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.