Wednesday, December 21, 2011

The European Central Bank Catches the Fed Disease

From today's Open Europe news summary:

Huge demand for new ECB long-term bank lending;
The ECB this morning launched its first three-year lending operation with 523 banks requesting €489bn in loans, well above the expectations of between €250bn and €350bn. The previous largest amount requested was €442bn in one year loans back in June 2009. The aim of the long term lending operation is to provide secure long term financing for banks which can no longer gain funds from the usual avenues, in turn hopefully boosting lending in the wider economy and possibly purchases of sovereign debt. It was widely expected that demand above €400bn would prompt a positive market response. Open Europe’s briefing on the role of the ECB and the potential consequences for its long-term lending featured in the Telegraph, on EUobserver and on Zerohedge. The FT reports that US money market funds, formerly a key source of funding for European banks, have now cut their European exposure to record lows.

There is a reason that some banks "can no longer gain funds from the usual avenues.." There is only so much money that they can squander before the market has had its fill of their poor business choices. But our central bankers will not accept the legitimate judgment of those who invest their own money, so they print fiat money and make the taxpayer pay. This will lead only to higher prices and a continuation of the international raid upon capital that goes under the guise of "providing liquidity to the banking sector". It is nothing more than stealing purchase power from existing money holders in order to protect politically connected constituents. But that is not all. The real damage will be done in the years ahead as more capital is squandered in another credit-induced boom that will inevitably lead to a bust. The world need savings, real savings, not fiat money masquerading as savings.

Saturday, December 10, 2011

Fed Money Expansion Is a Criminal Enterprise

Today we take it for granted that our central bank, the Fed, can print money out of thin air, supposedly for our own good. When I say it "can" print money, I mean that in two ways. One, that it has the technical ability to print money, and two, that it has the legal and moral right to print money. Yes, the Fed can and does create money out of thin air. But I challenge the notion that it has either the legal or moral right to do so.

What Is Theft?

I am confident that all who read this article will agree that theft is a crime. Taking something that belongs to someone else is the definition of theft. If I lift your wallet and steal your money, I have committed a crime. But what if I steal from you S-L-O-W-L-Y so that you barely notice it at the time? I could do this very carefully, so that for some time you do not know what has happened. Perhaps you may not notice that I took only part of your money, believing that you must have spent it. Nevertheless, whether or not you notice that you have been robbed, I have committed the crime of theft.

Is Inflation Theft?

Now, let's examine what happens when the central bank expands the money supply. It is the stated goal of the central bank to create some inflation. By inflation, I am not speaking in Austrian economic terms. For Austrians, inflation means only one thing--expansion of the money supply not redeemable in specie (gold, silver, etc.). For the layman and for the central bankers, inflation means higher prices.

The Fed has engaged in a systematic attempt to keep prices higher than the unhampered market would establish. Since the fall of 2008 the Fed has expanded the money supply tremendously. M1 has increased by fifty-four percent and M2 has increased by twenty-three percent. So, the question remains: does this increase in the money supply represent theft by those running the Fed?

Austrian Monetary Theory Clarifies the Issue

To answer this question, let us examine monetary theory. Money is a medium of exchange and arises spontaneously in the market. It becomes a medium of exchange by the fact that it is the market's most marketable commodity, meaning that it is accepted by most market participants first for consumption and then for exchange for some other good at a later time. Only commodities can arise spontaneously as mediums of exchange, because only commodities have prior intrinsic or industrial value. Pieces of paper with fancy ink engravings do not have intrinsic or industrial value at all. As Murray N. Rothbard has outlined in his wonderful book What Has Government Done to Our Money?,the fiat money that we all use today was gradually and systematically forced upon the public by the coercive police powers of government. Why did it do this?

The answer clearly is that government wanted to be able to expand the money supply. It especially wanted to be able to bail out the big banks when their depositors grew concerned that they would not be able to withdraw their money on demand. But the government had a problem. It could not tax the country to provide for these funds--the public would not support such a blatant act of protecting the rich from their own foolishness. So it had to eliminate the NEED to tax the public. Thusly, over several decades it eliminated gold money, that it could not expand, and replaced it with fiat money that it could expand in infinite amounts.

Ben Bernanke has famously stated that the Fed cannot go bankrupt, because it can produce legal tender in whatever amounts are necessary. His statement is prima facie evidence that the purpose of fiat money expansion is to give purchasing power to some who have done nothing to earn it. This, of course, is theft.

By lowering the interest rate or engaging in quantitative easing, the Fed allows some economic units to purchase real goods and services that they would not have been able to purchase in the absence of fiat money expansion. These are goods and services that will be denied to current money holders at the price that would have pertained in the absence of fiat money expansion. It is irrelevant to the question of whether or not the Fed has committed the crime of theft to ask if prices are higher. It is irrefutable that prices are higher than they would have been in the absence of fiat money expansion. Paying this higher price means that the public has been robbed of something real. The lowered purchasing power of the public's money means that people can buy fewer units of goods and services.

The Founding Fathers on the Crime of Money Debasement

Our Founding Fathers understood the evil of money expansion much better than our so-called sophisticated modern central bankers. The 1792 Coinage Act made it a capital crime--i.e., death penalty--for debasing money! They understood that money debasement was a crime against all the nation's citizens, not just picking one or two pockets. They were unconcerned about the price level; the crime was tied directly to money debasement, a crime against property. Notice this: money IS property.

It is no exaggeration to claim that fiat money expansion is a criminal act, conducted purposefully in order to give purchasing power to some at the expense of all others. If anyone other than the Fed prints money out of thin air, he is prosecuted for the crime of counterfeiting. So why is the same act legal when perpetrated by the Fed?

I addressed this very question to a panel of Fed representatives touring the country on a public relations campaign in the summer of 2009. My question was "If it is beneficial for the economy, as you say, for the Fed to expand the money supply, why does the government prosecute counterfeiters?" To my astonishment and delight, my question was greeted with cheers from the audience. The Fed panelists squirmed in their seats and quickly called an end to the meeting!

For the Fed to claim that it acts legally according to an act of Congress does not eliminate the crime. During the Nazi era the Germans legally and democratically passed the infamous Nuremberg Laws that persecuted the Jews. Frederic Bastiat would not have been impressed with either the acts establishing the Fed or the Nuremberg Laws. He understood that "...the law may be diverted from its true mission, that it may violate property rather than securing it,..." Such is the case with the acts establishing the Federal Reserve Bank and expanding its power to debase money.

Expanding fiat money is a criminal act and should be prosecuted as such, just as the infamous Nuremberg Laws gave no legal cover to those who persecuted the Jews. We may be reluctant to admit that our government has committed, and continues to commit, acts that our Founding Fathers would punish with the death penalty. But such is the case.

All those who have participated and continue to participate in the criminal act of robbing hundreds of millions of Americans of their rightfully earned wealth that is held in the form of dollar assets must be brought to justice.

Wednesday, December 7, 2011

The Euro as a Tool for Socialism

From today's Open Europe news summary:

Van Rompuy proposes fiscal integration through limited Treaty change;
Eurozone working on three-pronged financial backstop for eurozone
Council President Herman van Rompuy has drawn up plans for fiscal integration in the eurozone which would not require only unanimous consent in the Council rather than ratification at the national level – thereby avoiding an Irish referendum or tricky parliamentary negotiations in all 27 member states. Under the plan eurozone states would enshrine debt and deficit limits in their constitutions, as well as a balanced budget commitment, and the European Court of Justice would judge whether they had been properly enforced. These changes could be made by amending protocol 12 of the EU Treaties, which relates to excessive deficits, rather than a full revision. Under this method the European Commission would not have the power to discipline countries which continually breach the fiscal limits, something which Germany is keen on. Van Rompuy therefore also sets out a plan for wider treaty change which gives the Commission greater power. Lastly, the proposal calls for the ESM, the eurozone’s permanent bailout fund, to have access to ECB funding.

One only has to ask why Van Rompuy demands that any member of the EU should have any say over the budgets of its fellow members to begin to understand the problem. The answer is simple--the structure of the euro socializes irresponsible behavior. Ludwig von Mises explained very clearly the social consequences of capitalism and socialism. Under capitalism the acting party itself enjoys all the benefits and suffers all the losses of his actions. Under socialism the acting party must share his benefits with all others and force all others to share his losses. So capitalist countries go from strength to strength as those who incur losses are forced from the market and are replaced by those who succeed. The exact opposite happens under socialism--those who succeed are fleeced in order to subsidize those who fail until the capital stock of the nation is consumed. Van Rompuy admits as much when he demands that the EU have control over the budgets of irresponsible members. This undemocratic interference into the affairs of a sovereign nation is required by the fact that the euro is a socialist project. As Philipp Bagus explains in his excellent book The Tragedy of the Euro, irresponsible nations export their losses to all the other members of the EU via their ability to print euros, and the responsible nations automatically bear the costs. The misconstruction of the euro (Philipp Bagus' term) means that the entire continent of Europe will be socialized to a greater and greater extent until its capital stock is consumed. We see it happening now with Greek pensioners retiring in their early fifties, thereby consuming capital, and forcing their German neighbors to work into their late sixties to pay the bill. Merkel is taking the wrong approach by demanding that Germany control Greek's budget. No self respecting, patriotic Greek could ever agree to such interference. And such interference is unnecessary. Scrap the euro and the consequences, for good or ill, of each country's internal policies will be borne by that country alone. Capitalism, with all its social benefits of rewarding success and punishing failure, will return to the international financial markets. Instead of constant bickering and threats of foreign intervention, each country will have an incentive to live within its means because it will not be able to live at the expense of its neighbors.

Monday, December 5, 2011

When Did We Change the NATO Treaty?

From today's Air Force Magazine online:

NATO 3.0: NATO demonstrated that it is now an "operational alliance" via its successful air campaign in Libya, rather than just the collective defense construct of its Cold War founding, said the US permanent ambassador to the transatlantic alliance, Ivo Daalder. Speaking to reporters in Washington, D.C., last week, Daalder called today's alliance "NATO 3.0," building upon the original Cold War model and the alliance's later "export-of-security" model through its enlargement over the past 20 years. He noted that, at the height of the Libya operation, NATO had 177,000 military personnel under its command on three continents. While non-US aircraft flew most of the strike missions, US assets provided the majority of intelligence-surveillance-reconnaissance and aerial refueling capabilities. Only 10 percent of the precision-guided munitions dropped in Libya came from US aircraft, said Daalder. In comparison, US aircraft dropped some 90 percent of the PGMs during the 1999 Kosovo operation, he said. Belgian, Danish, and Norwegian aircraft together destroyed as many targets during the Libya operation as the French, he said during his Dec. 2 roundtable. Many allies were able to contribute beyond expectations, he said.

I don't recall any debate about expanding NATO's charter to become an "exporter-of-security" or a NATO 3.0. As much as all of us detested Kaddafi, Libya did NOT attack a NATO country, which would have triggered NATO's mutual defense mechanism. NATO's mission ceased to exist when the Soviet Union collapsed. Now it is just a useful mechanism for international adventures and bureaucratic advancement of people like Mr. Daalder. But he is sending real people in harm's way without a democratic mandate.

Friday, December 2, 2011

Sarkozy's Great Lie

From today's Open Europe news summary:

Sarkozy: “Europe’s re-foundation is not a march towards more supra-nationality”;
Calls for greater use of qualified majority voting in the eurozone
In a keynote speech on the state of French economy and the future of Europe yesterday, French President Nicolas Sarkozy said that he will meet German Chancellor Angela Merkel on Monday to finalise Franco-German proposals for EU Treaty change, to be discussed at the next meeting of eurozone and EU leaders on 8-9 December. In contrast to Merkel’s plans to give the European Commission and the ECJ more power to enforce budgetary discipline on eurozone countries, Sarkozy said, “A more democratic Europe is a Europe where it’s [national] political leaders who decide…Europe’s re-foundation is not a march towards more supra-nationality…The crisis pushed heads of state and government to take on growing responsibilities, because, at the end of the day, they were the ones who had the democratic legitimacy that allowed them to decide. European integration will go the inter-governmental way because Europe will have to make strategic choices, political choices.”
Outlining his ideas for reform of economic governance in the eurozone, Sarkozy said that “every eurozone country must adopt a 'golden rule' enshrining the balanced budget target in its juridical order,” adding that in future eurozone countries should take more decisions by qualified majority. He also said that the ECB “has obviously a decisive role to play. There is debate over what it is allowed to do under its statute. I don't want to weigh into that debate. The ECB is independent. It will stay independent. I'm convinced that, in light of the deflationary risk which threatens Europe, the ECB will act. It's up to the ECB to decide when and with what means.”
An editorial in Le Figaro argues that Sarkozy “has promised [Merkel] the budgetary golden rule, the sanctions against countries that violate the rules, the respect for the independence of the ECB. It’s now up to the [German] Chancellor to decide if she also wants to accept a compromise to save the euro, through the mutualisation of national debts.” On his Le Monde blog, Arnaud Leparmentier stresses Sarkozy’s “intellectual incoherence”, adding, “The President imagines a French veto in Europe, but considers that smaller countries must accept the majority principle.”

Notice that Sarkozy says that "smaller countries must accept the majority principle". He means that they must accede to being run by French and German bureaucrats. (Hitler and Napoleon would be proud.) This crisis was caused by the misconstruction (as Professor Philipp Bagus calls it) of the euro and the abandonment of the immediate post-WWII vision of a truly liberal Europe of free trade and free people. Sarkozy's vision is of a protectionist European bloc against the rest of the world and a highly regulated, socialist government internally. If Europe does in fact go this route, it will stagnate and fail. It is the time for Europe's true statesmen to oppose this socialist march to totalitarianism.

Sunday, November 27, 2011

One Intervention Leads to Another...and Another...

From Open Europe's news summary of November 22nd:

In an interview with FTD, EU Commissioner for Economic and Monetary Affairs Olli Rehn argues for “the functioning of the eurozone to be improved through better coordination and tighter fiscal surveillance”, which would include having to clear national budgets in Brussels in order to ensure that rules on budgetary stability are adhered to. According to a draft copy of the Commission’s legislative package seen by Süddeutsche Zeitung, member states would have to submit their draft budgets to Brussels by April 15 in order for the Commission to provide comments and suggestions. The budget would then be discussed nationally and resubmitted by October 15 in order to get the Commission’s final approval. Rehn argues that the Treaty changes urged by Germany would not be necessary to achieve this, although he added that the Commission did not exclude this possibility. Handelsblatt reports that a source close to German Chancellor Angela Merkel has said that her goal is a Treaty amendment which allows for similar budgetary intervention and an enforcement role for the European Court of Justice, and according to experts, such a change can be achieved through a protocol added to the EU Treaties.

The crisis in Europe is a textbook example (Austrian economics textbook, that is...) of how the adverse consequence of one failed market intervention leads to another and another until the state, or in this case the European Union super state, controls all economic life at the expense of personal liberty.The failed attempt at establishing a common currency has created a tragedy of the commons (see Philipp Bagus' excellent book The Tragedy of the Euro), whereby the most irresponsible nations are rewarded for their irresponsibility. Now, instead of simply abandoning the failed project and considering something with a real track record--dare I say "gold standard" or money freely chosen by the market?--the elitists of Europe plan to move to the next step of trying to run the supposedly independent and sovereign countries that comprise the European Monetary Union from their cushy desks in Brussels. Here in America we would ask the rhetorical question "Are they smoking dope?". But since this is Europe, with more refined continental tastes, perhaps the question should be "Are they drinking supermarket wine?".

Sunday, November 20, 2011

My Letter to the Wall Street Journal re: Fallacious Economic Theory by Fed Presidents

Subject: Fallacious Economic Theory by Fed Presidents
Date: Sat, 19 Nov 2011 17:50:50 -0500

Re: Fed Official Backs Action

Dear Sirs:
Seldom does one see so many fallacious economic theories displayed in one, short article. New York Fed President William Dudley believes that buying mortgage backed securities at above market prices with money that he creates out of thin air is "ammunition", and that he has a lot of it. But the reality is that more money does not create more resources--just ask the Zimbabweans or the Weimar Republic Germans. Cleveland Fed President Sandra Pianalto thinks that the definition of "inflation" is rising prices, and she doesn't see any. (The definition of inflation is expansion of the money supply, and more money eventually leads to higher prices.) Furthermore, she subscribes to the discredited "cost-push" theory of higher prices, whereby rising factor prices, such as labor union demands, somehow cause higher prices all by themselves. Well, labor unions may demand higher wages and they may get them, but the result will be unemployment to the extent that the wage increases granted are not supported by increases in labor productivity. With such gross economic ignorance at such a high level, no wonder we are in such a financial mess.

Patrick Barron

Wednesday, November 2, 2011

An Alternative View of the EU Crisis

Today's news reports from Europe reveal that political leadership of all Europe wants to deny their citizens the right to stop the EU's inflationist policies. They are determined to punish Greek leadership for having the temerity of actually asking the approval of its citizens for accepting more debt and more regulation of their country from non-Greeks. Merkel and Sarkozy have called Panpandreou onto the carpet to explain himself. When did he dare to become a democratically elected GREEK official? The Dutch government decided it won't even ask the approval of its own parliament; it will sign the newest bailout deal right now before the people or the people's representatives catch the Greek disease and decide that they might have a say in whether to further burden themselves with unpayable debt.

All financial crises start somewhere. For the last few months it appeared that perhaps the Finns or the Slovaks would precipitate the crisis. And why is there a crisis? If the Euro elite, as exemplified by Merkel and Sarkozy, think that they have the answers, why are they so concerned? The answer, of course, is that the people finally have awakened to the fact that they do NOT have the answers...or rather that they have the same OLD answer that they have always had--namely, more debt and more debasement of the Euro.

It is time for the politicians to step aside and let markets sort things out. Perhaps the contest to win Lord Wolfson's Prize (for the best recommendation for curing Europe's financial crisis) will bring forth new ideas...ideas that actually are very old; i.e., sound money and banking that is provided by private entities who are subject to standard commercial law.

My Letter to the Wall Street Journal re: Tax on Speculators

Subject: Re: Tax on Speculators
Date: Wed, 2 Nov 2011 08:03:10 -0400

Re: Time for a Tax on Speculation by Ralph Nader

Dear Sirs:
Since Mr. Nader fails to understand the source of our current economic woes, of course he will recommend a cure that will do nothing to fix the problem and most assuredly will make it worse. Generally, Mr. Nader blames "corporations" and trots out green-eyed envy of
Wall Street salaries as his evidence. Oh, and he says that Merkel and Sarkozy want a financial transactions tax in Europe and, since the Europeans have shown such foresight in handling their financial affairs, we here in America shoud emulate them. Well, Mr. Nader, take off your class consciousness glasses and take a look at the real problem--government control of money and banking. The government uses the Fed to fund its welfare state and endless overseas wars with massive amounts of new, fiat money. Here's a startling fact--more money does not produce anything. More money causes higher prices, a redistribution of wealth from the people to government's favorite insiders, and fosters the capital destroying boom/bust business cycle. Speculators are nothing more than government's favorite whipping boy, designed to shield our gaze from the real problem. The capitalists who oppose your ideas are right--a tax on speculators, really just a tax on capital--will harm ordinary Americans while doing nothing to cure the real problem.

Patrick Barron

Tuesday, November 1, 2011

My Letter to National Review re: The Real "Secret Bad Guy"

Subject: The Real "Secret Bad Guy"
Date: Tue, 1 Nov 2011 16:18:08 -0400

Re: Occupy Salem by Kevin D. Williamson

I very much enjoyed reading "Occupy Salem" by Kevin D. Williamson in the Oct 31st edition of National Review. The source of American's frustration, as manifested in the "Occupy Wall Street" movement, can be debated endlessly, and Mr. Williamson certainly has hit upon some excellent causes; namely, America's fleeting industrial superiority as the only unscathed combatant at the end of WWII. But, like Mr. Williamson, I would advise the OWS types that the real "secret bad guy" is not behind the scene but right in front of them as chairman of the most corrupt organization on the planet. I refer, of course, to Ben Bernanke, chairman of the Federal Reserve Bank. "Most corrupt organization on the planet"? You bet. The Fed acts in complete secrecy and for very good reason. It prints mountains of money and distributes it throughout the world to the detriment of the American people. Bloomberg News' Freedom of Information Act lawsuit revealed that the Fed had lent hundreds of millions of dollars to foreign banks, following the financial crisis in 2008. It refuses to allow an independent audit of its operations. It refuses an independent audit of its gold reserves. It enforces the federal government's perverse regulations that force banks to lend to those who are not creditworthy--the infamous Community Reinvestment Act. It bails out some banks and lets others go under, for no known reason (although we know that there always is a reason and it usually is political). And I haven't even touched upon its role in promoting unsustainable and capital destroying bubbles through its control of money and the interest rate. So, open your eyes, you OWS types, and picket the real bad guy--the chairman of the Federal Reserve.

Patrick Barron

Wednesday, October 19, 2011

A Quick Lesson in Banking Realities

From Open Europe news summary:

In the FT, Patrick Jenkins argues that new bank core tier one capital ratios of 9% could lead to reduced lending. He explains that several big banks across Europe have made clear that they will reduce lending commitments rather than raise additional capital in order to meet new EU capital requirements.
FT: Jenkins

A capital ratio is simply the capital account divided by total assets. As every school child knows (or should know!) the ratio can change from either a change in the numerator (capital), a change in the denominator (total assets), or a change in both. If government mandates that banks maintain a higher ratio, banks may choose to decrease the denominator (total assets) instead of increasing the numerator (capital). They would decrease total assets by reducing lending; i.e., not only refusing to make new loans but also refusing to renew existing loans. In today's money environment in which governments manipulate interest rates and change banking regulations as their whim strikes them, the market for new capital issues cannot be very attractive. Why risk more capital in such an environment?

Thursday, October 13, 2011

Restating the Question

The last paragraph of Japanese Prime Minister Noda's blog:

Within this month, I intend to formulate a concrete action plan on the basis of the midterm proposal for the revival of the food and agriculture industries in Japan that was compiled in August. In what ways can the national government assist in order to revitalize agriculture and transform it into a growth industry? I will put forward a definite vision as a nation so that the people who will be responsible for the future can engage in agriculture enjoying both big dreams and peace of mind.

He might just as well asked "In what ways can the national government encourage its people to make a career in a declining industry, one that requires fewer workers, produces less income than a career in alternative industries, and one that will burden the rest of the people of Japan through higher food prices?".

Monday, October 10, 2011

Social Security Cannot Be Reformed

In his recent essay in National Review magazine titled "Social Security Alert" senior editor Ramesh Ponnuru noted that Republican presidential contenders Rick Perry and Mitt Romney debated the merits of whether or not Social Security should ever have been established…Perry saying nay and Romney saying yea. His discussion of the structure of the program during the Great Depression and its impact on American society over the decades was a fine primer for those who think very little about it other than what one is likely to receive in benefits upon retirement. However, many of us readers of National Review have thought quite a lot about it, and I, for one, was somewhat disappointed that Mr. Ponnuru’s piece was more of an appetizer than a main course. Not that there was one untrue thing in the entire essay. But mark his concluding remarks that reform is necessary and that "moderating the growth of Social Security benefits…is a matter of some urgency…". This is like saying that someone really should have thought about designing watertight bulkheads for the Titanic. Come on, Ramesh; give it to us straight. We can take it.

The truth is that Social Security is one of the most corrupting and disastrous programs ever sold to the American people. Let me fast forward to the punch line—Social Security is not sustainable, is an unjust welfare program masquerading as a retirement program, and it may well bankrupt the nation. How’s that for a program that Mr. Ponnuru correctly states "remains one of the most popular federal programs, and polls consistently find that voters want to prevent benefits from being cut."?

Social Security was sold as a lie. While the government told the American people that it was a true annuity program just like one that could be purchased in the private insurance market, it told Congress that the program was nothing more than a welfare program, like many others that had passed Supreme Court muster. Well, we are long past worrying that an independent judiciary might actually read a little document called the Constitution and prevent our all-mighty government from doing whatever it wants, so lets look at what the program is, what it is not, and what the future holds.

Why Social Security Is NOT Insurance

The government was correct in its testimony to Congress in the 1930s that Social Security is NOT an insurance program. It is nothing more than a redistribution scheme, funneling current taxes from workers to retirees. Anything left over goes into the Social Security Trust Fund. But the trust fund holds no profitably invested assets out of which one would receive dividends. It merely holds general obligation bonds of the federal government. But a government bond is much different than a bond issued by a private company. The proceeds of the government bond have been spent, with no means of repayment other than by future taxes; whereas, the proceeds of a private bond are invested in productive assets that generate a revenue stream sufficient to repay the bond. Thusly, Social Security cannot be privatized: there is nothing to privatize! If Social Security did allow workers to invest some of their social security taxes in the private economy, the Trust Fund would go broke much sooner, because expenditures would outstrip revenue to a much greater degree than currently projected. Just think of it this way…if ALL Social Security taxes were invested in the private economy in order to produce a stream of revenue for later beneficiaries, from what source would current beneficiaries receive their benefits once the Trust Fund has been exhausted?

What the Future Holds

Since Social Security taxes were spent rather than invested, the capital of the nation has not been structured properly to support future beneficiaries. In an unhampered market economy workers save during their productive years and invest that savings, via banks and the stock market, in long term investments. Since workers curtail spending, there truly are more funds for financing this longer-term production structure. But the workers’ Social Security taxes did not fund productive investment. They were spent immediately by current beneficiaries. Mr. Ponnuru refers to the work of Harvard economist Martin Feldstein, whom no one would confuse with an Austrian economist, who contends that the capital stock of the nation—that is, the plants and factories that make the stuff that we want to buy—has been diminished by the program. There has been too much spending and too little savings to provide the real goods that workers will demand upon retirement. We have been eating our seed corn, so to speak, and we all are the poorer for it.

And things will only get worse. When the Trust Fund is exhausted there are only two choices—cut benefits or increases taxes (or some combination of the two). Oh, yes, I forgot the third choice—print more money and pretend that the government is honoring its obligations. That’s what it is doing now via its QE1, QE2, and QE3 programs for bailing out Wall Street and the auto companies, funding national health insurance, and paying for wars around the world so numerous that I have lost count. No doubt this will be the preferred method for meeting the Social Security shortfall, too. Of course none of these smoke and mirror proposals are real solutions. Perry is right. Social Security should never have been established, and the sooner we end the sorry program the better. Social Security cannot be reformed; it can only be terminated. The only truly sustainable retirement program is the one that each of us provides for himself.

Sunday, October 9, 2011

My Letter to National Review re: Why the Post Office Does Not Turn a Profit

Subject: Why the USPS Does Not Turn a Profit
Date: Sun, 9 Oct 2011 16:03:21 -0400

May I make a minor, but important, correction to Mr. Robert Vergruggen's otherwise excellent essay on the USPS titled "Dead Letter". The Post Office does not negotiate sustainable labor contracts with its unions and its unions have no concern over the terms that they demand not because the Post Office is a monopoly, as Mr. Vergruggen states, but rather because the Post Office is not a private company with private property to protect. If the Post Office were a private company with a government-enforced monopoly over first class mail delivery, it still would have to turn a profit or go out of business. Its shareholders would demand that the company turn a profit or, if that appeared to be impossible due to government interference in the labor market or union intransigence, they would demand that it cease operations and liquidate in order to preserve at least some capital. This is why private companies do a better job of negotiating labor agreements than public ones, and it is the same reason that capitalism is sustainable; i.e., those entrepreneurs who do a better job are rewarded with more capital to manage at the expense of those who do a poor job. So private firms go from strength to strength while public firms' deficits grow larger and larger.
Patrick Barron

Wednesday, October 5, 2011

Ron Paul's Campaign of Ideas

Kevin D. Williamson doesn’t quite know what to make of Dr. Ron Paul. Mr. Williamson is Deputy Managing Editor of National Review magazine and noted columnist therewith. In addition he is the author of The Politically Incorrect Guide to Socialism, which did point-by-point to socialism what the Romans did to Carthage. In his recent NR cover essay “Ron Paul’s Last Crusade”, Mr. Williamson “doubt(s) that there’s anybody at National Review who is closer to Ron Paul politically than I am…” Nevertheless, he finds much that bothers him about some of the Ron Paul supporters and even Ron himself…what he calls “Ron’s Ronness”.

I believe that Mr. Williamson’s concern over the background and fervor of some of the Dr. Paul’s supporters can be dismissed as not of Dr. Paul’s making or concern. What politician can spurn the support of those who agree with him on important campaign issues because they also hold somewhat out-of-the-mainstream or even odious views about non-campaign topics? Dr. Paul graciously accepts the support of the John Birch Society, for instance, but that in no way obligates him to endorse their conspiracy theories about plots to replace American sovereignty with a one-world government. I’ve heard this concern from many people who have never heard of the John Birch society and I would be surprised if Mr. Williamson has not heard the same. There is no doubt that many of Dr. Paul’s campaign workers are young, idealistic, and perhaps is often the case with the young. For instance, Mr. Williamson relates a conversation with a “well-spoken young woman” who did not handle very well his question of why Dr. Paul’s ideas were not all that popular. Is this really something for which Dr. Paul should be criticized? I think not.

So what about “Ron’s Ronness”? Mr. Williamson admires many of Dr Paul’s personal campaign traits; for example, that Dr. Paul almost never talks about himself or uses his family as props. His main beef is that Dr. Paul works any question around to the evils of fiat money and the unsustainable American military empire, which he is convinced will be the death of our liberty if not the death of the nation itself. But why is this a problem? Frankly, I see it as an indictment of our modern, personality centered campaigns of appearance over substance. American politics have been plagued by this phenomenon since 1928 when that new gadget the radio caused the electorate to be repelled by the Bronx-accent of New York governor and Democratic candidate Al Smith. Then it became enshrined as Gospel following the first-ever presidential TV debates, when Nixon’s five o’clock shadow and JFK’s Hollywood good looks may have tilted the 1960 election to JFK.

By contrast Dr. Paul harkens back to the days of the front-porch campaigns of the late nineteenth to the early twentieth centuries and even further back to the non-campaigning of Abraham Lincoln in 1860. The front porch campaign was coined in 1880 when candidate and later president James Garfield sat on his front porch and answered reporters’ questions. The last such campaign was by candidate and later president Warren Harding in 1920. Abraham Lincoln didn’t even go that far. He refused all interview requests during the dangerous 1860 campaign out of fear that he would say something not quite as he wished, which could then be used against him. He advised all those requesting interviews to study his many published speeches and position papers on all important campaign subjects. Dr. Paul has assembled such a campaign document in his recently release book Liberty Defined: Fifty Essential Issues That Affect Our Freedom. One could decide whether or not to vote for Dr. Paul simply by reading this book. Every topic that one could imagine is there, in simple, clear, unambiguous yet subtle writing. Dr. Paul himself explains that decades of thought went into this book. Do we really need anything else? How important, really, is the candidate’s looks, speaking style, wit, or charm to the great issues that he will face? I say not important at all.

Every interview with Dr. Paul eventually concludes with an attack on our monetary system for the simple reason that that is what is likely to destroy our liberties and possibly the nation itself, not al Qaeda or the Iranians or the North Koreans. Dr. Paul is a highly respected and much published Austrian economist. He has warned the nation about the dangers of fiat money and fractional reserve banking since he entered politics after Nixon took the nation off the last tenuous ties to the gold standard. His presidential campaign is a campaign of ideas. It is a true intellectual crusade, not because he calculated that that might get him elected but because an intellectual campaign is the only kind of campaign that can save us. It is an honest campaign, too. Unlike the typical politician who carefully tailors his speeches to match the prejudices or vested interests of his audience, Dr. Paul’s message is always the same—fractional reserve banking and fiat money are violations of historic legal principles. Their inherent fraud is revealed in frequent boom-and-bust business cycles that wipe out the honest savings of the people. Rather than prosecute such practices as fraud, bankers and businessmen conspired to create an institution that would shield THEM from the consequences of their fraud. That institution is the central bank; here in America it is called the Federal Reserve Bank. Although the central bank can protect the bankers and their politically connected businessmen by becoming a lender-of-last-resort, the central bank cannot stop the workings of economic law, which demands that someone, somewhere bear the loss of its wealth redistribution effects and capital destruction. That loss is born by the rest of us.

Dr. Paul is like a passenger on the Titanic who understands that plowing full steam ahead through iceberg infested waters is fraught with danger, while the captain and crew are engaged in schmoozing passengers about the ship’s finery and promises that they are part of a record-setting trans-Atlantic voyage. All is going well. The ship is making great progress. She is the finest product of modern engineering. She is unsinkable! Wait…what is that big, white thing up ahead? Too late. Too late.

Friday, September 30, 2011

Another Adverse Consequence of Welfare-On-Demand

From today's Open Europe news summary:

Commission threatens to sue UK over benefits test
The European Commission has threatened to take legal action against Britain arguing that the UK’s “right to reside” test for determining benefit entitlements indirectly discriminates against non-UK nationals. The Government fears the move could leave taxpayers facing a bill of up to £2.5bn to pay for EU nationals, including “benefit tourists”, a new cost that could ruin the Coalition’s plans for welfare reform. In the Telegraph, Work and Pensions Secretary Iain Duncan Smith writes, “This kind of land grab from the EU has the potential to cause mayhem to nation states, and we will fight it.”
Open Europe’s Stephen Booth is quoted in the Mail saying, “Freedom of movement within the EU has largely been positive for the UK but issues surrounding benefits and social security are understandably very sensitive. For the freedom of movement within the EU to work, governments have to be able to assure their citizens that welfare systems won’t be abused.”
Meanwhile, in the Netherlands, Elsevier reports that a parliamentary enquiry has found that that the Dutch government underestimated and was underprepared for the number of migrants from Eastern Europe after EU enlargement.
Times Telegraph Telegraph: Duncan Smith Conservative Home Sun Express Express: Leader Mail Mail 2 Elsevier NOS

Here in the U.S. the states have known for a long time that generous welfare benefits attract "welfare benefit shoppers", from both within the U.S. and without. But the EU is going further than even the U.S. in mandating that their members--who, after all, are SOVEREIGN countries--establish NO criteria that would discriminate against such welfare benefit shoppers. It is welfare-on-demand and other socialist enterprises such as taxpayer education for non-citizens that is the primary cause of the backlash against the economically beneficial free movement of labor across political borders.

Thursday, September 29, 2011

A Tactic of the Euro Elitists

From today's Open Europe news summary:

Meanwhile, the Guardian reports on Deputy Prime Minister Nick Clegg’s speech in Warsaw today, in which he is expected to argue, “Any change to governance structures must not lead to a weaker and divisive Europe where the aims of ‘Euro ins’ are set against those of ‘Euro outs’. There can be no inhibiting of trade, for example, and no obstructing the single market. Any decision that affects the 27 must always be taken by the 27.”
Open Europe blog Spectator Coffee House blog FT Mail Guardian Times

One of the tactics of the Euro elitists is to equate support for the Euro as support for free markets and opposition to the Euro as opposition to free markets. This is a logical fallacy. Many countries engage in free trade with one another even though they do not use a common currency. Nevertheless, if Nick Clegg's desire is to expand trade while minimizing currency conversion costs, he should support a return to the classical nineteenth century gold standard in which each country's currency was merely an expression of a certain weight of gold. He should reflect upon these words of Ludwig von Mises in Human Action:

"The gold standard was the world standard of the age of capitalism, increasing welfare, liberty, and democracy, both political and economic. In the eyes of the free traders its main eminence was precisely the fact that it was an international standard as required by international trade and the transactions of the international money and capital market. It was the medium of exchange by means of which Western industrialism and Western capital had borne Western civilization into the remotest parts of the earth’s surface, everywhere destroying the fetters of age-old prejudices an superstitions, sowing the seeds of new life and new well-being, freeing minds and souls, and creating unprecedented progress of Western liberalism ready to unite all nations into a community of free nations peacefully cooperating with one another."

Tuesday, September 27, 2011

The ECB as a Fed Clone?

From today's Open Europe news summary:

Mats Persson: Topping up bailout fund through ECB could prove to be “non-starter”
In an opinion piece in today’s CityAM, Open Europe’s Director Mats Persson writes that despite the positive news that eurozone leaders are now acknowledging that a Greek default might be necessary and the importance of recapitalising Europe’s banks, the alleged proposal for a new eurozone rescue package, based on leveraging the European Financial Stability Facility (EFSF) through the balance sheet of the European Central Bank (ECB), is a non-starter. He argues that: “the plan would require a radical reworking of the EFSF framework, since it is not designed to be leveraged or be subordinate to the ECB in terms of covering losses [and] using the ECB’s balance sheet to top up the EFSF would further expose the former to even more risky debt”. He notes that under the proposals “the ECB would fully enter the domain of fiscal policy”, which would be unacceptable to Germans. He argues that “a growing number of Germans now view the ECB with growing suspicion, as was seen in the dramatic resignation last month of Juergen Stark, the German representative on the ECB’s executive board, allegedly over the bank’s decision to start buying Italian and Spanish government bonds. One step further, and German support for the entire euro project could start to diminish.”

German finance minister Wolfgang Schäuble denied that a fivefold increase in the EFSF was imminent saying, “No, that is clear... We do not intend to increase it,” reports CityAM. Schäuble’s comments were echoed by a number of German politicians. Carsten Schneider, the SDP’s Finance spokesman said: "A new multi-trillion programme is being cooked up in Washington and Brussels, while the wool is being pulled over the eyes of Bundestag and German public. This is unacceptable."

The "programme..being cooked up in Washington and Brussels" is to turn the European Central Bank into a clone of the Federal Reserve Bank, a last-resort purchaser of worthless sovereign debt. Those who control the money control everything; thusly, turning the ECB into a European Fed would constitute a vast transfer of real power to Brussels.

Friday, September 16, 2011

Put Your Own House in Order

From today's Open Europe blog, quoting British Deputy PM Nick Clegg (my emphasis):

On his part, Nick Clegg said last month

"Countries like the UK should not see ourselves as spectators, watching from the wings, triumphalist, complacent, as if Europe's economic woes are a eurozone problem, rather than a problem for all of us - as if it is enough to put your own house in order, but then stand by and let the neighbourhood crumble."

Why "yes", Nick, it IS enough to put one's own house in order. In fact, that is the most important job of any politician. It is mere hubris to believe that a political leader has any kind of mandate, let alone effective control, over the internal affairs of any other nation. Put your own house in order and set a good example for others to follow. That will have more positive and lasting impact on world affairs than pompous pronouncements of international agreements that everyone knows will be broken. Oh, and by the way, this goes double for President Obama.

Thursday, September 15, 2011

Germany's FDP May Reinvent Themselves as Eurosceptics

From today's Open Europe news summary:

In the FT, Quentin Peel notes that the “Free Democratic party, the junior member of [Chancellor Angela Merkel’s] coalition that has seen its support collapse in a series of state elections, is flirting with the temptation of walking out and reinventing itself as a eurosceptic champion.”

This is GOOD news! The FDP needs to represent free markets and free people in Germany and forge links to UKIP in England and the True Finns in Finland. Each new poll shows that a majority of the German populace want out of the EU and back on the DM. There is nothing threatening in any of this (in contrast to to the Polish prime minister's comments that a breakup of the EU would mean the possibility of war in Europe within ten years. This is tantamount to claiming that free markets and free people cause war, when the opposite is the case).

Friday, September 9, 2011

Retrying the Discredited Policies of Hoover and FDR

I just finished re-reading America's Great Depression by Murray N. Rothbard. I read the book very carefully, because I needed to design a supervised reading course of the book for some students at the U. of Iowa. As I read the book, I was amazed that the same harmful policies pursued by Presidents Hoover and Roosevelt are being repeated today and justified by the same discredited economic theories.

Today's Open Europe news summary illustrates three harmful policies contemplated by the EU that were tried and found to be failures by Hoover and Roosevelt: (1) a proposed tax increases in the form of an EU-wide financial transaction tax; (2) a possible--and probable--rate cut by the ECB; and (3) the implied use of force to prevent a member from exiting the EU in order to avoid policies it deems harmful.

Hoover signed the largest tax increase in the history of the country at the bottom of the Great Depression, which destroyed purchasing power and incentives to produce. The Fed lowered interest rates, which made it impossible for banks to loan funds at a rate sufficiently high to compensate them for risk. The states were not allowed to opt out of the federal make work programs and new regulatory burdens.

I recommend that you read Rothbard's excellent book. You can download the book in PDF form for free:

Thursday, August 25, 2011

No Austerity for French Government Bureaucrats

From today's Open Europe news summary:

Separately, French Prime Minister François Fillon yesterday announced an austerity package aimed at saving €1bn this year and €11bn in 2012. The measures include increases on some capital income taxes, the elimination of capital gains tax loopholes, increases in tobacco and alcohol taxes as well as an exceptional tax levy of 3% on the very rich. The plan also contains proposals aimed at harmonising the French tax system with that of Germany.

These tax increases are not "austerity" for the French government. The French government is NOT reducing spending. It is raising taxes to support and make permanent its current level of spending. The French people will suffer by having their after tax incomes reduced, to be sure, but there is no austerity at the government level. I doubt that one bureaucrat will lose his job, which cannot be said of the private French economy. France is becoming a divided nation--government employees and those who receive their political favors on one side and the rest of French society on the other. This cancer upon society of bloated governments is occurring everywhere.

Wednesday, August 24, 2011

My Letter to National Review Magazine re: Medicare

Re: The Roadmap Back to AAA, by Kevin D. Williamson

Dear Sirs:
Kevin D. Williamson expresses in one sentence the true essence of Medicare when he states that it is "a welfare handout disguised as an insurance policy and structured as a Ponzi scheme."

Real insurance is sustainable, but Medicare is not real insurance. Most Austrian economists agree with Ludwig von Mises and Hans-Hermann Hoppe that it is impossible to insure one's own health, because the insured has too much control over the event that would trigger disbursements. Little needs to be said about the unsustainability of a Ponzi scheme. So we are left with Medicare as a welfare handout. Therefore, the real question is why the American middle class feels that it needs a welfare handout. My gut feeling is that most Americans feel that their taxes have been consfiscated for little benefit to themselves and that Medicare is one program that allows them to recoup some of their loss.

Patrick Barron

Tuesday, August 23, 2011

My Letter to National Review Magazine

Dear Sirs:
I enjoyed Mr. Herman's review of Car Guys vs. Bean Counters by Bob Lutz. But, the title should be Car Guys vs. Government. Bean counter Roger Smith is a product of an industry trying to cope with government intervention. Mr. Lutz properly lays the blame for Detroit's woes on government's CAFE standards, but he is wrong to blame its labor trouble on the "uneasily cozy relationship" between Detroit and the UAW. This is just another example of an industry trying to come to terms with a previous government intervention--the Wagner Act. The New Deal era Wagner Act destroyed traditional legal principles that protected the automakers' property. This seems to be a lesson never learned--that government intervention in the free market always results in the OPPOSITE of its intended purpose. The CAFE standards led to more, not less, American dependence on foreign oil. And the Wagner Act harmed the working man. Everywhere it has been vigorously enforced industries decline along with blue collar employment. Ludwig von Mises' Human Action explains all and should be required reading in every American university.

Patrick Barron

Wednesday, August 17, 2011

Laundry Detergent and Fighter Jets--Two Socialist Failures

In his second great book Socialism Ludwig von Mises explained why socialism is not an alternative to capitalism and, in fact, is not an alternative economic system at all. The elimination of private property by the socialist state makes economic calculation impossible; thusly, socialism in its pure form could not solve the ever-present problem of scarcity. The directors of a socialist state would not know what to produce, how to produce it, how much to produce, etc. Only free market capitalism can solve these problems. The main benefit of private property rights is to be able to make entrepreneurial decisions. Those who make good decisions prosper and are granted control of more resources. The opposite happens with entrepreneurial failures. So capitalist economies grow from the accumulation of capital and socialist economies consume capital until they collapse.

Laundry Detergents that Don't Get Clothes Clean

I was reminded of this basic law of economic science by two fairly recent incidents. The first occurred a few months ago when my wife and I had dinner with Professor Yuri Maltsev at the home of Michael and Dawn McKay in Fairfield, Iowa. Needless to say, the evening was delightful. We all had just read Jeffrey Tucker's Mises Daily Article titled "Why Everything is Dirtier" about why laundry detergent no longer gets clothes "clean and bright". Yuri said something that I will never forget. He told us that, when he told his mother, who suffered for most of her life living in Soviet Russia, about Jeffrey's article, she replied "Ah, the first sign of socialism – soap that does not clean." What a marvelous insight! I subsequently reread Jeffrey's article--which I highly recommend to you, dear reader. Laundry detergents no longer contain trisodium phosphate, an agent that helps whisk the dirt away during the rinse cycle. That dinginess you see in your clothes is the dirt that was not removed, the whole point of washing clothes. Similarly, this explains why your automatic dishwasher does not get your dishes ‘spotless’ anymore. The EPA banned the substance from commercially sold laundry products some time ago, although the consumer still can buy it in pure form and add it to his home laundry. A spokesman for the EPA explained that phosphates, a natural product, harmed the environment. Why we all have not succumbed to phosphate poisoning long ago was never explained. Mother nature was deemed to be harmed, so the substance was banned. Getting clothes clean was never a consideration.

(Twenty-five years ago, I consulted for The Citrus and Chemical Bank in Central Florida. The "Citrus" designation came from the local orange groves, and the "Chemical" designation came from the local open face phosphate mines. I can tell you that both oranges and humans were co-existing very healthily along with the huge natural deposits of phosphate.)

In banning phosphates from commercial laundry detergents the EPA did not consider the desires of the consumer or the property rights of the producers; thusly, absent market forces and legal protections, there was no need for economic calculation. The EPA spokesman did not care how or whether the consumer's clothes were laundered satisfactorily. True, the EPA does not own businesses that manufacture commercial laundry detergents, but in Human Action Mises also explained the two forms of socialism--that of the Russian variety and that of the German variety. In the Russian variety (that of Soviet Communism), it is clear that the state owns the means of production. In the German variety (that of Nazi Germany) business is still nominally owned by private individuals but the state makes all the important, and even some seemingly trivial but still important decisions – like what we can or cannot use to clean our dishes or clothes. Yuri’s mother understood that a small ‘first step’ of Socialism is taken. Mises explained that regardless of which socialist approach, Russian or German, the deleterious results were the same. Socialism expands, Freedom wanes; the State steps in and reduces our choices and, as a result, our quality of life is reduced – and life becomes more soiled.

Fighter Jets that Can't Fly

The second incident which reminded me of Mises' dictum that socialism fails due to the lack of economic calculation involves America's premier air superiority fighter--the F-22. The F-22 has been grounded since May due to a problem with the pilot's oxygen system. Just to let you know how serious this issue is, our government, in its vast wisdom, shut down the F-22 assembly line a couple years ago after producing only 167 aircraft. This is an astonishingly low production run, given the development cost, the success of the aircraft as the world's best fighter, and the fact that its replacement, the F-35, is many years away from deployment in any numbers. So right now America is without its most modern frontline air superiority fighter.

Sources from my old Air Force network claim that most modern military aircraft use a different oxygen system from the one I used many moons ago flying the F-111 and the one currently used on commercial aircraft. The new oxygen system is designed to operate in a chemical environment. Since outside ambient air may contain chemicals, the engineers did not provide the F-22 with access either to pressurized air in the cockpit or to outside ambient air should the system fail. Flight above 14,000 feet will cause rapid impairment of brain functions. Commercial airliners are pressurized, so our bodies believe that we are below 14,000 feet. But the F-22 pilot does not have access to a pressurized environment in the event of oxygen failure. Even if the pilot dove to below 14,000 feet, he would not be able to breathe outside ambient air--he cannot even jettison the canopy! So failure of the oxygen system on an F-22 means that the pilot either ejects or dies from hypoxia, lack of oxygen. Thus the “stand down”, the grounding of all F-22’s, was ordered until a solution is found.

Now, your local backyard mechanic probably could install a simple selector valve quickly and easily, giving the pilot access to ambient air in the case of oxygen failure. But the Air Force chose instead to form a committee to study the problem. Three months later the jets still are grounded and the pilots are losing proficiency since constant training/re-training is required. It isn't easy flying one of these machines! A professional musician once told me that he practiced his guitar every day, even after forty years of playing. He said, “If I miss one day, then I notice it. If I miss three days, then the audience notices it.” The term for losing flying proficiency is "getting behind the airplane". It is not just that the pilot loses a feel for the airplane as much as losing mental agility to anticipate what needs to be done next.

America Stumbles Down the Well-Worn Soviet Path to Military Failure

We should not be surprised that military hardware failures occur so frequently, for the military is the best example of a socialist institution in any society. Since economic calculation is difficult if not impossible for military hardware, there is no way to reasonably determine how to design hardware, what materials to use, and how many units to produce. The Air Force's F-22 debacle is distressingly reminiscent of Russia's military decline toward the end of the Soviet era. Despite pumping a huge proportion of its GDP into military hardware, the ravages of socialism meant that over-designed Russian military hardware could not be maintained. Tanks could not operate--most were not operational due to cannibalization of parts to keep a few going for appearance sake--and ships were abandoned in port, leaking radioactive waste into the water. Now the American Air Force has its limited F-22 fleet grounded and the highly trained pilots losing their edge daily.

The only "economic calculation" government understands is bigger budgets. More money is supposed to equal more of whatever is desired--national security, education, research discoveries, etc. But the opposite happens, due to the inherent socialist nature of government programs. The military does not generate revenue to offset its costs--as did the Revolutionary War era privateers!--so there really is no way to determine what to build, how to build it, and in what other words, there is no room for economic calculation. Even though the U.S. spends half of the entire world's military budget--in other words, we spend as much on the military as all the other nations of the world combined!--we are less secure. The Air Force's inventory has never been older. Why it stopped production of the F-22 remains a mystery, but I suspect that Lockheed needed a big project in order to survive. So, it lobbied for a new fighter to replace the F-22, which was built by Boeing, and got it in the form of the F-35, recently dubbed the world's first "trillion dollar airplane". As consumers, the military always wants more and newer hardware, of course.

The F-35: Headed for Failure

The F-35 is supposed to perform many diverse missions--air superiority and ground attack for the Air Force and Navy, and close air support for the Marine Corps. Plus we expect to sell lots of units to our allies. But the Air Force does not expect to deploy the aircraft in numbers suitable for operational responsibilities until 2017 at the earliest, meaning that the British may complete construction on two new aircraft carriers designed specifically for the "jump jet" version of the F-35 before America can provide the aircraft. As an old F-111 crewmember, I am experiencing déjà vu. The F-111 was dubbed "McNamara's Folly", because it too was supposed to fill many diverse roles. But it proved to be too heavy to land on a Navy carrier and was not nimble enough as an air superiority fighter for the Air Force. The Air Force stopped using it as a dive bomber--the preferred method to deliver close air support to ground troops--after the wings fell off testing this maneuver. It finally found a niche in medium range interdiction missions. Likewise I predict that the F-35 will not be found suitable for all the roles promised by Lockheed. The main problem is the VTOL capability. VTOL is an acronym for "vertical take-off and landing". But VTOL capability subtracts from a fighter's range, maneuverability, and armament. The British Harrier is the only Western fighter ever built with VTOL capability. It was a favorite at air shows but could not stay in the sky with front line fighters of its day. There is no military justification for VTOL. No modern fighter will be based in primitive locations, due to the need for vast support infrastructure. The Navy's catapult system on its carriers is powerful enough to throw a jumbo jet into the air. VTOL is being driven by other considerations.

This fighter debacle illustrates several points about the difference between socialism and capitalism. Although the military may claim to be consumers, it is not purchasing its hardware with exchange generated by its own, previous production. It is in the same position as any welfare recipient. So the military and its suppliers lobby for more money with no real feedback other than success or failure in war. The United States has not won a war since World War Two. Korea was a stalemate; we lost Vietnam; we are still fighting in Afghanistan; Iraq is not pacified; and Libya is a mess.

So just as more welfare money has not reduced poverty, more money for the military has not made us more secure. Yet the poor and the military both demand and get more. This welfare/warfare socialism will bankrupt us just as Soviet communism bankrupted Russia. We are seeing the first signs of this decline in the grounding of our pathetically few and enormously expensive F-22's and the delays in production of the over-engineered F-35. Oh!...and detergent that doesn't clean!

Letter to the Wall Street Journal re: the British Riots

Re: "The Barbarians Inside Britain's Gates" and "Notable & Quotable"

Dear Sirs:
Theodore Dalrymple and the editors of the London Telegraph are just the latest to observe that government interventions cause the OPPOSITE of their intended goals. Ludwig von Mises, for one, explained the phenomenon decades ago. The more extensive the intervention and the longer the time frame involved, the worse will be the outcome. In Britain's case, government has been contravening traditional legal principles for decades, making it almost illegal for citizens to defend themselves. This might work to some extent if Britain were Singapore, where the police and the courts do not tolerate anti-social behavior. But Britain does the opposite. Furthermore, its welfare policies have so corrupted its youth that millions are incapable of contributing to the economic system, becoming mere parasites upon society. So, in its desire for a more peaceful and prosperous society, British interventions into traditional legal principles of justice and protection of property rights have accomplished the opposite--civil strife and public bankruptcy.

Patrick Barron

Saturday, August 6, 2011

Tell the Truth and Risk Jail!

From yesterday's Open Europe news summary:

"Il Corriere della Sera reports that Italian prosecutors yesterday seized documents from the Milan offices of credit rating agencies Moody’s and S&P, as part of an investigation into the impact of evaluations on Italy made by the two agencies over the last weeks on the current financial markets turmoil."
Corriere della Sera Telegraph

The true face of government is revealed!

Another Round, Bartender!

From yesterday's Open Europe news summary:

"European Commission President José Manuel Barroso sent a private letter to eurozone leaders which urged for “a rapid re-assessment of all elements related to EFSF [the eurozone’s temporary bailout fund]” and suggested leaders should quickly assess “how to further improve the effectiveness of both the EFSF and the ESM [the eurozone’s post-2013 permanent bailout fund] in order to address the current contagion.” This has been widely reported to imply that the overall size of the EFSF should be increased, to allow it to cover Italy and Spain."

So, if irresponsible government debt-financed spending and ECB money printing has led to a crisis, then the answer is....MORE OF THE SAME! Incredible!

But we should not be surprised. As long as governments have a facility that can print legal tender out of thin air, that is exactly what they will do. The financial crisis will never be resolved until the world returns to sound money. The political pressure to print money, when that is an option, will always trump responsible behavior.

Monday, August 1, 2011

Why Were There Boom/Bust Business Cycles During the Gold Standard Era?

Austrian school economists universally cite the fractional reserve banking system as the primary cause of boom/bust business cycles, whereas defenders of our current fiat money/fractional reserve banking system claim that other forces are to blame, such as "shocks" to the economy like war and natural disasters, or inherent flaws in capitalism, such as periodic falls in demand. These Keynesians claim that periodic falls in demand which idle productive resources, including labor, must be countered by government intervention, primarily spending by government and artificial lowering of the interest rate by central banks. It is easy to see why this theory is so popular--it gives governments and central banks a scientific rationale for what they want to do anyway: spend and regulate. Despite decades of failure, this prescription still predominates the halls of governments and central banks.

For the Austrians the cause of the boom/bust business cycle has a simple cause which brings about a complex result. The simple cause is fractional reserve banking, which leads to bank credit expansion and malinvestment. The complex part is the Austrian explanation of how this credit expansion distorts the capital structure of the economy, leading inevitably to the bust. Bank credit not financed by real savings causes the unsustainable boom, and it is fractional reserve banking that allows banks to expand credit not backed by prior savings. So banks manufacture money out of thin air. Printing more money, as central banks are doing everywhere in the world right now, and deficit spending, also the policy of choice by governments, merely leads to more malinvestment, exacerbating the problem and leading to a deeper recession later that will take longer to heal...if the market is ever allow to heal.
Even in the so-called "gold standard era" of the nineteenth century, banks engaged in fractional reserve banking. Thusly, there were periodic boom/bust cycles. It was the absence of a one hundred percent reserve standard for demand deposits that accounted for these cycles. It need not have been so. Fractional reserve banking--in which the banker lends out DEPOSITED funds--was challenged in England in the early 19th century when some depositors asked the courts to force bankers to repay their deposits out of the bankers' personal funds. The depositors wanted the courts to treat deposit banking according to traditional legal principles. The banker would be required to keep ready for redemption one hundred percent of DEPOSITED funds, just as a grain elevator treats a farmer's deposit of corn or wheat. The elevator cannot speculate with this "deposit". But the courts ruled that the depositors had "lent" the banker the money rather than entrusted him with their money as a deposit. This judgment was accepted as precedent all over the Western world and led to dire economic consequences.

The economic side is that when the bank loans money in a fractional reserve system, rather than a one hundred percent reserve system, the money supply increases without an increase in prior savings. There are no new real resources freed for productive investment. Eventually reality reveals the problem, as prices start to rise in consumer goods, forcing resources back from more time consuming investments. These investments never were funded with real savings, only fiduciary monetary expansion. This is what caused the several depressions of the late nineteenth century.

But research has shown that these depressions were not nearly as onerous as those of the twentieth and now twenty-first centuries, because the underlying reserves themselves--gold and silver--could not be inflated. This provided a limit to the expansion. Furthermore, in the absence of a central bank as lender of last resort in the U.S., banks were wary of the ever-feared bank run, whereby bank depositors descended upon a bank en-mass demanding redemption of their deposits in gold. This fear limited credit expansion. But first the advent of the central bank in 1913, our Federal Reserve Bank, and the gradual demise of gold as reserves have meant a steady increase in bank credit expansion. Now the reserves themselves may be expanded by the Fed to infinite amounts. That is one source of the credit expansion. Then the fractional reserve banking system adds a second source of expansion.For example, if reserves are 1 monetary unit (m.u.) and the reserve requirement is 100%, then the money supply is 1 m.u. Next let's assume that we are under a gold standard and the banks are required to keep only 10% reserves. Now the money supply can be inflated to 10 m.u.'s. But, if reserves are not gold and the Fed inflates them to 2 m.u.'s and the reserve requirement is 10%, the money supply can be inflated to 20 m.u.'s. So, under a gold standard with fractional reserve banking, the reserves themselves cannot be inflated, which limits the extent of money inflation. But when reserves themselves are nothing more than blips on a computer screen, the money supply can be inflated to infinite amounts. This is the worst of all monetary worlds, because there now is no institutional check on monetary expansion. The Fed has created new reserves in massive quantities since the subprime lending bust of 2008--over a trillion dollars in new reserves! Under our fractional reserve system, the banks are able to expand credit to many times this already huge amount. This will lead to more not less malinvestment, because none of this credit expansion will have been financed by prior savings.

So, governments and central banks are doing everything in their power to create another unsustainable bubble. Central banks have intervened to keep interest rates close to zero (!), and governments are engaged in successive bouts of profligate spending that they characterize under the pompous title of "quantitative easing". It cannot last, and it will not last.

Monday, July 18, 2011

Corn, Corn Everywhere But Not an Ear to Eat

The 2011-12 U.S. corn crop is estimated at 12.5 billion bussells. The largest producer, by state, is Iowa at 2.2 billion bussells, followed by Illinois at 2.0 billion bussells, and Nebraska at 1.5 billion bussells. With all that corn one would think that corn-on-the-cob would be readily available in farmers' markets and grocery stores in the state of Iowa. But such is not the case. The tenth largest farmers' market in the nation is located in Iowa City, IA. Dozens of farmers offer their goods each Saturday morning from spring to fall. But last weekend not one ear of corn was offered for sale there. The largest grocery store in town is the Hy-Vee, part of a Midwestern chain of 220 grocery stores. There one can buy corn-on-the-cob...shipped to Iowa from Georgia. So where is all that great Iowa corn? I think it's hiding in your gas tank.

Tuesday, July 12, 2011

My letter to the Wall Street Journal re: How to Cure the Housing Slump

Re: U.S. Tackles Housing Slump

Dear Sirs:
U.S. interventions have caused massive malinvestment in housing for decades. As a result, America has the wrong housing in the wrong places at the wrong price. This inventory must be liquidated before we can return to a "normal" housing market. Therefore, make foreclosures easier not harder. And, in order to prevent the same thing from happening in the future, dismantle the entire governmental housing intervention bureaucracy. Liquidate Fannie, Freddie, the FHA, etc. Repeal the extortionist Community Reinvestment Act. Don't bail out anyone.

Patrick Barron

Germany at the Rubicon

From today's Open Europe news summary:

In the Telegraph, Ambrose Evans-Pritchard argues that, with the eurozone crisis seemingly turning to Spain and Italy, “Germany must now be willing either to buy or guarantee Spanish and Italian debt, and in doing so to cross the Rubicon to fiscal and political union, or accept that EMU must break up with calamitous consequences for German foreign policy. Large matters, beyond the intellectual vision of Germany's current leaders.”

Germany--and the rest of the world, for that matter--must face up to the fact that debt, once created, cannot be ignored. It must be repaid or written off. It is time for the world to recognize that more debt solves nothing and, in fact, is counter-productive. More debt forestalls reform and funds the failed inflationist and statist policies of the post-war years. I hope that Evans-Pritchard is wrong and that these matters are not beyond the intellectual vision of Germany's current leaders. The Euro project is a failure due to economic laws that cannot be ignored. Fiat, government controlled money is a failure at the national level; elevating it to a regional level solves nothing but merely masks the inherent fatal flaws.

Monday, June 13, 2011

The Fed Recruits Academia to Its "Brave New World"

On June 1, 2011 John C. Williams, president and CEO of the Federal Reserve Bank of San Francisco, delivered an address to the American Economic Association’s National Conference on Teaching Economics and Research in Education. He titled his address “Economics Instruction and the Brave New World of Economic Policy”. One wonders if Mr. Williams ever read Aldous Huxley’s chilling book, warning the world of the threat to individual freedom by a tyrannical one-world state. If he had I doubt that he would have included “Brave New World” in the title of his speech.

But perhaps he selected this title on purpose! For Mr. Williams’ speech was an unvarnished plea to recruit academia as co-conspirators to spread as economic truth the Fed’s latest, make-it-up-as-we-go-along, and increasingly panicking monetary interventions masquerading as well-thought-out policy. The speech was nothing less than an admission that the Fed’s monetary theories have failed, that it is experimenting with new ones, and that it wants academia to endorse whatever its latest policy experiments happen to be and incorporate them into college curricula! Here are his very words:

“We depend upon educators like you to explain how the Fed works and how our policies affect the economy. We all benefit when the public understands what we do and why, so we are very grateful for the work you do.”

A 1950s Grocer’s Account Book vs. a 2011 Credit Card Authorization

Mr. Williams launched into a rather disjointed defense of the reasons that the Fed had to employ new monetary policy tools. (Of the twelve policy tools on the Fed’s own website, Mr. Williams proudly proclaimed that nine of them did not exist four years ago.) I bet you didn’t realize that one reason monetary policy had to change was due to advances in the payment system. It seems that our ability to use debit and credit cards for purchasing goods and services has made traditional monetary aggregates obsolete. Again, in his own words:

“How do 1950s theories of cash and checks apply in a world in which you and I can instantly take out a loan of several thousand dollars with the swipe of a card at the cash register?”

It is obvious that Mr. Williams has never read Ludwig von Mises’ The Theory of Money and Credit. In Mises’ first great book he explains the differences between money and credit; thus, the name. Money represents final payment beyond which there is no recourse; credit must be satisfied via money. I’m certain that Mr. Williams would be surprised to learn that in early 1950s America credit was granted just as rapidly at some retail counters as it is today. Back then it was common for housewives to buy groceries on credit. The neighborhood grocer recorded the housewife’s almost daily purchases in a book kept under his counter. The transaction took less than a few seconds. Housewives settled their grocery accounts after their husbands were paid, usually in cash, at the end of the week. These credit transactions did NOT affect the money supply any more than do today’s credit card transactions. Furthermore, Mr. Williams may be surprised to learn that the debt card is simply “an electronic check”; it embodies all the legal risks and protections of a paper check. Of course, paper checks have been around long before 1950!

Next Mr. Williams bemoans the failure of some cherished monetary theories, such as the breakdown in the link between additional reserves and a growing money supply via the money multiplier. The volatility of the velocity of money gives him the vapors. Both theories assume that there is a mathematical linkage between the quantity of reserves, the quantity of money, and GDP. The thinking is thus--increase reserves, observe an increase in money; increase money, observe an increase in GDP. But, according to Mr. Williams:

“Despite a 200% increase in the monetary base—that is reserves plus currency—measures of the money supply have grown only moderately...(the) mechanical link between reserves, money supply, and ultimately inflation no longer hold…”

Driving down the interest rate hasn’t worked either.

“…model simulations recommended setting the feds funds rate below zero…”

So, what to do? Let’s try quantitative easing! The Fed bought $1.7 trillion in assets (many of dubious value), starting in late 2008 and will have added an additional $600 billion by June of this year. According to Mr. Williams, this is working. Based upon his “econometric analysis and model simulations…GDP will go up by three percent and the economy will add three million jobs…” Yes, this must be true--his econometric models say so, and who are we to argue with an econometric model? All of this nonsense would have been enough to get Mr. Williams laughed out of any Mises Circle gathering.

Defining “Growth” as an Increase in GDP

Embodied in Mr. Williams speech is the assumption that an increase in GDP represents an increase in economic output. That is why the Fed is unconcerned about inflation (what we Austrians call “rising prices”) and more concerned about deflation (what we Austrians call “falling prices”) If there really is some link between money and economic output via a money multiplier, then increasing money is as simple a way ever invented to bring on prosperity. (By this reasoning, Zimbabwe was tremendously prosperous.) So if prices rise by five percent and people are buying the same volume of goods and services, then according to the Fed the real economy improved by five percent. If it doesn’t happen—that is, if measured GDP fails to increase by five percent--then the government must deficit spend and the Fed must provide the funds at zero interest. As the Staples ad says, That was easy!

Of course, the Fed’s fixation with nominal GDP is the problem. As Jesus Huerta de Soto masterfully explains in Money, Bank Credit, and Economic Cycles, nominal GDP measures only final sales, and the majority of sales are NOT final sales but intermediate sales between companies. In fact a growing economy in which people extend their time preference, save more, and consume less may actually record a falling GDP! The structure of production is widened and lengthened, meaning that there are more stages of production and each stage gets larger. But GDP does not measure these intermediate stages.

Furthermore, in a sound money environment GDP would be flat to perhaps slightly rising, because real money—that is, commodity money such as gold—increases very slowly. Yet economies can boom with increased real production; prices fall, meaning that an unchanged volume of money simply does more work. But we see the political problem here. Nowhere in this real world is there a need for a central bank manipulating money. In fact, money manipulation by a central bank can cause only mischief, as explained so eloquently by Mises, Hayek, Rothbard, Huerta de Soto, and many, many others of the Austrian school. But don’t expect to hear that from the likes of Mr. John C. Williams or, unfortunately, many college professors attending the AEA conference. Austrian monetary theory is just too difficult for them; they’d rather reside in the Fed’s Brave New World and take a Soma Holiday.

Tuesday, May 31, 2011

My Letter to the Wall Street Journal re: Cyber Combat: Act of War

Subject: Re: Cyber Combat: Act of War
Date: Tue, 31 May 2011 06:01:53 -0400

Re: Cyber Combat: Act of War

Dear Sirs:
Despite the Pentagon's assessment of the threat from cyber warfare, it is up to Congress to declare war (Article I, Section 8 of the Constitution). In our constitutional republican form of government the military is strictly subservient to civilian authority via the president as commander in chief (Article II, Section 2 of the Constitution). Needless to say, the president may not delegate an authority that he does not possess.

Patrick Barron

Friday, May 27, 2011

My Letter to National Review re: Too Big to Win, by Mark Steyn

Nobody assimilates so much diverse information and finds the common thread better than Mark Steyn. And nobody writes with such wit and style.

Here is my two-cents' worth of insight into why the U.S. hasn't won a war in two-thirds of a century:

There is a link between the advent of central bank-produced fiat money and war. Prior to 1913 the U.S. did not fight a foreign war, with the exception of the brief Spanish-American War, which Professor Ralph Raico has shown to be a trumped up affair with the U.S. taking over a tottering Old World power's colonial empire. With almost unlimited access to the nation's resources through its power to monetize the debt via the Fed, the federal government does not have to go to the people or the peoples' representatives to get the money to wage war. This has two serious problems. One, we fight at the drop of a hat anymore and, two, we do not fight to win...which would mean a shorter, cheaper war. So, to answer Mark Steyn's question about why we fight so badly, we do not have to win or even have a strategy to win, because the funding will continue as long as we do not lose. As for the U.S. spending 43 percent of the world's military budget, I believe this reflects the enormity of the waste and corruption at the federal level. It is similar to claiming that we are serious about the war on poverty, because we throw so much money down the welfare rat hole. Everyone knows that the war on poverty is a failure, yet the funding continues. Take the Air Force's "new" F-35. It has been under development by Lockheed for years, yet its projected operational date is still six or seven year away...and I'll bet dollars (for what they are worth) to doughnuts that that date will be extended. So procuring much needed new military hardware has become a very well-paying welfare assignment for top federal officials, top Air Force officers, and, of course, military contractors like Lockheed. All know that the funding will continue, despite their failure to produce. The Fed sees to that. So, they don't produce. The private sector would have fired everyone long ago and found a different way to procure military resources.Patrick Barron

Sunday, May 22, 2011

My Letter to the Wall Street Journal--re: There's No Such Thing as "Natural Unemployment"

Subject: No Such Thing as "Natural Unemployment"
Date: Sun, 22 May 2011 07:14:51 -0400

Re: Jobs Harder to Find as Natural Unemployment Shifts

Dear Sirs:
There is no such thing as "natural unemployment". Government interventions and union coercion create "artificial unemployment" by denying all to work at the price that they and their potential employers would agree. The only true scarcity is the scarcity of labor.

Patrick Barron

Wednesday, May 18, 2011

Why Were There Boom/Bust Cycles in the 19th Century Gold Standard Era?

(Last month I gave a brief talk to a group of students at the University of Northern Iowa. The organizer, Mark, asked me an interesting question.)

Thanks for coming to UNI and discuss Austrian economics to a group of students. I was wondering if you could recap your argument on why the depressions occurred in the late 19th century and why they were not as severe.


Dear Mark,
My pleasure. Any time. The cause of all boom/bust cycles is the expansion of bank credit not financed by real savings. Fractional reserve banking allows banks to expand credit by manufacturing money out of thin air. This practice was challenged in England in the early 19th century, when some depositors asked the courts to force bankers to repay their deposits out of their personal funds. The depositors wanted the courts to treat deposit banking in the same legal manner as a bailment; that is, just as if a farmer deposited corn or wheat in a grain elevator. The elevator cannot speculate with this "deposit". But the courts ruled that the depositors had "lent" the banker the money rather than entrusted him with their money as a bailment. This is the legal side of the explanation to your question. The economic side is that when the bank loans money in a fractional reserve, rather than a one hundred percent reserve, system, the money supply increases without an increase in savings. Eventually reality reveals the problem, as prices start to rise in consumer goods, forcing resources back from more time consuming investments. These investments never were funded with real savings, only monetary expansion. This is what caused the several depressions of the late 19th century. But research has shown that these depressions were not nearly as onerous as those of the 20th and now 21st centuries, because the underlying reserves themselves--gold and silver--could not be inflated. This provided a limit to the expansion. But now the reserves themselves may be expanded by the Fed to infinite amounts. That is one source of the credit expansion. Then the fractional reserve banking system adds a second source of expansion.

For example, if reserves are 1 monetary unit (m.u.) and the reserve requirement is 100%, then the money supply is 1 m.u. Let's assume that we are under a gold standard and the banks keep only 10% reserves. Now the money supply can be inflated to 10 m.u.'s. But, if reserves are not gold and the Fed inflates them to 2 m.u.'s and the reserve requirement is lowered to 10%, the money supply can be inflated to 20 m.u.'s. So, under a gold standard with fractional reserve banking, the reserves themselves cannot be inflated, which limits the extent of money inflation. But when reserves themselves are nothing more than blips on a computer screen, the money supply can be inflated to infinite amounts. This is the worst of all monetary worlds, because there now is no institutional check on monetary expansion.


Patrick Barron

Wednesday, May 11, 2011

What Drives Higher Unemployment

One of my economics students traveled to India during spring break this year. Upon her return to class I asked if she had any observations about the Indian economy from an Austrian School of Economics perspective. She thought for a moment and then said that the Indians seemed to be very inefficient. For example, instead of using a backhoe to dig ditches or building foundations, Indian contractors used dozens of men with picks and shovels. I found this to be a wonderful observation, and the class discussed possible reasons for this phenomenon, which ranged from government regulations geared to increasing employment to the obvious surplus of cheap, manual labor.

Kevin D. Williamson addressed this subject in his May 2nd National Review article titled “A Nation of Sharecroppers”. He pointed out that one hundred and fifty years ago picking cotton was a job for slaves; fifty years ago it was a job for the rural working class, and now it is a job for a handful of very wealthy entrepreneurs driving monster John Deere cotton picking machines. What happened to the slaves and the rural working poor? Were all of them driven to destitution? My student worries about this possibility should Indian contractors get wise and buy backhoes, and Mr. Williamson worries that America’s working poor would be driven to dependency alongside the current welfare-dependent underclass. He provides no answers and ends his essay with the lament that for

“…a 21-year old man of average intelligence with a high-school education and a bit of training…his main attractions will be the sedative of dependency or the stimulant of underclass moral anarchy, and we cannot afford much more of either.”

I agree, but I think I know the source of the problem. (Here’s a hint: the word begins with “g” and ends in “ment”.) What Mr. Williamson and my student describe was observed by David Ricardo two hundred years ago and took the name “Ricardo Effect”. This term describes the phenomenon whereby labor is replaced by machinery and occasionally vice versa. Many have twisted Ricardo’s observation for their own purposes. For example, labor unions have justified striking for higher pay by claiming that such actions actually encourage businessmen to invest in productivity-enhancing capital, which raises the productivity of labor and labor wage scales. At the other extreme are the Luddites, who advise prohibiting businessmen from investing in these very same productivity-enhancing capital goods, because machinery causes “technological unemployment”. Both misunderstand what Ricardo observed.

Ludwig von Mises explains the Ricardo Effect, starting on page 767 of his magnum opus, Human Action. Mises explains that machinery replaces men only when the market is driving the cost of labor higher. Labor costs are rising because labor is more productive elsewhere. To remain in business the businessman must invest in capital goods to boost the productivity of labor in his industry, too. Therefore, labor has a choice between equally attractive alternative employments. In an unhampered free market system the Ricardo Effect is benign and just an interesting observation.

However, the Ricardo Effect turns malignant when the cost of labor is rising not due to improved productivity elsewhere but by non-market forces. To the businessman the result is the same; i.e., the cost of labor is rising and he must invest in productivity-improving capital goods. Ah, but here’s the rub. The productivity of labor is NOT rising, only its cost. Government regulations such as minimum wage laws, workers’ compensation insurance, matching social security taxes, family leave benefits, etc. are driving costs higher, not alternative employment at higher wages elsewhere. And these are just the seen costs. There are the unseen costs as well: such as the cost of defending oneself against wrongful employment termination, a new government-invented right to a specific job. Gone forever, apparently, is the concept of employment at will, whereby, absent an employment contract, jobs are “owned” by the employers, since employers create them, and are “offered” and withdrawn at their pleasure.

Today, this malignant Ricardo Effect is something for concern, as my student and Mr. Williamson articulate. Rather than being a product of a more productive labor market with alternative employment for workers whose employers fail to invest, this modern Ricardo Effect offers workers only welfare dependency and societal pathology.

Furthermore, it is not at all clear that elevating low end worker productivity--a goal that Mr. Williamson does perceive but fears cannot be achieved--would reduce unemployment for those at the low end of the wage scale. Government itself needs the unemployed in order to perpetuate its labor-regulating empire that provides it with high paying and secure jobs. What would all those labor lawyers, judges, advocates, investigators, insurance providers, and record-keepers do, if the country scrapped all labor laws and sent the departments of labor at all government levels to the scrap heap? A more likely scenario is that government will do what it has done since the Great Depression—keep raising the bar in all categories to provide itself with a steady supply of welfare dependents to nanny and goldbricks and slackers to defend in its kangaroo courts. After all, human nature has not changed…there is a disincentive to work, which can be abetted with government payments, and government has an infinite ability to rationalize its self-serving and predatory interventions. No wonder that capitalists are becoming more innovative in moving formerly “non-tradable” jobs into the “tradable” category. For example, x-rays can be read in India as easily as the office down the hall. Even shoe salesmen are not immune. Zappos has built a mail order empire selling shoes sans salesmen.

So, what’s the answer to this modern day malignant Ricardo Effect? As usual it is getting government out of the free market, which includes not just eliminating labor laws but also eliminating the entire welfare industry. It is a fallacy that our nation has millions of people who cannot provide for themselves and must ride through life on the backs of others or starve. All willing workers can find gainful employment, compete, and thrive without any government program or policy whatsoever. Jean Baptiste Say explained this phenomenon two hundred years ago. But that is a lesson for another time.