Wednesday, July 31, 2013

My letter to the WSJ re: Why do we celebrate when housing costs rise?

Housing Prices Jump, But Headwinds Build

This Wall Street Journal article is typical of many in that it celebrates the rise in home prices. Yet no one is happy if other costs of living increase, such as food, energy, clothing, autos, and education. But everyone seems to want the cost of housing to increase, which hurts low income and first time home buyers. If you already own a home and its value increases, you just have to pay higher property taxes, higher home insurance premiums, and higher maintenance costs. And if you move, the cost of your new home will be higher, wiping out any supposed "profits". Considering your home an investment makes no sense. It is occupancy expense, and we should celebrate when its costs drop, just like any other cost of living.

Tuesday, July 30, 2013

The First Step to a Free Detroit: Let Them Work!

I have received more personal emails regarding my earlier essay Declare Detroit a Free City than all my other essays put together. Some have been especially poignant.  For example, one lady said that she and her husband, who has been unemployed for two years from a company for which he worked for twenty-five years, would move to a Free Detroit themselves, confident that her husband could find work.  I pointed out to her that Ludwig von Mises explained that the only real barrier to economic expansion was the limited supply of labor, which puts a practical limit to the expansion of the division of labor.  In other words, the larger the pool of labor, the more specialized is the economy, which results in lower costs of production.
No Unwilling Unemployment in a Free Market

By himself an individual cannot exist much above basic survival, if he can even do that.  However, larger groups who engage in peaceful cooperation develop a division of labor which allows each individual to specialize according to his comparative advantage, accumulate capital, and provide everyone else in the group with goods and services that would be impossible for them to produce in a hermit's existence.  Given the fact of an unlimited desire to improve our condition that is limited only by the size of the labor pool, Mises explained that under free market capitalism there is no unwilling unemployment.  There is always more work to be done than there are people to it.  Therefore, the first step to freeing Detroit from its downward economic spiral is to remove whatever barriers exist that prevent people from working.

Step One--Free the Market for Labor
The greatest of these barriers to work are the myriad and complex laws that interfere in the ability for labor and capital to arrive at mutually agreeable terms of employment.  Minimum wage laws should be the first to go, but also the many costly labor regulations that business must consider when hiring.  Government has been piling on costly mandatory benefits, whether these benefits would be valued by the employee in a free labor market or not.   Again, Mises explained that business must take into account the total cost of labor, not just the wage cost.  If business must pay for other benefits, then that cost must be added to the explicit wage cost to arrive at the real, total cost of labor.

Protecting the All Important First Rung of the Ladder

Minimum wage laws and onerous regulation raise--or eliminate altogether--that critical first rung on the employment ladder for many workers, preventing them from gaining that all important first step on the road to independence and self-reliance.  The entry level employees and younger workers, those who have less marketable skills and whom labor laws are supposed to benefit, are the ones who are harmed the most by labor laws.  These workers are locked out of the labor market by the inexorable laws of economic reality.  If their skills provide business with less revenue than their total costs of employment, no business can employ them for long without running out of capital.  Hence, they never get on the ladder at all.  This is a tragedy not only for them but for all of us, too.

Dismantling the Ladder: Cooperative Relations Under Constant Attack

Our lawmakers seem to live in an alternative world where they believe that wages may be mandated ever upward with no adverse economic consequences.  In this tragic world--where unfortunately WE live--they are doing everything possible to stop new entrants from entering the labor force and gaining the skills that businesses would be willing to give them.  Currently there even is a movement afoot to outlaw the practice of "employing" interns.  Internships are one way for workers with low marginal productivity to gain skills and contacts in the careers of their choice.  Typically, an intern works either for free or perhaps for room, board, and a small stipend.  Hypocritically, Congress itself "employs" many interns.  My son was an unpaid intern for our congressman for two summers while in college.  Needless to say his eyes were opened to the ways of the world, which have served him well as an attorney.

The most egregious attempt at interference in what has always been a free labor market occurred recently in the great farm state of Iowa.  The U.S. Department of Labor, with assistance from the U.S. Department of Agriculture, attempted, unsuccessfully, to bring the children of farm families under their regulatory umbrella!  The rest of us benefited immensely when Iowa's farm families said NO!.  Not only was this an intrusion into the hearths and homes of some of the most hard working and independently reliant people in America, it would have created a precedence for even more intrusions into American families' everyday lives.  Tell junior to take out the garbage and mow the grass?  Make sure you pay minimum wage, buy workers' comp insurance, and file that W-2 at the end of the year!  (Don't think that this could not have happened!)

Detroit Could Become a New Beacon of Freedom

What might ordinary people achieve if all barriers to the free use of their labor were removed?  Might they not be inspired to move to such a place, set up shop, take on interns, establish apprenticeships, and produce the goods and services that all of us need and cannot produce for ourselves?  They would be following in the footsteps of all those who crossed an ocean to do just that, seeking only the opportunity to live and work freely.  Detroit could become the new beacon of freedom and liberty for the oppressed people of America, like the lady who told me that she and her husband would move to a Free Detroit.  She and her husband would follow in the honorable tradition of our pilgrim ancestors and all who came here later seeking only freedom.  Let us establish such a place, a haven free of the oppressive hand of the parasitic state.  And let us establish it in the most dysfunction real estate in America--the bankrupt city of Detroit.  All that our oppressors have to fear is our success.

Wednesday, July 24, 2013

Free the Detroit 700,000!

We who advocate the free market as the sure path to peace and prosperity and decry the seeming never ending interventions of government often hear the response that the US economy has to get much, much worse before any real reforms will be allowed to cure it.  When I ask why we must wait for the deluge before taking serious action to throttle back parasitic government, I usually hear a weak response that America always waits until the last minute when no one will be able to deny that government is the problem and not the answer.  Then even died-in-the-wool socialists will give the free market a chance.  Well, what if we get the deluge but, along with the deluge, we get even more government and not less?  Would not a people be so shocked at their economic plight that they would readily accept what can only be called a fascist economic order?  Given a choice, I for one prefer not to wait for such an eventuality.  I would rather have an American test case to illustrate that radically less government leads to peace and prosperity.

Detroit as a test case for economic freedom

The decades' growing tragedy of a now bankrupt Detroit provides a unique opportunity to test our fundamental principles.  What if Detroit became a free city in which government provided for public safety, honest courts, protection of property rights, and little else?  Might not unabated free enterprise take hold as it always has in America?

Detroit is bankrupt, and its problems appear to be unsolvable.  Its population peaked in 1950 at 1,850,000 only to fall to 706,000 in 2011, surely representative of people voting with their feet.  As British politician Daniel Hannan has written, the Detroit disease may be well advanced in the rest of American cities and perhaps in all of America as well.  Before the disease can kill the rest of America we have the opportunity to give free market reforms a chance in a fairly controlled setting--the bankrupt and dysfunctional city of Detroit.

All that Detroit really needs is economic freedom and secure property rights.  Give Detroit its freedom from all manner of government, including the federal government.  Declare Detroit a free city.  (You can rest assured, Detroit, that America will come to your rescue if those bloodthirsty Canadians attack!)  In other words, no one would pay any federal taxes whatsoever or be subject to any federal regulations whatsoever.  Wouldn't it be nice not to pay federal taxes, not even Social Security and Medicare taxes?  Do the same with Michigan taxes.  No taxes BUT also no federal or state aid either.

A Free Detroit would have absolutely no labor and workplace regulations, including minimum wages, mandatory insurance, equal opportunity rules, occupational safety rules, etc.  People would be allowed to work together cooperatively for whatever terms their marginal productivity of labor will secure.

End all red tape that thwarts business startups and hobbles its expansion, such as licensing, public health regulations and inspections, zoning restrictions, etc.  Do not be concerned that people may be employed in low wage, dangerous jobs against their will.  The reality is that business owners must recruit workers and not dragoon them and chain them to their workplaces.  Nor are business owners interested in harming either their workers or their customers.  If they do, normal civil and commercial law will suffice.

Privatize all government services, such as garbage pickup, water and sewage services, and allow for unbridled competition in these and other areas, even fire protection. Sell off city property (who needs offices that are empty of government bureaucrats anyway?) and deed public housing to its current occupants, making them responsible for their own abodes. You may be surprised how responsible people can be with their own property.  End public education and all its costs.  Allow the people to get the kind of education that they desire, whatever that may be.  Since half the current population of Detroit is functionally illiterate, what's the risk?

Do you want a safe society? Then let people arm themselves without any licensing requirements.  Since it takes Detroit police approximately an hour to answer a typical 911 call, this is simply a practical solution to the basic human right of self defense.  Above all end welfare.  The destructive cycle of dependency is driving American cities to the financial and cultural wall.

Do not expect overnight success, but who knows?  A free market always surprises us with new innovations.  At first one can expect lots of mom and pop startups, sidewalk vendors, unlicensed and untaxed services such simple property repair, home schools, private taxis, etc.  But if Nike and other American businesses are enticed by lower costs and fewer regulatory burdens to outsource their manufacturing operations overseas, why would they not take a good look at a Free Detroit?  Expect to be amazed.

Allow Detroit to become a safe, cooperative city that represents the best that America can be.  Economic freedom will ensure the rebirth of Detroit.  This city can become the beacon of true prosperity to the rest of America and to the world.

Monday, July 22, 2013

My letter to the WSJ re: Give Economic Freedom a Chance in Detroit

Re: Change of Heart Over Detroit

I'm sure that you have heard, as have I, people saying that the US economy has to get much, much worse before any real reforms will be allowed to cure it. Well, we have before us the opportunity to give reforms a chance in a fairly controlled setting--the city of Detroit. The problems of Detroit seem unsolvable, but all Detroit really needs is economic freedom. Reduce local government to its primary function of providing public safety and honest courts only. Leave the rest to the free market. End all labor and workplace regulations, including minimum wages, mandatory insurance, equal opportunity rules, etc. In other words, allow people to work together cooperatively. End all red tape that thwarts business startups, such as licensing and public health regulations, zoning restrictions, etc. You may be surprised to learn that business owners are not interested in harming their workers and customers! If they do, then the normal civil and commercial law will suffice. Privatize garbage pickup, water and sewage services, and allow for unbridled competition in these and other areas, even fire protection. Sell off city property and give public housing to its current occupants, making them responsible for their own abodes. You will be surprised how responsible people can be with their own property. End public education and all its costs. Allow the people to get the kind of education that they desire, whatever that may be. Do you want a safe society? Then let people arm themselves without any licensing requirements. An armed society is a safe and polite society. Above all end welfare. End the destructive cycle of dependency that is driving American cities to the financial and cultural wall. Don't expect overnight success and don't expect huge capital inflows. But expect lots of mom and pop startups, sidewalk vendors, unlicensed and untaxed services such simple property repair, home schools, etc. Allow Detroit to become a safe, cooperative, and, most importantly, a low-cost city.

Sunday, July 21, 2013

Opposition rises in Germany against wind power

Re: Eco Blowback: Mutiny in the land of wind turbines.

A thorough and interesting report on Germany's headlong rush to phase out nuclear power and replace it with wind power.

When free market capitalism no longer governs investment, economic calculation becomes impossible and capital is squandered. Germany is squandering capital in two forms--it is scrapping the huge capital investment in nuclear power (along with the human capital that is required to produce and maintain nuclear power) while it dumps new capital down the rat hole of wind power. In the end Germany will find that its productive base is much less competitive worldwide, due to the high cost of energy. 
On a recent trip to Britain and France, I saw many wind turbines. About one in ten would actually be turning.

Monday, July 15, 2013

My letter to the NY Times re: No such thing as deposit insurance

Subject: There's no such thing as "deposit insurance"
Date: Mon, 15 Jul 2013 13:58:33 -0400

Re: Grumbles Follow Plan to Raise Bank Capital

Dear Sirs:
This sentence from your excellent article about the Basel III capital requirements reveals the true source of the problem: "That there are bank capital rules at all stems from the issues a country faces when it provides deposit insurance."  So why not just eliminate so-called "deposit insurance" and end the controversy?  Many programs call themselves "insurance" that are no such thing.  Deposit insurance is one of them.  One of the cardinal rules of any true insurance plan is that the insured has no control over what triggers benefits.  Think tornado insurance, for example.  But banks have tremendous control over what will trigger deposit insurance benefits.  First of all, it is not the deposits that one is insuring but the loans and securities.  When these default or lose value the bank cannot meet its deposit obligations.  Deposit insurance rewards banks for taking more risk in the hope of higher returns.  If it works out, the banks make lots of money.  If it doesn't, deposit insurance relieves them of their liabilities.  This is a classic case of "moral hazard", whereby the economic agent assumes more risk when all or part of his losses will be born by others.

End deposit insurance and end all manner of regulatory burden.  But then, what would all those regulators do?  Find a real job?  Naw.

Wednesday, July 10, 2013

La France Exceptionelle

The French media have spilt a lot of ink venting outrage at the perceived insult to La République Française by the President of the European Commission Jose Manuel Barroso. The poor man had the temerity to use the word "reactionary·" with regard to the tactic of trying to shelter the world of culture from the chill winds of competition blowing across the Atlantic.

The phrase that French politicians, academics, artistes and journalists alike love to bandy about is "l'exception culturelle". By this they mean that industries such as film-making, media and publishing are somehow "different" from such uncultured business as aircraft manufacture or cosmetics. Therefore, the French reasoning goes, the EU should ensure that companies in this sector will never be exposed to the full rigors of competition and consumer-driven decision making; national governments in the EU should continue to be allowed to "protect" their industries and ensure that their citizens get a healthy dose of their national culture in order to render them more resistant to the onslaught of the mighty and vulgar "American culture".

The carefully-chosen language of the argument is deliberately misleading. This type of protectionism is not in fact "une exception culturelle"; rather it is a cleverly-dressed-up "exception française".

Another classic example of this phenomenon is what the French like to call the "European Social Model". What they mean by this noble-sounding slogan is a bundle of labour-market restrictions, such as a 36-hour week, that makes the economy uncompetitive in the global market. The French solution offered to this problem is to resist globalisation which is always perceived as a threat, never as an opportunity for change and growth. This ultra-restrictive approach is in reality the "French Social Model", for there is no single social model across the EU. Each Member State evolved differently in function of its own specific set of socio-economic circumstances. To seek to impose the French model on all 28 of them is to force other economies to reduce their own competitiveness by preventing them from offering fewer social benefits and engaging in less intervention in business and labour affairs.

Even in the area of church-state relations, France has the chutzpah to suggest that its model of "laïcité", which dates from 1905 and effectively installs fundamentalist secularism as a sort of state religion, is in fact a fundamental European value. Once again, history has shaped a very diverse set of arrangements across the EU. There are countries such as England within the UK, Denmark, and Finland which have their own established national church. There are others where the legal system provides for close collaboration and shared-competence in various fields such as education. At the far end of the spectrum there is France with a very unique separationist model. The French have nevertheless, including in shaping the European Constitutional Treaty, promoted the idea that this is the "European model" and should therefore be applied by the EU institutions too.

From the outset of the EU, the French have been tremendously successful, and absolutely shameless, in projecting their own vision onto the European level and convincing everybody that this is in fact the European view and in the European interest. By contrast, the real economic power-house of the Union, Germany, has traditionally been very nervous, for obvious historical reasons, about the notion of an EU singing a German tune.

France lost no opportunity to sweep into this power vacuum but, despite all the bluster, cannot do so for much longer. EU enlargement to Central and Eastern Europe brought in countries that have their own bad experience of pretending that the official doctrine of a large bullying neighbour is their doctrine too. French exceptionalism suffusing EU decision-making needs to be consigned to history. Vive la liberté!

Friday, July 5, 2013

Nice Thought, but That Ship Has Sailed

From today's Open Europe news summary:

In a full page FAZ op-ed, former ECB Chief Economist Otmar Issing argues that “Eurobonds would breach fiscal sovereignty” as they would lead to “a transfer of taxpayers’ money without democratic control.” He also advocates the “return of the no-bail-out principle” as “each country is in the end responsible for the consequences of its policy.”
FAZ: Issing

Of course, I agree with Herr Issing, but the sovereignty and no bailout principles were breached long ago.  The EMU has found ways to funnel money from one country's taxpayers to another, calling the transfer anything except what it is.  This tactic has been refined here in America where the US Agricultural Department has dozens of programs that subsidize farmers, but no one dare call any of the programs subsidies.  The only way to prevent these transfers is to scrap the agencies involved.

Thursday, July 4, 2013

If you can print money, you will print money

From today's Open Europe news summary:

Troika may show flexibility as Greece admits it cannot meet reform targets Greek Administrative Reform Minister Kyriakos Mitsotakis admitted yesterday that it is unlikely that Greece will be able to meet its reform targets and civil servant job cuts in time for the latest bailout review. However, Kathimerini reports that a deal may still be agreed, with the EU/IMF/ECB Troika showing some willingness to be flexible. The pressure is on to reach an agreement today to allow for the next disbursement of bailout funds to be approved at Monday’s meeting of eurozone finance ministers. Otherwise, Greece could have to wait until September for the next tranche of funds.
Kathimerini Kathimerini 2 Kathimerini 3 Kathimerini 4

It now appears that whether or not Greece or any other eurozone country in crisis actually meets its agreed upon reforms, the EU/IMF/ECB Troika will disperse money anyway.  Furthermore, the headline news is full of the crisis in Portugal, and all betting is that it will need another bailout.  Of course, both countries will get what they want!  We all must remember that no member of the Troika is using its own money; it is using money either entrusted to it by others or money that it can print in any quantities desired.  Unlike the case when dispersing one's own personal money, the bureaucrats running the Troika have no concern over losing their personal wealth.  The same is true of the US Federal Reserve Bank's quantitative easing program.  Despite hints by Fed Chairman Bernanke that the Fed may "taper" the program toward an eventual end, the political pressure will always prevail to ensure that the program never ends, as was predicted by Detlev Schlichter in his recent essay End of QE?--I don't buy it.  Any "taper" toward less money printing must cause the demise of those businesses that can survive only with more money printing.  In the short run unemployment will rise, tax receipts will fall, businesses will default on bank loans, etc.  The short term consequences are all negative and will always trump the long term benefits.

This monetary rule predominates: If you can print money, you will print money.  Therefore, we must move to a new monetary regime where government cannot print money that it forces on the rest of society.  This means that legal tender laws must be revoked, so that the incentives will change for money producers to produce better and better money chosen by the free market.  Only then will governments be forced by their creditors to face reality.