Two Distinctly Different Approaches to Crisis Resolution

There are two very distinct approaches to crisis resolution. One is the socialist approach, adopted by most governments of the world in the latest coronavirus crisis. The other is the individualistic approach, used by few if any of the world's major nations.

The Socialist Approach

Here are some of the main elements of the socialist approach:

·         Centralized decision making to which all must comply

·         Temporary loss of civil liberties

·         Suspension of property rights

·         Large, perhaps even totalitarian, government

·         Reliance on data and statistical models

·         Reliance on expert opinions and recommendations

The Decentralized/Individualistic Approach

Here are some of the main elements of the individualistic approach:

·         Radical decentralized decision making even to the individual level

·         Defense of all civil liberties

·         Defense of property rights

·         Limited government

·         Skepticism of data and statistical models, especially early in the crisis

·         Skepticism of experts, especially early in the crisis

The Look of the Two Different Approaches

We know what the socialist approach looks like, since it has been adopted by all the world's major nations during what is called the coronavirus crisis. The president closed our borders to international travelers (but not goods). Many state governors have restricted the people's right to assemble, the right to work, the right to open their businesses as normal, and even the right to leave their own homes except for "permitted purposes". The financial and personal cost of these measures is beyond calculation. Government justifies these measures by reliance on expert advice that to allow citizens to go about their lives as they see fit will cause a medical catastrophe. These experts rely upon data and statistical models to justify their recommendations. One of the problems with reliance upon experts who, in turn, rely upon data and models, is that the data and the models constantly change and may even become suspect. For example, the Foundation for Economic Education (FEE) reported on March 25, 2020 that the Oxford-based Our World in Data had stopped using World Health Organization data for the coronavirus reporting, citing errors. Another problem is assessing when the data and expert advice should trigger the suspension of civil and property rights, if ever. Is it not interesting that the Center for Disease Control and Prevention (CDC) predicts that 12,000 will die of the "normal" flu this year in the US and that 61,000 died in the 2017/2018 flu season? Yet the US has taken draconian action only this year in reaction to the 804 who have died with the coronavirus as of March 25, 2020. (Note the qualifying preposition "with".) What changed to warrant such action and are we to expect similar draconian responses in the future?

The individualistic approach is well known. It is the approach taken heretofore following other major flu-type outbreaks in the fairly recent past. But let us pursue a thought experiment somewhat. What action might individuals and businesses take on their own in response to this media hyperbole? We know that some people with medical conditions or those who simply don't want to take a chance are self-quarantining themselves or venturing out in public much less than normal. Furthermore, some stores are open and people seem to be taking precautions. They are maintaining a safe distance from one another in public. Hand sanitizers are being used in some stores to clean public shopping baskets and for customer use. Some stores are asking customers not to use cash. My local Ace Hardware Store has blocked off a six foot distance between the customer and checkout clerks. These are just some common sense actions taken by a self reliant people. But what might be the response if  businesses who were forcibly shutdown were allowed to open? I'll use my local dental office for a thought experiment.

My dental office has been forced to close, but what if it were not? It could close voluntarily anyway, of course. That would be my dentist's decision. But if she closed and others remained open, she might lose many customers permanently. Or she could remain open. Then customers could decide whether to see her for their regular checkups, etc. or not. If some did go, they might assess what steps the dentist was taking to protect herself and her patients. If they were not comfortable with her measures, they might try another dentist, in which case my dentist would risk losing a customer permanently if the other dentist adopted better protective measures. We could go on and on about the choices that both my dentist and her customers might take, but the point is that there are lots of options available to both my dentist and her customers. Individuals and businesses may rely on data somewhat, but the data is just one input to guide their action.

Conclusion

The Austrian school of economics explains that humans are guided by preferences, and preferences are NOT quantifiable. They are subjective. They differ from one person to another and change often within the same person. It is impossible for government to draft rules and restrictions that can satisfy the subjective preferences of ALL people all the time on how to respond to a crisis. Pretending that it knows what's good for over three hundred million people is ludicrous. Better to adopt the individualistic approach and let each of us decide for himself.

My letter to the NY Times re: Government money and banking policies con hapless borrowers

Re: The Great Wall Street Housing Grab, by Francesca Mari

Dear Sirs:

Ms. Mari's long and very detailed report of the role played by Wall Street property firms following the great 2008 real estate crisis fails to explain the underlying source of the crisis that ruined the dreams of so many. The 2008 crisis was fueled by massive government money printing--in order to drive down the interest rate--and unprecedented interventions into direct lending through its captive lenders Fannie Mae and Freddie Mac. Ms. Mari notes early in her report that one borrower put down only $15,000 as a down payment on a $840,000 property, for a down payment ratio of under two percent! No responsible, privately owned bank would make such a loan and stay in business for long. Yet this irresponsible loan does not rate a further mention as the foundation of all the sorrow that followed. Unfortunately Ms. Mari focuses the rest of her report on how Wall Street real estate investment sharks took advantage of government's sloppy and amateurish practices. No one should be surprised that Wall Street firms, whose principals could legally earn millions, ran circles around overworked government bureaucrats. The important lesson here is to understand that the government purposely encouraged hapless thousands to take on debt that neither they nor their bankers would have considered under a sound and private money and banking culture. The final tragedy is that nothing has changed.

My letter to the NY Times re: Another True Believer

Re: Our "Pursuit of Happiness" Is Killing the Planet, by James Traub

Dear Sirs:

After World War Two blue-collar philosopher Eric Hoffer tried to make sense of the mass movements that had led to the deaths of hundreds of millions of people. In The True Believer he identified the "misfit", (Hoffer's own word), who seeks to submerse himself in some movement that he considers greater than himself and to which he can pledge complete allegiance and cease all critical thinking. We have a new true believer in James Traub, who seeks to pledge his allegiance to the cause of radical environmentalism. Pardon me if I continue to express my skeptism that giving government the power to tell me how many times I may fly and how many real hamburgers I may consume will fix or delay anything that may or may not be happening. But I am certain that such a policy will open the floodgates to true totalitarian government. Furthermore, it seems to me that Mr. Traub has set the bar rather low in picking an all-knowing leader in teenager Greta Thunberg. Ms. Thunberg may not be anyone's idea of a threat to our liberties, but the jackbooted boys surely are waiting in the wings to carry out her juvenile flights of fancy.

One more thing...Mr. Traub dismisses John Stuart Mill's "no harm" principle, because the great philosopher/economist lived in an era without socialized medicine. I have no doubt that Mill would never have supported socialized medicine or any other form of socialism. Unlike Mr. Traub, Mill understood the dangerous power of Moral Hazard and The Tragedy of the Commons.

Patrick Barron

My letter to the NY Times re: Review of Dark Tower, a book about Deutsche Bank

Re: What Broke Deutsche Bank, by David Enrich, reviewed by Roger Lowenstein

Dear Sirs:

Roger Lowenstein's review of David Enrich's book about Deutsche Bank's descent from a pillar of sound banking to one of the most reckless banks on the planet fails to mention the most important event in German post war banking history; i.e., that Germany gave up its own currency, the Deutsche Mark, for the euro on January 1, 1999. The Deutsche Mark was the soundest currency in the entire world, with the possible exception of the Swiss Franc. The euro has proven to be one of the least sound currencies. The fact that Deutsche Bank embarked on a path of reckless, but apparently perfectly legal, lending and trading after the conversion cannot be passed off as a mere coincidence. Both Mr. Enrich and Mr. Lowenstein need to dig deeper than recounting the personal character flaws of Deutsche Bank's leadership to understand the real forces at work.

China Should Stop Manipulating Its Economy

Why I Want China to Stop Manipulating Its Economy

(Psst...It's probably not what you might think)

In his State of the Union Address--February 4, 2020--President Trump outlined his reasons for punishing nations like China that manipulate their economies in order to achieve some internal policy goal. The president claimed that such manipulation was unfair and harmful to its trading partners. The president's main concern is that by manipulating its economy China "steals" jobs. It does this in several ways.

 1. By keeping the yuan at a lower exchange rate with other currencies--meaning that the People's Bank of China gives more yuan for each dollar than would occur in a free currency market--Chinese goods are cheaper in terms of foreign currency than they would be otherwise.

2. By subsidizing its industries, Chinese goods can be offered at a lower price.

3. By erecting tariffs against some imported goods, China prevents foreign companies from producing more and employing more people than they would otherwise.

The president claimed that his policies were working...that manufacturing jobs were returning to the US and have created a "Blue Collar Boom" with unemployment statistics at very low levels for many politically sensitive segments of the labor market.

I agree with the president in his desire that China cease manipulating its economy, but my reasons are not the same as his. More importantly, I would not recommend reciprocal interventions to punish China. Instead I would follow the Barron maxim of "minding our own business and setting a good example". I would point out the following consequences of Chinese economic interventions.

1. China itself pays for the interventions, not its trading partners. In fact, Chinese economic interventions constitute a transfer of wealth from China to its customers overseas. Goods that previously cost X in the US market now cost less than X. Americans pocket the difference which increases our wealth. The Chinese people pay high taxes or higher prices. China's subsidies to business distort the Chinese economy away from producing other more desirable products. (If this were not the case, there would be no need for subsidies.) Its tariffs on imported goods reduce supply within China, leading to higher prices and/or shortages within China. In other words, Americans and the rest of the world benefit at the expense of the Chinese people.

2. In the short run this is good for Americans, so why should we complain? Remember that I pointed out in number one above that Chinese economic interventions are good for Americans in the short run. What about the long run? By intervening in its economy China weakens its productive capital base. It is this capital base that will pump out the many things desired by Americans in the future. Anything that weakens a trading partner's capacity to generate wealth means that its trading partners will be less wealthy too. Therefore, even loyal Americans should advise China to eschew economic manipulations that benefit them in the short run. No one ever explained this phenomenon better than Frederic Bastiat in his classic essay That Which Is Seen, and That Which Is Not Seen. Henry Hazlitt brought Bastiat's insights up to date in Economics in One Lesson. There actually are two lessons. The first is that one must consider the consequences of an economic act not only upon those who will benefit but also those who will be harmed. Of course, it is usually easy to point out those who will benefit. It is difficult if not impossible to quantify those who are harmed, especially if the harm constitutes benefits that never occurred but would have absent the intervention. Hazlitt's second lesson is that one must look not only to the short term benefit of an economic act but also to the long term costs. For example, steel import restrictions may result in a boom for the US steel industry with no apparent short term consequences. But if US steel were already competitive in terms of price, quality, and service, there would be no need for import restrictions. Therefore, we can conclude through economic logic that steel prices, quality, and/or service will deteriorate, harming Americans in the long run.

Conclusion

The president measures economic progress by an increase in employment and/or a decrease in unemployment rather than an increase in wealth. Laboring more is not necessarily a sign of economic progress. Communist countries, such as the former Soviet Union, had zero unemployment! The state chose a job for everyone. But no one would claim that decades of full employment made the unfortunate citizens of the Soviet Union wealthier. The opposite occurred. In a free market economy without the burden of onerous labor laws, high taxes, and other interventions, there is no barrier to full employment for the simple reason that there is no limit to economic satisfaction. Even a frugal person who desired no additional economic goods certainly would be pleased that he need labor less to achieve and maintain his current level of economic satisfaction.

The greater China's capital base, the greater the potential for a further expansion of the division of labor to employ this additional capital more productively. We Americans should wish that the entire world were free market capitalist economies, so we would have access to cheaper, better, and more varied products and services. China's integration into the world economy has benefited Americans tremendously. So, Mr. President, I also want China to end its economic interventions, but I do not want to punish China through tariffs and other means for doing so. Our response should be to declare unilateral free trade. Let's lead the world by setting a good example and look forward to a world of peace and prosperity.

My letter to the NY Times: Why the Predictions of Luddites Never Happen

Re: A World Without Work by Daniel Susskind, reviewed by Alana Semuels

In the closing paragraph of her review of Daniel Susskind's A World Without Work, Alana Semuels writes...

"The dire predictions of workers losing their jobs to machines have not come true in the past. That doesn't mean they never will."

If economics were an empirical science, Ms. Semuels would have a point. But economics is a deductive/a priori science. As such we can know without a doubt that increased productivity is a result of savings to accumulate capital in order to invest in processes to reduce the human effort and cost per unit of production of an economic good. Economic science is as true for labor as for any other scarce resource; i.e., man aims to economize its use. Unemployment, especially chronic unemployment, has other causes, mostly the result of policies recommended by Mr. Susskind, such as redistributing wealth through higher taxes. The most laughable of Mr. Susskind's concerns is that government must "create leisure policies to help people occupy themselves in a world without work." Is Mr. Susskind REALLY a fellow in economics at Oxford? I find that hard to believe.

Central Banks: Enemies of Freedom

Central banks are enemies of a free and prosperous society. Let me count the ways.

1. Like the military, central banks are creatures of the state. Suggestions of them being independent are pure fantasy.

2. There is a symbiotic relationship between central banks and the state. Central banks are created by legislatures with the full understanding that they will finance the state's spending, primarily war and welfare.

3. Since the main threat to freedom comes not from foreigners but from the state itself, central banks are willing accomplices in the state's attack on freedom.

4. Central banks are the source of fiat money expansion in society. In other words, central banks create money out of thin air. We commoners call this counterfeiting. Well, so does the state if done by anyone except the central bank.

5. As the source of money expansion in society, central banks are responsible for the boom-bust credit cycle. Main stream media falsely calls a central bank induced credit cycle as a                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       business cycle, implying that it is business or free market capitalism that is to blame. Alasdair Macleod has explained in many essays why central banks and only central banks are to blame.

6. Central banks are responsible for excessive state debt. In a sound money environment, state spending is limited by two factors, both of which are natural. One, the state can raise taxes to pay for new spending, but the public's tolerance of increased taxes has a natural limit. Two, the state can borrow to pay for new spending, but it must compete for funds in the bond market to do so. Either it must outbid other borrowers and/or induce a shift in public sentiment from spending to savings. Either tactic causes the interest rate to rise. Spending falls and the cost of capital increases, causing a reduction in investment in the future prosperity of the nation. (Note that this scenario is opposite of the one touted by Keynesian economists, who view government spending as beneficial, especially when an economy goes into recession due to previous money and credit expansion by the central bank.)

7. The central bank funds an almost unlimited confiscation of resources by the state. Whether to finance war or welfare, in a sound money environment the people will begin to question the options to excessive government spending. Not so when the central bank creates money out of thin air. The consequences of central bank monetization of government debt are delayed and poorly understood. When these consequences can no longer be ignored--price inflation, unemployment, never-ending war, an expanding dependent class--the state will blame others.  Furthermore, it is likely to recommend even more of the same poison that caused the crisis in the first place--increase government spending to continue war beyond the public's tolerance, to save politically connected industries like banking, or to continue to buy votes through welfare expansion.

8. A corollary to number seven above is the corruption of public understanding and need for limited government. Unlimited money via the central bank makes it appear that the state can fund anything, especially in the short run. Of course, all spending programs then become short run necessities, as if the lack of government funded, free healthcare was an existential threat; whereas, healthcare is one of many economic products for which the public must make individual, rational spending choices. After all, there is no magic limit to how much is appropriate spending on healthcare. It is a subjective personal choice of each individual in society.

In conclusion, central banking is not compatible with a politically free and economically prosperous society. Through money printing the central bank empowers the state to confiscate resources beyond what the people would accept if the true state of affairs were known, as in a sound money economy. This is NOT self-government or limited government. Furthermore, central bank credit expansion causes capital decumulation. Spending becomes the goal, not savings. Individuals understand intuitively the harmful effects of excessive spending. When our personal finances are strained, we would not entertain the idea that the way to restore them would be to take long, expensive trips, buy expensive cars, etc. Of course not. We reduce our spending to well within our income. The excess of earnings over spending is savings, which is the lifeblood of any economy. So simple for the individual to understand, yet the lesson is sneered at by Keynesian economists when applied to government spending. Time for getting back to basics and away from Keynesian fantasy.