://nationalaglawcenter.org/wp-content/uploads/assets/In%20Focus/IF00060.pdf
So, the federal government simultaneously acts to keep dairy prices high — thus driving up the cost of formula production — all while enrolling over eight million Americans in a program which increases the demand for formula.
If confronted with this fact, though, it is unlikely that many "experts" and medical professionals would go on the record calling for an end to the WIC subsidy program. After all, are they going to call for a cut to a program that is supposed to help low-income mothers and babies?
These experts beat their breasts over the wording of a UN resolution about advertising, but meanwhile, formula companies in the US are receiving enormous amounts of corporate welfare. The disconnect is odd, to say the least.
If critics of the Trump administration were concerned about formula companies taking advantage of vulnerable consumers, it would seem a far more reasonable place to start would be with the WIC subsidy or the dairy price support programs.
But this is politically unfeasible. The Trump administration could never win on this front, of course, because if it did support a cut back in corporate welfare for formula companies here in the US, it would be accused to abandoning low-income nursing mothers. Indeed, in June, the Trump administration proposed increasing eligibility requirements for receiving WIC vouchers, which would essentially trim the subsidy. Predictably advocates for more spending on government benefits, oppose this move.
While she may claim to protect consumers in one moment, US Senator Elizabeth Warren (D-MA) unapologetically endorses destructive, socialist measures in the next. In a new Senate bill, Warren introduced the “Accountable Capitalism Act,” which seeks to establish an “Office of United States Corporations,” which would be a federal board created for the task of issuing (or not issuing) charters to wealthy corporations, body corporates, body politics, joint-stock companies, or limited liability companies (hereafter referred to solely as “corporations”). These charters would be required of corporate firms with “more than $1,000,000,000 in gross receipts” to operate; without one, they would not fit the legal definition of corporation. Corporate charters would not be given out indiscriminately to firms that required them, for this would be redundant and result in little social change. Rather, Warren’s grand plan to “save” capitalism is to use these charters to destroy the profit motive, ultimately gutting the market of one of its most essential mechanisms.
Under the act, the Office of United States Corporations would be given the authority to restrict the issuance of charters only to those firms which have been deemed to “create a general public benefit; and balance... the pecuniary interests of the shareholders of the United States corporation with the best interests of persons that are materially affected by the conduct of the United States corporation.” Like most progressive sentiments, though, the ideas of creating a general public benefit and balancing conflicting interests is completely unclear and reliant upon arbitrary whims. What qualifies a benefit as being “general” or “public,” and at what point are interests to be considered properly balanced? Of course, the Office of United States Corporations is the deciding judge on these issues, and if it determines a particular corporation to be too profit-seeking or to not be sufficiently beneficial to society, it will use its authority to completely paralyze them. At best, it will force comapanies to ensure they receive under $1 billion in gross receipts per annum, significantly hampering their productive affairs, if it cannot eliminate their operation entirely. More pragmatically, it would simply force most large corporations to leave the United States and find a more suitable country for operation.
According to the bill, what must be taken into account in the issuance or non-issuance of a charter is the conduct of corporations with regard to the interests of “shareholders,” “the employees and workforce,” “customers and subsidiaries of the United States corporation,” “community and societal factors,” “the local and global environment,” and the corporation itself in “the short-term and long-term.” Since this is the case, the act allows any major corporation to be shut down due to the grievances of any shareholder, employee, customer, or even member of society. The question of which grievances are legitimate and take precedence, of course, is left to the Office of United States Corporations, a dangerous power to be granted.
The Accountable Capitalism Act would ultimately put the federal government in control of the largest firms of the economy, micromanaging them so that they conform to its plans and work for its benefit. It would be, essentially, a system of centrally planning the economy, or more accurately: centrally chartering it. Worse still, imagine the state of the market after the Office of United States Corporations inevitably became infested with corporate lobbyists; each large firm would be warring for survival in the congressional coliseum. Such a scenario would be economically ruinous, affecting firms not only at the corporate level, but also affecting the entire balance of the rest of the economy.
Warren’s bill does more than create a new regulatory bureaucracy and establish malleable guidelines governing it. It also creates definitive requirements for corporations with the framework of Warren’s far-left philosophy. The bill states, “Not less than 2⁄5 of the directors of a United States corporation shall be elected by the employees of the United States corporation” which is to say that employees will have democratic control over nearly half of their company’s directorial composition. In a footnote of Power and Market, Murray N. Rothbard briefly explains why such workplace democracy is bound to fail, and why it seldom appears in the market without the interference of the government. As he states:
if each owner receives only one vote regardless of how much money he has invested in a project (and earnings are divided in the same way), there is no incentive to invest more than the next man; in fact, every incentive is the other way. This hampering of investment militates strongly against the [democratic] form.
Not all employees have the same stake in a given business. Some may have worked there for decades, care about its reputation, and have much money invested in it as shareholders, while others may be recent hires with no money invested in it. The latter, compared to the former, has much less of an interest in determining who the best directors would be for a business. Even if they did have an equal interest and stake in doing so, they would still not necessarily be good decision-makers. Workplace democracy, even if instituted for determining only 40% of a corporation’s directors, then, would wreak havoc on the economy. There is a reason why some people are only employees and not simultaneously shareholders; namely, because of the fact that they may not make intelligent, efficient decisions with regard to the composition of the firm’s personnel. The Accountable Capitalism Act would still, though, make employees’ voices heard for the sake of democracy and equality, even if the result would be disastrous. Failure to comply with this 40% requirement would result in a civil money penalty against the corporation of between $50,000 and $100,000 per day, which would be collected after the closing of a 180-day period.
Although Warren claims the Accountable Capitalism Act would help consumers, it actually does the opposite. By the nature of the market, corporations can only exist insofar as the serve consumers. If customers are unhappy with a particular firm, they never have to visit the company again. Likewise, if shareholders or employees are unhappy, they can completely disassociate from the company. This process, which is coordinated via the receiving of profit or loss, allows for better, more value-productive firms to thrive and for worse, less efficient firms to fail, eventually going out of business if their inefficiencies persist. In giving the state the ability to control wealthy corporations, Warren’s bill would restrict choices for consumers, leaving them with a worse quality of goods at higher prices. Capitalism is already accountable, and there is nothing that the government can do but destroy this.
In just a few decades video gaming has grown from a niche market into one of the largest entertainment industries in the world, certainly no mean feat. However, its transformation has also brought with it the same regulatory problems that every large industry encounters sooner or later. And like most other industries, gaming’s regulatory woes are a combination of internal and external threats. We can categorize these threats as follows:
Politicians and regulators trying to control and manage the emerging industry (external)Industry leaders using regulation to their own advantage and to the detriment of competitors (internal) Gaming and Politics In the case of video games, the first type of problem is evident in the periodic hysteria about the alleged evils of gaming: games are addictive, games promote violence, games use predatory or fraudulent marketing, games taught my dog to lie and steal, etc. These assertions, which are usually supported by flimsy or nonexistent evidence, nonetheless make excellent fodder for political grandstanding. Recent examples include calls for the regulation of loot boxes and other microtransactions.
However, despite claims to the contrary by many gamers, demands for the regulation or outright banning of games do not originate solely from the political left: far from it. Conservatives have also been part of the crusade from its earliest days, right up to Trump’s current plan to curb the spread of violent games. Right and left are often united in their passion for bringing gaming under government control. Of course, it’s sometimes true that there are differences between their motivations, or between the types of content they object to: liberals can’t fathom how anyone could be interested in digital violence, while conservatives can’t fathom how anyone could be interested in sex. Yet the ultimate goal of both sides is to regulate and censor games.
Fortunately, like most political talking points, moral panic about gaming tends to last only as long as the current election cycle, that critical phase in which politicians try desperately to convince voters that “something must be done” about the latest scourge to society (that will be forgotten by next week).
Regulation as a Weapon Internally-driven regulations, however, tend to be longer-lasting and more damaging to the industry and its consumers. They are also harder to explain to the public, as they tend to revolve around mundane economic problems rather than the emotionally-charged topics that drive political efforts toward regulation (such as violence among children). A second problem is that private companies are too often thought of as innocent victims of government intervention. In reality though, the motivation for government regulation of business very often comes from businesses themselves. This is well-known, but can be obscured when the business in question is a young company offering flashy new products to devoted fans (think of someone like Elon Musk, whose grandiose innovations are often popular with free-market supporters, but whose businesses are heavily subsidized).
The gaming industry is no different. Like many of its products, game development is a fiercely competitive market, and it’s hard to consistently satisfy consumers while staying ahead of new players. Sadly, rather than risking their own assets in the marketplace through innovation and finding new and cheaper ways to serve consumers, many developers choose the safer strategy of using legal and regulatory privileges to keep out competition.
The typical case involves larger firms excluding smaller ones. Larger, established developers have the financial resources to seek out and take advantage of benefits that are unavailable to their smaller competitors. Common examples include the targeted tax breaks that exist in several US states for developers. These are not, as sometimes claimed, equivalent to straightforward subsidies for firms, but they are a kind of legal privilege that hurts the companies that are unable to qualify for them.
A more deeply-rooted example relates to intellectual property rights. IP litigation is on the rise in the gaming industry, and appears increasingly to target smaller companies and even not-for-profit and fan-based projects. The recent rash of these cases gives the lie to the idea that IP rights are intended to help struggling innovators. Microsoft, for instance, closed down ElDewrito, a free-to-play Halo mod that used some IP from an abandoned Halo project. The same fate also met Shadow Moses, a fan remake of Metal Gear Solid (released in 1998, and hardly one of Konami’s current bestsellers).
Other cases of using IP as a weapon abound. The UK-based broadcasting company Sky fought a secret three-year legal battle, which it eventually lost, to prevent the use of the word “sky” in No Man’s Sky (the company also sued Skype on the same grounds and forced Microsoft to change its “Skydrive” to “Onedrive”). And this isn’t the only example of trademarking a clearly unoriginal term: CD Projekt Red recently invited criticism by trademarking the word “cyberpunk” for its upcoming Cyberpunk 2077. The company claims this is a purely defensive move, but whether that turns out to be true or not, it only highlights an atmosphere of paranoia surrounding aggressive IP litigation in the industry.
It’s also important to point out that external, politically-driven interventions have the same result as internal, anticompetitive ones: they privilege some producers at the expense of others. For example, restrictions on violent content benefit companies like Nintendo who don’t specialize in violent games to begin with, while punishing companies like Rockstar, who do. At the same time, even Rockstar benefits from these laws relative to smaller competitors that make the same kind of games, but lack the time and money to navigate legal barriers. And crucially, these results have nothing to do with the intentions of the laws, or of their sponsors. They simply reflect the logic of regulation playing itself out. In fact, gaming is another sad case study of how counterproductive regulation can be—laws intended to limit the power of business can end up giving it more.
These are just a few examples of a growing trend among major developers to use resources to extract money from competitors rather than to produce compelling original content that consumers want to pay for. Yet this is just what we should expect from companies that use the legal system to insulate themselves from the demands of consumers. Just like any good game, the video game industry needs more competition, not more cheaters.
In a story that could only happen in 2018, septuagenarian Bernie Sanders took to twitter to agree with someone called Cardi B – who my teenage daughter tells me is a popular singer – about the importance of strengthening Social Security.
Sanders claimed that Social Security enables seniors to “retire with the dignity they deserve,” while Ms. B praised FDR for its creation.
Of course, Social Security needs “strengthening” because, by some estimates, it has long-term unfunded liabilities of $34 trillion, and will “officially” be insolvent by 2034.
The commonly held belief is that Social Security was created by FDR as a compassionate, “progressive” program to help older people feel more secure in their retirement.
Like so many progressive programs, however, Social Security was likely the creation of big businesses turning to big government technocrats to protect themselves against competition. That’s just one of countless insights unearthed by Murray Rothbard’s book The Progressive Era.
Social Security passed in 1935, but its genesis began in 1934 when FDR “commissioned three of his top officials to select the membership of a Committee on Economic Security (CES),” according to Rothbard.
The CES was the body that would craft Social Security legislation, but more specifically, the Technical Board of the CES would be tasked with the details of the plan.
Spearheading the Technical Board was J. Douglas Brown, head of the Industrial Relations Department at Princeton — a department created and largely funded by an organization called the Industrial Relations Councilors (IRC).
The IRC “had been set up in the early 1920s by the Rockefellers, specifically John D., Jr., in charge of ideology and philanthropy for the Rockefeller empire,” reports Rothbard.
The IRC was billed as a scholarly and activist group whose mission, Rothbard describes, was to “promote a new form of corporatist labor-management cooperation, as well as promoting pro-union and pro-welfare-state policies in industry and government.”
Part of the IRC’s activities included setting up Industrial Relations departments in Ivy League schools, including Brown’s at Princeton. Not coincidentally, the other two members of the CES’s Technical Board were IRC affiliates.
Which brings us back to J. Douglas Brown.
Brown was not only backed by a powerful Rockefeller outfit, he was also influenced by hand-picked advisors to the CES, many of which were heads of big businesses. Within this context, as Rothbard notes, Brown “was particularly adamant that no employers escape the taxes of the old-age pension scheme.”
Big businesses were upset that their smaller competitors were not providing retiree pensions, and wanted to use the federal government “to force their small-business competitors into paying for similar, costly, programs.”
At the time Social Security was being developed, about 15 percent of workers were covered by a company pension plan, with a little more than 300 – mostly large – businesses offering such plans.
In his testimony before the Senate Finance Committee in 1935, Brown declared that government compulsion of universal employer “contributions” to old-age pensions would make “uniform throughout industry a minimum cost of providing old-age security and protect(s) the more liberal employer now providing pensions from the competition of the employer who otherwise fires the old person without a pension.”
Put more simply, in Rothbard’s words, “the legislation deliberately penalizes the lower cost, ‘unprogressive’ employer and cripples him by artificially raising his costs compared by the larger employer.”
It should come as no surprise, as Rothbard wrote, “the bigger businesses almost all backed the Social Security Scheme to the hilt, while it was attacked by such associations of small businesses as the National Metal Trades Association, the Illinois Manufacturing Association, and the National Association of Manufacturers.”
Indeed, big businesses “collaborated enthusiastically” with the implementation of Social Security once passed. When confronted with establishing 26 million accounts for individuals, the Social Security Board consulted the Commerce Department’s Business Advisory Committee (BAC). Big business’ handprints were all over the Committee. BAC was dominated by W. Averell Harriman, wealthy heir to his father’s railroad fortune turned banker (and future New York Governor), head of Standard Oil Walter Teagle, and John Raskob of DuPont and General Motors.
Meanwhile, BAC member Marian Folsom of Eastman Kodak was instrumental in planning the creation of regional Social Security Board centers.
Rothbard’s work lays waste to the romanticized tale of Social Security as humanitarian program to provide grandpa’s nest egg. Instead, it’s just another case of big business leveraging government to protect themselves from smaller competitors, all at taxpayer expense.
In 2018, Ross Douthat of the New York Times introduced the phrase “woke capital.” Essentially, Douthat suggested that woke capitalism works by substituting symbolic value for economic value. Under woke capitalism, corporations offer workers rhetorical placebos in lieu of costlier economic concessions, such as higher wages and better benefits. The same gestures of wokeness also appease the liberal political elite, promoting their agendas of identity politics, gender pluralism, transgender rights, lax immigration standards, climate change mitigation, and so on. In return, woke corporations hope to be spared higher taxes, increased regulations, and antitrust legislation aimed at monopolies. Although woke capitalism alienates cultural conservatives, the Republican Party remains procorporate, making woke capitalism a win-win strategy for corporations.
Business Insider columnist Josh Barro suggested that woke capitalism provides a form of parapolitical representation for workers and corporate consumers. Given their perceived political disenfranchisement, woke capitalism offers them representation in the public sphere, as they see their values reflected in corporate pronouncements.
Others have suggested that corporations have gone woke only to be spared cancellation by Twitter mobs and other activists, that wokeness is a good “branding tool,” or that progressive shareholders also demand corporate activism.
But woke capitalism cannot be sufficiently explained in terms of placating coastal leftists, ingratiating left-liberal legislators, or avoiding the wrath of activists. Rather, as wokeness has escalated and taken hold of corporations and states, it has become a demarcation device, a shibboleth for cartel members to identify and distinguish themselves from their nonwoke competitors, who are to be starved of capital investments. Woke capitalism has become a monopoly game.
Just as nonwoke individuals are cancelled from civic life, so too are nonwoke companies cancelled from the economy, leaving the spoils to the woke. Corporate cancellations are not merely the result of political fallout. They are being institutionalized and carried out through the stock market. The Environmental, Social, and Governance (ESG) Index is a Chinese-style social credit score for rating corporations. Woke planners wield the ESG Index to reward the in-group and to squeeze nonwoke players out of the market. Woke investment drives ownership and control of production away from the noncompliant. The ESG Index serves as an admission ticket for entry into the woke cartels.
Research suggests that ESG investing favors large over small companies. Woke capitalism vests as much control over production and distribution in these large, favored corporations as possible while eliminating industries and producers deemed either unnecessary or inimical.
The investment approach of BlackRock Inc., the world’s largest asset manager; Vanguard, the second largest; and others lends credence to this interpretation. BlackRock and Vanguard are solidly behind stakeholder capitalism—the corporate ethos of benefiting “stakeholders” in addition to or in lieu of shareholders.
In his “2021 Letter to CEOs,” BlackRock’s CEO, Larry Fink, made his position on investment decisions clear, declaring that “climate risk is investment risk” and “the creation of sustainable index investments has enabled a massive acceleration of capital towards companies better prepared to address climate risk.” Fink promised a “tectonic shift” in investment behavior, an increasing acceleration of investments going to “sustainability-focused” companies. Fink warned CEOs: “And because this will have such a dramatic impact on how capital is allocated, every management team and board will need to consider how this will impact their company’s stock.” In thus throwing down the stakeholder gauntlet, Fink echoed the menacing words of World Economic Forum (WEF) founder and chairman Klaus Schwab, who wrote in June 2020: “Every country, from the United States to China, must participate, and every industry, from oil and gas to tech, must be transformed. In short, we need a ‘Great Reset’ of capitalism.”
But unlike Schwab’s rhetorical gesturing, Fink’s dictum of “go woke or go broke” should not be dismissed as the conspiratorial rantings of Dr. Evil. It has the direct force of capital behind it. Fink carries out what Schwab can only promote with propaganda.
Fink’s “2022 Letter to CEOs: The Power of Capitalism” continues the promotion of stakeholder capitalism, suggesting that stakeholder capitalism has always been the modus operandi of successful capitalist corporations:
Over the past three decades, I’ve had the opportunity to talk with countless CEOs and to learn what distinguishes truly great companies. Time and again, what they all share is that they have a clear sense of purpose; consistent values; and, crucially, they recognize the importance of engaging with and delivering for their key stakeholders. This is the foundation of stakeholder capitalism.
According to Fink, stakeholder capitalism is a not an aberration. He goes on to declare, rather defensively: “It is not a social or ideological agenda. It is not ‘woke.’ It is capitalism.”
Klaus Schwab erects the straw man of “neoliberalism”—which he equates with the free market—as the source of economic and social woes for the masses. But corporatism, corporate and state favoritism differentially benefitting chosen industries and players within industries—and not fair and free competition—has been the real source of what Fink, Schwab, and their ilk decry.
Corporatism, otherwise known as “economic fascism,” involves the coordinated production and the running of society by a consortium of dominant interest groups. If anything, stakeholder capitalism is a form of corporatism. Furthermore, despite Fink’s assertion to the contrary, the corporatism he promotes exercises corporate power and relies on state sanctions to achieve a particular ideological and political agenda. That agenda is wokeness. Woke capitalism is thus more accurately called woke corporatism.
Unsurprisingly, stakeholder capitalism has been seen by some conservatives, and even by a few socialists, as a new approach for advancing socialism.David Campbell, “Towards a Less Irrelevant Socialism: Stakeholding as a ‘Reform’ of the Capitalist Economy,” Journal of Law and Society 24, no. 1 (1997): 65–84. Yet woke stakeholder capitalism does not advance state socialism as such. Rather, it tends toward corporate socialism. In extreme versions, it amounts to capitalism with Chinese characteristics—an authoritarian state ultimately directing the for-profit production of state-sanctioned corporate entities.
Corporate socialism has a long history, dating back to the end of the nineteenth century. I’ve written about this history in connection with the monopolistic and socialist ideals of one King Camp Gillette, the founder of the Gillette Razor Company. Gillette authored and funded the writing of several books to promote a corporation-based socialism. He argued that socialism is best established by the corporation. Incorporation, mergers, and acquisitions would continue until all production is finally subsumed under one “World Corporation,” with all “citizens” holding equal shares. While this is not exactly the vision of contemporary corporate socialists like Fink and Schwab, they are no less presumptuous or contemptuous of the free market, and they use the rhetoric of diversity, equity, inclusion as a cover for their economic fascism.
Likewise, contrary to “correct” opinion, it is not reactionary to oppose woke capitalism. Economic fascism, in whatever form, is authoritarian and totalitarian. And, as Xi Jinping acknowledged in a recent address to the World Economic Forum, it is not “egalitarian.” It vests economic and political power in the hands of corporate and state elites, and it uses coercion and state power to concentrate the control of wealth in their hands—however much they promise to redistribute it through “social justice.”
In addition to building parallel cultural, economic, and social structures, in the short term, woke corporatism can be challenged by divestment from ESG-abiding corporations and by opposition to the politicians who promote these corporations through legislative favoritism.
When people hear the word “fascism” they naturally think of its ugly racism and anti-Semitism as practiced by the totalitarian regimes of Mussolini and Hitler. But there was also an economic policy component of fascism, known in Europe during the 1920s and ‘30s as “corporatism,” that was an essential ingredient of economic totalitarianism as practiced by Mussolini and Hitler. So-called corporatism was adopted in Italy and Germany during the 1930s and was held up as a “model” by quite a few intellectuals and policy makers in the United States and Europe. A version of economic fascism was in fact adopted in the United States in the 1930s and survives to this day. In the United States these policies were not called “fascism” but “planned capitalism.” The word fascism may no longer be politically acceptable, but its synonym “industrial policy” is as popular as ever.
The Free World Flirts With Fascism Few Americans are aware of or can recall how so many Americans and Europeans viewed economic fascism as the wave of the future during the 1930s. The American Ambassador to Italy, Richard Washburn Child, was so impressed with “corporatism” that he wrote in the preface to Mussolini’s 1928 autobiography that “it may be shrewdly forecast that no man will exhibit dimensions of permanent greatness equal to Mussolini. . . . The Duce is now the greatest figure of this sphere and time.Benito Mussolini, My Autobiography (New York: Charles Scribner’s Sons, 1928).” Winston Churchill wrote in 1927 that “If I had been an Italian I am sure I would have been entirely with you” and “don the Fascist black shirt.Cited in John T. Flynn, As We Go Marching (New York: Doubleday, 1944), p. 70.” As late as 1940, Churchill was still describing Mussolini as “a great man.”
U.S. Congressman Sol Bloom, Chairman of the House Foreign Relations Committee, said in 1926 that Mussolini “will be a great thing not only for Italy but for all of us if he succeeds. It is his inspiration, his determination, his constant toil that has literally rejuvenated Italy . .”Ibid.
One of the most outspoken American fascists was economist Lawrence Dennis. In his 1936 book, The Coming American Fascism, Dennis declared that defenders of “18th-century Americanism” were sure to become “the laughing stock of their own countrymen” and that the adoption of economic fascism would intensify “national spirit” and put it behind “the enterprises of public welfare and social control.” The big stumbling block to the development of economic fascism, Dennis bemoaned, was “liberal norms of law or constitutional guarantees of private rights.”
Certain British intellectuals were perhaps the most smitten of anyone by fascism. George Bernard Shaw announced in 1927 that his fellow “socialists should be delighted to find at last a socialist [Mussolini] who speaks and thinks as responsible rulers do.”Cited in Richard Griffiths, Fellow Travellers of the Right: British Enthusiasts for Nazi Germany, 1933-39 (London: Trinity Press, 1980), p. 259. He helped form the British Union of Fascists whose “Outline of the Corporate State,” according to the organization’s founder, Sir Oswald Mosley, was “on the Italian Model.” While visiting England, the American author Ezra Pound declared that Mussolini was “continuing the task of Thomas Jefferson.”Alastair Hamilton, The Appeal of Fascism: A Study of Intellectuals and Fascism, 1919-1945 (New York: Macmillan, 1971), p. 288.
Thus, it is important to recognize that, as an economic system, fascism was widely accepted in the 1920s and ‘30s. The evil deeds of individual fascists were later condemned, but the practice of economic fascism never was. To this day, the historically uninformed continue to repeat the hoary slogan that, despite all his faults, Mussolini at least “made the trains run on time,” insinuating that his interventionist industrial policies were a success.
The Italian “Corporatist” System So-called “corporatism” as practiced by Mussolini and revered by so many intellectuals and policy makers had several key elements:
The state comes before the individual. Webster’s New Collegiate Dictionary defines fascism as “a political philosophy, movement, or regime that exalts nation and often race above the individual and that stands for a centralized, autocratic government.”
This stands in stark contrast to the classical liberal idea that individuals have natural rights that pre-exist government; that government derives its “just powers” only through the consent of the governed; and that the principal function of government is to protect the lives, liberties, and properties of its citizens, not to aggrandize the state.
Mussolini viewed these liberal ideas (in the European sense of the word “liberal”) as the antithesis of fascism: “The Fascist conception of life,” Mussolini wrote, “stresses the importance of the State and accepts the individual only in so far as his interests coincide with the State. It is opposed to classical liberalism [which] denied the State in the name of the individual; Fascism reasserts the rights of the State as expressing the real essence of the individual.”Benito Mussolini, Fascism: Doctrine and Institutions (Rome: Adrita Press, 1935), p. 10.
Mussolini thought it was unnatural for a government to protect individual rights: “The maxim that society exists only for the well-being and freedom of the individuals composing it does not seem to be in conformity with nature’s plans.”Ibid. “If classical liberalism spells individualism,” Mussolini continued, “Fascism spells government.”
The essence of fascism, therefore, is that government should be the master, not the servant, of the people. Think about this. Does anyone in America really believe that this is not what we have now? Are Internal Revenue Service agents really our “servants”? Is compulsory “national service” for young people, which now exists in numerous states and is part of a federally funded program, not a classic example of coercing individuals to serve the state? Isn’t the whole idea behind the massive regulation and regimentation of American industry and society the notion that individuals should be forced to behave in ways defined by a small governmental elite? When the nation’s premier health-care reformer recently declared that heart bypass surgery on a 92-year-old man was “a waste of resources,” wasn’t that the epitome of the fascist ideal—that the state, not individuals, should decide whose life is worthwhile, and whose is a “waste”?
The U.S. Constitution was written by individuals who believed in the classical liberal philosophy of individual rights and sought to protect those rights from governmental encroachment. But since the fascist/collectivist philosophy has been so influential, policy reforms over the past half century have all but abolished many of these rights by simply ignoring many of the provisions in the Constitution that were designed to protect them. As legal scholar Richard Epstein has observed: “[T]he eminent domain . . . and parallel clauses in the Constitution render . . . suspect many of the heralded reforms and institutions of the twentieth century: zoning, rent control, workers’ compensation laws, transfer payments, progressive taxation.”Richard Epstein, Takings (Cambridge, Mass.: Harvard University Press, 1985), p. x. It is important to note that most of these reforms were initially adopted during the ‘30s, when the fascist/collectivist philosophy was in its heyday.
Planned industrial “harmony.” Another keystone of Italian corporatism was the idea that the government’s interventions in the economy should not be conducted on an ad hoc basis, but should be “coordinated” by some kind of central planning board. Government intervention in Italy was “too diverse, varied, contrasting. There has been disorganic . . . intervention, case by case, as the need arises,” Mussolini complained in 1935.Mussolini, Fascism, p. 68. Fascism would correct this by directing the economy toward “certain fixed objectives” and would “introduce order in the economic field.”Ibid. Corporatist planning, according to Mussolini adviser Fausto Pitigliani, would give government intervention in the Italian economy a certain “unity of aim,” as defined by the government planners.Ibid., p. 122.
These exact sentiments were expressed by Robert Reich (currently the U.S. Secretary of Labor) and Ira Magaziner (currently the federal government’s health care reform “Czar”) in their book Minding America’s Business.Ira C. Magaziner and Robert B. Reich, Minding America’s Business (New York: Vintage Books, 1982). In order to counteract the “untidy marketplace,” an interventionist industrial policy “must strive to integrate the full range of targeted government policies—procurement, research and development, trade, antitrust, tax credits, and subsidies—into a coherent strategy . . . .”Ibid., p. 343.
Current industrial policy interventions, Reich and Magaziner bemoaned, are “the product of fragmented and uncoordinated decisions made by [many different] executive agencies, the Congress, and independent regulatory agencies . . . . There is no integrated strategy to use these programs to improve the . . . U.S. economy.”Ibid., p. 370.
In his 1989 book, The Silent War, Magaziner reiterated this theme by advocating a coordinating group like the national Security Council to take a strategic national industrial view.”Ira C. Magaziner, Silent War (New York: Random House, 1989), p. 306.] The White House has in fact established a “National Economic Security Council.” Every other advocate of an interventionist “industrial policy” has made a similar “unity of aim” argument, as first described by Pitigliani more than half a century ago.
Government-business partnerships. A third defining characteristic of economic fascism is that private property and business ownership are permitted, but are in reality controlled by government through a business-government “partnership.” As Ayn Rand often noted, however, in such a partnership government is always the senior or dominating “partner.”
In Mussolini’s Italy, businesses were grouped by the government into legally recognized “syndicates” such as the “National Fascist Confederation of Commerce,” the “National Fascist Confederation of Credit and Insurance,” and so on. All of these “fascist confederations” were “coordinated” by a network of government planning agencies called “corporations,” one for each industry. One large “National Council of Corporations” served as a national overseer of the individual “corporations” and had the power to “issue regulations of a compulsory character.”Fausto Pitigliani, The Italian Corporative State (New York: Macmillan, 1934), p. 98.
The purpose of this byzantine regulatory arrangement was so that the government could “secure collaboration . . . between the various categories of producers in each particular trade or branch of productive activity.”Ibid., p. 93. Government-orchestrated “collaboration” was necessary because “the principle of private initiative” could only be useful “in the service of the national interest” as defined by government bureaucrats.Ibid., p. 95.
This idea of government-mandated and -dominated “collaboration” is also at the heart of all interventionist industrial policy schemes. A successful industrial policy, write Reich and Magaziner, would “require careful coordination between public and private sectors.”Magaziner and Reich, Minding America’s Business, p. 379. “Government and the private sector must work in tandem.”Ibid., p. 378. “Economic success now depends to a high degree on coordination, collaboration, and careful strategic choice,” guided by government.Ibid.
The AFL-CIO has echoed this theme, advocating a “tripartite National Reindustrialization Board—including representatives of labor, business, and government” that would supposedly “plan” the economy.[Lane Kirkland, “An Alternative to Reaganomics,” USA Today, May 1987, p. 20. The Washington, D.C.-based Center for National Policy has also published a report authored by businessmen from Lazard Freres, du Pont, Burroughs, Chrysler, Electronic Data Systems, and other corporations promoting an allegedly “new” policy based on “cooperation of government with business and labor.”Center for National Policy, Restoring American Competitiveness (Washington, D.C.: Center for National Policy, 1984), p. 7. Another report, by the organization “Rebuild America,” co-authored in 1986 by Robert Reich and economists Robert Solow, Lester Thurow, Laura Tyson, Paul Krugman, Pat Choate, and Lawrence Chimerine urges “more teamwork” through “public-private partnerships among government, business and academia.”Rebuild America, An Investment Economics for the Year 2000 (Washington, D.C.: Rebuild America, 1986), p. 31. This report calls for “national goals and targets” set by government planners who will devise a “comprehensive investment strategy” that will only permit “productive” investment, as defined by government, to take place.
Mercantilism and protectionism. Whenever politicians start talking about “collaboration” with business, it is time to hold on to your wallet. Despite the fascist rhetoric about “national collaboration” and working for the national, rather than private, interests, the truth is that mercantilist and Protectionist practices riddled the system. Italian social critic Gaetano Salvemini wrote in 1936 that under corporatism, “it is the state, i.e., the taxpayer, who has become responsible to private enterprise. In Fascist Italy the state pays for the blunders of private enterprise.”Pitigliani, The Italian Corporative State, p. 93. As long as business was good, Salvemini wrote, “profit remained to private initiative.”Ibid. But when the depression came, “the government added the loss to the taxpayer’s burden. Profit is private and individual. Loss is public and social.”Ibid.
The Italian corporative state, The Economist editorialized on July 27, 1935, “only amounts to the establishment of a new and costly bureaucracy from which those industrialists who can spend the necessary amount, can obtain almost anything they want, and put into practice the worst kind of monopolistic practices at the expense of the little fellow who is squeezed out in the process.” Corporatism, in other words, was a massive system of corporate welfare. “Three-quarters of the Italian economic system,” Mussolini boasted in 1934, “had been subsidized by government.”Gaetano Salvemini, Under the Axe of Fascism (New York: Viking Press, 1936), p. 380.
If this sounds familiar, it is because it is exactly the result of agricultural subsidies, the Export-Import bank, guaranteed loans to “preferred” business borrowers, protectionism, the Chrysler bailout, monopoly franchising, and myriad other forms of corporate welfare paid for directly or indirectly by the American taxpayer.
Another result of the close “collaboration” between business and government in Italy was “a continual interchange of personnel between the . . . civil service and private business.”S. Belluzzo, Liberta, September 21, 1933, cited in Salvemini, Under the Axe of Fascism, p. 385. Because of this “revolving door” between business and government, Mussolini had “created a state within the state to serve private interests which are not always in harmony with the general interests of the nation.”Salvemini, Under the Axe of Fascism, p. 380.
Mussolini’s “revolving door” swung far and wide:
Signor Caiano, one of Mussolini’s most trusted advisers, was an officer in the Royal Navy before and during the war; when the war was over, he joined the Orlando Shipbuilding Company; in October 1922, he entered Mussolini’s cabinet, and the subsidies for naval construction and the merchant marine came under the control of his department. General Cavallero, at the close of the war, left the army and entered the Pirelli Rubber Company . . . ; in 1925 he became undersecretary at the Ministry of War; in 1930 he left the Ministry of War, and entered the service of the Ansaldo armament firm. Among the directors of the big . . . companies in Italy, retired generals and generals on active service became very numerous after the advent of Fascism.lbid., p. 385.
Such practices are now so common in the United States—especially in the defense industries—that it hardly needs further comment.
From an economic perspective, fascism meant (and means) an interventionist industrial policy, mercantilism, protectionism, and an ideology that makes the individual subservient to the state. “Ask not what the State can do for you, but what you can do for the State” is an apt description of the economic philosophy of fascism.
The whole idea behind collectivism in general and fascism in particular is to make citizens subservient to the state and to place power over resource allocation in the hands of a small elite. As stated eloquently by the American fascist economist Lawrence Dennis, fascism “does not accept the liberal dogmas as to the sovereignty of the consumer or trader in the free market . . . .
Least of all does it consider that market freedom, and the opportunity to make competitive profits, are rights of the individual.” Such decisions should be made by a “dominant class” he labeled “the elite.”Lawrence Dennis, The Coming American Fascism (New York: Harper, 1936), p. 180.
German Economic Fascism Economic fascism in Germany followed a ‘virtually identical path. One of the intellectual fathers of German fascism was Paul Lensch, who declared in his book Three Years of World Revolution that “Socialism must present a conscious and determined opposition to individualism.”Adolph Hitler, Mein Kampf (Boston: Houghton Mifflin, 1943), p. 297. The philosophy of German fascism was expressed in the slogan, Gemeinnutz geht vor Eigennutz, which means “the common good comes before the private good.” “The Aryan is not greatest in his mental qualities,” Hitler stated in Mein Kampf, but in his noblest form he “willingly subordinates his own ego to the community and, if the hour demands, even sacrifices it.”Ibid. The individual has “not rights but only duties.”Ibid., p. 126.
Armed with this philosophy, Germany’s National Socialists pursued economic policies very similar to Italy’s: government-mandated “partnerships” between business, government, and unions organized by a system of regional “economic chambers,” all overseen by a Federal Ministry of Economics.
A 25-point “Programme of the Party” was adopted in 1925 with a number of economic policy “demands,” all prefaced by the general statement that “the activities of the individual must not clash with the interests of the whole . . . but must be for the general good.”Norman H. Baynes, The Speeches of Adolph Hitler (New York: Howard Fertig, 1969), p. 104. This philosophy fueled a regulatory assault on the private sector. “We demand ruthless war upon all those whose activities are injurious to the common interest,” the Nazis warned.Ibid., p. 105. And who are these on whom “war” is to be waged? “Common criminals,” such as “usurers,” i.e., bankers, and other “profiteers,” i. e., ordinary businessmen in general. Among the other policies the Nazis demanded were abolition of interest; a government-operated social security system; the ability of government to confiscate land without compensation (wetlands regulation?); a government monopoly in education; and a general assault on private-sector entrepreneurship which was denounced as the “Jewish materialist spirit.”Ibid., p. 104. Once this “spirit” is eradicated, “The Party . . . is convinced that our nation can achieve permanent health from within only on the principle: the common interest before self-interest.”Ibid.
Conclusions Virtually all of the specific economic policies advocated by the Italian and German fascists of the 1930s have also been adopted in the United States in some form, and continue to be adopted to this day. Sixty years ago, those who adopted these interventionist policies in Italy and Germany did so because they wanted to destroy economic liberty, free enterprise, and individualism. Only if these institutions were abolished could they hope to achieve the kind of totalitarian state they had in mind.
Many American politicians who have advocated more or less total government control over economic activity have been more devious in their approach. They have advocated and adopted many of the same policies, but they have always recognized that direct attacks on private property, free enterprise, self-government, and individual freedom are not politically palatable to the majority of the American electorate. Thus, they have enacted a great many tax, regulatory, and income-transfer policies that achieve the ends of economic fascism, but which are sugar-coated with deceptive rhetoric about their alleged desire only to “save” capitalism.
American politicians have long taken their cue in this regard from Franklin D. Roosevelt, who sold his National Recovery Administration (which was eventually ruled unconstitutional) on the grounds that “government restrictions henceforth must be accepted not to hamper individualism but to protect it.”Cited in Samuel Rosenman, ed., The Public Papers and Addresses of Franklin D. Roosevelt (New York: Random House, 1938-50), p. 750. In a classic example of Orwellian doublespeak, Roosevelt thus argued that individualism must be destroyed in order to protect it.
Now that socialism has collapsed and survives nowhere but in Cuba, China, Vietnam, and on American university campuses, the biggest threat to economic liberty and individual freedom lies in the new economic fascism. While the former Communist countries are trying to privatize as many industries as possible as fast as they can, they are still plagued by governmental controls, leaving them with essentially fascist economies: private property and private enterprise are permitted, but are heavily controlled and regulated by government.
As most of the rest of the world struggles to privatize industry and encourage free enterprise, we in the United States are seriously debating whether or not we should adopt 1930s-era economic fascism as the organizational principle of our entire health care system, which comprises 14 percent of GNP. We are also contemplating business-government “partnerships” in the automobile, airlines, and communications industries, among others, and are adopting government-managed trade policies, also in the spirit of the European corporatist schemes of the 1930s.
The state and its academic apologists are so skilled at generating propaganda in support of such schemes that Americans are mostly unaware of the dire threat they pose for the future of freedom. The road to serfdom is littered with road signs pointing toward “the information superhighway,” “health security,” “national service,” “managed trade,” and “industrial policy.”
Originally published in The Freeman, June 1994
“We believe that hindsight will show the champion of head-smacking craziness in the American stock market to be the period playing out right now.”~ Paul Singer, letter to Elliott Management shareholders, January 28, 2021
Who says finance has to be boring? Investing is often like watching paint dry, sometimes terrifying and occasionally exhilarating. Today the stock market is more than fun; it’s a sure thing.
Meanwhile, record stock prices have led to record household net worth ($130.2 trillion at year-end). Not one to let a boom go to waste, the federal government, by way of the $1.9 trillion American Rescue Plan, recently mailed $1,400 checks to each member of the household. Wall Street strategists expect a third of this lucre to find its way into the stock market and the rest spent, which is good for business. “We have never seen the consumer emerge this strong from a recession,” claims Chris Harvey, equity strategist at Wells Fargo Securities.
Today’s faith in stimulus would make John Maynard Keynes blush. Says Evercore ISI’s Ed Hyman:
Massive, unprecedented stimulus is already in place and increasing! It’s firing on all cylinders, i.e., QE, rates, and fiscal. So even though inflation and bond yields are moving up, equities are supported. We believe we’re at the start of a new expansion that will last five years or more.
Have we truly discovered the Holy Grail? Why didn’t we think of this sooner? Borrow, print, spend, speculate, rinse and repeat. The popular business press has long been pimping for this financial alchemy:
Barron’s said a year ago that policy makers would “have to get creative” to avert an economic catastrophe. They did and, as a result, better times await.
Is economics really this simple?
Seen and Unseen (the Lesson) “The first lesson of economics is scarcity. There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”
~ Thomas Sowell
What is the difference between a good economist and a charlatan? The phony economist focuses solely on the visible effects of government policies whereas the sound economist considers the unseen.
Government policies follow the path of least resistance, driven by groups pining for benefits in the short run (seen), and those harmed in the long run, but oblivious to the costs (unseen), are largely silent. On occasion, some may be visibly harmed in the short term, yet support policies out of economic ignorance. (The beneficiaries tend to be concentrated and well-organized politically while the victims are disparate and unorganized.)
Let’s take minimum wage laws as an example. Wages, like any price, are set by supply and demand. If passing a law magically raised wages, why stop at $7.25/hour, or $15.00/hour for that matter? All the minimum wage does is set a floor on legal wage contracts. Any that would take place below that floor are now considered criminal. In other words, raising the wage floor, all else being equal, results in unemployment.
The harm to those at the bottom rungs of the economic ladder should be obvious, but who benefits? For starters, those marginally more productive than the targeted group get to eliminate some of their competitors. Imagine a restaurant owner pays an unskilled teenager $10/hour, generating $12/hour in incremental revenue ($2/hour profit). If the minimum wage is raised to $15/hour, the owner is now losing $3/hour to hire this person. He would be better off hiring a more productive worker worth $14/hour who generates $15/hour in incremental revenue ($1/hour profit before the minimum wage law was imposed). The new $15/hour wage will eliminate his profit, but this is far more palatable than losing $3/hour.
Still, our restauranteur is not happy having a gun put to his head and his business disrupted. Can his unskilled worker be replaced by automation? At the margin, companies providing labor-saving technology also benefit from minimum wage laws. (This may be an investment opportunity at some point. “Supplying restaurant equipment isn’t a particularly big business—sales total about $40 billion annually—but it has been a steady one, driven by the need to constantly improve labor efficiency,” according to Barron’s.)
Despite considering all of his options, what happens if our owner still can’t make a profit? He folds the tent, welcome news to his larger competitors who have access to cheaper capital and are better able to deploy technology over a chain of restaurants.
The state benefits from centralization, having fewer businesses to lean on to act as tax collectors. The state also expands by becoming a broker in more and more win-lose schemes like the minimum wage. Market entrepreneurs, who in a truly free market must profit from mutually beneficial exchange (win-win), are constantly at risk of being seduced into this game, becoming political entrepreneurs in the process.
Notice how proponents of coercive win-lose schemes cunningly label voluntary win-win exchanges “exploitation.” This is a classic, albeit subtle, case of projection.
Economic Stimulus (the Lesson Applied) Now let’s take a closer look at the scheme du jour: economic stimulus. Notice how government has no way of conjuring up resources out of thin air. The pesky problem of scarcity remains. As economic historian Robert Higgs commented in early 2008, “Economic stimulus is like draining the deep end of the pool, pouring it back into the shallow end, and expecting the water level to rise.”
Who benefits in the short run? To the extent stimulus money props up asset prices, the investor class is an obvious beneficiary, but even this classification is too broad. Those who have already accumulated assets and expect to be net sellers benefit while younger people in their asset gathering years are harmed. Long-term investors welcome lower prices as an opportunity to accumulate more shares and build greater wealth in the future. Rising asset prices also help larger companies with access to the capital markets over their smaller privately-held competitors.
If the path of stimulus leads to price inflation, those whose income will be rising as they move into their peak earning years are in a much better position to protect themselves than retirees on fixed incomes. Similarly, those employed in emerging industries are in far better shape to deal with price inflation than those in declining industries.
Whenever new money is doled out (whether printed, borrowed or taxed), those at the front of the line benefit at the expense of those at the back, otherwise known as the Cantillon Effect. Wikipedia explains how early 18th century economist Richard Cantillon “posited that the original recipients of the new money enjoy higher living standards at the expense of later recipients.” To illustrate, consider how green energy gets preferred status while fossil fuels wait in line until everyone is seated and the carry-on compartments are full.
In the long run, there is no shortage of losers. The whole notion of saving and investing—deferring consumption in the short term in order to increase production in the long term—is turned on its head. After all, consumption is the very thing being stimulated; savings must suffer. So too, must future production, i.e., economic growth. On top of this, investors are turned into gamblers, leading to misallocation of resources, or what Austrian economists refer to as “malinvestment.”
Meanwhile, the parasitic class (the state and its clients) expands at the expense of the productive host. The free market—that system in which the consumer is sovereign and prices discovered by profit-seeking entrepreneurs—is crowded out by central planning in which priorities are determined and prices administered by vote- and power-seeking politicians.
One of the more pernicious effects of stimulus is its contribution to what economists call “high time preference” in society. People become addicted to short-term stimuli, whether social media, click-bait, get-rich-quick schemes, the next election or the evening news. They crave what is right in front of their noses, but fail to see long-term consequences. Writes Rolf Dobelli, author of Stop Reading the News:
News media outlets, by and large, focus on the highly visible. They display whatever information they can convey with gripping stories and lurid pictures, and they systematically ignore the subtle and insidious, even if that material is more important. News grabs our attention; that’s how its business model works. Even if the advertising model didn’t exist, we would still soak up news pieces because they are easy to digest and superficially quite tasty.
The highly visible misleads us.
Reading the Tea Leaves Where should the good economist train his eyes?
Economy—Avoid the common infatuation with economic statistics, especially GDP, and look behind the numbers. Agora Financial founder Bill Bonner explains:
Included in GDP is government spending. But the services offered by the government are not the kind that you are usually looking for. Few people wake up in the morning and say, “Today, I’m going shopping for an F-35 Joint Strike Fighter.” Instead, they want the things the government doesn’t make. Government spending is almost completely focused on the consumption of wealth, not the creation of it. In other words, it doesn’t add to the supply side of the supply/demand teeter totter. It subtracts from it.
Crises always ratchet up government spending, a pattern in the U.S. documented by Robert Higgs in Crisis and Leviathan. Covid is just the latest example.
Crisis and Leviathan
Fiscal
Year
Federal
Expenditures/
GDP
Crisis
1813
3.9%
War of 1812
1865
14.5%
Civil War
1919
23.4%
World War I
1944
41.6%
World War II
2020
45.7%
Covid-19
Consumer—The consumer is a lagging indicator: most confident at the peak of a boom and most pessimistic at the trough. Don’t forget that the consumer’s balance sheet is tied to that of the government. Says legendary contrarian investor Bob Rodriguez, now retired:
The consumer has saved a lot of money because they've gotten all this stimulus cash. They've paid down debt. They haven't spent much more than maybe half of what they've received. This is viewed as a positive. But I say, "That's only one side of the equation." The offset is the government borrowed this money, so it results in a negative savings rate and the net effect is a system-wide savings rate that hasn't been improved. It's a very pernicious environment.
Stock market—Some CEOs (and former presidents) measure success by their stock price, a classic red flag. Instead of fixating on the stock chart, focus on factors such as leverage, credit quality and valuations. Today, billionaire investor Paul Singer believes,
“Trouble ahead” is signaled by a rare combination of low-quality securities, staggering valuation metrics, overleveraged capital structures, a scarcity of honest profits, a desperate dearth of understanding evinced by the most active traders, and economic macro prospects that are not as thrilling as the mobs braying “Buy! Buy!” seem to think.
Sentiment—“The only permanent truth in finance is that people will get bullish at the top and bearish at the bottom,” Jim Grant counsels. Learn to survey the speculative landscape which Grant did recently:
Monetary laxity, fiscal profusion and zero-cost trading commissions have combined to raise up a SPAC boom, crush credit spreads, levitate meme stocks, infuse the cryptos, smile on the invention of non-fungible tokens, facilitate the issuance of trillions of dollars of low-cost public debt and train a youthful new cohort to speculate under the banner of “you only live once.”
The Market as Discounting Mechanism Spring is upon us. The vaccines are here, stimulus is kicking in and the economy in full bloom. Nonfarm payrolls surged by 916,000 in March, the biggest gain since last August. (Employment is still 8.4 million jobs below its February 2020 peak.) Job growth was led by the leisure and hospitality sector which hired 280,000 workers, two-thirds by restaurants and bars.
How much of the good news is already baked in? The Invesco Dynamic Leisure and Entertainment ETF (PEJ) sits 3% higher than its closing price at the end of 2019, five weeks before 691 passengers aboard the Diamond Princess tested positive for the coronavirus.
To no one’s surprise, the cruise industry has been among the hardest hit. Carnival Corp. (CCL) mothballed its entire fleet last March and plans to start sailing again in May. For its fiscal year ended November, the company reported negative free cash flow of $10 billion, a gaping hole filled by issuing stock ($3.2 billion) and bonds, but without taxpayer assistance. (Cruise operators sail under foreign flags to avoid paying U.S. corporate taxes and failed to qualify for bailout funds.) On December 31, 2019, CCL closed at $50.83, valuing the company (including debt) at $52.6 billion. Today, despite guaranteed losses for several more months and a cloud of uncertainty over their customers’ willingness to stomach the high seas again, the business is worth $49.3 billion. Investors who stayed the course have a –46.5% total return to show for their fortitude; i.e., filling holes is costly.
Covid-19 Losers
Industry/
Company
2020
Revenue
Growth
12/31/19
EV
($bil)
4/1/21
EV
($bil)
Airlines
Delta Airlines
–63.6%
69.8
73.2
Cruise Lines
Carnival
–73.1%
52.6
49.3
Hotels
Marriott Int’l
–49.6%
64.0
60.5
Leisure
Planet Fitness
–41.0%
7.4
7.8
Six Flags
–76.0%
6.8
6.7
Restaurants
Dave & Buster’s
–67.8%
2.1
2.9
Shake Shack
–12.1%
2.3
4.2
Retailers
Gap Stores
–15.8%
7.7
12.9
Skechers USA
–11.9%
5.6
5.5
Conclusion Following the blowout employment report on April 2, President Joe Biden was quick to claim credit:
The first two months of our administration has seen more new jobs created than the first two months of any administration in history. It's a reflection of two things going on here, a new economic strategy focused on building from the bottom to the middle up, and one that puts government on the side of working people.
Say goodbye to trickle-down economics and hello to “trickle-up economics.” Forty years ago, President Ronald Reagan promoted stimulus through tax cuts, supply-side economics and a core belief in limited government, claim the marketing gurus on the left. “Passage of the Biden plan reflects the triumph of precisely the opposite view: that only active and competent government can get us out of the mess we’re in now,” opined E.J. Dionne Jr. in The Washington Post.
These snake oil salesmen overlook the fact that federal spending as a share of the economy actually increased slightly during the Reagan years (from 32.6% to 33.4% of GDP). More importantly, Reaganomics reversed the 35-year post-World War II decline in public debt-to-GDP, running up the federal credit card from 31.2% to 49.7% of GDP in 8 years.
When it comes to government intervention, there is not much new under the sun. The state’s objective is always to extract as many eggs from the golden goose as possible. While Reagan’s economic team acknowledged the importance of keeping the goose alive, Biden & Co. operate under no such constraints. Count on the current administration to enact new taxes on capital gains, dividends and corporations. (An increase in the corporate income tax rate from 21% to 28% would cut after-tax earnings 9%.) The rich will be made a target, assuming they stick around for the abuse. In an increasingly virtual economy with an expanding remote workplace, the wealthy have options.
At a time when the industrialized world is gripped by a host of free lunch fallacies, there can be little doubt that the $1.9 trillion rescue plan ushers in “a new era of much bigger government.”
This article originally appeared in the Coffee Can Portfolio.
Perhaps the most pressing matter today for advocates of freedom is the prospect of the Left completing the institution of a totalitarian state. There is no other way to read the multiprong approach and the political maneuverings that political operatives are taking to rule under “Biden.” I put “Biden” in quotation marks here because the current president of the United States is not a singular person named Joe Biden. It is a central executive committee consisting of party rulers and advisers, plus corporate-state apparatuses. Make no mistake, the power grab that the Left is undertaking poses the most grievous threat to liberty in recent history, regardless of its effects on the Republican Party.
The signals could not be any clearer. In addition to the swath of executive orders, clearly composed by executive committee members and aimed at either ingratiating and expanding the Democratic Party’s base or extending federal power, the Democrats have initiated a growing body of laws which would, if passed, ensure uniparty rule for the foreseeable future.
These include especially H.R. 1, or the For the People’s Act, passed by the House. Should it pass the Senate (with the eradication of the filibuster), H.R.-1 would grossly favor Democratic candidates in federal elections. Notwithstanding the expansion of the Democratic base through various means, including overriding existing voter ID laws in many states and mandating that all states allow mail-in ballots without IDs, it would further centralize federal election oversight and, according to the Institute for Free Speech, “[e]xpand the universe of regulated online political speech (by Americans) beyond paid advertising to include, apparently, communications on groups’ or individuals’ own websites and e-mail messages.”
The legislative maneuverings include the ‘‘Judiciary Act of 2021,’’ which would simply expand the Supreme Court to twelve members plus the chief justice. This move, which would amount to adding four Democrat-approved justices, would essentially effect a legislative takeover of the Supreme Court, as the Democratic-controlled Supreme Court would increasingly “legislate from the bench” and likewise expand the power of the Democratic-controlled legislative and executive branches beyond official perimeters. The odds of its passage, as is, are slim, but the overture is indicative of an attempted power grab not seen since FDR.
But the most conspicuous sign of the nearing consolidation of totalitarian government is the effective merger of corporate and state functionaries, with corporations and other organizations acting as appendages of the government and enforcing corporate-state desiderata. The indications of this merger are so many and sundry that any exhaustive recounting of them would entail a book-length treatment.
But take, for example, the calls by Congressperson Maxine Watters (D-CA) that “protestors” “get more confrontational” if the Derrick Chauvin verdict is unacceptable. Given the widespread rioting since George Floyd’s death, Watters’s language is a call to nationwide insurrection. Yet this language meets the approval of the corporate-government-media complex, despite the Left’s insistence that Trump had done just that before the Capitol breach. Libertarians should take note of the double standard not as a sign of the continued diminishment of the Republican Party but of a doublespeak characteristic of totalitarian regimes.
The most conspicuous example of a corporate-state merger is the extension of governmental power to corporations and other organizations with the covid crisis response measures, which have now exceeded lockdowns and masking to include the issuance of vaccine passports that corporations and other organizations may enforce or are already enforcing. The best hope for resisting these totalitarian measures is a refusal on the part of state and local governments to allow such corporate implementations of governmental dicta.
The old saw that “these are private companies” does not hold water, because clearly these corporate bodies have been enrolled as state apparatuses. Operation Warp Speed was rolled out by the federal government and has enlisted private organizations—first and foremost Big Pharma—to execute it. The state has enabled Big Pharma to profit enormously by instituting a state-of-emergency regime which in the US makes non-FDA-approved vaccines legal. On the other hand, Big Pharma—along with the World Health Organization, the Centers for Disease Control and Prevention, and the National Institute of Allergy and Infectious Diseases—legitimizes the state-of-emergency regime, which in turn augments state power.
The enrollment of corporations in the scheme to vaccinate the population and to require such vaccinations for social participation should not be considered in terms of the prerogatives of private organizations but as part of the incursions of the state into private industry. What we are witnessing, and should be resisting, is a merger into a corporate-government complex, wherein government can bypass the legislative branch and enforce unpopular mandates by colluding with corporations and other organizations to make “policy.”
Perhaps the most egregious element of this corporate-state stranglehold on the population is the participation of Big Digital and the mainstream media. Big Digital conglomerates eliminate media outlets and voices that challenge the official covid narrative, including information about lockdowns, masking, and vaccinations, although the official narrative has not only changed willy-nilly but also has been proven factually wrong, as well as socially devastating. Big Digital and the media serve both the state and Big Pharma by eliminating oppositional views regarding the lockdowns, masks, and vaccines, and by pushing fear-inducing propaganda about the virus and its ever-proliferating variants.
As I have written in Google Archipelago, Big Digital must be considered an agent of a leftist authoritarian state—as a “governmentality” or state apparatus functioning on behalf and as part of the state itself. “Governmentality” is a term that should become well known in the coming days and weeks. I adopted the term from Michel Foucault and have emended it to refer to corporations and other nonstate actors who actively undertake state functions. These actors will be doing this in droves with vaccine passports, which will vastly augment state power under a state-corporate alliance.
Similarly, other major corporations perform state-sanctioned roles by echoing and enforcing state-approved ideologies, policies, and politics: indoctrinating employees, issuing woke advertisements, policing the opinions of workers, firing dissidents, and soon demanding vaccine passports from employees and customers.
The overall tendency, then, is toward corporate-state monopolization over all aspects of life, with increasing control by approved principals over information and opinion, economic production, and the political sphere. As the consolidation accelerates, the broad global state will require the elimination of noncompliant, disaffected, and “untrustworthy” economic and political actors. In the United States, with the elimination of political opposition, the tendency is toward uniparty rule, and with it, the merging of the party and state into a singular organ.
Listen to the Audio Mises Wire version of this article.
In recent years, it seems that the nation’s CEOs and billionaires are increasingly willing to drop the pretense that they are politically neutral entrepreneurs who simply want to go about their business.
Last week, for example, more than a hundred CEOs met to plot ways to punish the people of Georgia by “stopping investments in states” that pass laws unapproved by the billionaire class.
This comes in the wake of a decision by Major League Baseball—a collection of billionaire-owned sports teams—to punish residents of Georgia for the fact a tiny number of politicians there passed legislation designed to lessen voter fraud. In retaliation, MLB decided to move the league’s all-star game so as to deny the residents of Atlanta the economic benefits of hosting the game.
This comes only a few years after Apple CEO Tim Cook led a corporate campaign to boycott Indiana after Cook and Marc Benioff (the CEO of Salesforce) demanded the people of Indiana be punished. This was because the Indiana legislature passed a law which some billionaires decided was insufficiently pro-LGBT.
These examples, however, constitute only a small and relatively innocuous part of the political scheming and lobbying in which powerful CEOs, billionaires, and investors routinely engage.
Certainly, wealthy CEOs are happy to throw their weight around in pursuit of social policies they like. But while the CEOs’ calls for boycotts and retribution against entire populations of various states makes for good headlines and talk radio, the billionaire class inflicts far more damage on ordinary Americans through other means.
It is not unusual to find large corporate interests like big banks, Silicon Valley firms, and Wall Street investors calling for a wide variety of policies which transfer wealth from the general public to the well-lined pockets of the monied classes. These can include monetary policies that benefit the wealthiest Americans, as well as tax policies and regulations that favor large well-established firms at the expense of everyone else.
Unfortunately, this is nothing new, and it has always been the case that well-heeled pressure groups attempt to turn their financial resources into political power.
Free Markets vs. the Plutocracy The potential danger of this situation was not lost on the classical liberals (i.e., the libertarians) of generations past, who opposed "the privileged" among the wealthy who sought to exercise political power.
Specifically, it was the Jeffersonians, the Jacksonians, and other advocates of free markets and laissez-faire who attacked these monied groups under a variety of names. Names like “stock jobbers,” the “new aristocracy,” the “scrip nobility,” and “the plutocracy” have all been employed to draw attention to a wealthy elite which manipulates Congress and the central bank in schemes of economic exploitation.
The Classical Liberals and Economic Exploitation This language of “exploitation” might strike some readers as odd. Unfortunately, a certain naïve view of social classes has become popular among some conservatives and libertarians who think that that the concept of “class warfare” was invented by the Marxists. Moreover, some even insist that the wealthy classes pose no threat to political or market institutions, and that the wealthy seek only to mind their own business.
But, as historian Ralph Raico has explained, the idea of exploitation of one class by another was, in fact, pioneered by the classical liberals. It was these liberals who well understood that the power of the state could be harnessed by one group for the purposes of extracting resources from another group. Left to itself, of course, the marketplace does not foster exploitation, as market activities are voluntary. Once the state is involved, however, the coercive power of the regime changes the equation. The key to success in exploiting others lies in harnessing the power of the state to carry out the exploiters’ schemes. The wealthy have never been immune to this temptation.
[Read More: "Financialization: Why the Financial Sector Now Rules the Global Economy" by Ryan McMaken]
We find these views in an early form in America in the thinking of the Jeffersonian theorist John Taylor of Caroline. Taylor decried the urban investor class that sought to manipulate the new nation’s financial policies to serve this rising plutocracy’s own ends. Taylor, according to Raico,
was outraged by what he saw as the betrayal of the principles of the American Revolution by a new aristocracy based on "separate legal interests," the bankers privileged to issue paper money as legal tender and the beneficiaries of "public improvements" and protective tariffs. American society has been divided into the privileged and the unprivileged by this "substantial revival of the feudal system.”
The threat of this new “aristocracy” had certainly not lessened by the 1830s, when the Jacksonian William Leggett pointed out that the US had attained its own homegrown exploiter class to rival the haughty ruling classes of the Old World. Referring to the ostentatious palaces erected by the wealthy elites of Genoa, Leggett asked,
Is there no parallel for it in our own [country]? Have we not, in this very city, our “Street of the Palaces,” adorned with structures as superb as those of Genoa in exterior magnificence, and containing within them vaster treasures of wealth? Have we not, too, our privileged orders? Our scrip nobility?The term "scrip" refers to unbacked or inflationary banknotes issued by central banks or government-favored private banks. Aristocrats, clothed with special immunities, who control, indirectly, but certainly, the political power of the state, monopolise the most copious sources of pecuniary profit, and wring the very crust from the hard hand of toil? Have we not, in short, like the wretched serfs of Europe, our lordly masters, “Who make us slaves, and tell us ‘tis their charter?”
For Leggett, the answer to all of this, of course, was yes. To see this new class of plutocrats, Leggett observed, one need only “walk through Wall-street.” Leggett went on to suggests that if anyone “asks concerning the political power” of these Wall Street elites,
he will ascertain that three‐fourths of the legislators of the state are of their own order, and deeply interested in preserving and extending the privileges they enjoy. If he investigates the sources of their prodigious wealth, he will discover that it is extorted, under various delusive names, and by a deceptive process, from the pockets of the unprivileged and unprotected poor. These are the masters in this land of freedom. These are our aristocracy, our scrip nobility, our privileged order of charter‐mongers and money‐changers!
Plutocrats or Private Entrepreneurs? On the other hand, the great libertarian sociologist William Graham Sumner was careful to note that not all wealthy people are plutocrats. “[W]e must make some important distinctions,” Sumner writes. “Plutocracy ought to be carefully distinguished from ‘the power of capital’…. A great capitalist is no more necessarily a plutocrat than a great general is a tyrant.” In other words, the plutocrats are not simply the factory owners who are on the receiving end of Marxist claims that all capitalists necessarily exploit their workers.
Rather, according to Sumner, the plutocrat is something very specific. Modern plutocrats “buy their way through elections and legislatures, in the confidence of being able to get powers which will recoup them for all the outlay and yield an ample surplus besides.”
That is, plutocrats are political operatives who employ the power of the state to accomplish political and financial ends. Moreover, the plutocrat
is a man who, having the possession of capital, and having the power of it at his disposal, uses it, not industrially, but politically; instead of employing laborers, he enlists lobbyists. Instead of applying capital to land, he operates upon the market by legislation, by artificial monopoly, by legislative privileges; he creates jobs, and erects combinations, which are half political and half industrial …
Today's Plutocracy So, who are the plutocrats of today?
Certainly, this group includes those who seek to blackmail state legislatures with boycotts and pressure tactics. But we find plutocrats using more subtle tactics as well.
For example, Amazon corporation now supports raising the minimum wage. This may seem like some great populist and magnanimous move on Amazon's part. But it is just what we've come to expect from plutocrats. In fact, Amazon's senior managers know that it can endure paying a higher wage than can Amazon's smaller and less capitalized competition. Smaller operations have fewer financing options to weather a cash flow crunch and are thus more financially fragile. Basically, Amazon is likely to support a wide variety of government regulations, because government regulations are anticompetitive. Amazon, of course, being the dominant firm, is motivated to crush the competition through state action. This is partly why Jeff Bezos came out in favor of a hike in the corporate tax. He's just hoping to stay on top, and while a tax hike is unfortunate for him, it's even worse for the competition that Bezos hopes to destroy through his political lobbying.
We see similar forces at work when plutocrats like Mark Zuckerberg call for more regulation of social media companies. Zuckerberg is speaking as head of the industry's largest, most capital rich, and most dominant firm. Now that he's on top, he's fine with more regulation, which will hurt small competitors most. (Social media companies, of course, are also happy to buy favors from the regime by deleting user comments and punishing users who annoy regime operatives.)Silicon Valley overall benefits mightily from countless government contracts and it provides and maintains much of the infrastructure employed by the Pentagon and American law enforcement agencies. According to a Tech Inquiry report on Silicon Valley’s connections with government agencies, there is no “systemic divide” between Washington and Silicon Valley. The two now have a symbiotic relationship.
But perhaps the most subtle form of exploitation practiced by the plutocrats occurs through the central bank, and this is why the Jeffersonians and Jacksons focused so much on the role of the central bank throughout the nineteenth century. Leggett, after all, is known for calling for "the separation of bank and state."
The advantages offered to plutocrats through central banks have been similar for more than two centuries, but in today's world these advantages can be seen in the fact that central banks are now in the business of pushing up stock prices for the benefit of Wall Street and large public companies. Thanks to the "Greenspan put," for example, the Federal Reserve has now for three decades been in the business of propping up stock prices. Now, we barely even notice when stock prices soar upward even during periods when millions of workers are laid off and national production collapses. "Stock prices must always go up" is essentially now federal policy. This in itself further helps explain why the plutocrats so often come out in support of higher taxes and a bigger regulatory state. As David Stockman observed, people like Bezos and the Wall Street and Silicon Valley elite:
have been made so insanely rich by the Fed’s egregious stock market inflation that they no longer care if their businesses are inconvenienced or even deeply harmed by schemes like the Biden [tax hikes]; and, worse still, have no idea about how real, sustainable wealth is generated or that free market prosperity is not at all a sure thing when the state becomes an unhinged wrecker of honest money, fiscal rectitude and financial discipline.
Why worry too much about taxes or regulation when you know you'll be bailed out by the Fed? Stockman continues:
By and large these new titans are not geniuses. They are bubble riders who were in the right place at the right time. And after years of the Fed’s massive inflation of financial asset prices they have become totally corrupted—politically, intellectually and otherwise.
In all likelihood, they don't even know how they got rich. But since they are rich, they conclude they must be very smart, and therefore they're now entitled to run the country; to punish people who live in red states, and run lesser business owners into the ground using the power of the state.
The nation's billionaires and megacorps benefit from central banking schemes in other ways as well. Ultralow interest rate policies mean an endless tsunami of cheap debt. Nonetheless, the focus has remained on lending to the lowest-risk firms, which means there's far less financing available to smaller start-ups and other riskier enterprises. Low rates also mean financially conservative small-time investors can only earn very small returns on their investments. Generally, it's only the wealthy who can indulge in high-risk yield chasing, which further enriches the wealthy as others stagnate. The end result is more liquidity for the plutocrats while the newcomers fight over scraps.
[Read More: "Larry Summers Reminds Us That Federal "Stimulus" Mostly Exists to Help Wall Street" by Ryan McMaken]
The Fed now buys corporate debt, and for more than a decade has been buying up assets in order to prop up what would have been the ailing portfolios of the nation's megabanks and investment firms. The Fed's monetary inflation leads to immense amounts of asset inflation not only in stocks, but in housing prices as well. This impoverishes first-time home buyers and renters, but benefits those who are already wealthy—and own lots of these assets.
It's all part of a well-established scam that the laissez-faire liberals identified long ago. The plutocrats hope to keep it going forever.
“Threats to freedom of speech, writing, and action, though often trivial in isolation, are cumulative in their effect and, unless checked, lead to a general disrespect for the rights of the citizen.”
~ George Orwell
In early December I asked Jim Grant how to reconcile exuberant financial markets with economic reality that reads like dystopian fiction. He responded,
I’m not sure there’s much distinction. To me, the current form of dystopia is the bubble form. So I think this is the year of the dystopian bubble.
The opening pages of the new decade feel like we’re living through a combination of George Orwell’s 1984 and Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds. On the day the 2020 election results were to be certified in the Senate, a mob from the losing side surrounded and actually breached the Capitol. The outgoing president was accused of inciting a riot, threatened with impeachment, and banned for life on Twitter. Despite the chaos, stocks shrugged it all off and rallied to new highs.
The following weekend cover of Barron’s, “The Case for Optimism,” captured the manic side of the dystopian bubble perfectly. Its editorial staff sees a silver lining in practically every cloud:
[T]his is a market determined to march higher, and it’s not about to be derailed—even by historic mayhem in the nation’s capital. Stocks are rallying on the trillions of dollars in stimulus that may only be accelerated under the new administration. A chaotic political season is winding down, while the economy is gearing up for a postpandemic reopening.
Investors need to keep their eyes forward and look ahead to a Joe Biden presidency: to more-predictable domestic policies, smoother trade relations, and additional efforts to revive the economy. Now might not be a good time to own anything defensive.
Still, Barron’s acknowledges a new set of political risks:
That’s not to say that a Washington controlled by the Democrats…will be entirely friendly to investors. The Democratic agenda includes corporate and individual tax increases, heightened regulatory oversight, and such ambitious social and economic policies as a Green New Deal, health-care reform, and student-loan forgiveness.
With bigger government on the way, what could possibly go wrong?
Making America Great Again During the first presidential debate in September 2016, citizen Donald Trump trashed the 7.5-year Obama-Bernanke-Yellen bull market, calling it “a big, fat, ugly bubble.” The Fed’s balance sheet has since expanded 63 percent, the national debt grown 41 percent (tacking on $8 trillion), and the budget deficit multiplied 5.5 times. Meanwhile, US stocks, as measured by the S&P 500, have percolated another 80 percent.
Former president Trump may or may not suffer from narcissistic personality disorder, but he clearly doesn’t lack for confidence. One of the symptoms of NPD is grandiosity; “Make America Great Again” was always a delusion.
While the incoming administration promises to “build back better,” a betting man should expect more of the same; in fact, much more of the same.
Filling the Political Swamp American politics has been a quasi-one-party system at least since the days of Camelot (1960 election of JFK), with Democrats pushing the envelope toward big government and Republicans offering little principled resistance while providing the illusion of healthy debate, acclimating themselves to the political swamp in the process. The two-party system officially died in 1964 when Barry Goldwater was defeated in a landslide by Lyndon Baines Johnson. Goldwater was the last of a dying breed cast in the mold of the Old Right: an anti–New Dealer with a Cold Warrior streak, a classical liberal who called himself a conservative.
Richard Nixon was the first in a long line of establishment Republicans. While ending the Vietnam War, his administration consolidated the gains of LBJ’s Great Society programs, created the EPA (Environmental Protection Agency), OSHA (Occupational Safety and Health Administration), and ERISA (Employee Retirement Income Security Act), declared wars on cancer, drugs, and inflation, and on August 15, 1971, severed the last ties of gold to the US dollar. The Watergate scandal ended Nixon’s political career, but it was Goldwater’s threat to back the impeachment process that sealed his fate.
The upward march of statism has continued unabated with some brief pauses to catch our breath: Ronald Reagan was a throwback to Goldwater and Trump perhaps a less couth version of Reagan, each a watered-down version of his predecessor. Neither was willing or able to stem the tide of debt, deficits, and money printing.
Say what you will about Trump, as Lew Rockwell remarked after his improbable 2016 election victory, his most endearing quality is that “all the right people hate him.” The political left and establishment right are giddy over his defeat and both want to drive a stake through his heart and the populist movement he represents.
The 2020 election formalizes the transition to one-party rule in the United States.
The Pursuit of Truth “A society becomes totalitarian when its structure becomes flagrantly artificial: that is, when its ruling class has lost its function but succeeds in clinging to power by force or fraud.”
~ George Orwell
All (or nearly all) politicians lie, but those on the left take the art form to a new level. To understand why requires examining the mind of the progressive.
After the Capitol breach on January 6, a progressive on Facebook said of conservatives, “We’re going to drag them into the 21st century kicking and screaming if we have to.” The Left envisions a socialist utopia, the inevitable slope of human progress. Their role is to bring this about by any means necessary…and to run things, of course. Truth is a fuzzy concept, only to be bent and twisted to serve the state. Justice does not apply to the individual, but instead becomes an arbitrary concept used to advance the state under cover of the “common good” or “social justice.”
Progressives tend to deny objective truth yet hold the belief that central planners know what’s best for the rest of us. But how can they know without the existence of truth? Orwell referred to such holding of two contradictory ideas at the same time as “doublethink.” Another example is the notion that political power ought to be concentrated and wealth dispersed. Democracy is yet a third example: the people are seen as ignorant rubes but can be relied on to choose omniscient and caring rulers. Democracy was as feared as monarchy by the founders, another reason why the Left is tearing down statues and obliterating history.
Capitol Breach “The people will believe what the media tell them they believe.”
~ George Orwell
What exactly happened in Washington, DC on January 6?
Whenever a major event like this takes place that attracts national attention, I go through a process: What can be proven with minimal effort and a high degree of certainty? What is highly suspicious, but harder to prove? Who benefits? Who is willing to bend the truth to promote their agenda? (The study of history follows a similar process.)
Did President Trump incite a riot? This should be the easiest question to answer, yet received the least scrutiny. The media simply repeated the accusation over and over with little evidence until it became accepted as truth.
In the initial rush to judgment, how many people actually took the time to listen to Trump’s speech? Ann Althouse, an emerita professor of University of Wisconsin Law School, read the full transcript and listed the seven most violence-inciting statements. Ranked #1:
Together we are determined to defend and preserve government of the people, by the people and for the people.
Trump mentioned the Capitol just three times in a speech that lasted an hour and thirteen minutes, including:
I know that everyone here will soon be marching over to the Capitol building to peacefully and patriotically make your voices heard.
Is this why Trump’s allegedly incendiary tweets were so quickly erased? Once the Capitol trespassers went home, why not put the incriminating evidence back up for all to see?
Other questions are more difficult to answer with hard proof. Was the election stolen? Was the Capitol breach a false flag operation? There is plenty of evidence in support, but the left media has no interest in following leads that don’t fit their narrative. Standard practice is to either dismiss promoters of such theories as conspiracy nuts or repeat the lie that the claims have been disproven.
During his speech at The Ellipse in DC, Trump spent a good half hour going over his allegations of election fraud and unlawful behavior from states in their rush to set up mail-in voting. My father is a constitutional expert (five years a regular on a weekly radio show on the subject). After countless hours of research, he felt the Trump legal team had a strong case, especially regarding Pennsylvania Act 77’s conflict with the Pennsylvania Constitution.
These claims never saw the light of day, consumed by the political swamp. If the Democrats were so certain there was no impropriety, why not give Trump’s baseless charges a hearing? The last opportunity for Republicans to air their grievances was at the election certification on January 6, conveniently interrupted by the mayhem in the Capitol that day.
“Applying the classic legal question ‘cui bono?’ (‘who benefits?’), it is clear that Democrats, anti-Trump establishment Republicans, the leftist media, and TDS-sufferers all are victorious,” observed Lew Rockwell.
Projection In The Road Less Traveled, author Scott Peck claimed that mental illness consists of “an interlocking system of lies we have been told and lies we have told ourselves.” As those on the political left become further empowered and unhinged from reality, they increasingly make Freudian slips, accidentally revealing their methods and intentions. After the events of January 6, president-elect Biden accused Trump’s acolytes of the Big Lie over election fraud, even citing Nazi propagandist Joseph Goebbels. “The degree to which [a lie] becomes corrosive is in direct proportion to the number of people who say it,” Biden explained.
Psychological projection is the Big Reveal.
Big Brother “We know where you are. We know where you've been. We can more or less know what you're thinking about.”
~ Eric Schmidt, Google CEO, 2001–11
In the lead-up to the election, Facebook and Twitter censored conservative users, forcing them to leave in droves for alternative platforms like Parler. According to CNN Business, “The platform became the most downloaded app on the weekend of November 8—the day major media outlets called the election for Joe Biden.” A month later Parler had 2.3 million active users which exploded to 15 million after the Capitol breach. (Twitter reported 187 million daily active users as of September 30.)
Twitter initially put Trump’s account in the penalty box for twelve hours but two days later banned him permanently. That weekend brought a wave of purges from social media companies in which Twitter suspended seventy thousand “far-right” accounts. Parler shot to #1 in Apple’s App Store on Saturday but by Sunday evening had been kicked off the Apple and Android (owned by Google) platforms. Meanwhile, Amazon suspended its cloud hosting services, effectively turning out the lights.
“Don’t Be Evil” How did Silicon Valley, which was largely apolitical and libertarian leaning during the personal computer and networking waves of the 1980s and 1990s, become a virtual appendage of the surveillance state in a single generation?
From the turn of the millennium, the internet has been an incredibly disruptive force, replacing the old personal computer-centric tech trees with aggressive young saplings in online search, e-commerce, social media, cloud computing, etc. The new generation of founders leaned much further to the left and became fabulously wealthy, especially during the liquidity-driven bull market of the past twelve years.
Envy was also a factor. Microsoft had been relentlessly accused by competitors of acting “unfairly” and being a monopolist, leading to a landmark antitrust case in 1998 brought by the Department of Justice. Bill Gates quickly learned that sending an army of lobbyists to Washington, DC was well worth the investment. Today, Big Tech is a major contributor to political campaigns (overwhelmingly funding Democrats).
A third factor was the war on terror, whose fuse was lit on September 11, 2001. According to Ron Paul,
“Big Tech” long ago partnered with the Obama/Biden/Clinton State Department to lend their tools to US “soft power” goals overseas. Whether it was ongoing regime change attempts against Iran, the 2009 coup in Honduras, the disastrous US-led coup in Ukraine, “Arab Spring,” the destruction of Syria and Libya, and so many more, the big US tech firms were happy to partner up with the State Department and US intelligence to provide the tools to empower those the US wanted to seize power and to silence those out of favor.
In short, US government elites have been partnering with “Big Tech” overseas for years to decide who has the right to speak and who must be silenced. What has changed now is that this deployment of “soft power” in the service of Washington’s hard power has come home to roost.
Big Trees Fall Hard Will the technology forest rejuvenate itself as it has so many times in the past? Jeff Deist, president of the Mises Institute, sees green shoots:
The underlying ideology, the impulse towards freedom which includes free communications and speech, is not so easily quashed. And for that reason, I'm actually quite optimistic about a highly decentralized future where we don't have these huge gatekeepers like Google search, or Amazon Web Services, or Facebook and Twitter and Instagram as the only big 800 lb. gorillas in social media.
The business models of the tech giants could be in for a rude awakening. Huge swaths depend on trust, especially social media and cloud services. If censorship and cancel culture intensify, privacy will become a growing issue!
As a Big Tech contact tells me, the free market is already working to solve this problem:
Tim Berners Lee [known as the inventor of the World Wide Web] is well on his way to creating a Facebook called MeWe that is social media with paywall communities, no bots, no censorship other than by a channel owner. Dave Rubin has his own version called Locals.com that is backed by Peter Thiel protégé and Palantir CEO Joe Lonsdale. Tulsi Gabbard just announced a channel, joining Andy Ngo, Scott Adams and WalkAway star Karlyn Borysenko.
Talent will increasingly leave the rotting mature trees for vibrant saplings that offer creative freedom and opportunity:
I think there will be a financial price to pay for Twitter and Facebook if these alt platforms can keep a connection open. Already the CEO of Gab said that he had thousands of Silicon Valley insiders from high level executives to engineering talent contacting him asking him for a position. Gab is not reliant on any of the big cloud providers.
If high profile engineers and business people in Big Tech companies see this as the final straw then there will be internal pressure on those companies. It could be in the form of open dissent as pressure to reform or just silently leaving for a non-woke company.
I think there is a lot of pent up frustration at the wokesters who have ruled the roost for the past 12 years and we may see a talent drain which some smart and wealthy financiers will see as an opportunity to make a move and seize market share or start some cool new thing. This is the early innings of a shift that may turn out to be a second chance for those of us who have spent the past 10–12 years suffocating in the wokester's soft tyranny of many software companies.
Promoting the state’s false narratives can be quite destructive to a company’s brand. College and professional sports in the US learned that lesson the hard way as they backed the BLM movement last year, only to see ratings plummet. “Get woke, go broke” has become a rallying cry of departing fans.
As I wrote last November, “Nature works against bigness. Species exhaust food sources, monopolies invite competition, empires spread themselves thin.” Big Tech appears to be destroying itself from within, a victim of its own hubris and toxic culture. Worse, it has tied its fortunes to the most termite-infested sequoia in the forest: the state.
By Hatchet, Axe, and Saw Do the tech behemoths need to be regulated or broken up? Many think so, notably many who lack faith in markets.
According to Eric Savitz, who writes the Tech Trader column for Barron’s, “president-elect Biden, like Trump, has called for the elimination of Section 230 [the clause in the Communications Decency Act of 1996 which provides immunity from third-party content for website publishers].”
This would have a chilling effect on protected speech online and build a protective moat around the tech giants by drowning their upstart competitors in red tape and potential legal liability.
Interventions will only impede the market. As intellectual property lawyer Stephan Kinsella warns, “The only just solution is to shame them and build alternatives.”
Conclusion So far, investors are unfazed by the growing number of black swans lining up against Big Tech. Since the Capitol breach, Twitter’s stock has taken a 10 percent haircut, while Facebook has rallied. With $3.7 trillion in market cap at stake at Facebook, Twitter, Amazon, and Google (10 percent of the S&P 500), could a lurch to the political left unwittingly pop the everything bubble?
As Charles Mackay so wisely stated 180 years ago,
Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.
The recent GameStop short-squeeze drama has riveted financial markets. Given the historic unpopularity of short sellers (e.g., Holman Jenkins has written that “short-selling is…widely unpopular with everyone who has a stake in seeing stock prices go up”), the resulting heightened invective against them is not a surprise.
Unfortunately, an intensification of this rhetoric could lead to unwarranted broader restrictions on short selling, indicated by the politicians already calling for hearings that could be used to do just that. It would hardly be the first such abuse. For instance, when Joe Biden became vice president, he was replaced in the Senate by Edward Kaufman, whose first legislative initiative, after “a lobbying campaign by financial institutions and other companies, which have experienced sharp declines in their stock prices, and their allies in Congress,” would have restricted short sales, according to the New York Times.
That danger requires us to think more carefully about short selling than most have seemed willing to do.
To see to the core of the issue, we must recognize the bias from the self-interest of current stockholders, firm managers, stock exchanges, and a host of others who have an interest in higher prices for the assets they own, not to mention regulators whose oversight role has often been better performed by short sellers. That could certainly explain their criticisms, whether they are justified or not. But short selling benefits society via market prices that more quickly and accurately reflect reality, not to mention provide more liquidity and reduced bid-ask spreads that make markets work better. As finance professor Joshua White said, “Academic research on that is very clear. If we didn’t have short-sellers in the market then the stock prices would potentially be too high,” or in the words of Tim Fernholz and John Detrixhe, “Studies have found strong evidence, around the world, that fewer constraints on short-selling contributes to more efficient markets.”
But the value of short selling in generating more accurate information doesn’t keep the misguided criticisms at bay.
Short sellers are portrayed as heartless opportunists, seeking and benefiting from bad outcomes. But they are no different from doctors who profit from our illnesses and teachers who benefit from our ignorance, or insurance companies who benefit from the risk we face. In fact, short selling provides added incentives to discover valuable information, which is often the scarcest commodity in a world of uncertainty and change.
Negative information is just as valuable for making the best use of scarce resources as positive information. When research leads investors to negative conclusions, short selling allows them to profit when they correctly anticipate the market’s response as that information becomes more widely known. It also allows those who are not currently stockholders in a firm to profit from the earlier discovery of negative information. In both cases, the result is that all of us make fewer mistakes from relying on less accurate prices. And short selling cannot depress prices long if underlying circumstances do not warrant it.
That payoff to negative information is why short sellers are often the most effective market policemen, often uncovering fraud, questionable accounting, and management misbehavior that regulators fail to detect or prevent. That is also why target firms often assault short sellers with attack ad campaigns and lawsuits. But a 2004 National Bureau of Economic Research (NBER) study revealed that targets often had something negative to hide because “firms taking anti-shorting actions have in the subsequent year very low abnormal returns.”
Short selling is also common in business. Farmers selling in futures markets when they plant do the same thing. So do home builders and others producing to order. As the New York State Commission on Speculation noted over a century ago, “Contracts and agreements to sell, and deliver in the future, property which one does not possess at the time of the contract, are common in all kinds of business.” There is no reason why such a commonly accepted business practice is harmful in the stock market.
Short sellers are also criticized whenever they are wrong, as in the case of GameStop (particularly because the big hedge funds did not take cover positions to limit their otherwise unlimited downside risk). But holding them to a standard of correct expectations is an impossible standard. No one has perfect foresight.
In sum, short selling is part of the information-revealing process that is the central advantage of the market process. In a world of uncertainty and change, information is the scarcest good, and short selling is an important source of additional information that would otherwise be lost.
Allowing short selling increases the number of people with an incentive to discover valuable information about firms’ prospects, by providing an added mechanism to benefit from information that turns out to be negative. Such information may not be as valuable as positive information for purposes of cheerleading, but it is just as valuable when people wish to make the best use of scarce resources.
There is no reason to assume negative information will be revealed to—or discovered by—those who are already owners of a particular stock. To attack or restrict short selling is then to restrict the market’s ability to elicit and integrate all available information.
Short selling, which allows profits to be made from negative information, is akin to another aspect of a competitive financial market—hostile corporate takeovers. Management groups who fail to make the best use of their company’s assets object to the prospect out of their own self-interest. But hostile takeovers provide a mechanism for even those investors who own no current shares in a firm to benefit from negative information. If a firm is poorly run, even someone with no initial position in a company can purchase shares at a price capitalizing its prospects under current management. By then accumulating enough shares, and taking over management, “takeover artists” can gain from eliminating inefficiencies and improving results. This expands the number of potential investors who have incentives to discover such negatives and “fix” underperforming companies.
Opposition to short selling also confuses correlation with causation. Selling short only lowers the price sooner than would otherwise occur. It cannot force the price down for long if the fundamental circumstances do not support it. Short sellers simply recognize negative information sooner. Their activity can begin the process of reducing market prices, but it is the negative information that causes stock prices to fall. And even when short sellers are wrong, they provide extra profit opportunities to those who expand their holdings at the temporarily low prices that result, a benefit ignored by those blinded by their exclusive devotion to “what’s in it for me?” Consequently, opposition to short selling is often no more than objecting to its effects on a particular stock that the opponent currently owns. The only principle involved is that of preventing any change that might lower the price of what one owns, ignoring the benefits to society from revealing more accurate information.
Short sellers are also attacked for allegedly spreading negative rumors that sometimes turn out to be false. But false positive rumors are regularly asserted by a far larger group who benefit by pumping up stock prices, from managers to brokers to financial talk show touts. But critics of short selling are only concerned about what they don’t benefit from.
Short sellers receive widespread condemnation. But it is undeserved. They take substantial risks to improve the information incorporated in market prices that we all rely on to improve social coordination as we seek to make the best of a world of unavoidable scarcity. The attacks against them are poorly thought out and often come from those whose real abuses or regulatory failings short sellers threaten to uncover. It makes more sense to sell their critics short than to sell them short.
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On October 6, 2020, the auditor general of Pennsylvania, Eugene DePasquale, released a status update on his ongoing audit of the Pennsylvania Department of Community and Economic Development (DCED) waiver process for businesses that appealed Governor Wolf’s covid-19 closure order. To everyone’s surprise, the auditor general concluded that his office discovered inconsistencies and puzzling decisions in the business waiver process.
On March 19, Governor Tom Wolf ordered businesses not categorized as “life-sustaining” to close in order to slow the spread of covid-19, however, businesses could request a waiver to remain open. Immediately afterward, numerous business owners and legislators complained that the waiver process lacked transparency. On April 30, the auditor general's office announced DePasquale would audit how DCED manages the waiver process. On September 14, 2020, US district judge William Stickman IV found Governor Wolf’s business closure order unconstitutional, stating that covid-19 orders from Governor Wolf and Pennsylvania secretary of health Rachel Levine violated, and continue to violate, the First Amendment right to freedom of assembly as well as the due process and equal protection clauses of the Fourteenth Amendment. William Stickman IV writes that despite having good intentions in addressing the spread of the virus, “even in an emergency, the authority of government is not unfettered.”
In the time from Wolf’s decision to close non-“life-sustaining” businesses to the lifting of the restrictions on April 3, 2020, the DCED received 42,380 exemption requests. The auditor general looked into those applications and found that more than five hundred businesses received answers from DCED that later changed. DePasquale said, “The waiver process appeared to be a subjective process built on shifting sands of changing guidance, which led to significant confusion among business owners.”
From the news release by Auditor General DePasquale:
Business owners typically received one of three answers from DCED: an approval of the request to remain open, a denial, or a statement that a waiver was not required to remain open. So far, auditors have found:
171 waiver applications were changed from “No” to “Yes”
151 waiver applications were changed from “No” to “Not Required”
73 waiver applications were changed from “Yes” to “No”
48 waiver applications were changed from “Not Required” to “No”
“Some owners of small businesses may not have had the knowledge to use the right ‘buzzwords’ in their justification for remaining open, or realized they could ask a legislator for help to navigate the process,” DePasquale said, noting that some businesses submitted multiple waiver requests.
Even more damaging was the request by the auditor general for Wolf to provide details on his communication with legislators and lobbyists about waiver requests, noting that “the Pennsylvanians deserve answers about the role that outside influence may have played in whether businesses were treated fairly and consistently.”
A Disturbing Disregard for Private Property and the Rule of Law As Ryan McMaken wrote, the lockdowns were an experiment concocted by government that made a mockery of basic human rights while essentially expropriating private property. Ludwig von Mises recognized the tendency by government wanting to control everything when he wrote:
All those in positions of political power, all governments, all kings, and all republican authorities have always looked askance at private property. There is an inherent tendency in all governmental power to recognize no restraints on its operation and to extend the sphere of its dominion as much as possible. To control everything, to leave no room for anything to happen of its own accord without the interference of the authorities—this is the goal for which every ruler secretly strives. If only private property did not stand in the way!
Robert Higgs in his book Against Leviathan: Government Power and Free Society articulates well the ingrained tendencies of government to try to grab as much power as possible. In particular, the tendency of government bureaucrats to take advantage of “emergencies” like covid-19 to consolidate and grab power.
More importantly, businesses and private citizens cooperate with the government and support many new regulations and government powers with a sense of patriotic duty. Slogans like “One little ask, wear a mask” along the roads in Delaware or the more general “I wear a mask not for myself, but to protect others. Do it not for yourself, but do it for others” instill in people the feeling and moral obligation that it is their patriotic duty to wear a mask because the USA depends on their actions.
Robert Higgs masterfully introduces the concept of regime uncertainty.
Private investment is the most important driver of economic progress. Entrepreneurs need new structures, equipment, and software to produce new products, to produce existing products at lower cost, and to make use of new technology that requires embodiment in machinery, plant layouts, and other aspects of the existing capital stock.
Regime uncertainty pertains to more than the government's laws, regulations, and administrative decisions. For one thing, as the saying goes, "personnel is policy." Two administrations may administer or enforce identical statutes and regulations quite differently.
Any business owner knows that predicting the future demand for products and services is not an easy task. Adding government rules and regulations to the mix, many would be entrepreneurs who decided to quit. Even more damaging, as Higgs points out, is the uncertainty surrounding the application of rules and regulations. Businesses and entrepreneurs are able to navigate a stable regulatory environment and adjust business plans to fulfill those requirements. However, once the ability to predict how rules and regulations will be interpreted by government bureaucrats, based who makes the decision and how the paperwork is filed, is no longer there, the shifting sands of government make it almost impossible to operate profitably. The small business owner suffers the most without the resources to fight the government. Larger corporations with ample resources to adjust to shifting rules and regulations and the ability to lobby and influence decision-makers are the winners in all this.
Pennsylvania’s business waiver process provides scholars with a good case study and example of Higgs’ regime and regulatory uncertainty principle. Public policy experts should take note of how convoluted and inconsistent the waiver process was. Defenders of government interference will point out that because of the sudden onset of covid and the urgency of implementing the waiver process naturally there would be problems. But why do public policy experts and government officials always have to believe that they can control and predict human behavior?
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Paraphrasing the late Murray Rothbard, the "two party" system in America during the twentieth century worked something like this: Democrats engineered the Great Leaps Forward, and Republicans consolidated the gains. Wilson, Roosevelt, and Johnson were the transformative presidents; Eisenhower, Nixon, and Reagan offered only rhetoric and weak tea compromises. In politics, being for something always beats being against something, and Republicans were never much against expanding federal power provided they had a place at the trough.
George W. Bush challenged this dynamic in the early twenty-first century. Despite his own intellectual incuriosity, he used the terrorist events of 9-11 to advance a particularly noxious "conservative" foreign policy and justify a growing domestic surveillance state. The results were plenty transformative, from the Ashcroft/Yoo doctrine of unitary executive power to initiating two disastrous Middle East wars. Renditions, CIA black sites, waterboarding, and Guantanamo Bay all became part of the national lexicon. And everyone got paid, from Big Pharma in the form of a Medicare Part D drug benefit to teachers' union bureaucrats supporting the Bush–Ted Kennedy alliance known as No Child Left Behind. Throw in the Orwellian Department of Homeland Security and its Transportation Security Administration, and Bush's most visible legacy may be forever ruining air travel in America.
Donald Trump is no George W. Bush. Today, despite all his bluster and the Left's absolute derangement toward him, Donald Trump leaves office as a caretaker president. His real record, not his rhetoric and Twitter persona, will prove to be astonishingly in keeping with the DC status quo. His America First talk on jobs and trade, his schizophrenic foreign policy, his actual actions with respect to immigration policy, and even his vaunted tax cuts were not all that different in substance than anything Hillary Clinton might have done. Trump's difference was tone, not substance, but along with his outsider status that was enough to earn him the vicious enmity of the Swamp.
We have essentially endured a four-year national paroxysm over nothing, and for nothing. Think about that. All of this hate and division was not rooted in "policy" whatsoever, but in the political class's hatred and contempt for even purely rhetorical challenges to its power.
So what will the Biden/Harris administration do?
For starters, they will assume only cowed opposition from the Mitch McConnell GOP. As Trump departs, national Republicans are eager and relieved to return to their role as the polite warmonger loser caucus. The party looks to wash away any vestiges of Trumpism and embrace the leadership of atavistic figures like Mitt Romney, Liz Cheney, and Nikki Haley. But Joe Biden and Kamala Harris clearly smell blood after recent events at the US Capitol and their Senate victories in Georgia, looking to fully repudiate Trump and hang the GOP in the process. More importantly, they are under tremendous pressure from their left progressive flank, having relied on Bernie Sanders and Elizabeth Warren supporters while championing Antifa, BLM, and LGBT causes as centerpieces of their campaign.
Therefore we should expect a muscular progressive agenda advanced by Biden, some of it in the first hundred days via executive orders of dubious legality. Helpfully, incoming White House chief of staff Ron Klain issued a memo outlining all the robust actions Biden will take immediately to remove any whiff of Donald Trump's presence from the Beltway.
We should expect national covid mandates and lockdowns, aggressive climate change regulations, Medicare for All legislation, student loan forgiveness, and a host of federal rules perversely focused on race, gender, and sexuality in government, schools, workplaces, and corporate boardrooms. Amnesty for immigrants will be front and center, along with DC and Puerto Rican statehood. Supreme Court packing will be a particularly contentious topic, as many Democrats think two Trump appointees are illegitimate and conservatives in the Senate see the judicial branch as the last bulwark against the Left.
As for taxes, the word is UP. They're going up. But despite his campaign promises, one suspects the Biden administration will slow play any capital gains tax hikes. An awful lot of blue state Americans enjoyed big stock market gains in 2020, and this may temper their enthusiasm for overcoming wealth inequality. Also telling will be whether Biden in fact pushes to change the particular tax rules for private equity firms known as "carried interest." And he will rush to restore the full deductibility of state income taxes, which the Trump tax bill limited, injuring wealthy taxpayers in high-tax blue states. After all, he knows his base.
Kamala Harris is the wildcard in this story. Has any US president in modern history been elected with the widespread expectation he would not complete his term in office? Not only will Mr. Biden be the oldest chief executive elected, but he clearly shows signs of cognitive decline and often stumbles to find words—as one would expect of a man his age. Harris's presidential campaign raised an uninspiring $40 million, more than half of which came from wealthy donors. She failed to generate excitement both in polls and at the ballot box, underperforming with her party's left flank and failing to win a single Democratic delegate or primary. Virtually no Democrats voted for her to become president.
By virtue of her age and status as a "person of color," Harris certainly leans left of her boss. He is the old war-horse for corporate Delaware; she is the youngish hip senator from progressive California. But if Joe Biden dies or steps down—both reasonably possible over the next four years—Harris surely becomes a transformative figure.
Either way, the Biden administration inherits a political landscape wildly favorable to it. Politicians, journalists, CEOs, and people of all political stripes (including libertarians) celebrate the deplatforming and unpersoning of Trump, making clear their contempt for and desire to punish his supporters.
Democratic socialists now discover their love of discrimination by "private companies," supporting Deep Tech purges of recalcitrant voices or anyone who dares question election legitimacy. Alternative social media site Parler takes "build your own platform" to heart, only to be excluded by Android and Apple app stores and kicked off its Amazon web hosting. BLM/Antifa activists who spent the summer burning buildings and calling for city police departments to disband sound like Nixonian champions of law and order when it comes to the halls of Congress. And left progressives learn to "love the bomb" as they cheer the military occupation of DC with twenty-five thousand National Guard soldiers over a nonexistent threat to Biden's virtual inauguration (look for permanent stationing of troops around Capitol Hill, like in any good banana republic). Fencing now surrounds the sacred Capitol building; apparently walls do work to keep mere citizens a good distance away from the "People's House."
Meanwhile populism, that dirtiest of dirty words used to describe democracy when the wrong guy wins, is entirely warranted when elites fail this badly. It won't just go away. If the Biden administration really wants to create a de facto class of political dissidents, particularly among the flyover Deplorables, they may find resistance to their new Reconstruction(!) stronger than they imagine. Populists are not insurrectionists or traitors, nor are they domestic terrorists. And politically vanquished people regroup and resurface in different forms, sometimes virulent forms.
Is mass democracy across a country of 330 million people the answer? Is any degree of subsidiarity permissible, to allow for local control and greater social cohesion? Or must states fully and finally become glorified federal counties, archaic throwbacks to old conceptions of America? If Biden or Harris truly wants to transform America, these are the questions they must grapple with. The Left is in no mood for reconciliation with Trump supporters, but punishment is not a policy. It is the act of tyrants.
[This is the transcript of the eponymous talk presented at the Mises Institute’s Ron Paul Symposium on November 7, 2020, in Angleton, Texas.]
“Don’t be evil” may no longer be Google’s official company motto, but it remains the last sentence of its Code of Conduct. As part of not being evil, Google maintains that “everything [it does] in connection with [its] work…will be, and should be, measured against the highest possible standards of ethical business conduct.”
Apparently, Google does not deem it unethical to fire an employee for expressing the research-based view that differences between the sexes/genders may include occupational proclivities. Google must not consider it unethical to blacklist conservative or otherwise nonleftist news sites, websites, and users. Google must believe that autocompleting searches with patent nonsense represents the highest ethical standards. Google maintains that factual search results representing the world as it is amounts to “algorithmic unfairness” and changing them to desired results using “Machine Learning Fairness” is highly ethical. That is, nonideological, nonaltered search results represent unfairness, while fairness is the result of informational affirmative action results manipulation—in some cases. Algorithmically ranking search results in favor of leftist or left-leaning politics and down-ranking conservative or right-wing sites is most ethical. It must consider rating the “Expertise/Authoritativeness/Trustworthiness” of websites using Wikipedia as meeting the highest ethical standards. Fact-checking only conservative or nonleftist news, often wrongly, is highly ethical. Discrimination against populist political movements and campaigns and favoring other, establishment movements and campaigns meets the highest possible standards of ethical business conduct. YouTube’s routinely demonetizing and censoring conservative or otherwise nonleftist content is ethical. Bombarding users with political ads based on their search profiles, and especially bombarding nonleftists with items having a leftist perspective, represents the highest ethics. Blatant declarations of the intent to prevent the reelection of a US presidential candidate using search rankings meets the highest standards of ethics, especially since “(1) biased search rankings can shift the voting preferences of undecided voters by 20% or more,” as Robert Epstein and Ronald E. Robertson conclude.
In the wake of the riots across US cities over the past several months, I ran a Google search for “left-wing violence.” The top two results, from The Guardian and the New York Times, respectively, were entitled “White Supremacists behind Majority of US Domestic Terror Attacks in 2020” and “Far-Right Groups Are behind Most US Terrorist Attacks, Report Finds.” This is a highly ethical result, no doubt, especially when information on leftist violence was sought and no shortage of such articles exist. This is especially ethical, since the search analytics industry has found that the top three search results on Google drive over 70 percent of clicks. The top ten search results for the question, “Will Democrats steal the 2020 election?” included five articles about the prospect of Trump stealing the election, while all ten of the top ten results for “Will Trump steal the election?” were actually about the prospect of Trump stealing the election.
All but leftists realize that Big Digital corporations like Google, Facebook, Twitter, Instagram, LinkedIn and others lean left and squelch opposing views—to the point of creating an alternate reality. But few ask why they are apparently leftist, let alone satisfactorily answering the question—to my satisfaction, that is. How are we to understand the blatant and well-documented leftist bias and the censorship of nonleftist views and sites by these companies? Why leftist? Is the internet leftist merely because those in Silicon Valley have been indoctrinated into leftism?
And should we adopt the view that since Google, Facebook, Twitter and others are private enterprises, they can be as biased and censoring as they like? After all, aren’t these private platforms and not public utilities, with no obligation to represent views with which they disagree? They are no more obliged to do so than I am obliged to allow some Antifa member into my home to spout his, her, or zir beliefs, right?
These are the kinds of questions I address in this talk. The answers should go a long way toward explaining the disavowed yet blatant attempts on the part of Big Tech internet companies to decide the 2020 election, and much, much more. In terms of the election, they’ve interfered in the election with completely favorable coverage of one candidate and unfavorable content along with the near-complete blackout of favorable content about another. They’ve likewise made a rigged election result appear to be a credible result. Then they’ve censored or banned everyone from the president on down from talking about how the election was rigged. That’s more than an in-kind donation. They may be considered accomplices in a federal election crime. They represent a fraud on public credulity.
- The Governmentalization of Private Industry In Google Archipelago, I argue that these Big Digital goliaths, or what I call the Google Archipelago, act as appendages of the state, at the very least. They are state apparatuses, or, to use a postmodern neologism, they are “governmentalities.” In a series of lectures entitled Security, Territory, Population, the postmodern theorist Michel Foucault introduced the term “governmentality” to refer to the distribution of state power to the population, or the transmission of governance to the governed. Foucault referred to the means by which the populace comes to govern itself as it adopts and personalizes the imperatives of the state, or how the governed adopt the mentality desired by the government—govern-mentality. One might point to masking and social distancing as instances of what Foucault meant by his notion of governmentality. While Foucault’s usage has merit (yes, Foucault exhibited a few redemptive, libertarian tendencies), I adopt and amend the term to include the distribution of state power to extragovernmental agents—in particular to the extension and transfer of state power to supposedly private enterprises. This governmentalization of private enterprise, and not the privatization of governmental agencies and functions that leftists like Foucault decry, is the real problem with “neoliberalism,” as I see it.
Or do they amount to the same thing? We are witnessing the governmentalization of private industry, the turning of supposedly private enterprises into state apparatuses, and the growth of the state through putatively private extensions of it.
- Governmentalities in Action For clear and pertinent examples of governmentalities in this sense, consider government contractors that comprise the so-called shadow government. As depicted in the documentary Shadow Gate—which was banned from YouTube after just one day—according to two whistle-blowers who worked for military and intelligence contractors for many years, government contractors like Dynology, Global Strategies Group, Canadian Global Information (CGI), and many others engage in intelligence projects that include interactive internet activities (IIA). Such “social media psychological warfare” and “social media influence operations” rely on masses of data that social media and other sources provide and are designed to influence individuals, groups, or populations to behave in ways desired by the “deep state,” or other customers. Desired behaviors include voting for particular political candidates; supporting desired political movements and outcomes; and opposing undesired political candidates, movements, and outcomes—both at home and abroad. According to the Shadow Gate whistle-blowers, social media psychological warfare, which includes fake news, was initially developed for intelligence agencies but has been used and sold by intelligence contractors independently. They claim that social media psyops were employed in an attempt to tie Trump to Russia and discredit his campaign. The dominant narrative, of course, is that it was used by Russia to benefit Trump’s election. According to the Shadow Gate whistle-blowers, it was also used to whip up the recent “protests” after the death of George Floyd, while other sources claim that and the hype about the protests was itself fear porn whipped up by Russia-initiated psyops. Still others maintain that the protests themselves were part of a Russian psyops campaign targeting black Americans.
What does this have to do with Google, Facebook, and other digital media companies? IIA operations use and mine their sites, apparently gaining immunity from “fake news” designations. But these platforms are more than passive participants in personal data mining, social media psychological warfare games, and social media influence operations. A brief look at their inception, funding, and histories should make this clear.
- State and State-Connected Funding of Google and Facebook First, both Google and Facebook received start-up capital—both directly and indirectly—from US intelligence agencies. In the case of Facebook, the start-up capital came through Palantir, Accel Partners, and Greylock Partners. These funding sources either received their funding from, or were heavily involved in, In-Q-Tel.
In 1999, CIA created In-Q-Tel, its own private sector venture capital investment firm, to fund promising start-ups that might create technologies useful for intelligence agencies. As St. Paul Research analyst Jody Chudley notes, “In-Q-Tel funded Thiel’s startup firm Palantir somewhere around 2004. In 2004, Accel partner James Breyer sat on the board of directors of military defense contractor BBN with In-Q-Tel’s CEO Gilman Louie. Howard Cox, the head of Greylock, served directly on In-Q-Tel’s board of directors.”
In the case of Google, as independent journalist and former VICE reporter Nafeez Ahmed has detailed at great length, Google’s connections with the intelligence community and military run deep. Ahmed details that relationships with DARPA officials yielded start-up funding, and direct funding from the intelligence community (IC) followed. The IC saw in the internet unprecedent potential for data collection and the upstart search engine venture represented a key to gathering it.
In 2003, Google began customizing its search engine under special contract with CIA for its Intelink Management Office, “overseeing top-secret, secret and sensitive but unclassified intranets for CIA and other IC agencies,” according to Homeland Security Today. In 2004, Google purchased Keyhole, which was initially funded by In-Q-Tel. Using Keyhole, Google began developing Google Earth.
Intelligence agency backers also included In-Q-Tel itself. In-Q-Tel’s investment in Google came to light in 2005, when In-Q-Tel sold its $2.2 million in Google stocks. A no-bid contract with the NSA sister agency, the National Geospatial-Intelligence Agency (NGA), followed in 2010. Google’s connections with the IC and military communities also involved personnel exchanges, including the acquisition of the former head of DARPA and Highland’s Forum cochair, Regina Dugan, who left the agency in 2012 to become a senior Google executive overseeing the company’s new Advanced Technology and Projects Group.
“From its inception, in other words,” Ahmed writes,
Google was incubated, nurtured and financed by interests that were directly affiliated or closely aligned with the US military intelligence community, many of whom were embedded in the Pentagon Highlands Forum.
Second, and lest I be accused of the genetic fallacy, it should be noted that Google technologies were developed largely in connection with the IC and military and thus bear the earmarks of IC and military interests. And Google’s contracts with the IC have continued. Moreover, these platforms and social media outfits fully cooperate with the IC and military, handing over data to the NSA upon demand and granting them backdoor access to user data. Google was a deep-state asset from its inception and remains one to this day.
Furthermore, it is possible that tools developed by the IC and military have been acquired by private contractors and are being used by these platforms and social media giants to influence the behavior of users of their services. In particular, former IC contractor Patrick Bercy alleges that social media psychological warfare tools that he developed for the Defense Department were acquired, possibly illegally, by General James Jones, formerly the National Security Adviser under then president Obama. In partnership with the Atlantic Council, where Jones is now the executive chairman emeritus, Facebook, Bercy alleges, is using social media psychological warfare tools, supposedly for the purposes of “restoring election integrity worldwide,” and “to combat election-related propaganda and misinformation from proliferating on its service.” It just may be that what is deemed “fake news” by Google and social media platforms represents the truth about the fake news that the platforms themselves are proliferating.
In short, Google, Facebook and others are not strictly private sector entities; they are governmentalities in the sense that I have given to the term. They are extensions and apparatuses of the state. Furthermore, these platforms are governmentalities with a particular interest in the growth and extension of governmentality itself. This includes championing every kind of “subordinated” and newly created identity class that they can find or create, because such “endangered” categories require state acknowledgement and protection. Thus, the state’s circumference continues to expand. Big Digital is partial to the interests and growth of the state. It not only does business with statists but also shares their values. This helps makes sense of its leftist bent and their preference for the deep state Democrats. Leftism is statism.
- Russia, Russia, Russia! Or Chy-na! This talk would be incomplete without a treatment of the “actually existing socialism” in our midst, including its most significant, official state form, namely “socialism with Chinese characteristics,” i.e., China. Much ink has been spilled and many airwaves have been congested with the “Russian interference” narrative. Nary a day goes by without multiple references to Russia’s attempts to influence or interfere in US elections using social media. Donald Trump has been consistently portrayed as Putin’s puppet, even after the “Russian collusion” narrative officially fell apart. Less has been written and spoken about possible influence and interference by the Chinese Communist Party, although one may hear about this from a few sources. The recent revelations about the business dealings of Biden & Son in China brought the issue to the fore in those few outlying media and social media outlets that didn’t seek to deep-six the story. I don’t mean to suggest that Russia does not attempt to interfere in US elections or other national concerns but rather to note that CCP influence and interference attempts go largely unremarked upon or are otherwise dismissed while having no less if not more significant implications, especially where free information exchange and expression on Google and social media platforms are concerned.
Likewise, it is worthwhile to consider the differences between the objectives of these respective state-driven domains. As National Security scholars Michael Clarke, Jennifer S. Hunt, and Matthew Sussex argue:
For the Russian Federation, which has emerged as the West’s chief spoiler, the goal has to been to exacerbate existing social divisions in liberal democracies, to undermine public trust in key institutions, and to boost narratives around a host of statist themes: anti-immigration movements, the “alt-right,” and trade protectionism. In this way, Moscow has played the role of a wrecker, seeking to destroy the liberal order rather than replace it. It has utilized diaspora communities, fringe media, and political activists on the margins of political discourse as proxies, and has facilitated the leaking of compromising information to promote false narratives and conspiracy theories. China, on the other hand, has pursued an arguably more sophisticated approach given that it seeks gradually to supplant the Western order rather than simply undermine it. Its efforts therefore have been geared primarily around obtaining longer-term leverage through multiple channels of influence among elites in politics, business, and society.
Of the many tactics it uses to advance its agenda of actively shaping foreign perceptions and behaviors, China practices what Victor Cha of the Center for Strategic and International Studies called “predatory liberalism.” China “leverages the vulnerabilities of market interdependence to exert power over others in pursuit of political goals.” China flexes its economic muscle to spread its ideology and guard its reputation. Examples include pressuring Apple to remove its HKmap.live app from iPhones sold in China due to pressure by Beijing because the app enabled “illegal behavior,” as protesters used it “to target and ambush police” and to “threaten public safety,” or so China claimed. Another involved the NBA. When Houston Rockets general manager Daryl Morey tweeted on October 4, 2019, in support of the Hong Kong protesters, he was pressured to delete his post and apologize for “offense” caused to the Chinese people. Serving as a proxy for the CCP, the NBA in turn precluded any economic damage to its Chinese market that such a rhetorical breach might have caused.
Big digital platforms including Google, Facebook, and Twitter not only support the extension of domestic statism, they serve the expansion of foreign state ideology and power as well. While propaganda, censorship, and surveillance have turned social media into instruments of totalitarianism in China, China has invested millions into propaganda campaigns on social media and beyond its borders to extend its influence. Buying and usurping user accounts on Twitter and creating fake accounts on Facebook, for example, China seeks to influence the perception of the regime as well as promoting its agenda. Although Google’s Project Dragonfly was canceled and it is unlikely that Google will establish a search engine operative in China any time soon, Google nevertheless maintains offices and employees in China and sells cloud, AI, and other services there.
In accommodating their state customers and ideological sponsors, the dominant search and social media platforms have come to resemble the governments that they effectively serve and reproduce. This is especially true where China is concerned. Google, Facebook, and Twitter have adopted the CCP’s penchant for the regulation of speech, the dissemination of propaganda, and the suppression of dissident views. A few examples of direct interventions in search-related and social media control should suffice:
Facebook blocked posts that referenced a Chinese virologist whose research traced the SARS-2 virus to a Wuhan lab.Six Chinese nationals now work on Facebook’s “Hate-Speech Engineering” team to produce algorithms that rank, and block content deemed too conservative, among other tasks.Twitter purged tens of thousands of accounts critical of the Chinese government just days ahead of the thirtieth anniversary of the 1989 Tiananmen Square massacre on June 4, 2019.Twitter employees train Chinese officials to amplify their pro-China messaging.YouTube has deleted comments critical of the Chinese Communist Party due to “error.”In a case of contradictory non-fact-checking, Twitter allowed over ninety thousand tweets from the beginning of April through May 2020 from two hundred diplomatic and state-run media accounts that suggested that the coronavirus originated in the US or the US military, among other claims casting doubt on its Chinese origin. These are but a few of the examples of influence campaigns and tactics employed by China, and they do not represent the most egregious cases of the censorship and propaganda we’re encountering. Most of the censorship and propaganda is domestically oriented and produced. My point is more about shared ideological commitments and tactics than anything else.
- Trump or Not-Trump How does all this figure into the election? It’s clear that this presidential election has not been a contest between Trump and Joe Biden per se, but between Trump and not-Trump. It has been a contest between a boorish, rambling, irreverent, and politically incorrect gatecrasher versus a corrupt veteran of the political class. The “resistance”—which includes the mainstream media, the social media and “globalist” oligarchy, the neocons, the better part of the intelligence community, and an assortment of leftist political activists and radicals—has aimed at destroying the prior and supporting the latter. The political establishment has shown its sheer cynicism by propping up an enfeebled, high-stakes influence peddler and having him taken seriously.
I’ve considered the possibility that the anti-Trump fervor has been based largely on aesthetic revulsion. Indeed, aesthetic revulsion has been cultivated and promoted by the sponsors of the resistance. But the sponsors of the resistance don’t hate Trump merely because he fails to reflect the image of the effete intelligentsia. After all, look at how they’ve rehabilitated George W. Bush. No, there’s more to it.
Trump is a rogue parvenu who threatens (or threatened) the political establishment, not because he has [or had the potential to “drain the swamp,” an insurmountable task for any president or administration, but rather because he is unpredictable and might have stumbled upon and exposed “deep state” secrets and crimes. Trump has been an interloper, a nuisance, a thorn in the side of an elite cozy with elements that Trump has deemed inimical to American interests.
Further, Trump’s brand of nationalism interferes (or interfered) with the global interests of those who do business with our new Cold War opposition, and not only the kind we saw recently exposed in the case of the Joe Biden Swindling Company.
Finally, and most importantly, Trump has represented a line of defense, however tenuous and thin, of American liberties, liberties that stand in the way of a global governmental and extragovernmental order that thrives on lockdowns, masking, muzzling, banning, blacklisting, down ranking, memory holing, gaslighting, deleting, canceling, censoring, precensoring, and obliterating dissent and dissenters.
Concluding Remarks Regardless of the election outcome, however, repressive and propagandistic governmentalities—including academia, cultural institutions, culture industries, information and intelligence technologies, mass media, political movements, social media, woke corporations, and more—are combining to effect a totalitarian creep under which its subjects are complicit in their own subjugation and hellbent to impose it on others.
Whether Trump or not-Trump is finally declared the winner of the 2020 US presidential election, we are in for the battle of our lives. A constellation of state and state-extended apparatuses has openly declared war on liberty, on us. We are all thought criminals now. Risk aversion will not do. What we risk by being risk averse is everything that makes human life worth living. In the face of an enemy that brazenly revels in its totalitarian character, it is time to put everything on the line for liberty.
Listen to the Audio Mises Wire version of this article. President Donald Trump and his administration recently announced that Kodak would be transformed into a pharmaceutical producer under the Defense Production Act (DPA). The president confirmed that Kodak would receive a $765 million loan to establish Kodak Pharmaceuticals to manufacture generic pharmaceutical ingredients to decrease America’s reliance on foreign drug makers. If you have not been paying attention to Kodak’s transformation, you might be surprised that a film and camera maker from back in the day is now producing pharmaceuticals. But the business filed for bankruptcy in 2012 and turned itself into a materials and chemical company.
A Kodak Moment The announcement was huge for Kodak shares, as the stock skyrocketed nearly 1,300 percent in only a few trading sessions, climbing from a couple of bucks to as high as $60. But the subplots behind Kodak’s ascent were just as riveting as seeing the stock soar to the moon.
The first storyline involved the New York Stock Exchange halting trading because circuit breakers were tripped twenty times. The volume of Kodak trading activity spiked after the news was announced, climbing to more than 250 million in just two sessions. The number of Kodak options ballooned to as much as 300,000—and these were not bullish contracts either. The final compelling development was the considerable number of Robinhooders holding Kodak stock. Only a few thousand Robinhood traders held shares in the company before the news, but that figure spiked to more than 130,000.
The men in tights have been near the front of the line when it comes to the various bullish trades, even if it is only for a week or two. At the start of the pandemiconomy, dumb money was pouring into coronavirus-related stocks, such as personal protective equipment (PPE) and biotech companies. Weeks later, Robinhooders were hitting the bullseye on bankrupt stocks like J.C. Penney and Hertz. As gold prices hit all-time highs, users were putting their bows and arrows in gold exchange-traded funds (ETFs).
What else will the cool kids on the block tell us about the next big thing in the equities arena? It is generally said that investors should follow the Federal Reserve. But perhaps it is time to follow whatever the young whippersnappers are doing on the mobile platform.
The Swamp Judges Judy Senators Mitt Romney (R-UT) and Susan Collins (R-ME) recently confirmed that they would not support Judy Shelton‘s nomination to serve on the Federal Reserve. While Romney did not give a precise reason (we all know why), Collins expressed concern over Shelton’s past views regarding the nature of the century-old institution. It seems that you must not hold any dissenting opinions about the central bank. That is violating Fed orthodoxy, and that is not allowed.
Shelton’s nomination has been a contentious battle for about a year now. But this has been the norm for all of Trump’s picks to sit inside the Eccles Building. The late Herman Cain and Stephen Moore became targets in the mainstream media, because they, too, shared criticisms of the Fed.
It is more than likely that Shelton would be unable to transform the Federal Reserve System and would inevitably choose to maintain the neo-Keynesian status quo. But those opposing her nomination have made it clear that they do not appreciate her past writings that questioned the integrity of the Fed, the international monetary order, and the fiat money system. This is blasphemy inside the Swamp, as only money printing, market manipulation, and economic distortions are accepted monetary policy mechanisms.
Whether it is part of political expediency or a 4D chess strategy, Shelton has conceded that she will lend her support to near zero interest rates and debt monetization. By now it might be clear that any opposition is based on disdain for President Trump and nothing else.
That said, if Shelton’s nod fails, her presence in the public realm is still a positive one. Her public record might be enough to spark a discussion about the unprecedented and carte blanche endeavors of the US central bank. Is it wrong to have some reservations about unlimited quantitative easing, bailing out Wall Street through corporate bond buying, artificially low interest rates, and inflation? Tho Bishop may have said it best in a recent opinion piece for the Mises Institute:
If confirmed, will Judy Shelton be a revolutionary force within America’s central bank? Almost certainly not. Just as no election will truly drain the Swamp in Washington, no Fed nominee is going to restore humility to the Eccles Building. Instead, Shelton’s nomination is best seen as a litmus test for Republican senators. Are you interested in actually promoting ideological diversity within American institutions, or are you simply willing to stand with the academic gatekeepers that have given us the federal Leviathan that we have today? The Fed is the biggest Swamp creature of them all, but nobody is willing to slay the monster.
Misreporting the GDP Legendary economist Murray Rothbard wrote in Making Economic Sense:
It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a "dismal science." But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance. A perfect example of this is the mainstream media’s coverage of the gross domestic product in the second quarter. According to the Bureau of Economic Analysis (BEA), the US economy contracted by an annualized rate of 32.9 percent in the second quarter, beating market forecasts of –34.1 percent. The GDP shrank 9.5 percent in Q2 from the first. Which number do you think is generating the most headlines?
Yep, you guessed right: –32.9 percent.
CNN, for example, had this headline: “America’s Economy Just Had Its Worst Quarter on Record.” NPR reported: “GDP Drops at 32.9% Rate, the Worst U.S. Contraction Ever.” USA Today noted: “The second quarter Gross Domestic Product just plunged a record 32.9% from the previous quarter.”
The problem with this reporting is that it makes everything seem a lot worse than it is. The –32.9 percent annualized second-quarter decline was multiplied by four, and the 9.5 percent slump in Q2 was from Q1—a big difference. Whether this is out of ignorance or partisanship is unclear, but it is essential that the media, even the business-oriented outlets, get this right. Unfortunately, in today’s landscape, that is asking too much from the Fourth Estate.
The recent economic downturn has created the environment for a new round of bailouts by the government and the Fed. Last time they did this they told us it would be the last one, but anyone who knows our history knew that was not going to stand. Now we are told again that this is an exceptional situation and we must bail out businesses in trouble so that the economy can restart again as quickly as possible. But this is the same argument the government has always made when pushing for a bailout. What is more, every time the government has bailed out businesses, they have promised us that this will not create moral hazard.
Moral hazard here refers to the ability to take risk without fear of suffering the consequences. As I show below, businesses profit by making bad short-term decisions, and when these bad decisions bring them to the brink of bankruptcy, they are bailed out by taxpayers. So, the owners of these firms and their CEOs benefit from the upside, and taxpayers foot the bill on the downside. In what follows, I review the history of bailouts in the US and argue that we must consider bringing an end to bailouts if we want to have the real and sustainable economic growth we desperately need.
Financial Institutions Bailouts 1.0 and 2.0 After the savings and loan (S&L) industry had struggled for many years, government finally came to the rescue. The federal government, at the time under the leadership of President George H.W. Bush, passed a bailout that cost taxpayers $124 billion ($264 billion in today’s dollars). It is important for our purpose here to keep in mind that in the lead-up to this many of these firms had taken advantage of the booming housing market. Many of these companies lent too much money, and when the economy weakened they could not keep up with the losses. This led L. William Seidman, former chairman of the Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation, to say that "The banking problems of the '80s and '90s came primarily, but not exclusively, from unsound real estate lending." Hence, these companies were not prudent during the good times and did not plan for a downturn.
This was not the last time financial institutions were bailed out. Banks, along with the artificially low interest rates, were the main cause of the Great Recession. History repeated itself as the federal government stepped in and bailed them out again. We were told that the banks and AIG (American International Group) were “too big to fail” and could not be allowed to go bankrupt because the harm to the economy would be enormous. These bailouts—for AIG, the banks, Fannie Mae, and Freddie Mac—cost the taxpayers $621 billion in today’s dollars, or more than twice the previous bailout. But, aren’t the banks stronger now? one could ask. This is a fair question, yet the banks would be strong if we let them liquidate the parts of their companies that were hit the most. Had we done this we would have a stronger banking system and no moral hazard for the rest of the economy.
Automakers Bailouts 1.0 and 2.0 During the Great Recession the government bailed out the three big automakers in the US. But this was not the first time the government had bailed out a car company. Chrysler had already been bailed out in 1979, when they got $1.5 billion ($5.7 billion in today’s dollars). It is important to point out why Chrysler had needed to be bailed out. Charles Hyde, professor of history at Wayne State University and author of Riding the Roller Coaster: A History of the Chrysler Corporation, had this to say:
Well, in essence they made some very bad product choices throughout the 1970s. They decided to become specialists in large, gas-guzzling cars, and they did that right at the time there were two different Arab oil boycotts and crises with the price of gasoline. And their cars simply didn't sell. The other problem they had were very serious quality problems. Their cars were probably the worst-built cars in any showrooms anywhere.
Chrysler emerged stronger after this; they made the necessary changes, and it seems that at least for a while they did well. But in 2008 Chrysler and GM both found themselves in trouble. This time around, the bailout was about $100 billion adjusted for inflation, which is about 17.5 times the previous one. And, again, we know these firms had made bad decisions (misallocated resources), since Ford and other car companies did not need a bailout.
The concerned reader may ask, Aren’t the bailouts the price we have to pay to save jobs? The problem is that these companies never really fixed their problems. While low interest rates have helped them, they have also made them more fragile. As I have written elsewhere, the car market is in an unsustainable bubble, and with sales going down and delinquencies that were already rising, another crash and maybe another round of bailouts seem inevitable. In fact, the Fed has already implicitly “bailed out” Ford by promising to buy the fallen angels' debt. So, while the bailouts may save some jobs in the short run, they will cause much more trouble in the long run.
Airline Bailout 1.0 and 2.0 Following the attack on 9/11, airline traffic suffered a big hit and the airline firms needed the government’s help “to survive.” The government at the time provided $5 billion in grants and $10 billion in loans (about $22 billion in today’s dollars). After the bailout bill was passed President George W. Bush said:
I commend the Congress for their cooperation and quick action in passing responsible legislation that will improve passenger safety, help the victims and their loved ones, and keep America's airplanes flying while the airlines develop long-term viability plans.
But as it turns out, airline companies did not develop very good “long-term viability plans.” Recently, the US airlines were hit with the same problem they had after 9/11—a lack of passengers because of the COVID-19 crisis—and they could not have been less prepared for this. One would expect an industry that had experienced a similar situation not so long ago to be better prepared than others, but they clearly were not.
The government stepped in again and has bailed them out by allocating $25 billion in grants (30 percent of which will be repaid as a loan over ten years) and an additional $25 billion in loans.
But again one may ask, Doesn’t this save jobs? The answer to this important question is that this may save some jobs in the short run, yes, but the cost will be very high, since these jobs are not sustainable. What is more, this bailout will lead to lower economic growth, since the necessary resource reallocation will not happen.
Bailouts Lead to Lower Economic Growth Our history of bailouts shows that we have created tremendous moral hazard. As I have argued above, some industries or firms have been repeatedly bailed out. Hence, these companies have never learned to be prudent and save for a rainy day, which shows that they are incompetent at best or simply care only for short-term profits. Take the airline industry, for instance. In the post–Great Recession period, the airline industry used 96 percent of its profits to buy back stocks and did not plan for a downturn. It is true that it was not easy to predict a situation like the current one caused by COVID-19, but many would disagree that this was a black swan, including Nassim Taleb himself.
Hence, the bailouts have led to bad use of resources, which can explain, at least in part, the slow economic growth we have experienced post–Great Recession. The issue with bailouts is that the tradeoffs we face are higher unemployment now followed by higher and sustainable economic growth later, or lower unemployment now followed by lower economic growth later. Bailouts are directly connected to productivity, as the graph below shows. This means that the more bailouts we have the lower the economic growth. This makes sense, since economic theory tells us that when a company fails it means that they were not using resources efficiently. If the company goes bankrupt, then either some or all of the resources will be transferred to more prudent investors, which will lead to better use of these resources and higher economic growth. On the other hand, when a company is bailed out, they will continue to make bad decisions and even worse others will get the message that they will not be held responsible by the market if they make bad decisions.
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Source: "Deutsche Bank Gives Us a View of the Credit Abyss," Bloomberg.com, Apr. 27, 2020. Conclusion The good news is that some people are starting to speak out against these huge wealth transfers from taxpayers to large corporate shareholders and CEOs. In a recent interview for CNBC, Chamath Palihapitiya argued that companies that were not prudent should be left to go bankrupt. Sadly, many people are convinced that this would lead to massive unemployment, such that we are not bailing out corporations, but are rather helping workers. That is not quite the real story. When companies file for Chapter 11 bankruptcy, it is the shareholders and the speculators who get hurt, not the workers.
Yet the federal government and the Fed are doing anything they can to keep the debt bubble going. This is nothing new, since the federal government and the Fed have brought us to the current situation in concert. The Fed’s low interest rate policy together with the implicit bailout guarantee from the federal government led corporations to borrow too much. This has made the economy so fragile that it could not even handle interest rates at half of what they were before the last crisis started. As the Fed increased interest rates in 2018, the economy started to slow down so fast that they had to reverse and start lowering interest rates in 2019. Now they effectively stand at zero. Low interest rates, along with the many programs the Fed has implemented during the COVID-19 crisis, have led corporations to borrow more than $617 billion in the last two months alone. So, the story of bailouts and low interest rates continues. But until it ends we cannot expect to have the real and sustainable economic growth we desperately need.
Horrific videos out of China, uploaded at great personal risk, expose the communist lies and mishandling of the COVID-19 outbreak. The mishandling of public health by the centralized Chinese regime is just the latest example of how the regime believes control, secrecy, and centralization are the solutions to most any problem.
Examples extend well beyond the current coronavirus crisis.
The Chinese Economic Miracle That Wasn’t Like America, China responded to the 2008 crisis with a balance sheet increase. China went much further, however, as Ronald-Peter Stöferle and Mark J. Valek explained in 2018:
While in the US the balance sheet total of the banking system increased by USD 4,000bn in the years after the global financial crisis, the balance sheet of the Chinese banking system expanded by USD 20,000bn in the same period. For reference: This is four times the Japanese GDP.
At a greater rate than most nations on Earth, China flooded the credit markets, distorting the local economy by forcing Chinese manufacturers to respond to a government-planned demand and by expanding crony capitalism, making businesses more likely to take root in the country if they were connected with the Communist Party.
As economist and professor Per Bylund wrote inThe Observer, in a China-style economy, influence with the government “[carries] significantly more weight than actual value creation, and consumers have little say in which projects get priority.”
This overdependence on government-backed deals weakened the Chinese economy by forcing ordinary Chinese people to conform to a distorted labor market.
Riddled with malinvestment produced by the government’s easy credit policies, the country is seeing “loss-making factories, with excess production capacity [and] insolvent ‘zombie’ companies” dominate the environment, as Claudio Grass explained.
As the Chinese population begins to age and the Communist Party’s centrally planned economy begins to crumble, growing urban centers such as Wuhan, in the heart of central China’s Hubei Province, face a series of woes caused by the market distortion.
With car factory workers and members of a crippled government-backed steel industry trying to survive in the cramped environment, common Chinese in Wuhan find themselves living in an overpopulated and highly polluted urban center where some estimates suggest that up to 10 percent of the population is unemployed.
Despite the growing population density, the business opportunities didn’t materialize and Wuhan became an environment ripe for the rapid spread of pathogens. So much so that by early 2018 researchers had started to warn about the link between the hazardous mix of air pollutants found in cities like Wuhan and increasingly high death rates.
Unfortunately for the Chinese people, the government-managed economy hadn’t just become toxic due to the high number of subsidized factories pumping poisonous gases into the air.
In an interview with Bill Sardi, Lawrence Broxmeyer, MD, of the N.Y. Institute of Medical Research explained that long before the novel coronavirus outbreak Wuhan residents already suffered from an ongoing tuberculosis epidemic that surged during the winter months between 2004 and 2013:
Among the conditions [Chinese researcher Xiaobing Yang] attributed to the increased transmission of TB in the winter was indoor crowding, subsequent vitamin D deficiency, and even air pollution. The increasingly severe air pollution in Wuhan, powered by the influx of foreign companies and the increased use of incineration for waste disposal, resulted in a visible haze so thick that it reduced peripheral vision as far back as June of 2012.
As the years went by and the Wuhan population grew, the demand for food shot up.
With farmers pressed to provide the 11 million living in Wuhan with poultry and swine, farms were expanded. As farms became larger, they produced larger amounts of waste.
By 2015, Wuhan had five major waste incineration plants in use and was already planning to build more. In 2018, an unexpected health scare forced farmers to get rid of much more than just pig manure:
By July, 2018, fourteen large pig breeding farms in Wuhan, with a combined annual pig production of 1.5 million pigs pooled investments with the intent to slaughter 2 million pigs per year. China alone accounted for more than half of the world’s pig population. That is until another purported virus (African swine fever) spread throughout China which had no cure and a near zero survival rate for infected pigs, and which, by August 2019 virtually wiped out 40% of China’s entire pig population, including those in Wuhan.
With one-quarter of the globe’s pigs dying in just one year, Broxmeyer explained, it’s likely that many of the sick pigs were incinerated. Once pathogens are airborne, he later elaborated in the interview, humans become highly vulnerable to them.
If this timeline of events helped create the conditions for a perfect storm, the Communist Party’s response to the events that unfolded in late 2019 helps explain why the Chinese government’s approach to the management of the economy and healthcare not only helped to create this mess, but actually made matters much, much worse.
The Chinese Regime's Response to COVID-19 Much like it has done with the Chinese economy, the Communist Party of China has turned the Chinese healthcare system into a government-run structure, putting the majority of lives in the hands of public hospitals and health centers.
The fact that Chinese citizens and taxpayers have so little influence through market processes or through government institutions has only worsened the situation.
Although it is not quite like the single-payer system that Bernie Sanders is so passionate about, the Communist Party has expanded taxpayer-subsidized health insurance throughout the country over the past fifteen years.
When the first cases of the novel coronavirus were reported and Chinese residents sought their benevolent public servants for help, the fragility of the Chinese public healthcare system was laid bare for all to see.
Long lines, doctor shortages, high costs for drugs, and a list of other issues have all pushed Chinese patients to flood social media with complaints—or at least try to.
In order to reverse course and save face, the Chinese government did what any socialist authoritarian regime would do in the face of disaster: forcefully lock people away, impose curfews, and even issue passport-like documents to some households allowing only one family member to go out every two days for grocery shopping and the like.
Knocking on people’s doors to check if household members were sick also became a regular occurrence in some regions, as authorities would check in with those who had traveled to the epicenter of the outbreak in recent months.
Meanwhile, Trump promises that it’s all under control at home as government officials scramble to develop a second coronavirus test kit that actually works. For their part, the American media conglomerates have trumpeted how the Chinese government’s response could have been more effective if it not for “conspiracy theory peddlers,” all the while assigning the blame for the expected economic crash to Trump.
The reality is that Trump isn’t to blame for the Centers for Disease Control and Prevention’s slow response to coronavirus, and he certainly isn’t going to direct government officials to drag people out of their cars and into solitary confinement in public hospitals.
Nothing to See Here After the Chinese government saw its fragilities exposed far and wide by the COVID-19 coronavirus outbreak, it appeared to embark on a mission to shift the blame for its failures.
A group of Chinese medical researchers is now pointing the finger at the United States, claiming that an individual that came to Wuhan spread the virus to workers at the Huanan Seafood Wholesale Market in November, initiating the chain reaction that made Wuhan the epicenter of the health crisis.
This unknown “patient zero,” the study suggests, came from another country, triggering speculations that the authors were referring to the United States.
Whatever the case, it’s clear that the densely populated and heavily polluted town of Wuhan was made far more vulnerable to a health scare of pandemic proportions because of the measures implemented by the Chinese state.
Through the expansion of credit, crony capitalism, and the imposition of public healthcare institutions that distort the market, Chinese citizens find themselves cornered and forced to resort to inadequate government-backed services in a desperate attempt to survive.
The Edge of Democracy, a documentary by Petra Costa produced by Netflix and nominated for an Oscar, has been released to hundreds of millions of unsuspecting viewers who know nothing of recent Brazilian history and have little to no access to the real facts. So, as a Brazilian, I had to say something.
A documentary can look at facts and try to extract an interpretation or view from it. We might agree or disagree. The problem starts when a movie attempts to be a documentary and yet fails to get even basic facts or statistics right.
The documentary attempts to show what happened before, during, and after the impeachment process of Dilma Rouseff. The movie—let’s not call it a documentary anymore—largely ignores the corruption scandals that surrounded Dilma, former president Lula, and their Workers' party, only mentions the economic crisis they caused in passing, makes a straw man of the opposition, underplays the reason Dilma was impeached, misrepresents facts, and even gets basic numbers wrong.
Getting the Basics Wrong The documentary asserts that Lula achieved the lowest unemployment rate in Brazilian history. Wrong. It shows Lula saying that he got into politics because only two congressmen of 443 were working class when there were never exactly 443 congressmen. It claims that Dilma lost her prestige and power because she stood up to banks when in fact banks made enormous profits under her government and high interest rate policies. Guido Mantega, one of her former ministers, has even been charged with selling privileged information to those banks and funneling profits to the party. In her second term, Dilma brought banks into government by appointing Joaquim Levy to what is today the Ministry of the Economy. If that is standing up to the banks, I’d really like to know what it means to be helping them.
The movie claims that Lula created the Bolsa Familia, a policy of basic income for the poor that is one of the staples of his government. The fact is that Bolsa Familia is an amalgamation and expansion of different support programs from previous governments. Lula should know: he’s on record criticizing those programs.
Another quite curious claim is that Michel Temer, Dilma’s vice-president and president after the Impeachment in 2016, was a traitor to her government from day one of the second term. The record shows differently: he took up heavy pro-Dilma negotiations in Congress and that was widely recognized. One of Dilma’s vice-leaders in Congress, Orlando Silva, was on the news saying so.
These are easily checkable—yet incorrect—statements found throughout the movie and are easy for a reader who doesn’t know Brazil to understand. The problem is that these statements are probably the smallest offenders on the list. Explaining the rest requires quite a bit of context and recent Brazilian history.
The most egregious error is the overall narrative: democracy was doing fine championed by Lula and Dilma. They stood up to big interests and got taken down on a coup, and democracy was subverted. None of this is true, and it’s not even a matter of interpretation: it’s something that any speaker of Portuguese can settle with basic googling.
In 2005, a large corruption scandal erupted: Mensalão. Lula and his party—the Workers' Party, PT in Portuguese—were caught embezzling funds to buy support in the National Congress, get nominations, and ensure that they would rule unchecked. That is not only a corruption scandal but a direct attack on democratic institutions and principles.
In 2014 they were again caught in Petrolão. The scheme was the same, and largely organized by the same people: divert funds, buy support, rule unchecked. That makes them repeat offenders in attempting to destroy the separation of powers and gain control by illicit means.
Freedom of the Press The film claims Lula was a friend to journalists. Yet in 2004 Lula sent a bill to congress to create a federal council with powers to regulate and punish journalists. Almost every year Dilma or his party would drum up new efforts to “regulate the media,” and Dilma even tried to conjure a “limited” constitutional assembly—whatever that means—to discuss the media. A relatively minor but symbolically important scandal occurred at the beginning of Lula’s presidency. When an American reporter wrote that Lula had a drinking problem, Lula demanded the cancellation of his visa. When his aides told him it was unconstitutional to deport the journalist since he was married to a Brazilian woman, Lula’s reply was ominous: "F[…] the constitution." Thus, to imply or overtly say that democracy in Brazil was doing fine under the Workers' Party is downright dishonest.
The movie only briefly mentions the Mensalão scandal and treats Petrolão as some made-up charges by Sergio Moro, a judge trained in the US. The film thus implies that the scandals were the result of interventions from foreign powers. But to quote Roy Jones Jr., "They must all have forgotten": in 1992 Dilma took the exact same course that Moro did.
The Edge of Democracy also shows that during his court hearing Lula asks Moro how he feels about having collapsed the construction sector in Brazil. One would think it would be relevant to mention that those construction companies were the ones inside the corruption scandal, but somehow the filmmakers didn’t find it very relevant.
Speaking of construction, Lula was jailed because he received an apartment as a kickback from one of those construction companies. He also is accused of getting a wide-ranging upgrade on a rural property, embezzling millions, overseeing a corruption scheme, and much more. Yet the movie claims that all the judges had on him was the apartment.
That is also why Lula could not run for president in 2018. People convicted of certain crimes—corruption obviously included—cannot run for office for eight years, a provision of the “Clean Record Act,” known in Brazil as “Lei Ficha Limpa,” which Mr. Lula himself sanctioned. Oddly, the movie doesn’t mention that and instead claims that the conviction by Sergio Moro knocked Lula out of the race. Moro couldn’t possibly have done that, since the conviction that counts for the Clean Record Act is through an appeals court, and Moro was one step below that. Three other judges not only affirmed Moro’s sentence, but raised the jail time Lula had to serve.
Lula is only free today, because the Supreme Federal Court voted that you can only go to jail for nonviolent offenses once you lose your case and all appeals at the supreme court. Before this, one could go to jail after being convicted in an appeals court.
It’s worth noting that the president of the supreme court was, and still is, Dias Toffoli. Lula appointed him to the Supreme Court for the shining honor of having never passed a judge test and having been Lula’s campaign lawyer. In fact, seven of the eleven supreme court judges were appointed by Lula or Dilma. Hardly a hostile court attempting to attack democracy or be partisan to a coup.
The Economic Record But it was not only the construction sector that suffered. The entire economy endured its worst crisis in Brazilian history. The economy is only mentioned about an hour into the movie, and even then almost as an aside. The details are omitted, but let's clarify them.
In 2015 GDP shrunk by 3.8 percent and by 3.6 percent the next year. In 2017, unemployment shot up from 6 percent to almost 14 percent until new economic policies under Michel Temer started to knock it back down. Deficits exploded, taking the national debt from 51.5 percent of the GDP in 2013 to over 80 percent today, when we are still making deep reforms to try and tackle deficits and policies still on autopilot from the Dilma years. When pension reforms were approved in 2019, it was clear that if they did not go through Brazil would go bankrupt.
These issues were the result of expansionist and interventionist economic policies, interest rate manipulation, accounting fraud, price controls to control inflation and help Dilma’s reelection, and much more. That brings us to Dilma: why was she impeached?
Dilma's Impeachment The movie attempts to show Dilma's impeachment as a coup, omitting a simple fact: she clearly and widely broke budgetary laws. Not only did she do so in terms of the interpretation of the law, but also in the sense of its original intent.
Back quite a ways in Brazilian history, it was normal for governors to create state banks, use them to fund deficits, launch vote-buying schemes and general budgetary responsibility. These banks would then be declared bankrupt. This would be followed by the creation of a new bank, and the process would be repeated eternally. The depositors were left holding the bag, the government washed its hands of the affair, political players got money. Rinse and repeat.
This and many other accounting schemes prompted reforms that created budgetary laws prohibiting the government from taking loans without congressional authorization and mandating better accounting and many other good practices.
Dilma used state-owned banks to finance her policies. In practice, she used the banks’ balances as if they were treasury balances. To emphasize: this wasn’t a week-long snafu of account balancing; this was a policy going back to 2009 with 45 billion reais in open balances. For reference, that is a bit less than half of all federal spending on education in 2015. That constitutes a loan without congressional authorization and budget fraud, as verified by the the Federal Audit Court (TCU).
Now one might wonder: did the Workers Party, Lula, and Dilma defend themselves of those accusations? No. Their responses were similar to what we fing in Edge of Democracy: directly state the opposite of what actually happened. Don’t mention what really happened. Source your arguments with partisan narratives and repeat.
While it is true that there are still many elements on the right and on the left who want to end democracy in Brazil and take control of state power, the fact remains that the largest threat to democracy since it returned to Brazil in 1985 and in 1988 with a new constitution was posed precisely by Lula and the Workers' Party.
Michel Temer was never a threat to democracy. Was he corrupt? Although there are no convictions yet, the consensus in Brazil is a clear yes. He was bought and paid for a long time ago by Lula and his coterie. But there is a difference between a thief and a dictator.
Is Bolsonaro a threat to democracy? Maybe. He has had some concerning ideas but so far has not implemented anything that would constitute a threat. Of course, he has only been in power for one year. Yet trying to compare him with a party that twice tried—and for quite some time succeeded—to subvert the separation of powers and control all the levers is disingenuous. His story has yet to be written, while the story of Lula, Dilma, and the Workers' Party is already written, part of it in the records of many courts, of audits, and of arrests.
Lastly, we have the Hail Mary argument of the movie: for all its faults, the Workers' Party was a hope for the poor, a bastion against inequality. They put up a fight for the common man, and maybe there were mistakes made, but at least inequality was tackled.
Well, again come those pesky statistics to show otherwise.
Inequality was already falling in President Fernando Henrique Cardoso's second term, from 1994 to 1998. It continued to fall at pretty much the same pace during Lula’s presidency, implying that he added little to the mechanisms in play, and it started to rise again after Dilma’s reelection in 2014. Right after her reelection, many state-controlled prices were allowed to go up, inflation crossed 10 percent per year, and many programs were cut.
Yet when we step back and look at the whole picture, the fact is that inequality has hardly budged. The Gini coefficient in Brazil went from a high of fifty-eight to a low of fifty-two during those years. Looking at this over the decades, it almost looks like a straight line. And in the end Dilma failed to maintain what little progress had been made.
It’s easy to hold things together for a while when one can raid the balances of state-owned banks, cook the books, buy support in congress, and win elections with billions of reais in embezzled money. But that can only last so long, and it came to an end with Dilma's impeachment. Brazil, however, did not come to such an end. It will now struggle for a decade or more to clean up the mess and get back on a path to growth and the reduction of poverty.
(These are not the only lies within the documentary, here’s the full list.)
Originally published at Ideias radicais.
The size and activities of Google, and other Big Tech companies, has increasingly grabbed the attention of many on the ideological left, center, and right. (This is putting to one side the shortcomings of these particular categories.) On the Right, this has meant allegations of Google’s bias against conservatives. In the center, it has included allegations of Google’s power against competition. On the Left, it has meant allegations of Google’s exploitation of just about everybody.
The latter came to the fore again last year in the wake of Harvard professor Shoshana Zuboff’s book entitled The Age of Surveillance Capitalism: The Fight for a Human Future at the New Frontier of Power (January 2019). The Amazon entry for this book in part reads: "[T]he first detailed examination of the unprecedented form of power called 'surveillance capitalism,' and the quest by powerful corporations to predict and control our behavior."
As a starting point, one ought to be skeptical of any explicit or implied claims of "game changers" and "new economics." One ought also to be suspicious of any explicit or implied assertion that "out-of-control" capitalism is, once again, the problem and that the solution, yet again, is government "in greater control." Finally, one's BS detector ought to be on high alert when reading such doublespeak as ascribes to capitalism the hallmarks of statism—i.e., "powerful," "control," and, of course, "surveillance."
What the Left Is Saying Sam Biddle quickly gives away the anticapitalist agenda of those on the Left in his article for The Intercept (February 2019) by favorably "drawing comparisons to seminal socioeconomic investigations like Rachel Carson’s Silent Spring and Karl Marx’s Capital." He also interviewed Zuboff, who explained that Google and others are "just secretly scraping your private experience as raw material, and [selling] predictions of what you’re gonna do." And Zuboff alarmingly concluded: “These are bald-faced interventions in the exercise of human autonomy,…the 'right to the future tense',…[and] the very material essence of the idea of free will."
In another interview, this time by John Laidler of the Harvard Gazette (March 2019), Zuboff expanded on this:
I define surveillance capitalism as the unilateral claiming of private human experience as free raw material for translation into behavioral data. These data are then computed and packaged as prediction products and sold into behavioral futures markets.
She also boldly asserted that: "this [is] actually a new variant of capitalism," which supposedly "has now spread beyond the tech companies to new surveillance-based ecosystems in virtually every economic sector" and purportedly "arose in the era of a neoliberal consensus around the superiority of self-regulating companies and markets."
Katie Fitzpatrick starts her review of Zuboff’s book for The Nation (April 2019) with more subtle anticapitalism than Biddle did:
By resisting Go365 [a health monitoring app], the West Virginia teachers waged two battles at once: They fought in the trenches of state austerity and on the front lines of private digital surveillance.
Although Fitzpatrick doesn’t mention Marx as Biddle did, she uses Marxist language throughout to describe "earlier capitalism" and "surveillance capitalism," such as "exploitation," "surplus," and "extraction," not to mention postmodern statist concepts such as "free will illusion," "individual freedom chaos," and "conditioned social engineering." She revealingly concluded, and lamented that Zuboff did not, that:
The problem with surveillance capitalism is as much the capitalism as it is the surveillance.
Two new attempts to regulate "the problem" of "surveillance capitalism," and thus "capitalism" as well, come from Europe and California. Regarding the former, the Financial Times (FT) reported on December 2019 that “the EU’s landmark General Data Protection Regulation [GDPR], [was] six years in the making before coming into force in May 2018." They also, as the mainstream media (MSM) almost always does, inappropriately mixed in plenty of subjective prostatism opinions, such as: "There is no doubt that GDPR has already done a lot of good" and "But GDPR is deficient in several respects.…It should be looking to reshape data markets, rather than just regulate them as they are."
Slate reported on similar regulations that recently passed in California, and they wasted no time with subtleties, putting their opinion right in the subtitle: "Thanks, California!" (December 2019). They then described how
The California Consumer Privacy Act [CCPA] essentially empowers consumers [starting on New Year’s Day 2020] to access the personal data that companies have collected on them, to demand that it be deleted, and to prevent it from being sold to third parties.
They also optimistically opine:
Since it’s a lot more work to create a separate infrastructure just for California residents to opt out of…, these requirements will transform the internet for everyone.
As if that were not enough, they start, as the FT did for GDPR, the process of lobbying for more market intervention: "The law is vague on how much power and transparency companies must offer to consumers in this process."
What the Center Is Saying In an article for Truth on the Market, Alec Stapp states his thesis in the title itself: "Any Way You Measure It, Warren Is Wrong to Claim “Facebook and Google Account for 70% of All Internet Traffic" (October 2019). In countering Senator Elizabeth Warren’s statistic about Facebook and Google’s combined 70 percent market share of traffic, Stapp provides the following alternative stats: 20 percent of volume; 21 percent of time; 38 percent of connections; 33 percent of referrals; 32 percent of all advertising; and 59 percent of online advertising. And he, very importantly, notes that online advertising prices have fallen 42 percent over the past decade as volume has increased.
Adam Candeub and Mark Epstein address a key legal question about Google, and others, such as Facebook and Twitter, in an article for City Journal asking the question, "Platform or Publisher?" (May 2018). They write: "Section 230 of the Communications Decency Act immunizes online platforms for their users' defamatory, fraudulent, or otherwise unlawful content…but the law was not intended to facilitate political censorship." They also importantly note that Section 230 was a response to a judicial decision, under the common law, that concluded that
utilizing technology and the manpower to delete objectionable content made [one] more like publisher[s] than…newsstands, bookstores, and libraries.
Michael Dougherty provides some further background to Section 230 in the National Review (June 2019). He writes that it was passed: "in part to allow Internet services…to block pornography…[and not be] treated in the law as publishers…[which are] liable for whatever libels and slanders users posted on them." Section 230: "allows proprietors of websites and forums to set standards—to edit and moderate their content without becoming a publisher of them." But also, Section 230: "is now the legal remit under which social-media giants shadow-ban, block, and censor conservative speech."
What the Right Is Saying In his article entitled "Google Marxism" (December 2019), Michael Rectenwald asserted that there is nowadays a "Google Archipelago," which "is guided by a left authoritarianism." He described this as: "the most developed set of technological apparatuses for disciplinary and governmental power and control in the world," including "The principals of what I call Big Digital—the purveyors of mega-data services, media, cable, and internet services, social media platforms, Artificial Intelligence (AI) agents, apps, and the developing Internet of Things." He thus warned that "Socialism has always had global pretensions. Only Google Marxism is capable of creating it, albeit in corporate socialist form."
William Anderson has also written about Google for the Mises Institute on a number of occasions over the years, including in the context of woke capitalism (July 2019), economy bureaucratization (July 2018) and antitrust law (December 2005). Regarding the latter, he wrote: "Google's search policies are decidedly left-wing," but "[n]o one is forced to use the Internet at all and, thus, can avoid Google altogether if that is their choice." Nevertheless, Anderson warned, "The vagueness of Antitrust Law makes it easy for government to heap abuse upon those firms that are out of favor at any given time, as no real legal proof is needed for the courts to act against the alleged monopolist.” And he added: "despite the millions of dollars that the company's leaders and employees have raised for the Democrats, it is doubtful that many Democrats would be willing to stand up for a firm that is accused of being a monopolist."
Writing for Antiwar.com (August 2018), Justin Raimondo reminded that: "The Communications Decency Act immunizes these companies against any [common law] torts,” and that “[t]his two-tiered system is responsible for the cartel-like conditions enjoyed by Facebook, Google, Twitter, and the rest of the Silicon Valley crowd.” He added that, this plus "[t]he vast wealth poured into this new technology by investors buoyed by historically low interest rates, has resulted in the enrichment of Big Data beyond the dreams of Croesus." The result is that “In recognition of [these] government-granted privileges…the Lords of the Internet have agreed to become the regime’s enforcers.”
Conclusion These organizations that allegedly practice "surveillance capitalism" have become seemingly inescapable in our modern economy. This has led to a host of critics attempting to identify and explain the many ways that organizations like Facebook and Google have become damaging to our everyday lives and freedoms.
Many of these critics get it wrong, though.
On the Left, the reports and commentary about Google’s so-called surveillance capitalism were more about the capitalism than the surveillance. As they've done many times in the past (such as during the GFC (Global Financial Crisis) of the late 2000s, the Dot-com collapse of the early 2000s, and the Microsoft dominance of the 1990s), they call for failed and selfish markets to be heavily regulated or even replaced by successful and selfless government. And emotion-laden stories, from the edges of the bell curve, are once again trotted out to bolster their case.
In the center, there is largely an acceptance of the mixed economy (of markets and government) as it currently stands, and, in at least two cases, some pushback on further government intervention. Although these two do not seem to grasp the significance, they imply that government may be the source of a "market structure," resulting in "market power," and that regardless of that, "market conduct" includes "market performance" resulting in falling prices. (For more on structure-conduct-performance, see Regulated Monopolies are not "Natural," April 2018.)
Some conservatives get closer to the mark in their concern for free speech and the potential for abuse of government power through crony capitalism.
Yet, only the free market critics cut through to the most important problem—namely that the state's antitrust legislation has provided legal advantages against competitors while providing legal immunity to these firms. The size and power of the "surveillance capitalists" has allowed the industry to escape the brunt of antitrust legislation. Many of their competitors have not been so lucky, and this an unfair advantage, to say the least. Meanwhile, as Raimondo notes, federal law protects these firms from being called to account in the civil courts.
The result is a legal landscape that favors some at the expense of others. But as Anderson concludes, no one is forced to use the services of these firms, so claims of "monopoly" are questionable. Ultimately, it is this lack of true monopoly that illustrates the weakness of many claims that government action is necessary to rein in firms that are powerful precisely because so many voluntarily use their services.
Capitalism creates poverty. Capitalism has stolen our future. Capitalism ravages the planet. Capitalism oppresses us. Capitalism needs to be controlled by government or it will throw most of us into poverty and misery and enrich only the well-placed few.
These are not missives from The Nation or the Daily Worker, although no doubt the writers from those publications would share the sentiments. No, these diatribes against the market economy come from the American Conservative. Of course, it is hardly the only conservative publication that rails against the market system, as First Things can also be counted on to speak out against the evils of an economy based on private property, a price system, and profit and loss. For that matter, before it fell to the grim reaper, the Weekly Standard also raised its voice against markets. Pat Buchanan has been railing against free trade and free markets for years.
So, what is the case that conservatives make against a market system, and how do they justify the kind of government intervention that perhaps in a sober moment they might realize will have the opposite effects of what is allegedly intended? What is the so-called case against the market, and why do some conservatives believe that coercion can create a better economy and better society?
There are numerous issues that we must examine to answer these questions, and the first is this: what exactly is the conservative case against the market? Why are prominent conservatives attacking capitalism?
In a word, change. Capitalism brings change, and bedrock conservatism is anti-change at its core. To better understand that point, we need to go back nearly seventy years to the 1950s, a time that apparently both conservatives and progressives wish to freeze in time. Whether one reads Pat Buchanan or Paul Krugman, the message seems to be similar: this was a golden era for American workers and businesses, a time when the government tightly managed the financial system and key industries were heavily regulated, from transportation to telecommunications.
In a recent article, the American Conservative declared that during the 1950s organized labor “gave capitalism its ballast.” Writes James Pinkerton:
In fact, for a time after World War II, America’s national political leadership was mostly reconciled to strong unions, abuses and all — because the alternative was deemed vastly worse.
In those mid-century years, people remembered what it was like when unions were weak or nonexistent, when unfettered capital was free to grind the face of labor. Such immiseration was seen as a leading cause of the Bolshevik Revolution in Russia — and nobody wanted that to happen here.
Moreover, the Great Depression was an even more recent memory. Thus the Keynesian wisdom held that it was vital to boost workers’ pay so as to keep purchasing power in their hands; they could, after all, be counted on to spend their money and thereby keeping the economy going. In those years, fear of a Depression-ish capital strike was far stronger than fear of a labor strike.
Ballast balances ships to keep them from capsizing at sea. In Pinkerton’s view, organized labor kept the economy “balanced” by keeping “unfettered capital” at bay and preventing it from oppressing labor.
Economically speaking, such a statement only can be called nonsense. As Carl Menger so aptly put it in his 1871 Principles, it was the development of capital goods that raised living standards and provided labor with real wealth increases. Far from grinding the face of labor, it was private capital — and capitalism — that gave them the benefits that people like Pinkerton attribute to the violence of organized labor.
Writing about labor and the 1950s, Pinkerton declares,
strong unions shaped society. Picket lines were not to be crossed, and work rules — detailing which worker could do which job — were strictly enforced (unless there was a payoff).
To anyone much younger than a Baby Boomer, the impact of unionization is hard to comprehend, because over the last four or so decades, we simply haven’t seen incidents such as the one in 1956, when the Teamsters blocked all deliveries to the Waldorf Astoria in Manhattan because of a jurisdictional dispute over the hotel’s barbers.
Still, this Baby Boomer, who grew up near Chicago, well remembers what it was like to live in a strong union town. For instance, meat wasn’t for sale on Sundays. Why not? Because the butchers had work rules to prevent such selling — and that was that. Then there was McCormick Place, the big convention center that was a steady source of scandal-mongering newspaper stories: about union featherbedding, prohibitive labor costs, and the occasional disappeared load of cargo.
Of course, sometimes, union matters got worse than that: incidents of union-related strong-arming, leg breaking—even the occasional murder—were in the news.
Nothing Pinkerton has described can build an economy, and it certainly cannot build wealth. Instead, he has described classic plunder, in which people seeking the opportunity to make a living were beaten, threatened, and even murdered for the “crime” of wanting to do something without the permission of organized labor. And according to the American Conservative, we should want to return to such a regime, which supposedly dominated the 1950s.
Perhaps we should be wary of labeling the 1950s a golden era, even though the theme of the 1950s as Oz reverberates from Paul Krugman to Pat Buchanan to Tucker Carlson. To Krugman, marginal tax rates were 90 percent and organized labor ruled the workplace, which, in his view, preserved a balance in US society that no longer exists. Conservatives like Buchanan see American industry from steel to automobiles to textiles as having been seemingly unchallenged in the world, protected by tariffs double the rates we see today.
That idyllic economic landscape, in Buchanan’s view, disappeared in the 1980s, when Americans began to buy goods, from automobiles to clothing, that were imported. Workers in Third World lands that once sold Americans nothing at all began to undercut the high American wages that both Krugman and Buchanan believe were central to US prosperity. As Buchanan and other conservative critics of the market economy put it, less protectionism and the lure of “slave wages” overseas enabled capitalists to gear their investments “in a race to the bottom.” Such a scenario did not exist in the 1950s. Make cars in Mexico and in South Korea? Not a chance.
Before we call for the return of tax, labor, and trade policies in the decade of poodle skirts, sock hops, and ubiquitous picket lines, however, we should remember that a third of Americans then lived in poverty, much of it abject. Jim Crow laws were on the books, and racial discrimination was embedded in American life in a way that most people today would not be able to comprehend. The government organized key industries, from banking and finance to all forms of transportation and telecommunications, into regulated cartels that forced Americans to pay higher prices for just about everything. If you wanted economic opportunity, you usually needed a union card or a connection to government regulators and politicians.
Yet, there is an appeal to the nostalgia of the company towns and the seeming stability of the working-class towns. I lived in such a place in southeast Pennsylvania from the mid-1950s to mid-1960s, until I was almost eleven years old, and I remember knowing people who worked at places like US Steel, the Sun Oil refinery, Ford Motor Company, Baldwin Locomotive Works, and Sun Shipbuilding. Ours was a middle-class town, and it was the rare worker that was not a member of a labor union.
The industries that once buttressed my former hometown no longer exist, from the oil refinery two miles from my house to the other manufacturing facilities that employed my neighbors. They are shuttered, many of the buildings and fixtures sold for scrap or having been transformed into large, empty lots. This is Rust Belt scenery and the ruin porn is repeated on the Eastern Seaboard and in towns in Ohio, Pennsylvania, Michigan, and elsewhere. Many old working-class towns once held together by a single manufacturing plant that has closed are left to struggle, and some places are transformed into what some have called the “Heroin Belt.”
Conservative critics tend to agree with politicians like Bernie Sanders and Elizabeth Warren about the cause of this economic and social decline, and they increasingly are willing to accept the “solutions” these politicians are demanding, from high tax rates on businesses and individuals to both internal and external protection. And like Sanders and Warren, these conservative market critics blame “corporate greed” for the changes that new investment patterns bring to once prosperous manufacturing communities.
Like those on the Left, the anticapitalist conservatives want to preserve those places that we remember from years ago. What they fail to comprehend is that demanding that government hold back changes in capitalization along and in the methods by which firms make things, they also are demanding that government restrict changes in everything else. To put it another way, we cannot preserve the 1950s manufacturing economy and the mill village without restricting changes in the quality of medical care we receive, in telecommunications, and in transportation.
The old socialist countries provide an insightful lesson regarding the “freezing in time” syndrome. People who have visited places like present-day Cuba or spent time behind the Iron Curtain when the USSR and the eastern European satellites were in existence note that in many ways going there was like entering a time warp. However, this was not the experience one has when visiting an “old town” section of a modern city to see examples of lovely architecture from the past.
Instead, although the old architecture might have dominated in, say, Havana or Prague before the 1990s, everything looked old and run down. Yes, there was evidence of some of the glory of the old days, but for the most part, these places would evince grime, disrepair, and the lack of hope. If one does not want change, then one should go to Havana, where even the 1956 Chevys still are on the road.
For that matter, one does not need to bring back memories of communism to find examples of how the lack of change and development because of government restrictions can have negative effects. Look at American railroads before and after deregulation. As Milton Friedman pointed out in Free to Choose, the US rail system pre-1980 looked like something from the 1950s, and he contrasted the railroads with the US automobile industry, which was already coming out with new models every year.
Since the Jimmy Carter administration ended nearly a century of federal regulation of the railroad industry in 1980, American railroads have become a major factor in a stronger US economy. Michael Grunwald wrote in Time Magazine in 2012:
It’s not just that they are self-sufficient and fuel-efficient, employ 175,000 workers and have poured $500 billion into their trains, tracks and terminals since 1980. They are also quite literally the engines of our economy. America’s passenger rail is a global joke, but our freight rail is the envy of the world, carrying over 40% of our intercity cargo. Trains carry much less of Europe’s freight, which is why trucks clog Europe’s highways. And America’s rail-shipping rates are the world’s lowest, reducing the cost of doing business in the U.S.; they’ve fallen 45% in real dollars since the industry was deregulated three decades ago.
One only can imagine the objections we would hear today from TAC and conservative journalists such as Tucker Carlson if such a deregulatory proposal was to be presented today. "What about economic concentration?" "The railroads will jack up prices!" "Good service will disappear!" "What about safety?" "Won’t there be more derailments and rail accidents?" And so on.
The conservative case against free markets is based on the belief that if change disrupts the status quo in any way, or if companies impose cost reductions that result in a shifting of employment — or even some layoffs — then government should step in and take control. Now, I should add that the conservatives are not advocating outright state ownership or control — or at least that is what they are saying.
Of course, the notion that government will just regulate a little bit and only restrict a few things is fantasy. Likewise, anyone who believes that government regulation will reduce alleged economic concentration does not know the history of regulation. Before the late 1970s and early 1980s, the government essentially organized several industries into regulatory cartels, including passenger airlines, trucking, railroads, banking, and telecommunications. One might recall the numerous railroad bankruptcies that resulted in the formation of Conrail, which was nothing more than a government rail firm that covered the East Coast.
Telecommunications? The only game in town was AT&T and phone service was primitive compared to what it would become only a decade after the end the old regulatory regime. A relative free market transformed the rail industry, and trucking also has vastly increased its hauls. These industries are much more competitive now that government does not control rates and routes.
Since 1980, American living standards have increased in ways that no one then could have predicted. Free markets have played a major role, and one would think that conservatives would appreciate that fact. Instead, they present a picture of wise and paternalistic government that somehow can provide prosperity but still preserve our imaginary Norman Rockwell world.
Why do people believe in conspiracy theories?
Michael Shermer, a famous skeptic, was forced to admit that one of the reasons is that some of them are true. In his research he found that the fact that some conspiracy theories are real feeds people’s suspicion and makes them susceptible to the belief in others that are far less credible.
We are increasingly herded into taking a hard line on issues which are nuanced. One example of this is an apparent increase in two camps: some people are entirely against mainstream medicine while others will bend over backwards to mount an extreme defense of the indefensible excesses of Big Pharma.[[{"fid":"94553","view_mode":"default","fields":{"format":"default","alignment":"center","field_file_image_alt_text[und][0][value]":false,"field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":"https://mises.org/2020donate"},"type":"media","field_deltas":{"1":{"format":"default","alignment":"center","field_file_image_alt_text[und][0][value]":false,"field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":"https://mises.org/2020donate"}},"attributes":{"class":"media-element file-default media-wysiwyg-align-center","data-delta":"1"}}]]
Drugs save lives. Drugs are dangerous. These should not be controversial statements, nor do they contradict one another. According to the American Medical Association’s own figures, medical care has become the third leading cause of death in the United States,Ray Sipherd, “The Third-Leading Cause of Death in US Most Doctors Don’t Want You to Know About,” CNBC, Feb. 22, 2018, http://bit.ly/100_errors. yet few would advocate a return to a time before we had modern medical care.In their famous report, To Err Is Human, the Institute of Medicine estimated that while 98,000 Americans are killed each year by medical errors, between 90,000 and 400,000 patients are harmed or killed by the innocent use of drugs. They either received the wrong drug, the wrong dose of the right drug, or two drugs that interacted in the wrong way. Institute of Medicine, To Err is Human: Building a Safer Health System, ed. Linda T. Kohn, Janet M. Corrigan, and Molla S. Donaldson (Washington, DC: National Academies Press, 2000).
When the government is buying the drug no matter what and those companies are protected from liability for damages that may be caused by those drugs, it ceases to be surprising that people may question whether what is being offered up to them is safe or not. One of the reasons why people believe in conspiracy theories about Big Pharma is because some of them are true.
Some of Pfizer’s History A 2004 advert for Zoloft claimed that over 16 million Americans were affected by social anxiety disorder. But here’s the thing: a study conducted by Pfizer (the manufacturer) discovered that participants did a lot better overcoming social anxiety with “exposure therapy,” including counseling with a primary care doctor about their symptoms and homework to learn how to identify and break through social habits and fears, did better than people who took their drug.John Abramson, Overdosed America: The Broken Promise of American Medicine (New York: Harper Perennial, 2013), p. 232–33.
When the Upjohn Company (now Pfizer) developed Minoxidil, a drug that was originally manufactured to lower blood pressure, they found that it could cause hair regrowth in some balding patients. So they simply switched the marketed effect for the so-called side effect, and they had a drug for balding which just so happened to lower blood pressure.Doug McGuff and Robert P. Murphy, Primal Prescription: Surviving the "Sick Care" Sinkhole (n.p.: Primal Nutrition, 2015), p. 65.
The ALLHAT Study (Antihypertensive and Lipid-Lowering Treatment to Prevent Heart Attacks Trial), was intended to compare the effectiveness of four drugs in preventing complications form high blood pressure. It was originally intended to continue for between four and eight years, but part of it was stopped prematurely because those participants assigned to Cardura (manufactured by Pfizer) were developing significantly more cardiovascular complications than those taking a diuretic. At the time the results were published in JAMA (Journal of the American Medical Association), about $800 million worth of Cardura was being sold each year—but the diuretic was proving more effective at preventing high blood pressure complications at a seventh of the cost. Taking advantage of the fact that most doctors weren’t aware of the research, Pfizer hired damage-control consultants. The American College of Cardiology (ACC) issued a press release recommending that doctors “discontinue use” of Cardura but mere hours later downgraded its wording to “reassess.” Could this be something to do with Pfizer contributing more than $500,000 a year to the ACC?Abramson, Overdosed America, p. 108–09.
Whoever funds the study comes out on top. Companies commonly use positive results from head-to-head trials to encourage doctors to prescribe their drug rather than a competitor’s. When the authors of a Journal of Psychiatry survey looked at the trials, they found a curious thing: in five trials that were paid for by Eli Lilly, its drug Zyprexa came out looking superior to Risperdal, a drug made by the company Janssen. But when Janssen sponsored its own trials, Risperdal was the winner three out of four times. When it was Pfizer funding the studies, its drug Geodon was best. In fact, this tendency for the sponsor’s drug to come out on top held true for 90 percent of the more than thirty trials in the survey.Shannon Brownlee, Overtreated: Why Too Much Medicine Is Making Us Sicker and Poorer (New York: Bloomsbury, 2008), p. 230.
A 2017 article noted that “prices for U.S. made pharmaceuticals have climbed over the past decade six times as far as the cost of goods and services overall.”Robert Pearl, “New Checks and Balances For Big Pharma,” The Health Care Blog, May 12, 2017, http://bit.ly/New_Checks. In a famous case Mylan was able to increase the price of the EpiPen by more than 450 percent, adjusting for inflation, between 2004 and 2016—despite the epinephrine in each injection costing only around $1—because they were the only legal supplier of the product.Charles Silver and David A. Hyman, Overcharged: Why Americans Pay Too Much for Health Care (Washington, DC: Cato Institute, 2018), p. 28. This example, while extreme, is unfortunately not exceptional. Pfizer, Biogen, Gilead Sciences, Amgem, AbbieVie, Turing Pharmaceutical, Envizo, Valeant Pharmaceuticals, and Jazz Pharmaceuticals (to name a few) all seem to have benefited from price gouging by obtaining legally protected monopoly power over certain healthcare products.Silver and Hyman, Overcharged, pp. 25–30.
The covid-19 vaccine manufactured by Pfizer—having bypassed the usual 5–10 years of safety testing—may well be completely harmless, but so long as this kind of tomfoolery continues to be common within the medical field we can expect ever more skeptical people to be labeled by their critics as “antivaxx.”
Pfizer set a record for the largest health care fraud settlement and the largest criminal fine of any kind with $2.3 billion in 2009. The online website Corporate Research Project includes a Pfizer Rap Sheet detailing a number of the controversies they have been involved in.
The United States has always had a love affair with certain generals. George Washington, of course, was immensely popular, and thirteen US presidents were generals before they were president.
But prior to the Second World War, generals as a group were not revered or treated with any particular veneration or respect. In fact, in the nineteenth century, full-time US military officers were often treated with suspicion and contempt. While state militia officers were regarded as indispensable night watchmen who preserved order, the full-time government employees who served in the federal military were often derided as lazy and otherwise unemployable.
But now those days are long gone. In recent decades, active generals and retired generals have grown into a group of politically influential technocrats who can be regularly seen on evening news programs and are habitually feted and promoted as incorruptible patriots. They are fawned over by media organizations while being paid enormous pensions. Moreover, upon retirement they are able to turn their former government employment into lucrative positions on corporate boards and throughout the private sector.
The immense deference and trust placed in the opinions and alleged expertise of these men is far beyond what is warranted. Like all technocrats—whether we're talking Supreme Court justices or public health bureaucrats—the generals have their own interests and their own agendas. This was recently highlighted by the president's new public feud with some generals. At a Labor Day press conference Trump averred: “The top people in the Pentagon probably aren’t, because they want to do nothing but fight wars so that all of those wonderful companies that make the bombs and make the planes and make everything else stay happy.” It's always difficult to guess Trump's motivations and earnestness when he makes statements such as this, but the statement itself isn't wrong. The generals—retired and not— are often deeply enmeshed with weapons manufacturers and tech firms that rely on Pentagon spending.
The Generals' Unimpressive Record It's difficult to see why the nation's generals enjoy such a stellar reputation. The US military establishment has lost every major military endeavor since 1945 and has been shown to be fiscally inept at a level that could only be described as criminal indifference. The Pentagon has repeatedly failed audits and has “misplaced” trillions of taxpayer dollars.
Yet in spite of this impressive record of failure and incompetence, generals continue to be held up by pundits and media organizations as the men who somehow care more about America than anyone else. Moreover, as is typical for technocrats, the generals are used by the establishment to provide intellectual and ideological cover to those who wish to forever expand US military adventurism and intervention. The alleged expertise of the generals—although apparently insufficient to actually win any wars—is said to offer us great insight into how American foreign policy ought to be conducted today.
The Generals Are Hardly Objective, Unbiased Observers Needless to say, this view of the generals veers far from the reality. Moreover, the generals may now be morally and ideologically compromised by their deep ties to weapons manufacturers and the corporate boards on which many generals serve.
In a blistering article published at the American Conservative last week, Hunter Derensis explains how the image of American generals as selfless public servants is long past its expiration date:
Perhaps Trump learned the hard way that the generals of the forever wars don’t measure up to the twentieth-century soldiers he adulated growing up.
For instance, when George Marshall oversaw the deployment of 8.3 million GIs across four continents in World War II, he did so with the assistance of only three other four-star generals. In retirement, Marshall refused to sit on any corporate boards, and passed on multiple lucrative book deals, lest he give the impression that he was profiting from his military record. As he told one publisher, “he had not spent his life serving the government in order to sell his life story to the Saturday Evening Post.”
Contrast that to the bloated, top-heavy military establishment of today, where an unprecedented forty-one four-star generals oversee only 1.3 million men[-] and women-at-arms. These men, selected and groomed because of their safe habits, spend years patting themselves on the back for managing wars-not-won, awaiting the day they can cash in. According to an analysis by The Boston Globe, in the mid-1990s nearly 50% of three- and four-star generals went on to work as consultants or executives for the arms industry. In 2006, at the height of the Iraq War, that number swelled to over 80% of retirees.
The examples are as endless as America’s foreign occupations: former Director of Naval Intelligence Jack Dorsett joined the board of Northrop-Grumman; he was later followed by former Air Force Chief of Staff Mark Welsh; meanwhile, former Vice Chair of the Joint Chiefs of Staff James Cartwright went to Raytheon; former Chairs of the Joint Chiefs—the highest ranking position in the military—William J. Crowe, John Shalikashvili, Richard Myers, and Joseph Dunford went on to work for General Dynamics, Boeing, Northrop-Grumman, and Lockheed-Martin, respectively.
Just as former presidents are able to turn their fame into multimillion dollar fortunes (as the Obamas and Clintons have done) generals are able to engage in very similar activities. Derensis continues:
General James “Mad Dog” Mattis, in between his forced retirement from the Marine Corps and appointment as Secretary of Defense, joined the board of General Dynamics where he was paid over a million dollars in salary and benefits. Returning to public life, Mattis then spent two years cajoling President Trump into keeping the U.S. military engaged in places as disparate as Afghanistan, Syria, and Africa. “Sir, we’re doing it to prevent a bomb from going off in Times Square,” Mattis told his commander-in-chief. Left unsaid was that a strategic withdrawal would also lead to a precipitous decline in Mattis’ future stock options, which he regained after he rejoined General Dynamics following his December 2018 resignation.
None of this proves generals are all amoral cynics, of course. It is quite possible to want a safe and prosperous America while also being an opportunist who’s always on the lookout for new ways to turn one’s life of living off the sweat of the taxpayer into some additional easy cash.
But what this all shows us is that it’s time to start viewing the generals for what they are: lifelong bureaucrats who upon retirement are more than happy to use their easy and vaunted experience in government as a means to fame, adulation, and easy money. After all, in the modern world, generals don’t become generals through courage on the battlefield, or even through any particularly insightful thinking or expertise. It’s not 1944, and these guys aren’t exactly George S. Patton.
Today’s generals are politicos, bureaucrats, and Washington insiders whose primary skill set lies in gaining influence in the halls of Congress and on cable TV shows. It’s very easy and rewarding work. If you can get it.
The Organization of the Petroleum Exporting Countries (OPEC) and its partners have been cutting production since September 2016. Between September and November 2016 they cut production by more than 1.7 million barrels a day, a historical cut that was wrongly prolonged throughout the expansionary phase of the global economy. In December 2018 they cut production again.
OPEC’s was trying to artificially inflate the price of oil. But no oil-producing country lost money at the 2016 price; the only thing they could not afford was to pay huge subsidies, civil servants, and non-oil expenses that many OPEC members finance with export earnings.
This strategic error led to two negative effects for producing countries: On the one hand, supply diversification and technological substitution accelerated; customers responded. On the other hand, the market share of OPEC fell to almost a decade low. The subsequent fiscal and monetary effects turned a strategic error into a disaster. The vast majority of these countries entered into significant fiscal and trade deficits (twin deficits) and, in the absence of local and international demand for their domestic currency, the vast majority increased their US dollar–denominated debt. With falling exports and dollar revenues, now they face a massive dollar shortage in the middle of a demand collapse.
Those production cuts, moreover, worked as an unintended subsidy to United States producers. The short-term rise in the price of oil due to the supply cuts meant an unprecedented capital injection for the North American oil industry, which was going through very dire financial times. OPEC bailed out shale and lost market share. This led to the United States reaching an all-time production record, beating Saudi Arabia and Russia in daily production.
Additionally, between 2015 and 2019 we witnessed an expansion of credit and historical levels of the global money supply. From China to the European Union, credit expansion was encouraged in such a way that investments of dubious profitability were financed at historically low rates, excess capacity and questionable oil investments were kept zombified, and the companies that should have gone bust were kept alive through constant refinancing and issuing high-risk debt at increasingly lower yields. A tsunami of idle capacity was brewing despite the previously mentioned production cuts. New debt issued by the oil sector to finance investments and operations reached $200 billion a year according to the Wall Street Journal. And with very low yields.
The oil industry became one of the main areas of malinvestment in the years of massive liquidity and low yields. This perpetuated excess capacity and kept inefficient companies unnecessarily alive. OPEC cuts added another layer of support that ultimately came back to bite producer nations.
Before COVID-19, there were dangerous signs of a slowdown in the energy world. The International Energy Agency (IEA) had already lowered demand growth estimates in 2019 and warned of the pace of weakening. In June 2019, the Oil Market Report lowered demand growth expectations to 1.2 million barrels a day, a cut in estimates that it had also made in May and April of the same year. Global oil inventories were comfortably at the average of the previous five years and oil stored on the sea was beginning to rise worryingly for a world that was apparently growing steadily.
America’s storage problems were already evident years before the COVID-19 crisis. The United States has a historic problem with the storage and evacuation of oil. Storage issues had surfaced already in 2007. Back in 2007, a price crash on West Texas Intermediate (WTI) occurred when a Valero refinery in Texas was temporarily closed. Storage filled up quickly and the reference price of crude oil collapsed. The United States has 91 million barrels of crude oil storage capacity in Oklahoma, but most refineries are a long distance away or in other states, and there is an evacuation problem that was not solved when some major pipeline projects were halted by government and judicial decisions.
The oil market was showing a small backwardation curve in mid-2019, reflecting a reasonably positive environment for the sector, yet idle capacity and weakening demand growth were already evident. Then, COVID-19 arrived, and with it the forced closure of the economy.
All of these factors have been key to the perfect storm, which was generated in April 2020, when the May WTI crude oil contract price came to a negative price. Storage capacity collapsed with slumping demand, which in March and April fell in the United States to the lowest levels seen since 1995. According to Bloomberg, oil demand in the United States would drop more than 9 million barrels a day in April 2020, erasing all the consumption growth of the decade. The collapse of the price of crude oil led to monster “margin calls” and an urgent fire sale when nobody wanted to buy and those who could execute the contract had no place to store crude.
In Brent, the most international benchmark crude, the situation is similar but not as dramatic. The price has plummeted more than 70 percent in 2020.
Crude oil stored in tanks has soared in 2020 to 3.2 billion barrels, and to this must be added hundreds of ships floating in the world’s seas laden with crude oil—at least 160 million barrels in ports from Singapore to Suffolk.
Worldwide, there is an idle capacity of around 1.4 billion barrels for the storage of crude oil. This is not much considering the speed at which demand is destroyed, and a point has been reached where many producers have to continue delivering barrels because shutting down production is more expensive than maintaining it and others need to generate any possible cash. Demand, according to the IEA, may drop by 9.3 million barrels a day in all of 2020, with a slump of 29 million barrels a day in April.
In 2020, supply will likely be cut by about 12 million barrels a day, but it is not enough to mitigate the destruction of demand or the lack of storage capacity.
Many market participants are wrong when they think that bankruptcies in the oil sector will balance the market and limit supply. When a company goes bankrupt, the assets are absorbed by another more efficient and debt-free business.
Governments all over the world are going to bail out their so-called strategic sectors, and the energy complex stands at the forefront of these actions. Betting on creative destruction to curb overcapacity will be a mistake. Governments and central banks will bail out the entire malinvestment binge of the past decade and, more importantly, incentivize even more overcapacity through massive stimuli, liquidity injections, and negative rates.
The oil market was already weak in 2019. Now it faces a cataclysm. Producers will have to adapt, as always, by adjusting costs. Cutting production only disguises the problem in the short term and creates more problems later, as we explain in The Energy World Is Flat (Wiley).
The reason why the oil market is broken is that it was not a free market. It benefited from direct and indirect subsidies to create overcapacity and excess supply and has become a consequence of the excess in monetary and fiscal policies. The energy sector has become the clearest example of a “too-big-to-fail” mistake. Unfortunately, malinvestment will—again—be rewarded, and the oil market is likely to remain as inefficient and bloated as the coal and aluminum ones.
There will be volatility. But the long-term value destruction of the sector, both from state-owned and private entities, will remain.
Originally published at dlacalle.com
Donald Trump’s recent pardon of Michael Milken, the so-called junk bond king, has brought out the usual suspects to denounce Milken. John Carroll, one of the federal prosecutors that secured Milken’s guilty plea (more on Carroll later) declared in the Washington Post that Trump’s action “outraged” him and claimed that the pardon is proof that American “justice” is unjust:
What outrages me, and what I think should outrage others, is the process that brought about the pardon. In as guileless an admission as I have ever seen of rich man’s justice, the White House bolstered its decision by listing a murderer’s row of Republican donors and billionaires who provided “widespread and long-standing” support for Milken’s pardon.
In fact, what makes this pardon worse, according to Carroll, is that wealthy people—and even Rudy Giuliani himself, the man who led Milken’s prosecution—asked Trump to pardon him. In other words, some of those who have stood up for Milken are wealthy beyond a reasonable doubt, and if their names aren’t George Soros or Kennedy, they should just shut up and count their money.
Indeed, I, too, am outraged by Trump’s pardoning Michael Milken, but the cause of my outrage is that Milken should have needed a pardon at all. That he was coerced into a guilty plea—for “crimes” that federal judges later would say were not criminal actions—and that he spent two years in a federal prison is the real outrage, and the fact that even after thirty years American political and legal elites still are holding to the same false narrative should raise the blood pressure of any person who believes in liberty, fairness, and the rule of law.
For those readers who do not remember the infamous Wall Street prosecutions of more than three decades ago, the story does not have a happy ending. In his brief article celebrating the Milken pardon, David Gordon cites Murray Rothbard’s commentary on that era. Rothbard correctly identified it as a struggle between Michael Milken—a true financial genius who had a positive macroeconomic effect on the US economy—and the power elite.
The story of Michael Milken does not begin with his guilty plea or even the start of the Wall Street predations led by Rudy Giuliani, who then was the US attorney for the Southern District of New York and used his success to launch his political career. Instead, it begins during the Great Depression, when the Franklin Roosevelt administration decided that America’s economic salvation lay in reorganizing the US economy into a series of cartels.
Because of the huge rate of bank failures in the early 1930s, the New Dealers especially sought to cartelize the nation’s financial system, and although the system held together in the first two decades after World War II, by the 1970s it was clear that the heavily regulated and noncompetitive system was not up to enterprises tied in with the new technologies making their way into the economy. That is where Michael Milken and his high-yield bonds underwritten through the upstart investment bank Drexel Burnham stepped in.
When CNN ran its story on the pardon with a snarky headline derisively calling Milken the “Junk Bond King” (and falsely intimating that he was convicted of insider trading and calling him the “face of greed,” another misnomer), the story failed to point out that CNN’s very existence is due to the fact that Milken underwrote its financing through those “junk bonds” that CNN’s talking heads now are deriding. The cartelized banking system was not about to finance a 24-hour news channel, something the “experts” were panning, and especially not one founded by the iconoclastic Ted Turner and to be headquartered in Atlanta and not New York.
Milken also led the financing for McCaw Cellular and MCI, both of which helped to revolutionize telecommunications and upset the status quo. However, as Rothbard points out, Milken’s real “sin” was to be a major force in financing the wave of mergers and hostile takeovers that challenged the progressive status quo in corporate America and the mainstream media. Rothbard wrote:
What Milken did was to resurrect and make flourish the takeover bid concept through the issue of high-yield bonds (the "leveraged buyout"). The new takeover process enraged the Rockefeller-type corporate elite, and enriched both Mr. Milken and his employers, who had the sound business sense to hire Milken on commission, and to keep the commission going despite the wrath of the establishment. In the process Drexel Burnham grew from a small, third-tier investment firm to one of the giants of Wall Street.
He continued:
The establishment was bitter for many reasons. The big banks who were tied in with the existing, inefficient corporate elites, found that the upstart takeover groups could make an end run around the banks by floating high-yield bonds on the open market. The competition also proved inconvenient for firms who issue and trade in blue-chip, but low-yield, bonds; these firms soon persuaded their allies in the establishment media to sneeringly refer to their high-yield competition as "junk" bonds, which is equivalent to the makers of Porsches persuading the press to refer to Volvos as "junk" cars.
The Wall Street establishment had its own weapon in Giuliani, who saw an opportunity to permanently ingratiate himself with New York’s political and financial ruling classes, which would prove to be valuable to him when he later became the city’s mayor. Both Daniel Fischel and Harvey Silverglate have written definitive books in which they detail the abusive way that federal prosecutors went after the financial upstarts using the Racketeer Influenced and Corrupt Organizations (RICO) Act. I also detailed Giuliani’s predations in Regulation a decade ago:
The most notorious business RICO prosecutions came in the late 1980s when Giuliani, then the U.S. attorney for the Southern District of New York, went after two investment firms, Princeton-Newport Securities and Drexel-Burnham-Lambert, which employed Michael Milken. Because RICO’s language is vague, Giuliani found a political treasure trove on Wall Street, where the onerous penalties that accompany RICO coincided with the fact that few people who work on Wall Street ever have been caught up in the maw of the criminal justice system. Giuliani bragged that business people “roll a lot easier” than do hardened criminals. The complexity of the criminal charges plus the stigma of being investigated or charged with “crimes” made Wall Street figures more likely to plead guilty.
Giuliani made it clear that he had targeted Milken for prosecution no matter what, and given the malleability of federal criminal law, Giuliani was able to channel the infamous Lavrentiy Beria, Stalin’s state security head who once declared, “Find me the man, and I will find you the crime.”
Giuliani’s strategy was simple: denounce Milken to a hungry press and feed journalists what for all purposes was disinformation. Select reporters such as James Stewart and Laurie P. Cohen of the Wall Street Journal and journalists at the New York Times received illegally leaked material from the grand jury. Although such leaks are felonies, federal prosecutors are not in the habit of indicting themselves, and the lawless behavior of Giuliani and the elite financial press sent a signal to Milken and everyone else in the federal crosshairs that the rule of law did not apply when the feds were engaged in a popular “war on greed.”
Using the RICO statute enabled Giuliani and his staff to take regulatory violations that normally were handled in the civil arena by the Securities and Exchange Commission and bundle them into “racketeering” charges. At the same time, federal prosecutors constantly threw out the accusations of insider trading, even though they never charged Milken with such “crimes” (and had they had real evidence, there is no doubt that they would have levied that charge, too). However, the progressive American media picked up the “insider trading” narrative and ran with it, just as they did with Martha Stewart (who also did not engage in that act).
While prosecutors levied the usual “fraud” charges against Milken that one sees in federal prosecutions, the actual charges were weak, something that really would come to light when federal judges later deep-sixed identical charges against other Wall Street defendants in future trials. Milken, however, pleaded guilty, something that Carroll writes is proof of his guilt:
I cannot speak to Milken’s place in financial history, but I can attest that he committed financial crimes. I know that not only because we prosecutors saw the evidence but also because his attorneys, the best lawyers of his generation, counseled him to plead guilty. It is true that his crimes were “technical” and “regulatory” in the sense that they violated, as Milken himself put it, “the laws and regulations that govern our industry.” I have always thought that his sentence answered any suggestion that his crimes were less than serious. The sentencing judge determined that Milken should spend years of his life in prison and then three more years doing community service. That has always seemed very serious to me.
Actually, Carroll seems to be quoting himself regarding the “technical” and “regulatory” aspect of Milken’s so-called crimes, since it was Carroll who bragged to Rutgers University law students in 1992 that the government had broken new ground in this case. Federal prosecutors, he said,
were guilty of criminalizing technical offenses….Many of the prosecution theories we used were novel. Many of the statutes that we charged under…hadn’t been charged as crimes before….We’re looking to find the next areas of conduct that meets [sic] any sort of statutory definition of what criminal conduct is.
In other words, Milken and Carroll made the same claims, but now Carroll somehow wants to say that only Milken was saying such a thing. This speaks volumes about Carroll’s integrity.
So why did Milken plead guilty? Even had a Manhattan jury convicted him, the appellate courts almost certainly would have overturned the convictions as they did for the Princeton-Newport defendants. Milken pleaded because federal prosecutors essentially took hostages. First, they aimed their guns at Milken’s 92-year-old grandfather, threatening to prosecute him. Then they indicted Milken’s brother, Lowell. However, they promised Michael that if he pleaded guilty, they would drop the charges against his brother and not prosecute his grandfather. As Giuliani would quip, “A brother for a brother.”
More than three decades have passed since Milken pleaded guilty, his case still brings out the long knives. It doesn’t matter that federal prosecutors committed felony after felony and lied about Milken’s activities. It doesn’t matter that Milken probably broke no criminal statutes and that the advances in finance that he helped create were immeasurable. Nor does it matter that Milken has been a major player in researching prostate cancer—and he even reached out to Giuliani when the latter was stricken with prostate cancer.
No, Michael Milken was responsible for the nonexistent “Decade of Greed.” The New York Times says so. Barron’s says so. The Washington Post says so. Even CNN says so, and Fox News also got into the “greed” act. The narratives, however, are built on something other than the truth. Rothbard puts the whole thing into perspective:
this whole Milken affair, in fact, the entire reign of terror that the Department of Justice and the Securities and Exchange Commission have been conducting for the last several years in Wall Street, raises a lot of questions about the workings of our political as well as our financial system. It raises grave questions about the imbalance of political power enjoyed by our existing financial and corporate elites, power that can persuade the coercive arm of the federal government to repress, cripple, and even jail people whose only "crime" is to make money by facilitating the transfer of capital from less to more efficient hands. When creative and productive businessmen are harassed and jailed while rapists, muggers, and murderers go free, there is something very wrong indeed.
Capital accumulation and productivity growth are the outcome of free market investment and not of government spending. This is well known to Austrian school economists. RothbardMurray N. Rothbard, Man, Economy and State with Power and Market, pp. 967–69. argued that only the free market can ensure an efficient allocation of factors of production whereas government sponsored investment is “either malinvestment or not investment at all, but simply waste assets.” MisesLudwig von Mises, Human Action, pp. 274–79. explained how restricting market competition shifts production to places with less favorable conditions, resulting in lower labor productivity and standards of living. Nevertheless, this point still needs to be understood by countries such as South Korea, whose growth model driven by state-led and export-oriented industrialization appears to have reached its limits.
Remarkable Success Story of Growth at First Sight Korea grew from one of the poorest economies in the 1960s into an advanced economy while avoiding the middle-income trap. Its GDP per capita in PPP (purchasing power parity) almost reached the OECD (Organisation for Economic Co-operation and Development) average in 2018 after having been less than one-sixth in 1970 (Graph 1). Rapid growth rates of between 7 and 10 percent for several decades until the mid-1990s were propelled by very high investment which peaked at 40 percent of GDP in 1990 and has averaged around 32 percent of GDP since then (Graph 2).
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Rapid industrialization and deep integration in the global value chains helped Korea become the world’s fifth-largest exporter of manufactured goods in 2017. It is most striking that behind this seeming outstanding success lies an active industrial policy. Government support for large business groups, known as chaebols, via subsidies and trade and investment barriers turned the likes of Samsung, Hyundai, LG, Kia, and Daewoo (now defunct) into global champions. But as Ryan McMaken points out, there are a lot of “unseen” missed economic opportunities behind Korea’s government-corporate “cooperation,” which means that centralized decision-making and government favoritism to big businesses obviously come at a price.
Growth Slumping While Productivity and Consumption Lag Behind Growth typically decelerates when countries grow richer. Yet Korea’s decline in real GDP growth has been very abrupt—from about 7–8 percent in the 1980s and 1990s to below 3 percent currently. Its potential output has also slumped, driven by slowing capital accumulation and total factor productivity despite the very high investment rates. Most importantly, labor productivity has lagged significantly behind the rapid GDP growth. In 2018 Korea’s real GDP per capita was one-third lower than that of the top half of OECD countries, while labor productivity was 46 percent below that of the same sample (Graph 3). The difference is compensated by longer working hours—Koreans work 15 percent more than the OECD average and 30 percent more than the EU average.
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In exchange for the long working hours, Koreans must content themselves with lower wages and private consumption levels relative to GDP performance. From 1990–2018, the Korean GDP per capita in PPP more than doubled from 43 to 94 percent of the OECD average, while the average wage in purchasing power parity grew much slower, from 59 to 85 percent of the OECD average. This is consistent with the weaker labor productivity growth, but also reflects the monopsonic power of chaebols, very rigid labor market conditions, and an inefficient wage model favoring length of service over performance, which keeps wages depressed in exchange for job security. At 53 percent of GDP, the share of labor compensation is among the lowest in the OECD group. Similarly, households’ net disposable income has steadily dropped, reaching around 50 percent of GDP in 2018 compared to US and euro area levels of about 75 and 60 percent of GDP.
In addition to compressed wages, high import tariffs and limited competition among domestic companies has hurt private consumption, which fell to a quite low 48 percent of GDP in 2018 (Graph 4). As household incomes lagged behind GDP growth, consumption and housing purchases were increasingly supported by credit. Household debt peaked at about 92 percent of GDP in 2019, one of the highest among developed economies.
Revealing an Inefficient Resource Allocation According to the mainstream growth recipe, Korea should be a top-class student with its very high investment ratio, extremely long working hours, and first-rate R&D (research and development) spending (4.6 percent of GDP in 2017). It has obviously excelled in the quantitative utilization of both capital and labor. But the sheer size of resource utilization is not enough to deliver sustainable growth without their efficient combination. Only free markets can ensure an efficient allocation of factors of production to their most productive uses. Unfortunately, in Korea’s case, labor and product markets are heavily regulated and cannot perform their resource optimization task.
Restricted competition on product markets and the government picking winners have always been intrinsic features of Korea’s growth model. The protectionist toolbox has comprised both trade and investment barriers and subsidies. In contrast to its excellent overall ranking in the 2019 Global Competitiveness Index (thirteenth out of 141 countries), Korea ranked only the ninety-first in terms of trade openness for tariffs and seventy-seventh for nontariff barriers. Similarly, its stock of inward foreign direct investment (FDI) was a meager 14 percent of GDP in 2018, compared to 55 percent of GDP for the EU and 36 percent of GDP for the US. With an outward FDI stock of about 22 percent of GDP, Korea has been a net exporter of direct investment. On-budget subsidies for economic activities are almost double the OECD average.
When the chaebol system overstretched and its inefficiencies became too obvious, especially after the 1997 financial crisis, the government pushed for its downsizing and leveling the playing field versus small to medium-sized enterprises (SMEs). As vested interests made market liberalization almost impossible, government support was instead gradually extended to SMEs via credit and other financial subsidies, lower taxation, preferential access to public procurement, and exclusive rights to operate in certain business lines. As a result, both chaebols and SMEs are now operating in segmented and rigorously protected markets while Korea’s product market regulations remain the fourth strictest among the OECD nations.
Labor market regulations are very rigid too, which led to an inefficient dual labor market over time. Korea only ranked close to one hundredth in the 2019 Global Competitiveness Index in terms of labor market flexibility, redundancy costs, and ease of hiring and firing. The labor market is strongly segmented, with a large share of irregular jobs to make up for the tight regulations. Nonregular workers represent about one-third of total employment compared to 11 percent in OECD economies, and earn only 66 percent of regular workers’ wages on average. Well-paid regular jobs in large companies are scarce relative to unattractive jobs in SMEs and services, which suffer from labor shortages. Together with educational mismatches this contributes to a fairly low youth employment rate.
Shift in Growth Strategy Goes in the Wrong Direction As often is the case with government action, Korea tried to address the symptoms rather than the root causes of its problems of inefficient growth and depressed consumption. In 2017, the newly elected president Moon Jae-in announced a shift towards domestic income–led growth, primarily by redistributing incomes and boosting consumption. The government increased substantially the minimum wage by a cumulated 30 percent during 2018–19, reduced statutory working hours from 68 to 52 hours per week, and promised an increase in public employment of about 40 percent.
It goes without saying that these measures made things worse, especially as they overlapped with a significant decline in external demand following the US-China trade war. Employment growth decelerated notably, driven by job losses in manufacturing and SMEs, and new jobs were created primarily in the public sector and more precarious part-time positions. Despite income redistribution measures, private consumption growth decelerated further in 2019 while private investment declined for six quarters in a row, weakened by FDI outflows and company relocations. All in all, Korea’s real GDP growth declined from 3.2 percent in 2017 to an estimated 2 percent in 2019. On top of that, income-boosting measures have been costly: the budget balance is projected to deteriorate from a surplus of 2.6 percent of GDP in 2018 to a deficit of 1.4 percent in 2020.
A Sensible Way Forward What Korea needs to achieve a sustainable revival of its potential growth is an efficient allocation of factors of production by free markets, unencumbered by government protection of either dominant chaebols or SMEs. Only this can ensure genuine capital accumulation and higher labor productivity to underpin market-set wages that do not undermine cost competitiveness. As production is only a means for consumption, freedom to choose the preferred consumption schedules would provide Koreans with a better standard of living and work incentives.
The case of Korea justifies in full Mises’s assertion that government interference with businesses makes people poorer and less satisfied. In Mises’s own words:
government doesn’t have the power to encourage one branch of production except by curtailing other branches….It may subsidize openly or disguise the subsidy in enacting tariffs….What alone counts is the fact that people are forced to forego some satisfactions which they value more highly and are compensated only by satisfactions which they value less (Human Action, p. 737).
[From Power and Market, chapter 3.]
One of the favorite arguments for licensing laws and other types of quality standards is that governments must “protect” consumers by insuring that workers and businesses sell goods and services of the highest quality. The answer, of course, is that “quality” is a highly elastic and relative term and is decided by the consumers in their free actions in the marketplace. The consumers decide according to their own tastes and interests, and particularly according to the price they wish to pay for the service. It may very well be, for example, that a certain number of years’ attendance at a certain type of school turns out the best quality of doctors (although it is difficult to see why the government must guard the public from unlicensed cold-cream demonstrators or from plumbers without a college degree or with less than ten years’ experience). But by prohibiting the practice of medicine by people who do not meet these requirements, the government is injuring consumers who would buy the services of the outlawed competitors, is protecting “qualified” but less value-productive doctors from outside competition, and also grants restrictionist prices to the remaining doctors.It is hardly remarkable that we hear continual complaints about a “shortage” of doctors and teachers, but rarely hear complaints of shortages in unlicensed occupations. On licensing in medicine, see Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1963), pp. 149–60; Reuben A. Kessel, “Price Discrimination in Medicine,” Journal of Law and Economics (October 1958), pp. 20–53. Consumers are prevented from choosing lower-quality treatment of minor ills, in exchange for a lower price, and are also prevented from patronizing doctors who have a different theory of medicine from that sanctioned by the state-approved medical schools.
How much these requirements are designed to “protect” the health of the public, and how much to restrict competition, may be gauged from the fact that giving medical advice free without a license is rarely a legal offense. Only the sale of medical advice requires a license. Since someone may be injured as much, if not more, by free medical advice than by purchased advice, the major purpose of the regulation is clearly to restrict competition rather than to safeguard the public.For an excellent analysis of the workings of compulsory quality standards in a concrete case, see P. T. Bauer, West African Trade (Cambridge: Cambridge University Press, 1954), pp. 365–75.
Other quality standards in production have an even more injurious effect. They impose governmental definitions of products and require businesses to hew to the specifications laid down by these definitions. Thus, the government defines “bread” as being of a certain composition. This is supposed to be a safeguard against “adulteration,” but in fact it prohibits improvement. If the government defines a product in a certain way, it prohibits change. A change, to be accepted by consumers, has to be an improvement, either absolutely or in the form of a lower price. Yet it may take a long time, if not forever, to persuade the government bureaucracy to change the requirements. In the meantime, competition is injured, and technological improvements are blocked.For case studies of the effects of such “quality” standards, see George J. Alexander, Honesty and Competition (Syracuse: Syracuse University Press, 1967). “Quality” standards, by shifting decisions about quality from the consumers to arbitrary government boards, impose rigidities and monopolization on the economic system.
In the free economy, there would be ample means to obtain redress for direct injuries or fraudulent “adulteration.” No system of government “standards” or army of administrative inspectors is necessary. If a man is sold adulterated food, then clearly the seller has committed fraud, violating his contract to sell the food. Thus, if A sells B breakfast food, and it turns out to be straw, A has committed an illegal act of fraud by telling B he is selling him food while actually selling straw. This is punishable in the courts under “libertarian law,” i.e., the legal code of the free society that would prohibit all invasions of persons and property. The loss of the product and the price, plus suitable damages (paid to the victim, not to the State), would be included in the punishment of fraud. No administrator is needed to prevent nonfraudulent sales; if a man simply sells what he calls “bread,” it must meet the common definition of bread held by consumers, and not some arbitrary specification. However, if he specifies the composition of the loaf, he is liable for prosecution if he is lying. It must be emphasized that the crime is not lying per se, which is a moral problem not under the province of a free-market defense agency, but breaching a contract — taking someone else's property under false pretenses and therefore being guilty of fraud. If, on the other hand, the adulterated product injures the health of the buyer (such as by an inserted poison), the seller is further liable for prosecution for injuring and assaulting the person of the buyer.On adulteration and fraud, see the definitive discussion by Wordsworth Donisthorpe, Law in a Free State (London: Macmillan & Co., 1895), pp. 132–58.
Another type of quality control is the alleged “protection” of investors. SEC regulations force new companies selling stock, for example, to comply with certain rules, issue brochures, etc. The net effect is to hamper new and especially small firms and restrict them in acquiring capital, thereby conferring a monopolistic privilege upon existing firms. Investors are prohibited from investing in particularly risky enterprises. SEC regulations, “blue-sky laws,” etc., thereby restrict the entry of new firms and prevent investment in risky but possibly successful ventures. Once again, efficiency in business and service to the consumer are hampered.Some people who generally adhere to the free market support the SEC and similar regulations on the ground that they “raise the moral tone of competition.” Certainly they restrict competition, but they cannot be said to “raise the moral tone” until morality is successfully defined. How can morality in production be defined except as efficient service to the consumer? And how can anyone be “moral” if he is prevented by force from acting otherwise?
Safety codes are another common type of quality standard. They prescribe the details of production and outlaw differences. The free-market method of dealing, say, with the collapse of a building killing several persons, is to send the owner of the building to jail for manslaughter. But the free market can countenance no arbitrary “safety” code promulgated in advance of any crime. The current system does not treat the building owner as a virtual murderer should a collapse occur; instead, he merely pays a sum of monetary damages. In that way, invasion of person goes relatively unpunished and undeterred. On the other hand, administrative codes proliferate, and their general effect is to prevent major improvements in the building industry and thus to confer monopolistic privileges on existing builders, as contrasted with potentially innovating competitors.The building industry is so constituted that many laborers are quasi-independent entrepreneurs. Safety codes therefore compound the restrictionism of building unions. Evasion of safety codes through bribery then permits the actual aggressor (the builder whose property injures someone) to continue unpunished and go scot-free.
It might be objected that free-market defense agencies must wait until after people are injured to punish, rather than prevent, crime. It is true that on the free market only overt acts can be punished. There is no attempt by anyone to tyrannize over anyone else on the ground that some future crime might possibly be prevented thereby. On the “prevention” theory, any sort of invasion of personal freedom can be, and in fact must be, justified. It is certainly a ludicrous procedure to attempt to “prevent” a few future invasions by committing permanent invasions against everyone.We might add here that on the purely free market even the “clear and present danger” criterion would be far too lax and subjective a definition for a punishable deed.
Safety regulations are also imposed on labor contracts. Workers and employers are prevented from agreeing on terms of hire unless certain governmental rules are obeyed. The result is a loss imposed on workers and employers, who are denied their freedom to contract, and who must turn to other, less remunerative employments. Factors are therefore distorted and misallocated in relation to both the maximum satisfaction of the consumers and maximum return to factors. Industry is rendered less productive and flexible.
Another use of “safety regulations” is to prevent geographic competition, i.e., to keep consumers from buying goods from efficient producers located in other geographical areas. Analytically, there is little distinction between competition in general and in location, since location is simply one of the many advantages or disadvantages that competing firms possess. Thus, state governments have organized compulsory milk cartels, which set minimum prices and restrict output, and absolute embargoes are levied on out-of-state milk imports, under the guise of “safety.” The effect, of course, is to cut off competition and permit monopoly pricing. Furthermore, safety requirements that go far beyond those imposed on local firms are often exacted on out-of-state products.See Stigler, Theory of Price, p. 211.
Listen to the Audio Mises Wire version of this article. Ever since images of the police deploying armored vehicles against peaceful demonstrators in Ferguson, Missouri, hit the national airwaves in 2014, the Pentagon’s program for supplying “surplus” military equipment to local police departments has been a news item. It’s also gotten intermittent attention in Congress and the executive branch.
Since 1997, the Pentagon’s 1033 Program, as it’s called, has channeled to 8,000 separate law enforcement agencies more than $7.4 billion in surplus equipment, including Mine-Resistant Ambush Protected (MRAP) vehicles of the kind used on the battlefields of Iraq and Afghanistan, along with rifles, ammunition, grenade launchers, and night vision devices. As Brian Barrett has pointed out at Wired, “Local law enforcement responding to even nonviolent protests has often looked more like the U.S. Armed Forces.” Political scientist Ryan Welch coauthored a 2017 study suggesting, when it came to police departments equipped in such a fashion, “that officers with military hardware and mindsets will resort to violence more often and more quickly.”
Under the circumstances and given who’s providing the equipment, you won’t be surprised to learn that the 1033 Program also suffers from lax oversight. In 2017, the Government Accountability Office (GAO) created a fake law enforcement agency and was able to acquire $1.2 million worth of equipment through the program, including night vision goggles and simulated M-16A2 rifles. The request was approved within a week of the GAO’s application.
The Obama administration finally implemented some reforms in the wake of Ferguson, banning the transfer of tracked vehicles, grenade launchers, and weaponized aircraft, among other things, while requiring police departments to supply more detailed rationales describing their need for specific equipment. But such modest efforts—and they proved modest indeed—were promptly chucked out when Donald Trump took office. And the Trump administration changes quickly had a discernible effect. In 2019, the 1033 Program had one of its biggest years ever, with about 15,750 military items transferred to law enforcement, a figure exceeded only in 2012, in the Obama years, when 17,000 such items were distributed.
As noted, the mere possession of military equipment has been shown to stoke the ever stronger “warrior culture” that now characterizes so many police departments, as evidenced by the use of Special Weapons and Tactics (SWAT) teams armed with military weaponry for routine drug enforcement activities. It’s hardly just SWAT teams, though. The weaponry and related items provided under the 1033 Program are widely employed by ordinary police forces. NBC News, for instance, reported that armored vehicles were used at least 29 times in response to Black Lives Matter protests organized since the murder of George Floyd, including in major urban areas like Philadelphia and Cincinnati. NBC has also determined that more than 1,100 Mine-Resistant Ambush Protected vehicles have been distributed to local law enforcement agencies under the MRAP program, going to communities large and small, including Sanford, Maine, population 20,000, and Moundsville, West Virginia, population 8,400.
A report from the American Civil Liberties Union (ACLU) has similarly documented the use of Pentagon-supplied equipment in no-knock home invasions, including driving up to people’s houses in just such armored vehicles to launch the raids. The ACLU concluded that “the militarization of American policing is evident in the training that police officers receive, which encourages them to adopt a ‘warrior’ mentality and think of the people they are supposed to serve as enemies, as well as in the equipment they use, such as battering rams, flashbang grenades, and APCs [Armored Personnel Carriers].”
Who Benefits? Companies in the military-industrial complex earn billions of dollars selling weapons, as well as building and operating prisons and detention facilities, and supplying the police while theoretically dealing with problems with deep social and economic roots. Generally speaking, by the time they’re done, those problems have only become deeper and more rooted. Take, for example, giant weapons contractors like Lockheed Martin, Boeing, and Raytheon that profit so splendidly from the sales of weapons systems to Saudi Arabia, weaponry that in turn has been used to kill tens of thousands of civilians in Yemen, destroy civilian infrastructure there, and block the provision of desperately needed humanitarian assistance. The result: more than a hundred thousand deaths in that country and millions more on the brink of famine and disease, including COVID-19.
Such major weapons firms have also been at the front of the line when it comes to benefiting from America’s endless post-9/11 wars. The Costs of War Project at Brown University estimates that the United States has spent over $6.4 trillion on just some of those overseas conflicts since 2001. Hundreds of billions of those dollars ended up in the pockets of defense contractors, while problems in the US, left far less well funded, only grew.
And by the way, the Pentagon’s regular budget, combined with direct spending on wars, also manages to provide huge benefits to such weapons makers. Almost half of the department’s $750 billion budget goes to them. According to the Federal Procurement Data System’s latest report on the top recipients of government contracts, the five largest US arms makers alone—Lockheed Martin, Boeing, Raytheon, Northrop Grumman, and General Dynamics—split well over $100 billion in Pentagon awards among them in 2019. Meanwhile, those same five firms pay their CEOs a total of approximately $100 million per year, with hundreds of millions more going to other top executives and board members.
Meanwhile, in the Trump years, the militarization of the border has become a particularly lucrative business opportunity, with General Atomics, for instance, supplying ever more surveillance drones and General Dynamics supplying an ever more intricate and expensive remote sensor surveillance system. There are also millions to be made running privatized prisons and immigrant detention centers, filling the coffers of firms like CoreCivic and the GEO Group, which have secured record profits in recent years while garnering about half their revenues from those two sources.
Last but not least is the market for even more police equipment. Local forces benefit from grants from the Department of Homeland Security to purchase a wide range of items to supplement the Pentagon’s 1033 Program.
The True Bottom Line Much has been written about America’s failed post-9/11 wars, which have cost trillions of dollars in taxpayer treasure, hundreds of thousands of lives (American and otherwise), and physical and psychological injuries to hundreds of thousands more. These wars have also propped up sectarian and corrupt regimes that have actually made it easier for terrorist groups like al-Qaeda and ISIS to form and spread. Think of it as the ultimate boomerang effect, in which violence begets more violence while allowing overseas terrorist organizations to thrive. As journalist Nick Turse has noted with respect to the militarization of US Africa policy, the growth in American military operations on that continent has proceeded rather strikingly in conjunction with a proliferation of new terrorist groups. Put the best light on them and US counterterror operations there have been ineffective. More likely, they have simply helped spawn further increases in terrorist activities in the region.
[This is a selection from a longer essay published at TomDispatch.com.]
Although the roughly two million affected residents of Northern California are recovering from the rolling blackouts imposed by utility PG&E, the company has warned that these “fire safety outages” may be periodically required for another decade. Naturally, California Governor Gavin Newsom decried the debacle as yet another example of “greed and neglect.” Yet as IER analyst Jordan McGillis explained in a previous article, the episode actually showcases the dangers of a government-imposed monopoly in electricity provision. In this article, I’ll elaborate on McGillis’ insights and show why the conventional economic rationale for government regulation of electric utilities is fundamentally flawed.
PG&E’s Rolling Blackouts Not a Free-Market Outcome When a company screws up so horribly, letting down literally millions of its customers and moreover promising to continue doing so for another decade (!), the obvious question is: Why don’t they go out of business? Why doesn’t a competitor grab their market share?
The answer, of course, is that the California government forbids PG&E’s customers from switching to a competitor. Let me quote directly from McGillis who gets to the heart of the matter:
PG&E does not function as would a company in a competitive marketplace. As a regulated monopoly, it has been granted status as the sole provider of electricity to a swath of the state stretching more than 500 miles from Eureka, north of the Bay Area, to Bakersfield, in the San Joaquin Valley. The company operates in tandem with the California Public Utilities Commission (CPUC), a panel of regulators appointed by the governor. Unlike in a competitive marketplace, PG&E does not need to compete for customers by offering more value dollar-for-dollar than other companies. Instead PG&E is guaranteed a rate of return on its investments and establishes with the CPUC the corresponding rates that customers will pay.
So we’ve solved the most immediate puzzle: The reason PG&E can get away with such outrageous mismanagement and shoddy customer service, is that the California government literally guarantees them their business. It is illegal for another company to try to entice PG&E’s disgruntled customers to switch their patronage.
Companies in an Open Market Love Periods of “High Demand” Although the outrageous episode of PG&E is fresh in our minds, this is nothing unusual. Every summer, it is commonplace for utilities to urge their customers to “conserve power” by keeping their air conditioners at an uncomfortable setting, and they often impose rolling blackouts or “brownouts” in order to maintain the integrity of the grid.
Notice that you never see this type of behavior from genuinely private sector companies? Even though people greatly increase their consumption of beer and hot dogs during July, you never see Budweiser or Oscar Mayer imposing temporary outages on their customers.
On the contrary, companies in an open market love it when the public suddenly wants to buy more of their product or service. It’s only in the realm of government-regulated utilities (or services directly provided by a government agency) where the customers are viewed as annoying nuisances, who need to be scolded to stop consuming so much.
Different Incentives, Different Results Any adult American reading my article surely can agree—regardless of your politics—that I am speaking the truth. To repeat, you simply do not see private companies in (relatively) open markets operating the way PG&E and other “public utilities” do. So the mismanagement and shoddy service of PG&E can’t possibly be the fault merely of corporate greed and neglect. Rather, the difference is due to the institutional structure and incentives that the government sets up.
As McGillis explained in the block quotation above, a regulated public utility is typically given a monopoly for a certain region. It’s not allowed to charge “whatever the market will bear,” but instead must have its retail prices approved by government regulators. After showing the regulators the official cost of providing the service—whether electricity, natural gas, land phone lines, water, etc.—the utility is then allowed to charge enough to cover its costs and earn a reasonable rate of return for the investors.
The problem with this approach should be all too obvious, in light of PG&E’s debacle and the similar episodes we see all the time with other government-regulated monopolies—the residential drinking water crisis in Flint, MI comes to mind. Once a company is guaranteed its customers, with competition expressly outlawed, there is little reason for it to maintain quality.
Furthermore, because the retail price to the final consumer is regulated, whenever the quantity demanded exceeds the supply, the only solution is to artificially restrict the ability of customers to use the product. In a normal, relatively unregulated market, the price rapidly adjusts to balance the quantity demanded and supplied. In extreme situations—such as the immediate aftermath of a hurricane—this can lead to “outrageous” prices for bottled water and batteries, but such “price gouging” is exactly what we want to ration the available supply and motivate outsiders to bring in new supplies.
The Conceptual Flaw With Mainstream Models of Regulation The textbook rationale for regulating certain services—such as residential electricity and water—is that they constitute “natural monopolies.” The idea is that a certain level of infrastructure spending is necessary to even have the ability to offer these services to a particular region, and so in an unregulated open market you would either have unnecessary duplication—with a given street having numerous pipes and power lines from different companies—or you would have one company that had captured the market and could charge outrageously high prices for such essentials. In order to combat these undesirable outcomes, the model of a publicly regulated monopolist with cost-plus pricing was developed.
Yet as I’ve argued above, there is something terribly wrong with this approach. It simply takes it as a given that a regulated monopoly will provide the same quality of service as one facing open competition, which we see in practice is simply not true. Furthermore, as those in the Austrian tradition of economics stress, there is no such thing as an objectively given “cost of production.” Firms need to discover cheaper methods of producing electricity, water, etc., and we would expect them to look more diligently when they have profits as a reward. In other words, once your firm is allowed to charge its “cost” plus a markup for profit, you have no reason to weed out inefficiencies—the regulators will simply make you cut your retail price.
Conclusion The PG&E debacle showcases the flaws of government-regulated monopolies. This is not an isolated incident, but is typical of the entire model. Yes, there are practical reasons that free and open competition might not work as smoothly with services requiring large infrastructure spending, but these complications pale in comparison to the dangers of having government outlaw competition. If we see the benefits of competition in trivial goods like soda and cereal, we should all the more so insist on competition for essentials like electricity and drinking water.
Almost two weeks have passed since Hurricane Irma made landfall in South Florida, yet tens of thousands remain without power. With temperatures regularly eclipsing over 90 degrees, these outages are not only a grave inconvenience for Floridians cleaning up after the storm, but have proved to be deadly. Given the power of Irma, it is not surprising that it has left behind incredible devastation. Unfortunately it is also not surprising that it is a government-protected utility that has done the most to impede recovery. The pain and suffering currently being felt is the direct result of government policy and the perverse incentives of crony capitalism.
One of the talked about examples of how bad policy is making things worse for Florida families are a variety of government policies that discourages the use of solar power in the Sunshine State. Government policy dictates that Floridians are required to be connected to the central power grid, even if they have enough solar panels installed to power their entire house. Because of this requirement, a family stuck in areas without power with solar panels installed cannot use them now because doing so could endanger workers trying to restore power for their neighbors. Once again government’s desire for centralized control has unintended consequences.
Of course, even without such rules, it’s unlikely that all of Florida would decide to go off the grid. Given that, it’s important to understand how the legal monopoly granted to electric companies not only traps customers into being entirely reliant upon a single company, but actively incentivizes those companies to be reactive – rather than proactive – when it comes to natural disasters and other events that threaten service.
After all, companies like Florida Power & Light will respond to Irma as they have done to hurricanes past, by increasing prices on their customers. Unfortunately, the revenue reaped seems to have made little impact in FPL’s preparedness for future storms. While the company has reported that its recovery efforts have moved faster this year than when Hurricane Wilma hit South Florida in 2005, more residents suffered outrages due to Irma – in spite of the fact that Wilma actually had higher sustained winds when it made landfall.
Along with the temporary wage hikes following storms, the company also charges annual “storm fees” meant to pay for tree maintenance around power lines. FPL is now facing a class-action lawsuit in the aftermath of Irma over their apparent failure to do so. Legal cases are certainly nothing new to FPL, as they have often legally fought measures requiring more of their powerlines to be buried underground, rather than be subjected to tropical storm winds above.
While FPL may be skimping on storm preparedness, they do make significant investments in the one resource that is truly vital to their business model: government.
FPL and other power companies are regularly among the largest political contributors in the state of Florida. In return, their lobbyists have been able to earn significant influence in writing energy legislation in the state of Florida. Of course this is the inevitable result of government granting monopolies to private companies. Isolated from the competition of the market, a business has no need to satisfy the needs of the customer, they only need to protect the relationship they have with government. Mises summed it up well in Human Action when he wrote, “Corruption is a regular effect of interventionism.”
Now given the amount of heat companies like FPL are facing following Irma, it’s possible the companies may finally have the political incentive to make some changes in the way they conduct business. Legislators may even be shamed into removing some of the restrictions on solar panels.
What Florida really needs, however, is to do away with the entire concept of natural monopolies for public utilities. There should be no legislation arbitrarily awarding either private or public companies a commercial fiefdom by legally protecting them from competition. Doing so ensures that desires of customers will always take a back seat to the good will of politicians, and will stifle the ability of the market to innovate superior methods of delivering such important services.
As Murray Rothbard wrote in Man, Economy, and State:
Regulation of public utilities or of any other industry discourages investment in these industries, thereby depriving consumers of the best satisfaction of their wants. For it distorts the resource allocations of the free market. Prices set below the free market create an artificial shortage of the utility service; prices set above those determined by the free market impose restrictions and a monopoly price on the consumers. Guaranteed rates of return exempt the utility from the free play of market forces and impose burdens on the consumers by distorting market allocations.
Hurricanes in Florida are as inevitable as Florida Man headlines. It is not a matter of if Florida will be hit with another powerful storm, but when will it happen next. If its state government wants to truly do everything it can to protect its citizens from the damage Mother Nature can wrought, it should free them from the devastation they face at the hands of government monopolies and crony capitalism.
On June 28th, 2015, Elon Musk’s SpaceX Falcon 9 rocket launched a Dragon resupply ship not into space, but rather into the Atlantic Ocean. It was a catastrophic failure that cost taxpayers $112 million. The payload that was meant to resupply the International Space Station (ISS) went up in a huge plume of smoke and flames. However, even though SpaceX did not complete their mission, they still received all but 20 percent of the full payment. Standard NASA protocol is to release a report on every launch accident, but to this day — two years later — there is still no formal statement as to what went wrong on the SpaceX accident.
Per NASA, there won’t be one released anytime soon. The Agency recently announced that it will in fact not publicly release a report on their investigation into the disastrous explosion of the SpaceX Falcon 9 rocket. They had originally committed to reporting their results by the summer of 2017, but have instead passed the buck to the FAA.
“Since it was an FAA licensed flight, NASA is not required to complete a formal final report or public summary, and has deferred any additional products related to the matter at this time,” the agency’s Public Affairs Office (PAO) stated. “The data is important for historical purposes, but the mishap involved a version of the Falcon 9 rocket, the version 1.1, that is now no longer in use.” Apparently, the fact that SpaceX is no longer using that version of the Falcon 9 after this $112 million “mishap” of taxpayer funds means the American taxpayers have no right to know what happened. Strangely, that storyline did not work for a competing firm’s similar failure that occurred eight months prior.
On Oct. 28th, 2014, an Orbital Sciences Antares rocket was loaded with NASA Supplies aboard a Cygnus cargo ship worth $51 million bound for the ISS. Upon lift-off, the booster exploded, and the payload was lost, severely damaging the launch pad. Just like the SpaceX flight, the Orbital rocket was an official FAA-Licensed commercial launch. Both the Antares and the Falcon 9 launches were conducted under the same NASA Commercial Resupply Services (CRS) program. And just like the Falcon 9, the Antares was part of an expiring line of rockets. Yet, NASA completed and published an executive summary within one year of the Antares incident.
The smell of hypocrisy has never been so potent.
After the report on the Antares accident was released, the explosion was traced to a failure of a turbo pump on an aging AJ26 first stage engine that was originally built for the Soviet Union’s lunar program more than 40 years earlier. Two months after the accident, Orbital announced it would replace the AJ26 engines with newly manufactured RD-181 engines which would require substantial modifications to Antares. The company learned from its mistake, as it should have been expected to do.
The same cannot be said for SpaceX. The only report NASA has made public regarding the Falcon 9 accident was an audit conducted by the agency’s Office of Inspector General. This report focused only on the loss of Dragon on NASA’s resupply program. The audit spent less than one page discussing the cause of the accident without presenting any conclusions.
This glaring hypocrisy between the handling of the Orbital and the SpaceX cases has not gone unnoticed. Rep. Lamar Smith (R-Texas), chairman of the House Committee on Science, Space and Technology wrote a letter just after the SpaceX accident to NASA Administrator, Charles Bolden, expressing his belief that this “discrepancy … raises questions about not only the equity and fairness of NASA’s process for initiating independent accident investigations, but also the fidelity of the investigations themselves.”
The lack of a full investigation into the SpaceX Falcon 9 accident begs the question: Why is SpaceX given such preferential treatment? It appears that NASA is playing favorites with SpaceX. Considering the high risk and astronomical cost of the space program, shouldn’t all those involved be held to the highest standards?
Instead of getting to the bottom of the problems leading up to the SpaceX explosion, NASA responded by giving SpaceX a new long-term contract. The contract included discounted prices for future cargo missions and other “significant considerations,” but it still gives the impression that NASA has chosen to reward failure. The whole process raises questions about how NASA handles launch failure investigations, manages risk for cargo flights, and assigns cargo for those missions — not to mention their standards of accountability to the taxpayers that are funding the space program.
While there is no doubt that SpaceX has implemented some innovative, cost-cutting solutions for NASA, it should not be held to a different set of standards. Over the years, there have been various amendments proposed to completely ban the use of the company’s competition. For instance, in the FY 2018 NDAA, the House Armed Service Committee has proposed limiting funding for Russian rocket engines, as well as funding for new launch vehicles and launch vehicle systems. Competitors like the United Launch Alliance (ULA) are working on new, competitive evolved expendable launch vehicles (EELVs) that use American-made rockets, but the NDAA in its current form would kill their progress and give SpaceX a monopoly.
If Facebook disappeared forever this afternoon, I wouldn't exactly be upset about it. I'm astounded when I see people post loads of personal information on the site, including posts about all their travel plans, their shopping habits, their daily routines, and their family members. Long is the list of people who have been harassed by law enforcement agencies or "child welfare" agencies in response to something they said or did on Facebook. And, given what we know about Big Tech's willingness to collaborate with government agencies, people who are fond of posting their every move in Facebook might as well hand over their daily itineraries to the FBI.
Similar problems exist with other tech platforms as well, from Twitter to Google.
However, there is a fairly easy way to minimize the amount of information Facebook and other platforms collect on the user. The user can stop using the platform, or at least stop using it so often. Unlike the state, which is free to mandate that people use their "services," consumers are still free to not use Facebook.
Also, it is still the case that producers are free to create new firms that will compete with Facebook. And many have done so. Recent data suggests that Facebook users are spending less time on Facebook, and younger users are preferring to spend their time elsewhere. Facebook is expected to actually lose users in the under-25 category this year. Some will keep using Facebook-owned Instagram, but many will go to services not owned by Facebook, such as Snapchat.
For whatever reason, whether it's increased competition or a decline in social media use overall, Facebook is not bulletproof, and it is facing competition from others. True, none of Facebook's competitors are just like Facebook. But that's how competition works. Other firms offer a choice for consumers, and offer different products.
After all, we've already seen firms like Facebook be beat by competition in the past. Remember MySpace? It was once bigger than Facebook. And now it's not.
If consumers want to use social media platforms that aren't Facebook, and which offer different choices, the answer lies in greater competition. But, if greater competition is what we want, barriers to entry must be kept low, government regulations must be abolished or minimized, and consumers must be free to use or not use firms as they please. So long as this is the case, Facebook will never have a true monopoly. Consumer preferences can always change. And sometimes they change drastically.
Get Ready for More Regulation Unfortunately, this week's Congressional hearings with Facebook founder Mark Zuckerberg suggest that things are going in a direction that will only end with increasing whatever monopoly power Facebook currently has. Washington politicians are interested in regulating the social media world, and ultimately, this will only strengthen the big firms that dominate the industry now — while making things harder for smaller start-ups and future competitors.
Oh sure, politicians are making a big show of how concerned they are about everyone's privacy, although it is embarrassingly obvious that the elderly and out-of-touch-with-reality members of the Senate have no idea how social media works. The most they could do was read questions written for them by staff and try to understand Zuckerberg's answers.
(These people, by the way, will be the ones voting on any future legislation that regulates social media.)
But even if members of Congress had a wonderful grasp of the internet and social media, would anyone benefit from any new regulations on the industry?
Well, yes, of course some people would benefit. Those who would benefit include the government agents who will get jobs as regulators, the politicians who can score political points for passing new legislation, and the large incumbent firms that now dominate the social-media market.
Dominant Firms Want Regulation It should not surprise us, then, that even before he testified to Congress, Mark Zuckerberg was calling for his own industry to be regulated:
Facebook chief executive Mark Zuckerberg said on Wednesday that he’s open to having his company be regulated.
“Actually, I’m not sure we shouldn’t be regulated,” Zuckerberg said in an interview...I actually think the question is more ‘What is the right regulation?’ rather than ‘Yes or no, should it be regulated?’” Zuckerberg told CNN.
But why so open to regulation? Zuckerberg cleared this up himself in one of his answers to questions from members of Congress:
I think a lot of times regulation puts in place rules that a large company like ours can easily comply with but that small start-ups can't," Zuckerberg said as he testified for the second consecutive day on Capitol Hill.
Indeed.
Government regulations such as minimum wages and financial mandates are especially burdensome on small firms because small firms have less access to capital and enjoy fewer benefits of economies of scale.
It's far easier for a firm like Walmart, for instance, to pay higher wages than for a small start-up. And, should the economy fall on hard times, higher costs can be weathered better by large firms that can borrow large amounts to get through a crisis. Small firms have far less borrowing power.
One example of this can be seen in the decline of small banks in the wake of the new banking regulations found in the Dodd-Frank legislation. Compliance costs created by the new legislation have led to fewer small firms, fewer start-ups, and fewer community banks. Huge financial institutions have benefited greatly from additional legislation. Market share for small firms, meanwhile, is being destroyed.
These barriers to both entry and survival for small firms, end up destroying competition. Per Bylund notes:
Regulated markets are different from open, free markets in that they have artificial barriers to entry: they redistribute costs of business to protect some incumbent firms by forcing the cost on (some) entrants. In other words, there are fewer new businesses and thus less competition.
Moreover, this decline in competition then means that the surviving large firms can afford to be less responsive to the desires of consumers. Efforts to reduce prices also fall by the wayside and competition wanes. Bylund continues:
Under interventionism, businesses do not always need to discover accurate consumer prices because the threat from new entrepreneurs entering the market is smaller than it otherwise would have been.
In other words, government regulations diminish consumer sovereignty by reducing both competition and thus the incentive to stay in tune with what consumers want.
Dominant Firms Control the Regulators The other great danger in regulation exists in the fact that regulatory bodies have a tendency to be taken over by the large dominant firms themselves.
This is a common occurrence in regulatory schemes and is known as “regulatory capture.” When new regulatory bodies are created to regulate firms like Facebook and other dominant firms, the institutions with the most at stake in a regulatory agency’s decisions end up controlling the agencies themselves. We see this all the time in the revolving door between legislators, regulators, and lobbyists. And you can also be sure that once this happens, the industry will close itself off to new innovative firms seeking to enter the marketplace. The regulatory agencies will ensure the health of the status quo providers at the cost of new entrepreneurs and new competitors.
Moreover, as economist Douglass North noted, regulatory regimes do not improve efficiency, but serve the interests of those with political power: "Institutions are not necessarily or even usually created to be socially efficient; rather they, or at least the formal rules, are created to serve the interests of those with the bargaining power to create new rules."
After all, how much incentive does the average person have in monitoring new regulations, staying in touch with regulators, and attempting to affect the regulatory process? The incentive is almost zero. The incentive for regulated firms, on the other hand, is quite large.
So, once Congress begins its process of regulating social media firms, you can be sure that Facebook and the other major firms involved will be at the table, and will be key in writing the legislation, and in guiding it through the legislative process. And why wouldn't they be allowed to be closely involved? As The Verge has already shown, Facebook freely writes checks to members of Congress as "political donations." And once the new regulatory bodies have been created, Facebook will be involved every step of the way, from selecting regulators, to writing new regulatory rules.
Needless to say, it won't exactly be a priority for Facebook to make sure that start-ups and other small firms get a fair shake at slicing off a piece of Facebook's market share.
Mark Zuckerberg isn't pandering when he says that he welcomes new regulations from Congress. He doesn't want Facebook to end up like MySpace, and new regulations are among the easiest ways to crush the competition.
In April 2019, the Center for Economic and Policy Research (CEPR) published a report called Economic Sanctions as Collective Punishment (Weisbrot and Sachs 2019). The report tries to evaluate the consequences of the economic sanctions the United States imposed on Venezuela in August 2017. In it, the authors conclude that said sanctions decreased the population’s daily calorie intake, increased the mortality rate, and displaced millions of Venezuelans as a consequence of the worsening economic depression and hyperinflation.
However, in May 2019, a report was published by Brookings that refutes these claims. This new report, Impact of the 2017 Sanctions on Venezuela: Revisiting the Evidence (Bahar, Bustos, Morales, and Santos 2019), finds that the methodology Weisbrot and Sachs utilized did not allow them to estimate the causal effect of the sanctions and that accordingly their conclusions are incorrect for two reasons. First, in the absence of an adequate counterfactual, the effects of the sanctions cannot be separated from the negative economic trends in Venezuela that preceded them. Second, the deterioration observed by Weisbrot and Sachs could also be explained by other, more important factors beyond the 2017 sanctions that have not been taken into account.
If we stick to the data, regardless of which socioeconomic indicator we choose, it seems clear that the sharp economic downturn began long before 2017.
Access to International Financial Markets Prior to August 2017, international markets had already stopped the flow of credit to Venezuela. The spread of Venezuela’s sovereign debt — the premium that holders of sovereign bonds demand that the country pay above the “risk-free” rate — was on average 2,884 basis points in the 30 days before the sanctions were announced. This is 7.8 times more than the margin paid by the rest of Latin America and 9.5 times more than what was paid by emerging markets during the same period. As can be observed in the following graph, the imposition of sanctions did not have an impact on the Venezuelan spread.
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On the contrary, the spread only increased — by 1,013 basis points — when Nicolás Maduro announced the creation of a commission for refinancing and restructuring Venezuela’s foreign debt. The data indicate that by August 25, 2017, the Venezuelan government’s capacity to issue debt was either severely limited or nonexistent and investors had already discounted possible sanctions and their potential impact.
Oil Production Weisbrot and Sachs argue in their report that Venezuela’s problems worsened as a consequence of the sanctions. They use Colombian oil production as the counterfactual to determine the sanctions’ impact on Venezuela. For Colombia’s oil production to be considered a suitable comparison, both trends should be similar prior to the sanctions imposed on Venezuela.
However, although the trends seem similar for the period selected by Weisbrot and Sasch, they differ significantly if we go back further back in time.
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Therefore, it would not be reasonable to expect parallel trends after the sanctions. In fact, the evolution of Colombia’s oil production is due to very different underlying factors, which would explain the different trends. Some analysts agree that the fall in Venezuela’s oil production is nothing more than a continuation of a decline that began with the dismissal of more than eighteen thousand workers from PDVSA (the state-owned oil and natural gas company) after the national strike during Hugo Chávez’s presidency. This dismissal resulted in an important loss in administrative and technical capacity (Forero 2003). Even during the golden age of oil, 2004–14, Venezuela’s oil production fell by 24 percent between 2005 and 2016.
Another comparison can be made with oil production in countries that belong to OPEC (excluding Venezuela). As the following graph shows, the trends in oil production were similar before the fall in oil prices (even since 2013). However, oil production in OPEC countries did not decrease after the fall in crude oil prices at the beginning of 2016. In Venezuela, on the other hand, oil production began to collapse.
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Can we conclude that the difference in oil production between OPEC countries and Venezuela is a result of the sanctions? Based on the data, the answer is no. In fact, there is no counterfactual that is appropriate for analyzing Venezuela’s oil-production trends.
Socioeconomic Consequences Weisbrot and Sachs’s work attributes the negative performance of Venezuela’s socioeconomic indicators entirely to the August 2017 sanctions. They argue that Venezuela lacks enough foreign currency to import food and medicines to satisfy the population’s basic needs because of the fall in oil production and the consequent decrease in revenue. In contrast, Brookings’s new report concludes that it is impossible to measure the effect of the observed decrease in production before the sanctions. Furthermore, the significant deterioration in Venezuela’s socioeconomic conditions began in 2013 and cannot be observed in any other part of the region.
The following image shows the value of food imports from Latin America over time. In 2016, the year before the sanctions were imposed, Venezuela was already importing 71 percent less than its maximum in 2013.
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Something similar occurred with imports of medicine and medical equipment. Venezuelan imports fell by 68 percent between 2013 and 2016, whereas they stayed constant in the rest of the region. In other words, most of the fall happened before the sanctions in August 2017. By the end of 2017, Venezuelan imports of these basic sanitary products constituted only 8 percent of the amount observed in 2013.
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Next, the daily measure of the purchasing power of the Venezuelan minimum wage is analyzed in terms of the cheapest calories available, calculated by Douglas Barrios of the Center for International Development at Harvard University (CENDAS, for its acronym in Spanish). Using the prices reported by CENDAS for fifty-eight products at more than fifty points of sale in the metropolitan area of Caracas, they obtained the maximum quantity of daily calories that can be purchased with a minimum wage, on average, for every month between 2010 and 2018. As can be seen in the following graph, there has been a sharp reduction in Venezuelans’ calorie intake, but this decrease began long before the sanctions of 2017.
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The data show that at the moment when the sanctions were imposed, an entire minimum wage could only buy 6,132 of the cheapest calories available per day, 92 percent less than in January 2010. This represents only 56 percent of the minimum dietary needs of a family of five people, which is estimated to be 10,800 daily calories. While the purchasing power of the minimum wage continued to decrease after August 2017 (at levels that only enable the purchase of hundreds of calories), it is impossible to determine how much of this decrease was simply a continuation of the strong trend observed before the sanctions were imposed.
Weisbrot and Sachs also associate a 31 percent increase in the overall mortality rate recorded in Venezuela between 2017 and 2018 (according to their own sources) with the sanctions, concluding that they have been directly responsible for forty thousand deaths. These data have supposedly been extracted from an internal report by the United Nations about Venezuela, Overview of Priority Human Needs (March 2019), which, it seems, is not publicly available. Therefore, to make a comparison that is objective and publicly available, we use data on infant mortality are used because it is often recognized as a good indirect measure of the overall quality of public health services.
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The graph shows infant mortality rates in the first year of life expressed per thousand live births in Latin America over time. In line with the previous findings, the decline in infant mortality (and the correlated increase in overall mortality rates) preceded the imposition of sanctions in August 2017.
Conclusion Although it is probable that the sanctions have had some impact on oil production in Venezuela, the analysis in Brookings’s report does not find sufficient evidence to conclude that the sanctions were responsible for the worsening of the socioeconomic crisis. At this moment, there are not sufficient publicly available data to rigorously estimate a causal effect. The Brookings report therefore concludes that most of the deterioration of socioeconomic indicators occurred prior to the sanctions of August 2017. In fact, a large part of the suffering and devastation in Venezuela has been inflicted by those in power since 1999 and not as much by the sanctions imposed in 2017.
Originally published at UFM Market Trends
One of the few elected Democratic lawmakers with an extensive anti-war record, Rep. Tulsi Gabbard (D-Hawaii), has combined forces with Sen. Rand Paul (R-Kentucky) to push legislation through both the House and the Senate that would bar federal agencies from using taxpayer-backed funds to provide weapons, training, intelligence, or any other type of support to terrorist cells such as al-Qaeda, ISIS, or any other group that is associated with them in any way. The Stop Arming Terrorists Act is so unique that it’s also the only bill of its kind that would also bar the government from funneling money and weapons through other countries that support (directly or indirectly) terrorists such as Saudi Arabia.
To our surprise — or should we say shame? — only 13 other lawmakers out of hundreds have co-sponsored Gabbard’s House bill. Paul’s Senate version of the bill, on the other hand, has zero co-sponsors.
While both pieces of legislation were introduced in early 2017, no real action has been taken as of yet. This proves that Washington refuses to support bills that would actually provoke positive chain reactions not only abroad but also at home. Why? Well, let’s look at the groups that would lose a great deal in case this bill is signed into law.
An Army of Lobbyists With trillions of tax dollars flowing to companies such as Boeing, Lockheed Martin, and even IBM, among others, companies that invest heavily in weapons, cyber security systems, and other technologies that are widely used in times of war would stand to lose a lot — if not everything — if all of a sudden, the United States chose to become a nation that stands for peace and free market principles.
For one, these companies have a heavy lobbying presence, ensuring that lawmakers sympathetic to their plight are elected every two years. When the possibility of a new conflict appears on the horizon, these companies are the first to lobby heavily for action.
But this dynamic isn’t a secret. We all know that the crony capitalist system that thrives in Washington, D.C., is the very bread and butter of politics in America. After all, President Dwight D. Eisenhower warned the nation in his farewell address in 1961 that “an immense military establishment and a large arms industry” were becoming the great powers behind U.S. politics, and that if we weren’t weary of this influence, we would risk living in a perpetual state of war.
Still, we allowed it to take over. And there isn’t one industry powerful enough to counter this destructive authority. With the support of an army of well-established and connected millionaire lobbyists, the war machine operating in Washington is so powerful that anything can be turned into an existential threat.
Any conflict abroad that has absolutely no importance or that poses literally no threat to the common American is inflated to become a threat to the American way of life. They hate us “for our freedom.” Therefore, we must show them what democracy looks like.
The Pro-War "Social Justice" AngleWithout the same kind of powerful and wealthy team behind the cause for sanity and peace, this army of big money and big lobbyists has single-handedly put us and many generations to come in debt over Iraq, Afghanistan, Pakistan, Libya, Yemen, and now Syria. And as the marketing machine behind this kind of lobbying effort taps into the social justice trend that has infiltrated every aspect of our culture in recent years, these organizations have learned that they will get even broader support from the public if they add feminist, anti-poverty, and pro-equality messages to their pro-war efforts.
Take the #BringBackOurGirls campaign, for instance, which, as NBC has reported, originated with “Obiageli Ezekwesili, a former vice president of the World Bank for the Africa region and a senior advisor on Africa Economic Development Policy for the Open Society Foundations” — a George Soros-backed foundation. In no time, the social media “effort” had become the most effective lobbying force behind the expansion of the never-ending war on terror. And whether it was meant to promote this outcome or not, it helped the United States easily invest more tax dollars into an unwinnable war.
As you can see, even if Gabbard and Paul managed to use all of their time to force the Stop Arming Terrorists Act through Congress so it could get to President Donald Trump’s desk, the powers at play in Washington would do their best to sweep this effort under the rug. Not because individuals involved in pro-war lobbying are, perhaps, thirsty for war per se, but because the system under which they operate allows for bad incentives to produce a great deal of wealth and influence, tilting the balance toward evil.
Without a state that can be bribed, companies would be left to fend for themselves and stay afloat by making customers… happy. And you can’t make customers happy if all you have to offer is war.
First published at theantimedia.org.
As political and academic progressives expand their frenzied attacks on “wealth” and on the alleged transgressions of “big business,” antitrust regulation is suddenly back in vogue big time.
As an example, take the off-the-wall proposal by Sen. Elizabeth Warren ( D-Mass.) that firms such as Amazon and Google be regulated as public “platform” utilities and that several of their recent acquisitions be divested to increase “competition.” Or take the radical perspectives of long-time progressive Robert Reich, who argued in a recent USA Today column that antitrust regulation should aim to break up Facebook, Amazon and Google like the courts broke up the older “railroad, oil, and steel monopolies.” According to Reich, “monopolists aren’t good for anyone except for the monopolists.”
In some sense these proposals and alleged historical accounts are not to be taken seriously since they are based on an almost total misunderstanding of monopoly theory and of the history of antitrust regulation. On the other hand, the political power of poor theory and fake economic history should never be underestimated.
Senator Warren’s suggestion that we regulate Amazon and Google like governments regulate electric or water companies ignores the fact that public utilities are poor performing monopolies because governments protect them by law from competition. On the other hand, Amazon and Google compete in free markets and have earned their respective market positions through efficiency and repeated customer support.
Ironically, both of these companies are antitrust targets of progressives precisely because of their success; if Amazon or Google had performed poorly from a consumer perspective, both would both have lost market share and no one, not even progressives, would be demanding that they be regulated like some electric or water company.
In fact Warren and her fellow progressives have the regulatory issue with respect to free markets and public utilities almost precisely backwards. Instead of applying public utility regulation to successful free market companies, they should be thinking, instead, about ways to restructure public utility monopolies to perform more like Google and Amazon. Ending legal monopoly status for utilities would be a good place to start.
Robert Reich is similarly confused about antitrust history. In the case of the early steel industry, for example, there was never any “monopoly” and the dominant firm (U. S. Steel) was never “broken up.” It is true that U. S. Steel was charged with monopolization in 1911 but the case was dismissed by the Supreme Court (SC) in 1920.
Pointedly, the SC dismissed the case because they agreed with the lower court that U.S. Steel had significant competitors; that overall steel output had increased substantially; and that steel rail and steel ingot prices had declined over the alleged period of monopolization. U.S. Steel was a large firm but they were not illegally monopolizing anything.
Reich ’s allegation concerning antitrust and some unidentified railroad monopoly is even more curious. I know of NO major antitrust case that sought to break up any railroad monopoly. Indeed, the only serious “monopoly” associated with the railroad industry was the creation of the Interstate Commerce Commission (1887) which existed to stabilize (decreasing) railroad rates, a classic case of government (not private) cartelization of an industry.In the Standard Oil of New Jersey case (1911), it is true that the Supreme Court did find the company in violation of the Sherman Antitrust Act and ordered several of Standard’s subsidiaries to be divested from the parent company. But contrary to Reich’s assumptions about what how monopolists behave–and despite Standard’s many acquisitions– the oil industry (exploration, refining, transportation, marketing) was never monopolized by Standard Oil or by anyone else. The Standard Oil Company always had dozens of rivals (such as Chevron, Texaco, Sun, Shell, Atlantic Refining, etc.) and always produced a high-quality product (mostly kerosene) which it sold at lower prices…for decades. Thus, contrary to Reich’s insinuations, Standard Oil earned its profits not by any monopoly exploitation but by ruthlessly reducing costs and by continually enhancing consumer welfare.
Contrary to the popular impression (which progressives share), antitrust regulation has a long and sordid history of both ignoring legal monopoly and of hampering, instead, the free market competitive process. Most of the classic “monopoly” cases in antitrust history involve firms that were expanding outputs, lowering prices and innovating rapidly, much to the displeasure of less-efficient rivals. Supporters of regulation such as Elizabeth Warren and Robert Reich would do well to examine economic history more carefully before threatening to bludgeon efficient firms like Amazon and Google with regulation that both lowers economic efficiency and harms consumers.
Originally published at LewRockwell.com
One of the fundamental questions in development economics is how an economy grows. As the reader may know, an economy grows by means of economic freedom, which implies property rights and the emergence of markets and exchange ratios (prices). Further, such chains of events bring about economic calculation. However, are such conditions enough for economic development? That is, does a nation need only property rights to develop?
The answer is no. So long as there is a state — government — there need to be constraints with respect to the actions of politicians. That is, there must be rules to the game, namely rules to the political process. So long as there is discretion — the ability to break rules of the game, rent seeking, which is a form of value (or wealth) destruction, will impoverish a nation.
What is Rent Seeking? Rent seeking, as mentioned above, is a form of value destruction. However, it should be emphasized that according to the Kirznerian definition of the entrepreneur, such action is a form of entrepreneurship — the realization of a profit opportunity. Therefore, rent and profit seeking have one thing in common: both are forms of entrepreneurship. The difference, of course, is that the former is destructive whereas the latter creates value.
There might be confusion with respect to the term "rent" in "rent seeking." Rents, in economics, are payments above opportunity costs, that is, profits. Rent seeking, therefore, is the process by which a firm seeks payments above its opportunity costs. But, unlike profit seeking, rent seeking occurs by means of the political process — that is, firms must lobby, expend resources — in order to capture profits by means of government legislation. Again, per the Kirznerian interpretation of entrepreneurship, such action is a byproduct of profit opportunities, namely the attraction of artificial scarcity rents.
Rent seeking, however, has massive welfare costs.See Gordon Tullock, “The Welfare Costs of Tariffs, Monopolies, and Theft,” Economic Inquiry 5, no. 3 (1967): 224–32. For example, in The Welfare Costs of Tariffs, Monopolies and Theft, Gordon Tullock, one of the creators of the term, noted that the cost of a tariff, which is a means of capturing rents, is not fully captured by the Harberger triangle (deadweight loss).
Prior to Tullock’s groundbreaking work on the welfare costs of rent seeking, mainstream economists underestimated the costs of tariffs. That is to say, according to mainstream microeconomics, a tariff’s cost was quantified and graphed as simply deadweight loss. However, as Tullock stated,
There are a considerable number of costs that are ignored by this procedure. … a collection of a tariff involves expenditure on custom inspectors, etc., who do the actual collection, and coast guards, who prevent smuggling.Ibid. p. 223.
As Tullock demonstrated, tariffs are more than transfers of wealth — that is, producers stealing consumers’ surplus — as such legislation brings about numerous costs, namely a waste of scarce resources which have alternative uses.
To better understand Tullock’s thesis, let us imagine that American car companies expended resources so that the federal government would implement a tariff that would essentially prohibit the importation of cars. As mentioned above, mainstream microeconomics would label such legislation as simply a transfer of wealth — that is, the producer is gaining income at the expense of the consumer.
But, as Tullock emphasized, there is more to the story: that individuals were purchasing imported cars shows that domestic producers must have not been using scarce resources efficiently, since foreign producers were meeting their respective wants instead. Such a tariff would mean that resources are being misallocated in lobbying for its enforcement, in addition to the misallocation of resources toward to the production of American-made cars that it would cause.
Moreover, politicians, who act to increase their respective utilities, do not enforce tariff legislation at random, but rather do so by means of the firms that waste scarce resources to lobby for its existence. Put simply, one must picture the political process as a market (or catallactic) process, with politicians exchanging property rights — monopoly privileges — for resources, namely money or special favors such as employment following the politician’s term.
Once it is clear that the political and market processes are analogous and that the ability for politicians to create rents is a profit opportunity for firms, it should be expected that firms will expend scarce resources on capturing such rents. That is, there will be a tendency not to invest capital, but rather to consume it.For more on capital consumption see, Ludwig von Mises, Human Action (Indianapolis: Liberty Fund, 2007), pp. 523–29.
Rent Seeking and Impoverishment Besides the study of human action, one of the fundamental questions in economics, as stated above, is how to develop an economy. While Ludwig von Mises and other private property economists, such as Armen Alchian and Harold Demsetz, emphasized the importance of private property as a means to rationally calculate, such rights are not enough to ensure development. So long as there is government and self-interested politicians, who act purposefully — that is, seek to increase their utility — they will create rents, and firms will such policies as profit opportunities for themselves. Therefore, as stated above, one will see a tendency for firms to waste scarce resources on capturing the rents offered by the government, particularly politicians. Ultimately, the ongoing cycle of rent seeking, as Tullock stated, does not promote value creation, but rather value destruction. Indeed, as William Baumol noted in his article entitled "Entrepreneurship: Productive, Unproductive, and Destructive," rent seeking is a form of unproductive, at times even destructive, entrepreneurship.William J. Baumol, “Entrepreneurship: Productive, Unproductive, and Destructive,” Journal of Business Venturing 11, no. 1 (1996): 915–19.
Constraints on Politicians and the Emergence of Productive Entrepreneurship Ultimately, so long as there is government, constraints must be placed on politicians. In particular, they should be prohibited from creating rents, which would, all things being equal, encourage productive, as opposed to destructive, entrepreneurship. One of the great differences between wealthy and impoverished nations lies in the rules of the game — that is, in creating an environment in which entrepreneurs are encouraged to profit, not rent seek.
With constraints placed on politicians, one would see the emergence of entrepreneurs who thoroughly bear the uncertainty of the market with the end of satisfying the wants of their fellow men. This is a form of productive entrepreneurship and thus brings about economic development.
According to the IMF (International Monetary Fund) and the IIF (Institute of International finance) global debt has soared to a new record high. The level of government debt around the world has ballooned since the financial crisis, reaching levels never seen before during peacetime. This has happened in the middle of an unprecedented monetary experiment that injected more than $20 trillion in the economy and lowered interest rates to the lowest levels seen in decades. The balance sheet of the major central banks rose to levels never seen before, with the Bank Of Japan at 100% of the country’s GDP, the ECB at 40% and the Federal Reserve at 20%.
If this monetary experiment has proven anything it is that lower rates and higher liquidity are not tools to help deleverage, but to incentivize debt. Furthermore, this dangerous experiment has proven that a policy that was designed as a temporary measure due to exceptional circumstances has become the new norm. The so-called normalization process lasted only a few months in 2018, only to resume asset purchases and rate cuts.
Despite the largest fiscal and monetary stimulus in decades, global economic growth is weakening and leading economies’ productivity growth is close to zero. Money velocity, a measure of economic activity relative to money supply, worsens.
We have explained many times why this happens. Low rates and high liquidity are perverse incentives to maintain the crowding out of government from the private sector, they also perpetuate overcapacity due to endless refinancing of non-productive and obsolete sectors t lower rates, and the number of zombie companies -those that cannot pay their interest expenses with operating profits- rises. We are witnessing in real-time the process of zombification of the economy and the largest transfer of wealth from savers and productive sectors to the indebted and unproductive.
However, as monetary history has always shown, when central planners face the evidence of low growth, poor productivity and higher debt, their decision is never to stop the monetary madness, but to accelerate it. That is why the message that the ECB (European Central Bank) and the IMF are trying to convey is that there is a savings glut and that the reason why negative rates are not working as expected is that economic agents do not believe rates will stay low for longer, so they hold on to investment and consumption decisions.
Complete nonsense.
With the household, corporate and government debt at still elevated levels and close to pre-crisis highs, the notion of excess savings is ludicrous. What informs such a misinformed opinion? The often-repeated “there is no inflation” fallacy. If money supply is high and rates are low but inflation does not creep up, then surely there must be a savings glut. False. There is massive inflation in financial assets and housing but there is also a very clear rise in inflation in non-replicable goods and services versus replicable ones, which means that the official consumer price indices (CPI) misrepresent the true cost of living increase. That is the reason why there are demonstrations all over the eurozone against the rising cost of living at the same time as the ECB repeats that there is no inflation.
When central planners blame economic agents for an inexistent savings glut and repeat that there is no inflation when there clearly is a lot, they also tend to add a conclusion: if households and corporates are unwilling to spend or invest, then the government must do it. This is, again, a false premise. Households and corporates are spending and investing. There is no evidence of a lack of capital expenditure, let alone solvent credit demand. The private sector is simply not investing and spending as much as governments would want them to, among other reasons because the private sector does suffer the consequences of taking a higher risk when the evidence of debt saturation is clear to all those who risk their capital.
Unfortunately, the next wave of central bank action will be the full monetization of government excess. The excuse will be the so-called “climate emergency” and “green deals”. Yet governments do not have better or more information about the best course of action in the energy transition, and by artificially picking winners and losers, ignoring the positive forces of competition and creative destruction to deliver faster innovation and progress, governments tend to delay, not accelerate change.
In any case, it will happen. The ECB, always happy to repeat the mistakes of Japan with an even stronger impetus, is likely to start new programs of debt monetization for green projects and claim it is a different, radical and new measure… as if it was not doing so already with the Juncker and Green Energy Directives.
The result is easy to predict, unfortunately.
Governments hate two things that disruptive technologies do: reduce consumer prices and generate lower tax revenues. Yes, disruptive technologies are, by definition, disinflationary both in CPI and in tax receipts. Furthermore, disruptive technologies also demolish government control of the economy. These three reasons, lower inflation, lower tax revenues, and less control, are the reasons why governments will never adopt true changes in the economic growth pattern. And because of these reasons, the massive spending financed with new money creation is likely to be even worse for economic growth. Not only it is likely to be an even bigger crowding-out of the private sector, but make economies less dynamic, less productive and more indebted.
There are ways to incentivize change and a green revolution. It is called competition and creative destruction. None of those are favored by governments, not because they are evil, but because governments have the incentive to maintain the obsolete sectors via subsidies.
If the previous $20 trillion stimuli have delivered more debt, less growth, and rising discontent among the middle class that always pays for government experiments, the next one will likely be the last step towards full Japanization. If anything, what are already prudent spending and investment decisions from the private sector are likely to be even more conservative, and the resulting negative productivity growth will mean lower salaries and employment but higher debt and a larger size of government in the economy… Which is, in reality, the ultimate goal of these massive plans.
The reader may think that this time is different but it is not, because the incentives are the same. What I am completely sure is that, once it fails as well, many will demand even more stimuli to solve the problem
Originally published at DLacalle.com
The €750 billion stimulus plan announced by the European Commission has been greeted by many macroeconomic analysts and investment banks with euphoria. However, we must be cautious. Why? Many would argue that a swift and decisive response to the crisis with an injection of liquidity that avoids a financial collapse and a strong fiscal impulse that cements the recovery are overwhelmingly positive measures. But history and experience tell us that the risk of disappointment regarding the positive impact on the real economy is not small.
The history of stimulus plans in the eurozone should alert us against excessive optimism.
As you may remember, the European Union launched in July 2009 an ambitious project for growth and employment called the “European Economic Recovery Plan.” A stimulus of 1.5 percent of GDP to create “millions of jobs in infrastructure, civil works, interconnections, and strategic sectors.” Europe was going to emerge from the crisis stronger than the United States thanks to the Keynesian impulse of public spending. However, 4.5 million jobs were destroyed and the deficit almost doubled while the economy stagnated. This was after the balance sheet of the European Central Bank had doubled between 2001 and 2008. That enormous plan not only did not help the eurozone get out of the crisis stronger, but we can debate whether it prolonged it, as by 2019 there were still signs of evident weakness. The tax increases and obstacles to private activity that accompanied this large package of expenses delayed the recovery, which in any case was slower than those of comparable economies.
We must also dismantle the idea that the European Central Bank did not support the economy in the 2008 crisis: two huge sovereign bond buyback programs with Trichet as president of the European Central Bank, rate cuts from 4.25 percent to 1 percent since 2008, and purchases of more than €115 billion in sovereign bonds. At the end of 2011, the ECB was the largest holder of Spanish debt while it was accused of inaction.
During all this time, the ECB's balance was greater than that of the Federal Reserve with respect to GDP, and in May 2020 it stands at 44 percent of GDP compared to the Fed's 30 percent.
Stimuli have never stopped in the eurozone. An additional ECB buyback plan in addition to the targeted longer-term refinancing operations (TLTRO) liquidity programs with Draghi brought sovereign bonds to their lowest yields in history and the ECB bought almost 20 percent of the main states' total debt. This was such an excessive balance sheet expansion plan that at the end of May 2020 excess liquidity in the ECB was €2.1 trillion. Excess liquidity was barely €125 billion when the so-called 2014 stimulus plan was launched.
No one can deny that these enormous plans' impact on growth, productivity, and employment has been more than disappointing. Except for a brief period of euphoria in 2017, downward revisions to eurozone growth have been constant, culminating with France and Italy in stagnation, Germany on the brink of recession, and a significant slowdown in Spain in the fourth quarter of 2019. The excuses of Brexit and the trade war did not disguise the fact that the economic result of the stimulus was already more than poor.
We have another important example for caution. The so-called Juncker Plan, or “Investment Plan for Europe,” considered the solution to the European Union's lack of growth, also had an extremely poor result. It mobilized €360 billion, many for projects with no real economic return or effect on growth. Estimates of growth in the eurozone fell sharply, productivity growth stagnated, and industrial production fell in December 2019 to the lowest level in years.
We must also be cautious with the green plans. We cannot forget that a very important part of the European Union’s “green” plan attacks demand via tax increases and protectionist measures such as a border tax on countries that have not signed the Paris Agreement (but not to those that do not comply, which face no risk). This limits the potential for recovery and increases the possibility of an additional trade war.
We cannot ignore the negative impact on industry and employment of the massive “green” policy plans of the euro area of 2004–18, which caused the EU countries to suffer household electricity and natural gas bills twice as in the USA while growth stalled.
What is the problem with European stimulus plans compared to those of the United States? The first and most important is that they come from directed economy central planning. These are plans with a very strong component of political decisions about where and how they are invested. Political planning is an essential part of these stimuli, and as such they generate poor growth and weak results. Thus, one of the big problems is that sectors that are already suffering from overcapacity are being “stimulated,” or a false demand signal is being generated via subsidies, which then generates working capital problems and an alarming increase in the number of zombie companies. According to the Bank of International Settlements, the number of zombie companies in Europe has exploded amid stimulus plans. The past is bailed out and the economy is zombified.
Another big problem is that the wrong sectors are stimulated while thousands of small companies that have no access to credit or political favor die. It is not a coincidence that the eurozone destroys more innovative companies or prevents them from growing when regulation forces 80 percent of the real economy to be financed through the banking channel (while in the US it does not reach 30 percent). Can you imagine an Apple or Netflix growing via bank loans? Impossible.
Another big problem is the obsession with redistribution. By fiscally penalizing high-productivity sectors and subsidizing low-productivity industries, while keeping public spending above 40 percent of GDP at any cost through higher taxes, the European Union incurs a huge malinvestment risk. It is no coincidence that Europe does not have technological champions. It scares them off by perpetuating the obsolete national champions and penalizing merit remuneration and alternative investment via taxation.
Nothing we just discussed changes in the newly announced plan package. It is the same, but much larger. And we cannot believe that this time will be different. Although they tell us about green plans, the vast majority of the bailouts will go to aluminum and steel, autos, airlines, and refineries. Meanwhile, a huge tax increase in savings and investment may further drown startups, investment in research and development, and innovative companies.
The European Union's problem has never been a lack of stimuli, but rather an excess of these. The European Union has chained one state stimulus plan after another since its inception. This crisis needed a strong boost to merit, innovation, private capital, and entrepreneurship with supply measures. I am afraid that, again, it has been decided to bail out everything from the past and let the future die.
Originally published at dlacalle.com.
Despite massive government and central bank stimuli, the global economy is seeing a concerning rise in defaults and delinquencies. The main central banks’ balance sheets (those of the Federal Reserve, Bank of Japan, European Central Bank, Bank of England, and People’s Bank Of China) have soared to a combined $20 trillion, while the fiscal easing announcements in the major economies exceed 7 percent of the world’s GDP according to Fitch Ratings.
This is the biggest combined stimulus plan in history. However, businesses are closing at a record pace and unemployment has reached extremely elevated levels in many countries.
There is an important risk in what I call the "bailout of everything," or the conscious decision by governments and central banks to provide any needed support to all sectors and companies with access to debt. Most of these stimulus packages and liquidity measures are aimed at supporting current government spending and providing liquidity to companies with assets, with access to debt, and in traditional sectors. It is not a surprise, then, that at the same time as we see the largest fiscal and monetary support plan since World War II, we are already witnessing two dangerous collateral effects: the rise of zombie companies and the collapse of small businesses and startups.
According to the Institute of International Finance (IIF), the figure of global corporate bond defaults has risen to $50 billion in the second quarter of 2020 despite historic low interest rates and high liquidity. Additionally, according to Deutsche Bank and the Bank of International Settlements, the number of zombie companies in the eurozone and the US, large companies that cannot cover their interest expenses with operating profits, has rocketed to new all-time highs. In 2019 Professors Petroulakis (ECB) and Andrews (OECD) stated, "Europe’s productivity problem is partly due to the rise of zombie firms that crowd out growth opportunities for others" ("What Zombie Firms Tell Us about Europe’s Productivity Problem,” World Economic Forum, April 2019). This problem is only increasing in the current crisis.
The rise in bond defaults is a consequence of previous high leverage in a weakening operating income environment. This should not be a concern if creative destruction works to improve the economy, as inefficient companies are taken over by efficient ones and new investors restructure challenged businesses to make them competitive. The big problem is how massive liquidity and low rates are perpetuating overcapacity and keeping an extraordinary amount of zombie firms alive.
Maintaining and increasing zombie firms destroys any positive effect from restructuring and innovation. Additionally, to maintain cash flows and stay alive, companies are cutting investment in innovation, technology, and research. Meanwhile, small businesses that do not own hard assets or have access to debt are dissolving every day. In most developed economies, where 80 percent of employment comes from small businesses, the "bailout of everything" is becoming a massive transfer of wealth from the new economy to the old economy, preventing a stronger and more productive recovery.
In the eurozone, the main beneficiaries of the European Central Bank corporate bond purchases are large industrial conglomerates that were already facing weak margins, poor growth, and bloated balance sheets in 2019. In the United States, the financing channel of the real economy is more diverse, and the impact of zombification is smaller, but not negligible or irrelevant.
Some of these problems may have been inevitable in a crisis, but the majority of them could have been mitigated significantly by implementing supply-side policies instead of large government-directed stimuli and recovery plans based on adding more debt to already challenged sectors.
The Bailout of Everything (as long as it is large) creates significant risks.
Low-productivity and indebted sectors survive, creating a perverse incentive that benefits malinvestment and poor capital allocation. Additionally, as these sectors already had overcapacity and structural problems, their bailout does not lead to higher job creation or stronger investment. Furthermore, high-productivity sectors will likely suffer the rising tax burden after these governments’ rescue plans diminish the employment potential and the likelihood of rising real wages as productivity growth stalls.
Finally, when governments bail out large and overcapacity-ridden conglomerates, investment in innovation, efficiency, and restructuring of loss-making divisions is severely diminished. Why? Because the reason why governments agree to take stakes or bail out large sectors is precisely to prevent them from restructuring in the first place. Tax cuts and supply-driven liquidity measures to small businesses and technology would have worked significantly better and at a lower cost for taxpayers.
What we are seeing today may have long-term negative implications.
A weaker than expected recovery, with low-productivity growth and a challenging return of the lost employment as well as poor investment growth, are likely the collateral damage of the misguided and panic-driven Bailout of Everything. Unfortunately, it will also generate more debt and higher taxes that will further complicate things for taxpayers and innovative sectors.
Originally published at DLacalle.com as "The Risk of the 'Bailout Of Everything'."
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Income inequality is today perceived by many as the root cause of poverty all around the world. Many governments have declared fighting income inequality to be a priority. Of course, too much economic inequality could potentially lead to social upheaval, causing criminality, social resentment, and cultural backwardness. However, none of this shows that economic inequality causes poverty, or that markets cause economic inequality.
The truth is that there are two kinds of income inequality. There is income inequality that is created by the private sector and which is a characteristic of developed economies. This kind of income inequality is a positive and healthy inequality, because it is based on the two fundamental elements that create economic growth, the rule of law and private property. But income inequality also results from corrupt regimes that extract wealth from the population and hoard it within the government class. The difference is that the first kind of inequality goes hand in hand with wealthy countries. The second kind does nothing to lessen poverty.
Development and Inequality The United States, the United Kingdom, Canada, the Scandinavian countries, and Japan, just to name a few, are examples of developed countries. Yet each of these countries has a considerable degree of income inequality. Interestingly, we can see similar dichotomies in Africa as well.
According to the United Nations Development Programme, South Africa is the most unequal country in Africa and yet it is the wealthiest country in the continent as well. Indeed, South Africa, Botswana, and Namibia are the most unequal countries in Africa, with a Gini coefficient higher than 0.60: 0.65 for South Africa, 0.62 for Namibia, and 0.62 for Botswana. But these countries are the richest and least conflict-prone in Africa. If income inequality is such a predicament, then how come are these countries the wealthiest? These three countries also have in common a higher index of property rights and a higher index of the rule of law. These characteristics are more established in these countries than in Africa overall.
Since people in these areas have relatively well-established legal property rights, they can create capital and increase their labor productivity. As a matter of fact, income inequality naturally and logically expands to a considerable degree in societies that value the rule of law and private property, because when the government is restrained from intervening in the economy, individuals maximize their economic output, since they have the freedom to decide how they want to manage their own resources. We cannot expect individuals to have the same economic outcomes if they manage their resources differently. The economic productivity of a society is to some extent based on how resources are managed. If an individual manages his resources in an efficient way that generates him a substantial profit, his income will be higher than that of one who did not manage his resources adequately.
Inequality in Poor Countries Income inequality can also grow in a society where there is no rule of law, where access to private property is significantly limited, and where resources are mismanaged. This has been the case of the Central African Republic. The Central African Republic has one of the lowest human development indexes in Africa, because its degree of income inequality is preventing its economy from flourishing. The lack of rule of law and an effective administration of justice impedes access to private property that is legally and physically secure. The high degree of corruption that reigns in the Central African Republic disincentivizes the layman from creating wealth and improving his living standard as well as that of his fellow men. As a consequence of this ongoing corruption, income inequality has greatly expanded poverty in the Central African Republic. As a matter of fact, the poverty rate is at a staggering 71 percent, which means that more than two-thirds of Central Africans live in absolute poverty. These indicators show that in fact income inequality in the Central African Republic is not caused by the private sector, but by the corruption that is ruling their government. The members of the Central African government are richer than two-thirds of the population. As we can observe in figure 1, of the four major unequal countries in Africa, the Central African Republic has the lowest income per capita. The Central African Republic has an average income per capita of $458.5, South Africa of $6,561.86, Botswana of $7,494.295, and Namibia has an average per capita income of $5,294.517.
Figure 1
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Source: World Bank, author’s computation. There are two kinds of income inequality. South Africa, Botswana, and Namibia reflect the positive income inequality that a society creates as it innovates and develops. Negative income inequality is created by the public sector. It relies on corruption and the concept of rent seeking. In countries like the Central African Republic, where income inequality is created by the public sector through a lack of justice and an absence of private property, those who work for the government become much wealthier than the rest of the population. And this kind of income inequality generates overall a national decline. This has been exactly the case for the Central African Republic. Income inequality is not inherently a product of injustice. Everything depends on the conditions under which it takes place.
For many years, Chile was the exception in Latin America, with an unprecedented model of sustained economic development. Contrary to populism and demagoguery, the Chilean recipe for the last forty-five years was respect for private property and entrepreneurial freedom. Indeed, the phrase "Chilean miracle" was even used by economist Milton Friedman to describe the Chilean economy's reorientation in the 1980s from socialism to a free market economy. Many other commentators looking at Chile's remarkable growth in recent decades have come to a similar conclusion. Twenty years ago, it looked like Chile was well on its way to joining the world's developed countries as the wealthiest in the world. However, this predicted path looks less and less likely as Chile's reputation, as a country of freedom and opportunity is coming to an end.
One year after the so-called Social Outbreak—a new movement of riots and leftist activism designed to undo recent decades of promarket reform—it is possible to conclude that Chile will NOT become a developed country in the coming decades if it continues down this path. With the current system the country cannot end the political, economic, and social decline that has lasted more than a decade. It is a cultural problem, reflected in many areas, including rampant violence and crime, that along with economic hibernation and politicians' irresponsibility has contributed to the collapse of the Chilean economy.
International indicators explain the debacle of the Chilean economy in the last decade:
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The Index of Economic Freedom (by the Heritage Foundation and the Wall Street Journal) shows that Chile fell from eighth place in 2008 (the country with the freest economy in the Americas) to twentieth in 2017.
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The Doing Business Index (World Bank) indicates that Chile fell from fortieth in 2008 to fifty-nineth in 2020.
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The Corruption Perception Index (Transparency International) shows that Chile fell from twenty-third place in 2008 to twenty-sixth in 2020.
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The Fiscal Competitiveness Index (Tax Foundation) places Chile among the five worst in the Organisation for Economic Co-operation and Development (OECD). More specifically, Chile's maximum corporate tax rate is 27 percent, while the OECD average is 23 percent (Chile was the only country that increased this tax by ten percentage points in the last decade!).
The economic recovery proposals are not promising either. On the one hand, the proposed government plan "Step by step, Chile recovers" consists of the "Keynesian aphorism"—that is, a lax fiscal policy of sustained increase in public spending (9.5 percent more than in 2020) and the financing of the fiscal deficit (–9.5 percent in 2020) with higher public debt (which would reach 44 percent of GDP in 2022 and 70 percent in 2030, the highest amount in the last thirty-five years). It is the prelude to new tax increases for families and entrepreneurs in Chile. At the same time, the Board of the Central Bank of Chile has agreed to the "monetarist aphorism," a loose monetary policy to keep the monetary policy interest rate at 0.5 percent (but the gross interest rate should be around 4 percent!). These artificially cheap loans portend higher debt rates for Chileans (total Chilean household debt has reached 75.4 percent of their disposable income, a historical record).
Economic theory reveals that higher risk of confiscation (for example, political instability, public sector corruption, lack of public order, arbitrary institutional arrangements, manipulation of the money and credit supply, high risks of default, taxes, and expropriation regulations) tend to anticipate decreasing levels of entrepreneurship and therefore of economic development. These interventions affect people's ability and willingness to look beyond the immediate present and take a long-term view to adopt new ideas and take risks. As Jesús Huerta de Soto said, "whoever wants to favor development must encourage and promote entrepreneurship; on the other hand, whoever prefers underdevelopment and social conflicts must put all kinds of obstacles in the way of entrepreneurship." These facts explain why Chile's average annual growth in the last six years has been 0.7 percent, far from the 5.5 percent between 1977 and 2013 that positioned the country as a development model for Latin America.
In conclusion, Chile will not be a developed country unless it returns to a culture of respect for private property and free enterprise. This must be done while addressing long-term development challenges, fostering ideas of freedom that make countries prosper.
REFERENCES Bunn, D., and Asen, E. 2020. International Tax Competitiveness Index 2020. Washington, DC: Tax Foundation. https://files.taxfoundation.org/20201009154525/2020-International-Tax-Competitiveness-Index.pdf.
Friedman, Milton. 1994. “Passing down the Chilean Recipe.” Foreign Affairs 73, no. 1: 177–78.
Huerta de Soto, Jesús. 2008. The Austrian School: Market Order and Entrepreneurial Creativity. Cheltenham, UK, and Northampton, MA: Edward Elgar.
———. [1992] 2010. Socialism, Economic Calculation and Entrepreneurship. Cheltenham, UK, and Northampton, MA: Edward Elgar.
Miller, T., Kim, A., and Roberts, J. 2020. Index of Economic Freedom . Washington, D.C.: The Heritage Foundation.
Transparency International. 2020. Corruption Perceptions Index 2019. [Berlin]: Transparency International. https://www.transparency.org/cpi2019.
World Bank. 2020a. Doing Business 2020. Washington, DC: World Bank Group. http://documents.worldbank.org/curated/en/688761571934946384/pdf/Doing-Business-2020-Comparing-Business-Regulation-in-190-Economies.pdf.
———. 2020b. World Development Indicators. Washington, DC: World Bank Group. https://databank.worldbank.org/source/world-development-indicators.
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Even as production of goods and services has declined as a result of the reaction to covid-19, governments have been issuing larger and larger amounts of money.
The fact that this seems reasonable to many people stems from a common and understandable misconception: namely, that money is wealth. After all, aren’t people with a lot of money considered wealthy? However, while wealth and money are often found together, they are very different in their character and importance.
Wealth is in most respects more tangible and therefore easier to understand than money. Useful goods and services and, perhaps more crucially, the productive resources needed to create useful goods and services, are wealth. A loaf of bread is wealth, as are the farms, factories, and human labor and ingenuity that are needed to grow and process the crops necessary to produce it.
Money, meanwhile, is best understood as a tool used to transform wealth from one form into another. For instance, your skills and ability to perform work are a form of wealth. So is the food you eat. The money paid to you in wages which you in turn pass along to the grocery store performs the simple yet crucial task of efficiently transforming your labor into food.
From this, it should be clear that the amount of wealth in an economy is much greater than the amount of money, as wealth only periodically and for a short time period turns into money before, usually, being turned into another form of wealth. To illustrate, imagine a small business owner who retires and sells her business. She is unlikely to keep the sale proceeds in her bank account or under her mattress. Instead, she will probably use the money to invest in other businesses (either directly or through the stock market) in order to generate income for retirement. And, of course we all know that it seems like no time at all before our pay packets are transformed into food, housing, gasoline, and the other necessities of life.
However, from the late 1990s the quantity of money in the economy has grown much faster than either wealth or economic output. Since the onset of the covid-19 pandemic, this growth has accelerated enormously, even as economic lockdowns have caused output to fall.
Does this growth present any potential danger? The fact that we have not suffered from large amounts of consumer price inflation has led to speculation that perhaps there is no limit to how much money governments can create to finance socially desirable objectives such as infrastructure renewal, a shift toward renewable energy, or universal child care.
This thinking, though, makes the elementary error of mistaking money for wealth. Creating trillions of dollars of new money will not create the skilled labor or the other productive resources needed to achieve these ends, especially as in modern times most new money is created by banks issuing loans for property and other forms of speculation. Instead, at best it will simply direct wealth and productive resources away from those most able to use them wisely into the hands of those most likely to mismanage them. At worst, it threatens the viability of productive enterprises altogether.
To illustrate with an example, let’s return to our small businessperson. If a large quantity of new money were to enter the economy during the time in which she sold up, the price of alternative forms of wealth would be sure to rise. Rising stock markets even amid the economic wreckage wrought by the pandemic and associated lockdowns are evidence of the impact of money creation on asset prices. Unfortunately for our retiree, her money, generated from the sale of real wealth, is now competing with newly created money, created from nothing, to purchase income-generating assets. Her business wealth will not, therefore, be able to purchase as much wealth in other forms as would have been the case had new money not been created.
More troublingly, though, wealth is being reallocated away from a person who has demonstrated his or her ability to create and preserve wealth and toward people who, as well-connected insiders with access to unlimited sums of newly created money, have every incentive to be reckless.
And so we have the situation now facing much of the developed world. Once productive industrialized economies have, over the past forty years, seen much of their wealth pass under the control of those large corporations, private equity and venture capital firms, with privileged access to money. However, rather than using this money to invest in innovation and growth to create additional wealth, these new owners have chosen instead to loot the firms they control by compelling them to load up on debt in order to buy their own shares on the stock market.
While this has made both earnings per share and executive bonuses soar, it has also made firms more indebted and vulnerable to economic shocks as well as less innovative and productive. Wealth built up over decades has been squandered, and in the process income and wealth inequality have grown to such a degree as to threaten social stability.
As the insolvency specialist Roy Adkin put it in the documentary "The League of Gentlemen" (episode 3 of Pandora’s Box, directed by Adam Curtis): “The economists seem to think that the whole of the problems can be solved by money, by the use of money, rather than the creation of wealth. But they’ve never really got anywhere near it. So I would ask the question: Whose money? What money? Where’s it coming from?”
Money is a tool. It performs a useful service when it facilitates the exchange of different forms of wealth. However, it is not wealth. Under our current monetary system, though, the power of money has grown to the point where it is no longer a servant of wealth but instead its master and destroyer. Given this, the continued and accelerated creation of money, while sold as a means by which we might create a better society, is more likely to lead us in precisely the opposite direction.
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India's farmers have been demonstrating in response to the government's decision to liberalize the agricultural sector. Though economists note that these measures will boost the incomes of farmers, it is unsurprising that the protests have received immense support. Unlike corporate titans, the heavily subsidized farmers of Punjab can weaponize sympathy to further their agenda. Because people rarely equate farming with wealth, these relatively prosperous farmers are well suited to present themselves as victims in need of sympathy. Although downplayed, generating sympathy is a crucial step in the quest to maintain privileges.
If Punjabi farmers had been portrayed as affluent, the media would view them as greedy entrepreneurs. But leveraging the political capital of perceived powerlessness has allowed them to obscure their true status as rent seekers. New legislation provides farmers with the liberty to freely sell their produce without the interference of Agricultural Produce Marketing Committees, also known as mandis. This can potentially raise the incomes of farmers by allowing them to demand prices higher than the fixed minimum support price (MSP) offered by the mandis. Research suggests that farmers are unhappy with the present system preventing them from selling produce outside government-controlled markets. Contrary to the narrative promoted by the media, India’s farmers want free markets in agriculture.
[Read More: "India Takes Small Steps toward Economic Freedom with New Agrarian Reforms" by Sathyajith MS]
But the issue is that Punjabi farmers comprise an influential lobby that has managed to skew the story in their favor. Also missing from the headlines is the fact that earnings from mandi fees are a major source of revenue for the government of Punjab. Because of their role in stimulating India’s Green Revolution in the 1960s, Punjabi farmers have managed to extract government assistance in the form of free electricity and subsidized inputs. Moreover, the system of procurement instituted in the 1960s primarily favors states like Punjab and Haryana. So, they have been able to secure lucrative prices for crops benefiting from the MSP policy. Interestingly, most households are unaware of the MSP policy, and it discriminates against numerous farmers since they do not specialize in cereals. The truth is that only 10 percent of total crops are sold at MSP.
As such, Punjabi farmers are opposing reforms that seek to remove privileges. Economist Ashok Gulati argues that the Punjabi farming household records the highest income in India at nearly 2.5 times the income that an average farming household in India receives, while their annual subsidies average $1,626 per family. It is apparent that Punjabi farmers are defending their interests at the expense of society. Yet globally people are expressing solidarity with their presumed plight. However, we should not be shocked, because this has a psychological basis. Punjab farmers are arguing that in the absence of government regulations the monopolization of the market by big corporations will result in them being exploited. People are naturally skeptical of change, so the farmers have exploited fear of the unknown to generate sympathy for a selfish cause. Even if some admit that regulations are costly, they are reluctant to embrace change. People often prefer the certainty of an inefficient present to the dynamism of an unknown future.
Pius Fischer in a widely cited text clearly explains the role of uncertainty in aiding rent seeking: “Incomplete information and limited rationality create fertile ground for rent-seeking activities…. It can be assumed that rent-seekers find it easier to influence citizens if they are uncertain and do not understand the impact of reform policies.” Citing Robert H. Bates and Anne O. Krueger (1993) he informs us that frequently perceptions are shaped by the activism of rent seekers: “Under conditions of uncertainty, people’s beliefs of where their economic interests lie can be created and organized by political activists; rather than shaping events, notions of self-interest are instead themselves shaped and formed.”
Intriguingly, Fischer also lists identity bias as a major boost to rent-seeking activities: “The identity of losers in contrast to that of potential winners, is better known and thus creates stronger sympathy among the population. Living in a world of incomplete information and rationality, powerful rent-seeking groups may even find support among members of the social classes exploited by them.” Although many sympathize with the Punjabi farmers, the latter have brutally exploited gaps in the public’s grasp of the situation to evoke sympathy, thus making people inclined to assist them in their desire to entrench privileges. However, the reality is that the Punjabi farmers, like crony capitalists, deserve our ire.
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The GameStop saga—can we call it an insurrection?—wants easy heroes and villains. Both are available.
The populist version of the story goes like this: a few thousand angry gamers, colluding via the now infamous WallStreetBets subreddit, brought at least one powerful hedge fund to its knees. Melvin Capital and other short sellers, completely blindsided, lost a reported $5 billion in what must have seemed like a sure-bet opportunity for their model of vulture capitalism.
Meanwhile GameStop, the plucky brick-and-mortar retailer thought to be going the way of Blockbuster Video, gained a reprieve from its looming execution date. Robinhood, the “free” app masquerading as a stock trading platform for the little guy, was exposed as a data-mining operation—one happy to shut down the casino when too many of the wrong kind of people started winning.
And for once, at least a few ordinary retail investors were able to pump a stock and make a killing. Turnabout is fair play!
But things are never so cut and dried. GameStop’s position was not quite as precarious as advertised; its financials are reasonably solid and the management team recently gained former Amazon executives, who presumably would not jump onto a sinking ship.
It turns out there was plenty of institutional money on the long side of the GameStop trade as well, including hedge funds as big and rich as Melvin. Apparently it takes more than a gang of Reddit bros to pump a stock price from less than $20 to an all-time intraday high of nearly $500 in a single month. Robinhood, meanwhile, had express authority under its terms of service to stop heavily one-sided margin trading so it could cover collateral requirements.
So the perception of Reddit’s David to Wall Street’s Goliath may well be facile. If we view these kinds of revolts as stepchildren of the broader Trump revolution—and we should—the results similarly may not match the rhetoric.
But every story is clearer with hindsight. GameStop is more than just a tale of greed, mania, manipulation, or vengeance. It is a story of power dynamics and a challenge to those dynamics. Tellingly, that challenge came—at least ostensibly—from the Right. Democrats, not fading country club Republicans, are the hedge fund class today.
Financial media dismissed this populist forest and focused on the trees, asking only the obvious and instant questions. Can a traditional gaming retailer, weighed down with rent and salaries at more than five thousand stores, survive in an era of digital downloads? Should short selling on margin, especially the naked version, be more heavily regulated? Should a bunch of Redditors be able to manipulate an entire stock price against the interests of (suddenly noble) professional fund managers?
As a result—and because journalists think the Right by definition cannot have legitimate political grievances—the far more interesting and pressing questions go unasked: What is the purpose of capital markets? Do they work? And whose interests do they serve?
These are the kinds of questions which should answer themselves as self-evident and obvious. Yet we all know the real and true answers, which is why they go unasked. In short, the United States Federal Reserve, US Treasury Department, Wall Street, stock markets, and large public companies are ensconced in a cozy revolving door relationship which enriches a professional banking class at the expense of ordinary Americans. The process is complicated, but grounded in what we term the Cantillon effect, the change in relative prices due to changes in the money supply, named after the seminal eighteenth-century economist Richard Cantillon. At the center of it all is money, which is always manipulated by central banks. Money isn’t neutral: it flows through the economy unevenly and unequally, and its creation heavily benefits those at the front of the line.
Ordinary Americans, needless to say, generally find themselves at the back of that line.
We want to believe the market is us. Conservatives, for their part, once took pains to promote an “ownership society.” One Gallup poll indicates some 55 percent of Americans own at least some shares of stock (this is ominously down from 62 percent before the Great Recession of 2008). But before happily concluding that somewhere north of half of us are “in the market,” consider that stock investors skew overwhelmingly older, whiter, and better educated. And many of them are invested through 401(k) retirement plans or simple mutual funds, rather than actively trading or following markets closely.
In truth, relatively few Americans engage in stock trading to any extent. Pitted against institutional investors and the increasingly algorithmic forces of Wall Street, a large majority of retail investors in fact lose money.
Can the GameStop short squeeze be replicated and weaponized against other Wall Street interests, as an emerging populist guerrilla tactic? How about the silver market, rumored as Redditors’ next play?
The appeal is clear enough. Gold bugs and sound money types see themselves as underdogs fighting the Fed and its fiat dollar, having long suspected central bankers of manipulating precious metals prices. And silver is the Miller High Life to gold’s Dom Pérignon. Throw in an enormous hundred-to-one disconnect between the paper and physical markets and the situation seems ripe.
But silver is not a stock, and there is no shortage of it. Central and commercial banks have the ability to flood the market with more of it quickly, and congressional committees chaired by the likes of Maxine Waters are already assembled to make sure another GameStop won’t happen. Big market players and politicians have an enviable track record when it comes to protecting incumbents.
Populists should take heart, however. Ordinary people may have little interest in the details of the GameStop affair and even less interest in economic theory. But they do care quite a bit about understanding who is ripping them off. Ordinary people have lost the ability to be thrifty and earn compound interest in simple savings vehicles. Subprime borrowers still pay 18 percent on credit cards and car loans, while private equity firms borrow at near-zero rates to fund M&A. And the rotten Fed fights deflation, the market’s natural tendency to make average workers better off even with stagnating wages.
When elites screw up money and banking as badly as they have over the last century, populist blowback is both inevitable and justified. Expect more of it.
This article originally appeared in Chronicles.
In the US, a hysterectomy or a gall bladder surgery can set you back tens of thousands of dollars. For families that do not possess medical insurance or have inadequate coverage, it can be financially stressful to visit a hospital or schedule an appointment with a doctor. Most people residing outside the US would suffer sticker shock since they receive medical treatment for free at the point-of-service, though their taxes are through the roof. Indeed, the US does have an affordability issue. Is this the result of free market economics, or is there something else to it?
A Retail Surgery Shop When you walk into your physician’s office or a hospital and receive medical care, you are unlikely to know the cost of the visit. If you are insured, the administration will just bill your provider or, if you are subscribed to a government program, a subsidy will pay for your appointment. This produces myriad problems but primarily pricing opacity. One hospital in Oklahoma City is changing that.
In 2004, Dr. Keith Smith and Dr. Steven Lantier founded the Surgery Center of Oklahoma (SCO), a medical facility established on the idea of price honesty. Four years ago, the organization began posting a detailed list of all-inclusive and guaranteed pricing. If there is one thing these medical professionals have learned over time, it is that “healthcare really doesn’t cost that much” but “what people are being charged for is another matter altogether.”
If you undergo a breast biopsy at SCO, you can expect to pay $3,500. Anywhere else, you would pay more than $16,000 for the same procedure. Do you need an ankle arthroscopy? It will cost you just under $4,000 at SCO, compared to about $23,000 in other parts of the country. If you tore your patella tendon you could expect to be faced with a $30,000 medical bill, but walk into the Oklahoma establishment and you’ll pay a fifth of the price.
Using economic principles, these two doctors aimed to transform the local healthcare sector through price transparency and bidding wars. It has worked out quite well, as a whole host of institutions have gradually mirrored SCO, including the Oklahoma Heart Hospital, Breast Imaging of Oklahoma, and McBride Orthopedic Hospital. To avoid burdensome regulations, some facilities have announced that they do not accept Medicare and Medicaid — something that has recently become more common. Dr. Smith told Conservative Modern,
Hospitals are having to match our prices because patients are printing their prices and holding that in one hand and holding a ticket to Oklahoma City in the other hand and asking that hospital to step up. So we’re actually causing a deflationary effect on pricing all over the United States.
In recent years, there many smaller clinics across the country have been adopting these kinds of models. Even Walmart, which has entered the healthcare business, is offering low-cost care. When you walk into some of these offices, you see a board on the wall that lists prices for everything from a physical examination to a flu shot or an x-ray. These establishments are usually cash only. So, if these outlets are implementing such practices, why can’t the entire industry do it?
An Anatomy of Healthcare Economics Healthcare price inflation has skyrocketed since the 1970s. What, then, has been the main driver of this tremendous surge in medical care costs? The two most despised institutions in society: insurance companies and the government.
Back in the day, insurance was only purchased for catastrophes such as cancer, heart attacks, and life-threatening surgery. Today, patients buy health insurance for benign medical matters, from the common cold to the flu shot. Rather than pay out of pocket for these services, either the insurer or the state foots the bill, which means patients are more willing to go through tests and exams that might not even be necessary. When price transparency is eliminated from the equation, people take advantage of the system. When directly impacted by prices, though, the public is far more willing to shop around, price match, and do what is best for the pocketbook, much as it does with other goods and services.
Put simply, if you are paying for healthcare directly, you will ask: how much will this cost? Unfortunately, trying to determine the cost of both routine and more intricate services can be nearly impossible. Even if you were to ask, medical clinics would likely be unable to answer your inquiries; they are already spending about one-fifth of their earnings on administrative staff just to file insurance paperwork.
It is true that bills may vary per patient. One individual might be overweight and older, with a preexisting condition. Another person might be young and in shape, with zero medical complications. The former has vastly different needs from the latter. That said, home renovators can provide quotes for homes of different sizes, shapes, and ages. A restaurant can put together a menu with prices for each dish. A dentist or optometrist can be specific in what he or she charges. But in general medical care, it is impossible. When this is the norm, it is extremely difficult to influence providers to lower their premiums.
A Free Market Failure? Leftists will shriek to the heavens that the US healthcare system is a free market failure. There are two things wrong with this statement. The first is that American healthcare is among the best in the world for serious chronic illnesses, which is why people flock there from all over the world to seek medical care. The second is that it is not an authentic free market system. The main problem with US healthcare is that there are far too many regulations, rules, and restrictions imposed by the government. When you add in state subsidies, an insurance industry built on cronyism, and doctors buried in paperwork, you have a mess of a system.
The Surgery Center of Oklahoma is a prime example of what free market health care looks like — and it is far superior to hallway healthcare in Canada and long wait times across the pond.
Originally published at LibertyNation.
The departed Al Davis, who owned the AFL’s and then NFL’s Oakland Raiders, was famous for saying “Just win, baby.” The Raiders are now operated by Al’s progeny, Mark, whose motto must be “Just raid the taxpayers, baby.”
After the City of Oakland wouldn’t kowtow to Davis the younger’s stadium demands, Mr. Davis went east from the East Bay and found a new group of suckers in Nevada’s capital. In 2016 the Nevada legislature approved $750 million in taxpayer funds to build what is now called Allegiant Stadium.
While numerous academic studies show that professional sports teams provide no stimulus to a local economy, Andy Abboud, the chief lobbyist for Las Vegas Sands, said at the time, “But this is really about jobs, and I think at the end of the day people saw this as a fantastic economic stimulus package.”
Roger Noll, a Stanford professor emeritus in economics and former senior economist for the president's Council of Economic Advisers, is an expert on the economics of sports. “NFL stadiums do not generate significant local economic growth, and the incremental tax revenue is not sufficient to cover any significant financial contribution by the city,” explained Noll.
With the stadium nearing completion, the Davis organization is not done raiding. The team’s latest money grab comes in Henderson, which adjoins Las Vegas. The Raiders approached the City of Henderson to purchase a prized property for the team’s practice facility.
The 55-acre parcel was appraised at $12 million; however, the City of Henderson let it go for $6.05 million. The resolution announcing the sale stated that the city council “believes that the Property is an ideal location for the Headquarters and that the Headquarters will bring significant notoriety and economic investment to the City.” So ideal that the city had to sell it for half price?
Henderson mayor Debra March bubbled with excitement when the deal was imminent, saying, “We’re only on the 20 yard line when it comes to this proposal, but we’re looking to score a touchdown if this sale goes through.”
Yes madam mayor, a touchdown has been scored, but the Raiders are doing the scoring. In fact, they are running up the score. Eli Segall reported for the Las Vegas Review Journal this week, “The Raiders have sold their Henderson headquarters for $191 million and leased it back, a rapid sale of a project that is still being built by a team that has not yet played a game in Las Vegas.”
Although we don’t know the lease rate, Chicago-based Mesirow Financial purchased the under-construction facility, which stands on 24.6 acres of the Raider property, and leased it back to the NFL team for twenty-nine years with seven ten-year extension options according to the Clark County recorder. City records show that the facility was designed to span 323,000 square feet and include indoor and outdoor fields, a gym, a sand pit, and offices, Segall reported.
The Raiders say they have plans for the remaining thirty acres but nothing specific. My guess is that they won’t be offering the property for half price. The math on the sale-leaseback is $6.05 million for the land plus $75 million to build the facility equals $81.05 million in costs. The quick profit looks to be $100 million and, again, the Raiders have thirty acres left to sell.
Recently, MGM sold the Bellagio Hotel for $4.2 billion and will lease the property back at $245 million in the first year, which equates to a juicy 5.83 percent CAP rate. Juicy is relative, of course, due to central bank–manipulated rates. If the Raiders command a similar rate, they may be paying roughly $11 million a year in rent.
Typically, developers must widen roads to their proposed projects; however, the City of Henderson approved a $300,000 contract to widen Sunridge Heights Parkway to connect with Executive Airport Drive and Bermuda Road near the site of the practice facility and team headquarters.
But what’s $300,000 after $850 million?
Just Raid the Taxpayers, Baby!
Originally published at LewRockwell.com.
The European Central Bank balance sheet has risen to 53.9 percent of GDP in July 2020. This compares to the 32 percent of the Federal Reserve and 33 percent of the Bank of England. This means a €1.78 trillion increase year to date. Furthermore, excess liquidity has soared to €2.9 trillion, a €1.2 trillion increase since January.
Added to this unprecedented monetary stimulus, the eurozone has included a record high 10 percent of GDP in various fiscal stimulus programs. None of it has prevented the economy from showing signs of slowing down in August.
After a strong bounce in May and June, coming from the reopening of most economies and the base effect, high frequency data compiled by Bloomberg Economics shows an evident slowdown in July and August. All economists who follow the eurozone economy are warning about the worrying weakening of leading indicators. The Organisation for Economic Co-operation and Development (OECD) has also published its July 2020 Leading Indicator Index, which shows that economies like Spain are not just showing signs of weaker growth, but contraction. Italy continues to improve but at a slow pace, while France and Germany post declining growth levels.
The reason is evident. All the eurozone monster stimulus is focused on perpetuating bloated government budgets and incentivizing noneconomic return or subsidized spending. The entire European Recovery Fund is clearly aimed at promoting white elephants disguised as green projects, but what is more concerning is that the eurozone Green Deal includes more taxes and measures to prevent demand growth than productivity-enhancing plans.
This lesson should have been learnt in 2009. The European Union launched its massive Growth and Jobs Plan, which rose to more than 1.5 percent of the EU GDP, and the economy did not improve, while more than 4.5 million jobs were lost.
The problem of these massive stimuli is that they benefit the wrong parts of the economy. Multinationals and national champions that did not have any problem accessing markets in the past are taking advantage of current government spending in entitlements and subsidies and the massive private bond purchases and liquidity injections.
While the eurozone is raising “environmental” taxes on citizens and promoting subsidized spending in “the new green deal,” the biggest beneficiaries of the ECB corporate bond purchase program are large automotive companies, oil and gas multinationals, and big multiutilities. The ECB has bought bonds from Shell, Eni, Repsol, OMV, Total, Siemens, Daimler AG, BMW, Volkswagen, Renault, etc. None of these companies had any difficulty accessing capital markets or issuing debt at low rates, and their bonds could not be categorized as cheap in any way considering the yields and spreads. Most of these companies have established and mature businesses in sectors where overcapacity and margin challenges existed way before the previous and current crisis, so they will not increase hiring or capital spending due to the monetary stimulus.
Meanwhile, thousands of startups and small businesses with no access to credit because they have no hard assets are collapsing every month. The monster credit support coming from the transmission mechanism of monetary policy is hoarded by governments and multinationals. It is a massive incentive to overspend and malinvest. Governments feel happy adding more current spending and entitlements with no real economic return, and traditional multinationals that were in slowdown phase years ago are zombified by low rates.
The ECB and eurozone stimulus plans end up being massive subsidies to low productivity with collateral damage to high-productivity sectors in the form of higher taxes.
The reader may think that the same can be said about the United States and what the Federal Reserve does. Yes, to a certain extent. The main—and vital—difference is that the United States monetary policy transmission mechanism does not depend on the commercial bank channel. Less than 15 percent of the United States’s real economy is financed by the banking sector thanks to a diversified and flexible private credit system. In the eurozone it is more than 80 percent, similar to Japan.
This path to long-term stagnation should serve as a reminder for the United States, again, of why it is not advisable to follow the eurozone policies. The results are invariably disastrous.
Allegations of corruption have recently been levied against Canadian prime minister Justin Trudeau and Finance Minister Bill Morneau (since resigned) for not recusing themselves from discussions about awarding a contract to a charity which has financial ties to their families.
Notice that the wrongful act—corruption—is completely focused on the names of the state's decision-makers, not on the actual decisions. Thus, the purpose of the state’s rules is to create a perception of legitimacy for state activities so long as the behavior of politicians and bureaucrats remains within the boundaries which they define. Moreover, these boundaries do not consider the collecting and spending of taxpayers' money, per se, to be an act of corruption.
The definition of corruption from Merriam-Webster (emphasis added): dishonest or illegal behavior especially by powerful people (such as government officials or police officers).
Now let's consider some things which we're told are totally not corrupt and perfectly fine.
The state monopolizes the provision of police and judicial services. These bureaucracies are enriched, yet they fail to solve a majority of violent crimes. But the state refuses to return any of the tax dollars—tax dollars taken by coercive means—to citizens, as compensation for its failure to provide all of the services it promised in exchange for those tax dollars.
In Canada, the state implemented universal healthcare with a dishonest claim that this was necessary because many poor people lacked access to healthcare. Healthcare bureaucracies have been enriched, as healthcare has become the largest item in provincial budgets. However, once again, the state refuses to return any of the stolen tax dollars to citizens as compensation for its failure to provide all of the healthcare services it promised.
And then there is the usual political lobbying process in which interest groups provide "campaign contributions" to politicians in exchange for political favors.
This, of course, could easily be called bribery, although politicians have defined it as perfectly legal.
Part and parcel of all this is the state's regulatory apparatus (of similar magnitude in Canada as in the US on a per capita basis), which supposedly exists to protect the safety and welfare of consumers from unscrupulous corporations. Yet somehow the regulatory machine manages to affect a massive transfer of wealth from workers and consumers to politically influential corporations. Thus, the 1 percent gains at the expense of the 99 percent, thanks to the politicians who are on the receiving ends of these legal bribes.
Those are just a few of the thousands of examples of state corruption, which Frédéric Bastiat refers to as legal plunder.
We must not allow the state, and its sanctimonious cheerleaders in the mainstream media, to bastardize the definition of the word "corruption." If Justin Trudeau, Bill Morneau, and all the other politicians and bureaucrats start "obeying the rules," this does not eliminate corruption. These rule breakers are not the problem. They are merely symptoms of the disease. The disease is legalized corruption, with the state's forced taxation, complete lack of accountability, and its predisposition to grant itself legitimacy through democratic elections every four years. As Albert Jay Nock wrote:
The interests of the State and the interests of society…are directly opposed.
The State is not…a social institution administered in an anti‑social way. It is an anti‑social institution.
State power has an unbroken record of inability to do anything efficiently, economically, disinterestedly or honestly. (emphasis added)
The truth is that those who are tasked with serving the public interest are well positioned to serve whatever interests they choose because the rules they create to control their own behavior are far too lax. And why wouldn't they be lax? When state officials have the power to make their own rules, you can be sure they will give themselves wide latitude.
Listen to the Audio Mises Wire version of this article.
Last week’s massive social media purges—starting with President Trump’s permanent ban from Twitter and other outlets—was shocking and chilling, particularly to those of us who value free expression and the free exchange of ideas. The justifications given for the silencing of wide swaths of public opinion made no sense and the process was anything but transparent. Nowhere in President Trump’s two “offending” Tweets, for example, was a call for violence expressed explicitly or implicitly. It was a classic example of sentence first, verdict later.
Many Americans viewed this assault on social media accounts as a liberal or Democrat attack on conservatives and Republicans, but they are missing the point. The narrowing of allowable opinion in the virtual public square is no conspiracy against conservatives. As progressives like Glenn Greenwald have pointed out, this is a wider assault on any opinion that veers from the acceptable parameters of the mainstream elite, which is made up of both Democrats and Republicans.
Yes, this is partly an attempt to erase the Trump movement from the pages of history, but it is also an attempt to silence any criticism of the emerging political consensus in the coming Biden era that may come from progressive or antiwar circles.
After all, a look at Biden’s incoming “experts” shows that they will be the same failed neoconservative interventionists who gave us weekly kill lists, endless drone attacks and coups overseas, and even US government killing of American citizens abroad. Progressives who complain about this “back to the future” foreign policy are also sure to find their voices silenced.
Those who continue to argue that the social media companies are purely private ventures acting independent of US government interests are ignoring reality. The corporatist merger of “private” US social media companies with US government foreign policy goals has a long history and is deeply steeped in the hyperinterventionism of the Obama/Biden era. “Big Tech” long ago partnered with the Obama/Biden/Clinton State Department to lend their tools to US “soft power” goals overseas. Whether it was ongoing regime change attempts against Iran, the 2009 coup in Honduras, the disastrous US-led coup in Ukraine, “Arab Spring,” the destruction of Syria and Libya, and so many more, the big US tech firms were happy to partner up with the State Department and US intelligence to provide the tools to empower those the US wanted to seize power and to silence those out of favor.
In short, US government elites have been partnering with “Big Tech” overseas for years to decide who has the right to speak and who must be silenced. What has changed now is that this deployment of “soft power” in the service of Washington’s hard power has come home to roost.
So what is to be done? Even pro–free speech alternative social media outlets are under attack from the Big Tech/government Leviathan. There are no easy solutions. But we must think back to the dissidents in the era of Soviet tyranny. They had no internet. They had no social media. They had no ability to communicate with thousands and millions of like-minded freedom lovers. Yet they used incredible creativity in the face of incredible adversity to continue pushing their ideas. Because no army—not even Big Tech partnered with Big Government—can stop an idea whose time has come. And Liberty is that idea. We must move forward with creativity and confidence!
Reprinted with permission.
Like me you are probably looking over photos of supposed Trump supporters breaching the ramparts and storming the Capitol yesterday. That is if you can find them. To “protect” us from viewing these incredibly “disturbing” scenes, Twitter has helpfully announced that it will severely restrict their distribution across its network. We can all rest easier, I suppose. Though even memory-addled Americans may recall the free-for-all in posting BLM and Antifa violence on Big Tech’s Big Platforms.
“Gee that’s not fair! Twitter is discriminating!”
Conservative politicians and “responsible” Beltway libertarians are wringing their hands over the supposedly horrible optics of people breaking through police lines and violating that Most Holy of Sanctuaries, the Senate Floor! The religion of America is politics and any violation of the sanctity of that Holy Body is to be condemned.
Many of us, myself included, are not concerned about weirdos in buffalo horns occupying that sacred space reserved for Saint Mitch McConnell. “Oh no! It will give CNN something to say about how horrible is the opposition to the incoming robber administration, whose ‘victory’ is doubted even by almost one in five Democrat voters!”
Because absent that, they’d provide balanced coverage.
The mainstream media and whinging Republicans are having a panic attack over those evil people who don’t like the feeling that their vote was stolen! The opportunities for “responsible” Republican virtue signaling are endless and too intoxicating to resist.
So do we support the “occupation” of the Senate Chamber as an expression of righteous anger over the feeling that the election was stolen? Not really, because it will not achieve anything. As we said in yesterday’s Liberty Report, the Republicans have lost both chambers of Congress mostly because they are devoid of ideas. They scream about socialism while voting for insane spending bills that only benefit the rich and well connected. They decry the Democrat obsession with Russia as the enemy not because they know it’s bogus, but only because they want their own enemy: China! They dream of war with Iran and endless occupation of the Middle East. They drool over the prospect of more “American global leadership” without pausing for a moment to think that the rest of the world has had quite enough “leadership” from US neocons and “humanitarians.”
Is anyone shocked that Republican empty minds were rejected at the polling place?
So let’s look for a silver lining. Opposition to Leviathan must be based on principle. The Democrats and Republicans are nearly identical in their view that only the political elites, from the Sacred Throne of Democracy recently defiled by the unwashed masses, can save us from ourselves. We don’t know how to manage our lives, we don’t know how to manage our health, we are far too stupid to simply live without their constant guidance.
Remember the monster Victoria Nuland? Obama’s assistant secretary of state who was the prime mover behind the murderous coup in Ukraine? Where thousands died unnecessarily because Obama’s foreign policy geniuses thought bringing Ukraine into the US orbit—regardless of what Ukrainians actually wanted—would be a great idea? The nasty woman who actually walked amongst the most violent US-sponsored thugs and offered them cookies to keep them energized as they murdered their fellow citizens?
Remember Nuland’s intercepted phone call where she did not even try to hide the fact that the United States had arrogated to itself the authority to determine who would run postcoup Ukraine? “F*** the EU,” she said. Yeah, that’s “American global leadership,” neocon style.
How many Republicans supported this most idiotic and pointless policy? Most. Because they have no principles.
Well, the big failure Nuland is back, demonstrating that there is nothing like being catastrophically wrong in foreign policy to boost your career in Washington’s foreign policy establishment! Incoming Biden has announced that he would reward neocon Nuland for her incompetence with an assistant secretaryship for policy at the State Department.
There are many areas wide open for us—we noninterventionist, nonpartisans—to affect the debate in the coming people. It has in a way fallen into our laps: we oppose interventionism on principle, and we have no opposition because no one else has any principles! It’s only about empty-headed power.
Schumer is drooling all over himself with his newfound power, tweeting “buckle up” yesterday. But he has no real power because he has no ideas. We have the ideas, and as Dr. Paul always says, no army can stop an idea whose time has come. Our time has come!
Reprinted with Permission.
What's a telltale sign of economic illiteracy?
I'm starting to believe the worst is the claim that markets lead to monopoly and the accumulation of wealth in a few hands. Why? Because it makes no sense at all on the face of it and has no logical explanation, so it is indicativeof fundamental confusion and misunderstanding.
Granted, many great thinkers have been deluded by this, including Joseph Schumpeter (the old pessimist, not the young optimist). It is nevertheless a fundamental error. This error lies not in the fact that some, or even many, businessmen strive for empire, that businesses and businessmen would like and may wish for monopoly, or that they seek as much profit as possible, but in mistaking the aims of individual actors for the mechanism that they collectively comprise. This is like figuring the function of money in the economy by studying a dollar bill.
Little, if anything, will come of it, because the instance is not the function.
This difference is captured in the slogans "promarket, not pro-business" or "free market anticapitalism," which here have similar meanings. The core of the market is voluntary exchange undertaken for private gain. But in voluntary (nonfraudulent) exchange both parties, not only one, anticipate gain. There is no transfer of wealth, but an increase on both sides.
The market comprises any and all voluntary exchanges, and sees no barriers to entry other than scarcity: you cannot trade what you do not have.
Markets ease the burden of scarcity on society by determining relative values (prices) and through them allocate resources to the most productive hands (from the perspective of consumers; i.e., value creation). In this situation, one can only accumulate wealth through production followed by an exchange that is anticipated to benefit consumers, who are the final arbiters of value. Even if one were to monopolize some valued resource, it only has value when utilized inproduction. If I were to monopolize meat, I could only use this situation for my benefit by selling the meat.
The typical counterargument is that some resources are necessary for some forms of production, such that the monopolist can extract rents from the rest of the economy. This is only true in a static world, however. In a world where we learn, discover, and innovate, there are no such resources.
In fact, someone's lasting monopoly of a treasured resource means two things: first, it is a great incentive for entrepreneurs to focus their efforts and imagination on finding alternatives (which are always possible because nothing in this world is entirely specific), and, second, it makes the monopolist relatively poorer for as long as s/he does not put the resource to use.
It is only through using the resource (i.e., using it to benefit consumers) that it becomes valuable and can generate income for the owner. In other words, it is through undermining their monopoly that the owner best serves himself. It is also through using (and, thereby, sharing) the resource that innovations that can undermine its value can be limited.
In fact, the more effectively a resource is used to satisfy consumers, the more valuable it is. Additionally, the less bothersome the monopoly is, which means that innovative efforts are directed elsewhere, the better it does.
The market simply does not offer a mechanism for monopolists to exploit consumers. The value of any resource is derived from the valuable contribution it offers to consumers, which means capital and resources are valuable because consumers determine that they are. The owner is a servant of consumers, not the other way around.
So why, then, do we see monopolies in the "market economy"?
Why do we see immense inequality?
It is not a result of voluntary exchange, because that mechanism benefits all involved by improving their positions—and society at large by producing a more beneficial resource allocation. The only reasonable and logical explanation is that something has distorted voluntary exchange. Typically, it is the burden of regulations, which almost exclusively impose costs on and restrict entry for competitors and thereby indirectly protect incumbents, who then no longer respond to consumers on fully marketable terms.
In other words, the market mechanism is partially put out of play, and therefore the outcome too is distorted. By not letting the market mechanism work fully, some of the most beneficial exchanges will no longer take place, which is a loss to those parties. As a result, some resources—especially the ones protected from competition—become relatively overvalued and offer their owners more benefit than the benefit to consumers warrants. As long as they are shielded from(rather than subject to) the market mechanism, they can take advantage of the position.
This is the real problem of monopoly—not that someone is the sole seller or provider of a resource, but that monopolists are artificially protected and thus are no longer subject to profits from benefiting consumers. The market logic no longer applies, which is the reason we see these problems. For this to happen, a market does not need to be fully nationalized or controlled by the government. It is sufficient to circumscribe the market mechanism, and thereby directentrepreneurs to activities that would not otherwise have been their first choice, to cause highly distorted outcomes. The more restrictions affect the market mechanism and limit the realm of voluntary exchange, the greater the burden on consumers.
The common misconception that voluntary exchange leads to monopoly and accumulation of wealth is, consequently, the exact opposite of what follows from the logic of the market.
More regulation cannot solve this problem, because regulation is the problem.
It is very unfortunate that so many fail to consider what mechanism could or must have caused the problems they observe. There is no conceivable way by which voluntary exchange can lead a producer to a position of "market power," because production is valuable only because consumers think so—and this is based on their opportunity costs: the comparison of value gained versus what other value can be gained instead. A monopolist jacking up selling prices is pushing customers elsewhere, directing them to consider other options and providing entrepreneurs with increased profit incentives to find ways to serve consumers without involving the monopolist.
Only by restricting these logical outcomes can the monopolist gain market power. Such restrictions are imposed on the market, typically by the government, but they are not part of the market.
Formatted from Twitter @PerBylund.