Monday, December 21, 2009

Analysis of Current Michigan Public Policy, written by Dr. Timothy Nash and Dr. Keith A. Pretty for the Ash Institute at Harvard University.

Dear Readers,

Below you will find some interesting solutions for troubled state economies like Michigan. Your thoughts and input and welcome and appreciated,

Published by the Harvard Kennedy School, Ash Institute for Democratic Governance and Innovation

November 16, 2009

The following is a public policy position paper on the Michigan economy written for the
Ash Institute at Harvard University. This is one in a series of papers published by the Ash
Institute regarding potential public policy solutions to the economic and political problems
facing key states across the country.

Analysis of Current Michigan Public Policy

By Timothy G. Nash and Keith A. Pretty


As of October, 2009, Michigan had a projected budget shortfall of $2.8 billion for the
current fiscal year. In recent history, the governor and Michigan legislature have used tax
increases and service cuts as the primary approach for putting its fiscal house in order. The
following are five policy suggestions Michigan’s political leaders should consider to help
the state become more efficient and more effective.

Five Policy Suggestions

1. The tax structure in Michigan is not friendly to business and must change.
According to the Public Policy Institute of New York, Michigan ranks 48 out of 50 states in
terms of its corporate tax burden. Michigan needs to reduce its top marginal corporate
income tax rate from 9.01% to 5% or less and eliminate the 22% surcharge on the
Michigan business tax.

2. Michigan has the highest unemployment rate in the country at 15.2% and was
ranked last in economic performance by the American Legislative Exchange Council for
2009. Michigan needs to encourage labor policy that gives those employed the right to
decide whether to financially support or join a union while giving employers more freedom
to hire employees that best fit their needs. This is imperative given Michigan has lost more
than 750,000 jobs since 2000 and needs to create a more entrepreneur friendly

3. The state has 637,000 people holding public sector jobs making government the
largest single source of employment in Michigan. The Michigan economy will lose more
than 291,000 jobs in 2009 with most coming from the private sector. A 10% reduction in
public sector jobs would fuel increased innovation in government while providing
substantial cost savings to the state economy.

4. The Detroit Regional Chamber of Commerce has argued for more than a year that
the Michigan state government can realize more than $800 million dollars in savings
annually by a) privatizing prison functions like food services and b) normalizing
sentencing and parole guidelines to those of other Midwest states.

5. Change the retirement system for Michigan K‐12 public school teachers from a
defined benefit plan to a defined contribution plan. Under such a system the state would
match teachers’contributions at a set rate with the pensions owned and controlled by the
teachers and managed by a private company. Over time, the state would exit the pension
business for teachers and not have to back-fund the pension program.


Given the ongoing fiscal crunch facing state and local government, innovative practices
must be part of the solution. Michigan House Speaker Andy Dillon’s proposal to pool health
care for all state employees is a good start. The five reforms outlined above would serve as
a strong foundation for a state government that makes the most of its limited tax dollars.

Dr. Keith A. Pretty is president and CEO of Northwood University and Dr. Timothy G, Nash
is a vice president and holds the Fry Chair in Free Market Economics at Northwood

You can read more of our white papers here.

Wednesday, December 16, 2009

Market Interest Rates Need to Tell the Truth, or Why Federal Reserve Policy Tells Lies by Richard M. Ebeling

On December 16, 2009, the Federal Reserve Open Market Committee announced that it was planning to maintain a Federal Funds rate between zero and a quarter of a percentage point. The Committee said that it would keep interest rates “exceptionally low” for an “extended period.”

Arguing that there was no reason to fear significant price inflation for the foreseeable future, the Open Market Committee also told that it was continuing to inject more Federal Reserve-created money into the financial markets as it finishes buying up by the end of March 2010 a total of more than $1.5 trillion in mortgage-backed securities and related debt held on the books of Fannie Mae and Freddie Mac.

Virtually all commentaries about the Fed’s announced policies focus on whether it is too soon for the Federal Reserve to raise interest rates given the state of the economy, or whether the Fed should already be raising interest rates to prevent future price inflation.

What is being ignored is the more fundamental question of whether the Fed should be attempting to set or influence interest rates in the market. The presumption is that it is both legitimate and desirable for central banks to manipulate a market price, in this case the price of borrowing and lending. The only disagreements among the analysts and commentators are over whether the central banks should keep interest rates low or nudge them up and if so by how much.

Market-Based Interest Rates have Work to Do

In the free market, interest rates perform the same functions as all other prices: to provide information to market participants; to serve as an incentive mechanism for buyers and sellers; and to bring market supply and demand into balance. Market prices convey information about what goods consumers want and what it would cost for producers to bring those goods to the market. Market prices serve as an incentive for producers to supply more of a good when the price goes up and to supply less when the price goes down; similarly, a lower or higher price influences consumers to buy more or less of a good. And finally, the movement of a market price, by stimulating more or less demand and supply, tends to bring the two sides of the market into balance.

Market rates of interest balance the actions and decisions of borrowers (investors) and lenders (savers) just as the prices of shoes, hats, or bananas balance the activities of the suppliers and demanders of those goods. This assures, on the one hand, that resources that are not being used to produce consumer goods are available for future-oriented investment, and, on the other, that investment doesn’t outrun the saved resources available to support it.

Interest rates higher than those that would balance saving with investment stimulate more saving than investors are willing to borrow, and interest rates below that balancing point stimulate more borrowing than savers are willing to supply.

There is one crucial difference, however, between the price of any other good that is pushed below that balancing point and interest rates being set below that point. If the price of hats, for example, is below the balancing point, the result is a shortage; that is, suppliers offer fewer hats than the number consumers are willing to buy at that price. Some consumers, therefore, will have to leave the market disappointed, without a hat in hand.

Central Bank-Caused Imbalances and Distortions

In contrast, in the market for borrowing and lending the Federal Reserve pushes interest rates below the point at which the market would have set them by increasing the supply of money on the loan market. Even though savers are not willing to supply more of their income for investors to borrow, the central bank provides the required funds by creating them out of thin air and making them available to banks for loans to investors. Investment spending now exceeds the amount of savings available to support the projects undertaken.

Investors who borrow the newly created money spend it to hire or purchase more resources, and their extra spending eventually starts putting upward pressure on prices. At the same time, more resources and workers are attracted to these new investment projects and away from other market activities.

The twin result of the Federal Reserve’s increase in the money supply, which pushes interest rates below that market-balancing point, is an emerging price inflation and an initial investment boom, both of which are unsustainable in the long run. Price inflation is unsustainable because it inescapably reduces the value of the money in everyone’s pockets, and threatens over time to undermine trust in the monetary system.

The boom is unsustainable because the imbalance between savings and investment will eventually necessitate a market correction when it is discovered that the resources available are not enough to produce all the consumer goods people want to buy, as well as all the investment projects borrowers have begun.

The unsustainability of such a monetary-induced investment boom has been shown, once again, to be true in the latest business cycle. Between 2003 and 2008, the Federal Reserve increased the money supply by at least 50 percent. Key interest rates, including the Federal Funds rate and the one-year Treasury yield, were either zero or negative for much of this time when adjusted for inflation. The rate on conventional mortgages, when inflation adjusted, was between two and four percent during this same period.

It is no wonder that there emerged the now infamous housing, investment, and consumer credit bubbles that have now burst. None of these would have been possible and sustainable for so long as they were if not for the Fed’s flood of money creation and the resulting zero or negative lending rates when adjusted for inflation.

The monetary expansion and the artificially low interest rates generated wide imbalances between investment and housing borrowing on the one hand and low levels of real savings in the economy on the other. It was inevitable that the reality of scarcity would finally catch up with all these mismatches between market supplies and demands.

This was, of course, exacerbated by the Federal government’s housing market creations, Fannie Mae and Freddie Mac. They opened their financial spigots through buying up or guaranteeing ever more home mortgages that were issued to a growing number of uncredit worthy borrowers. But the financial institutions that issued and then marketed those dubious mortgages were, themselves, only responding to the perverse incentives that had been created by the Federal Reserve and by Fannie Mae and Freddie Mac. Why not extend more and more loans to questionable homebuyers when the money to fund them was virtually interest-free thanks to the Federal Reserve? And why not package them together and pass them on to others, when Fannie Mae and Freddie Mac were subsidizing the risk on the basis of the “full faith and credit” of the United State government?

More Monetary Mischief in the Post-Bubble Era

What has been the Federal Reserve’s response in the face of the busted bubbles its own policies helped to create? Between September and December of 2008, the monetary base (currency in circulation and reserves in the banking system) exploded by 82 percent, from $905 billion to over $1.6 trillion. And over the last 12 months, from December 2008 to November 2009, the monetary base has continued to increase by an additional 18 percent to over $1.9 trillion.

At the same time, M-2 (currency in circulation plus demand and a variety of savings and time deposits) grew by 12 percent in calendar year 2008, and has continued to increase by 5 percent in 2009. Monetary aggregates like M-2 have not expanded even more in the last year due to the fact that about $1 trillion of the monetary base created by the Federal Reserve is sitting as excess reserves.

Why haven’t banks lent out this huge amount of newly created money? Partly it is due to the fact that after the wild bubble years, many financial institutions have returned to the more traditional credit worthy benchmarks for extending loans to potential borrowers. This has slowed down the approval rate for new loans. (For trying to once again follow some of these more responsible lending practices, President Obama has been criticizing the banks for failing to once more expand loans to potentially overly risky business and investment ventures.)

But more importantly, those excess reserves are collecting interest from the Federal Reserve. With continuing market uncertainties about government policies concerning environmental regulations, national health care costs, the burden of the Federal debt and other government unfunded liabilities (Social Security and Medicare), as well as other possible political interferences in the marketplace, banks have found it more attractive to be paid interest by the Federal Reserve rather than to lend money to private borrowers. And considering how low Fed policies have pushed down key market lending rates, leaving those excess reserves idle with Ben Bernanke has seemed the more profitable way of using all that lending power.

Even under the heavy-handed intervention of the government, markets are fundamentally resilient institutions that have the capacity to bounce back unless that governmental hand really chokes the competitive and profit-making life out of capitalism. Any real recovery in the private sector will result in increased demands to borrow that would be satisfied by all of that Fed-created funny money currently sitting idle. Once those hundreds of billions of dollars of excess reserves come flooding into the market, price inflation will not be far behind.

But even before the private sector may wish to significantly increase their demand to borrow to undertake new investment, the funding of the trillion-dollar a year Federal deficits may end up using a good part of those excess reserves. Then those hundreds of billions of Fed-created dollars will enter the market to finance all of the government’s spending that taxes are not paying for.

Central Banking as the Problem, Not the Solution

At the heart of the problem is that fact that the Federal Reserve’s manipulation of the money supply prevents interest rates from telling the truth: How much are people really choosing to save out of income, and therefore how much of the society’s resources – land, labor, capital – are really available to support sustainable investment activities in the longer run? What is the real cost of borrowing, independent of Fed distortions of interest rates, so businessmen could make realistic and fair estimates about which investment projects might be truly profitable, without the unnecessary risk of being drawn into unsustainable bubble ventures?

Unfortunately, as long as there are central banks, we will be the victims of the monetary central planners who have the monopoly power to control the amount of money and credit in the economy; manipulate interest rates by expanding or contracting bank reserves used for lending purposes; threaten the rollercoaster of business cycle booms and busts; and undermine the soundness of the monetary system through debasement of the currency and price inflation.

Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from their interventions, regulations and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way.

Monday, December 7, 2009

Is the Case for Liberty Too Extreme? by Richard M. Ebeling

If there is one label more than any other that principled advocates of individual liberty are often stamped with it is that they are “extremists.” How can you be so extreme, it is said, what is wrong with a compromise between personal or economic freedom and some “reasonable” degree of government regulation, welfare legislation, and social intervention?

The first response that should be given when confronted with such an accusation is to inquire, with what is the friend of liberty being asked to compromise? The real answer, of course, is that the friend of liberty is being asked to compromise with the use of coercive force in human relationships.

Freedom or Coercion in Human Affairs

The simple fact is that human association may be based on peaceful and mutually beneficial agreement and exchange, or it may be based on one party in this human relationship threatening or using force to make the other party do something that he would not willingly do if he were free from the danger of violence.

Freedom is important not because a person might want to say, “yes,” to an offer that has been made to him, but because he might want to say, “no.” If an individual cannot say “no” without being threatened with some form of physical harm from the other person in the relationship, then that individual is not free.

Being a slave is to be required to do what someone else wants without one’s voluntary consent. It is to be coercively made the means to another’s ends or goals. That individual’s life is no longer his own. Instead, to the extent that he is made to serve the ends of another without his voluntary consent he is no longer a free man, but rather the property of another to be used as the slave-master wishes.

Often when the friend of freedom gives this reply he is accused, again, of going to extremes. But who, in this debate over freedom and coercion, is the actual extremist and who is the actual moderate? The advocate of state coercion in social affairs cannot stand the fact that people make choices, and undertake courses of action, of which he disapproves. He objects to the fact that people fail to follow the paths that his reason and values consider rational and good. Everything else is either chaotic or sinister.

The Social Engineer as Political Madman

In this sense, he is like the maniac of whom G.K. Chesterton speaks in his book, Orthodoxy. The madman, Chesterton says, is the one "who has lost everything except his reason.... He is not hampered by a sense of humor or by charity, or by the dumb uncertainties of experience. The madman's explanation of a thing is always complete, and often in a purely rational sense satisfactory." The madman has a "most sinister quality" of "connecting of one thing with another in a map more elaborate than a maze."

The advocate of state coercion has, in this sense, been driven mad by the outcomes of a free society. If some men are poor while others are well-to-do, he cannot accept the idea that this is due to the natural scarcity of resources, or is merely as far as capitalism has yet been able to raise people's standards of living in an on-going and time-consuming process of savings and investment. No, it must be because men have not submitted themselves to a plan — his plan — that his reason has given him, and not others, the superior wisdom and insight to see.

If some men receive lower pay than others, or do not have access to all the goods and services they desire, the advocate of state coercion — like the madman — often sees sinister motives and dark conspiracies. If some workers receive lower wages, it can't be because of a lack of marketable skills or insufficient personal ambition to better themselves. No, it must be because of the businessman's greed and unwillingness to pay "a fair wage," or a plot among the employers to exploit their fellow human beings. The advocate of state coercion can see beneath the charade and he, of course, knows the regulation or intervention to put the conspirators in their place and remedy the problem.

The social madman has the answer and the solution for everything. He has no patience for ignorance, good intentions that go astray, or some natural scheme of things. And like the madman, he has no doubts about his knowledge, the goodness of his intentions and their outcome, or what the scheme of things should be turned into. Human freedom and its advocates are the irritants that he tolerates when he has to, but with which and with whom he never compromises. He has too much confidence in his own vision. In his mind, extremism in the defense of the state-molded "good society" is no vice.

Smoking and the Political Extremist

Let me try to explain this with two issues that have dominated social policy in the Western world over the last several years. The first one is the growing ban on smoking in virtually all public and private areas. In the “bad old days” it was taken to be common courtesy and good manners to ask others in an enclosed space if they minded if he, the smoker, wished to light up his cigar, cigarette, or pipe. If there were any objections, the smoker would either refrain or move to another place to enjoy his nicotine fix. Sometimes, non-smokers would be, in turn, well-mannered enough not to object if the smoke was not too much of a nuisance.

The antismoking advocate just cannot reconcile himself to the existence of others who gain pleasure from something of which he disapproves, and by people who weigh the enjoyment of the present more highly than the possible consequences of health problems in the future. Nor can he stand a world in which the market provides options to those with different preferences: restaurants, bars or other public places in which the proprietor may see the economic benefit of providing both smoking and non-smoking facilities, including ones in which some such places are completely smoke free while other places permit unrestricted smoking.

For the advocate of freedom, the market alternative is precisely the reasonable and moderate one. It recognizes and accepts the varieties and preferences among men and offers a compromise, a peaceful resolution, of the differences among them. And it leaves a wide avenue open for one group of men to reason and persuade another to modify their choices and forswear "a filthy and corrupting" habit.

Religious Tolerance vs. the Politically Closed Mind

Another example is religious tolerance. For centuries in Europe, kings and governments did not tolerate religious diversity. Those who dared to confess and practice a faith differing from that of the monarch or the political authority were threatened with imprisonment, exile, or even torture and death. It took hundreds of years and numerous religious wars before men where willing to leave religious faith, or no faith, to the conscience of each member of society.

In the liberal society that slowly evolved during the last few centuries in the West it came to be accepted that religion was a private matter and not “an affair of the state.” Debates, disputes, and even heated argument over religious matters were to be left to the free marketplace of ideas. Conversions and “crusades” for the acceptance of the “true” faith were only to be fought on the battlefield of the mind and the spirit, and not at the end of the hangman’s rope.

But now there has arisen a new political intolerance against any public demonstration for or stated disagreement with a particular religious faith. Religious views are to be locked away in the believer’s mind, and any public expression of his faith is considered somehow to be imposing that belief on others. Thus, if a private business establishment chooses to exhibit a religious symbol on its own property (and even if many of his customers desire or agree with it), it is increasingly considered grounds for legal suit and legislative prohibition.

At the same time, if the proponent of one faith declares his disagreement or disapproval of another faith this, in turn, is considered an act of religious “intolerance” that is to be regulated or legislated against as a supposed “hate crime.” Thus, in the name of religious “tolerance” governments are increasingly becoming intolerant of any individuals or private groups that express their differences and disagreements with other belief systems in that marketplace of ideas. A new form of religious censorship is being imposed on people of every faith.

The New Religious Intolerance vs. the Marketplace of Ideas

The most recent publicized instance of this new intolerance has been the firestorm of controversy that followed publication of the Danish newspaper cartoons, which portrayed Mohammed in an unflattering light. When some foreign governments and domestic pressure groups called for the censorship and punishment of those who published the cartoons, the liberal reply should have been that law and politics have no place in this matter. One might question and even personally challenge the good manners or polite taste of those who published them, but this is all part of the peaceful rivalry of ideas in which both the vulgar and the refined compete for the attention and acceptance of the reading and thinking public.

When I was a small boy I was taught that when someone said something rude or insulting to me the appropriate response was, “Sticks and stones may break my bones, but words can never harm me.” Now, of course, words can and do hurt, and precisely because of this decent men in a free society should show a reasonable moderation in what and how they say things. And, indeed, it used to be taken as more of a demonstration of the “crudity” and “ignorance” of the speaker that he should rise no higher than the gutter in what he said and how he acted toward another.

But, instead, the intolerant, political extremist wishes to ban what he considers the religiously “insensitive” and what he labels “word harms” and therefore crimes. Does this settle disputes among men about matters of religious faith (or any other idea or belief)? No, this new political extremist intolerance for private religious expressions of faith and differences of views in the public arena threatens to potentially make social tensions even worse over this issues.

It makes people fearful of speaking their minds, forces them into a public hypocrisy, and allows differences and disagreements to fester below the surface. And by driving men’s thoughts “underground” it generates a “black market” place of ideas where the truly corrupt, vile, and dangerous can grow and mutate precisely because they are not challenged in the bright light of open and public discourse and debate.

The advocate of freedom, with his deep belief in the sanctity and uniqueness of the individual, has always been repelled by the idea of condemning or punishing people because of the values or beliefs that they may hold but which they do not attempt to forcibly impose on others.

The friend of liberty has believed that all ideas should be treated with respect and can only be discussed and challenged on the basis of reason and evidence. Attempts to politically discriminate against or ban open and free discussion of any ideas are the only things that should to be viewed as unreasonable and intolerable in the free society.

Liberty and a Society of True Tolerance

The free society tries to avoid extremes through the diversity of free men that it

both permits and fosters. It restrains the practice of "extreme" personal behavior because it imposes costs and consequences upon everyone who practices them — loss of economic opportunity, and social ostracism by those who are repelled by it. And it teaches the advantages of moderation — courtesy, good manners, tolerance and "socially acceptable" conduct – in the competitive arena of intellectual pluralism where to win an argument the only medium of exchange is peaceful persuasion.

In other words, the free society nudges men toward better behavior and rational thought rather than tries to compel it. It teaches good and tolerant conduct through reason and example. It fosters compromise by demonstrating the personal costs of being too extreme in one's words and actions. And it raises the ethical conduct of society by the discovered advantages of personal improvement through time.

Are the arguments for and the advocates of liberty too extreme? Quite to the contrary. Freedom is the epitome of moderation. And it is freedom's moderation, its tolerance and diversity that drive some men mad. But madness, by definition, is not the normal condition of a healthy human being. The history of Western civilization is the story of man's slow escape from the madness of political and social extremism. Our dilemma and our challenge is that this sickness still controls the minds of too many of our fellow citizens, and is the guiding principle of those who use political power to get their way.

Tuesday, December 1, 2009

America's Return to a Road to Serfdom? by Richard M. Ebeling

Under the cover of one of the most severe economic crisis in the post-World War II period, the United States is witnessing the largest and most dramatic increase in the size and scope of government power since the 1930s and 1940s.

We are dangerously returning to “the road to serfdom” that free market, Austrian economist and Nobel Laureate, Friedrich A. Hayek, warned about in a book with that title that was originally published in 1944. A spider’s web of regulations, controls, and commands were imposed on the free enterprise system at that time, first under the crisis conditions of the Great Depression and then expanded in Great Britain and the United States during the emergency years of the Second World War.

Hayek feared that with this growth in government control over the economic affairs of the nation, individual freedom was being seriously threatened. He argued that with government commands over production, pricing, and resource use there inevitably came government control over peoples’ lives.

“We, the People,” or Government Control

The vital issue, Hayek insisted, is whether “we, the people” decide what shall be produced and for what purposes based on what we think goods and resources are worth through the free interplay of supply and demand in a competitive free market; or whether it shall be those in political power who will increasingly dictate through those commands, controls and planning regulations what we, the citizens of the country, should have available to use and consume, in what quantities and qualities, and for what purposes and at what costs.

At least in America and some other Western nations, Hayek’s warning was partly heeded. Neither the United States nor the rest of the Western world ever fully reversed the extent to which governments had grown in size and intrusiveness in the 1930s and 1940s. But they did step back and did not follow either Nazi Germany or the Soviet Union all the way down that road to serfdom under which individual freedom is completely crushed and each human being is reduced to a mere expendable cog in the wheel of state planning and power.

Unfortunately, over the decades since the Second World War Western governments have continued to incrementally encroach on people’s liberty through the expansion of the Interventionist-Welfare State. Taxes have increased, regulatory powers have expanded, and redistributive programs have grown so much that many in America and Europe truly believe that they have an “entitlement” to other people’s income and wealth.

Economic Crisis and Massively Growing Government

But it is under the cover of the current economic crisis, that this growth in government power and control is accelerating at a gravely dangerous pace. If this trend is not halted, we once again seem headed down that road to serfdom about which Hayek warned more than six decades ago.

Starting in 2008, Big Brother in Washington has been poured hundreds of billions of dollars into various sectors of the U.S. economy. With these dollars have come more and more government control and influence over the private enterprise system.

In the autumn of last year, the Bush Administration decided to spend nearly $700 billion in the American financial sector to prop up banks and other lending institutions facing either insolvency or in some cases bankruptcy, under the argument these corporations were “too big to fail.” In exchange for these vast sums of bailout money, the U. S. Treasury took partial stock ownership over many of the leading banks and financial institutions in the United States.

Now, under the guise of being the steward of the taxpayers’ money, the Obama Administration has appointed a “pay czar” who has been imposing wage controls on the salaries to be received by senior executives employed in these financial institutions.

In addition, the regulatory reach of the Federal government and the Federal Reserve System is being extended to more closely oversee and determine the types of risk management and lending strategies banks and investment houses may be allowed to follow in the years ahead. The capital markets of America are threatened with even far more politicization of investment decision-making than has been the case in the past.

More than $80 billion of taxpayers’ money has been spent in an attempt to prop up the declining American automobile industry. In the process, ownership over General Motors has been turned over to the United Auto Workers Union, with Uncle Sam as a powerful voice in the background influencing the future technology and production direction of the American auto manufacturing. After three Washington bailouts, now, since the 1970s Chrysler has been merged with Fiat, with the government still serving as a backseat driver.

The $820 billion cap-and-trade bill wanted by the Obama administration would basically nationalize the entire atmosphere over the United States, with the government selling and assigning permits dictating the amount of emissions that may be associated with every type of manufacturing in the U.S. With this power, those in political authority in Washington can determine not only the technologies with which every private enterprise in America can undertake any form of production, but will be able to decide who will be allowed to stay in business, as well as what they produce and for what purpose.

It will represent a crushing stranglehold over all of the county’s industry that will also be extremely expensive for the buying public. It has been estimated that within a decade or so, the higher costs of manufacturing due to cap-and-trade will raise by at least $3,000 a year the consumption expenditures of the average American household.

And to top all of this off, the Congress is now in the process of very well passing what will amount to the virtual nationalization of the entire health care industry in America. The government will dictate even more comprehensively than it already does the medical fees and treatments that will be available to every single American citizen. The price tag for having this dubious government bedside manner is estimated to be around $1 trillion and rising over the next decade.

There will be government rationing of a widening circle of medical services and facilities. There will be increasing government regulatory controls over the availability of pharmaceuticals for various diagnosed diseases. There will be political determination of who lives and who dies based on government actuarial judgments concerning the elderly, the young, and the chronically ill. It will not be patients and their doctors who will have the greatest influence and control over this most personal and intimate matter. Rather, it will be pressure group politics and expected voting patterns in upcoming election days that will determine what a particular life is worth in terms of government dollars allocated out of the Federal budget.

Human Diversity or Government-Imposed Uniformity

The essence of a free enterprise society is that each individual has the personal liberty to determine his own goals, weigh the costs of achieving the various ends he values, and make the personal trade offs that he considers worthwhile, given what he would like to do so his life has meaning and fulfillment.

But as Hayek also warned many years ago, as the government takes over control of more and more aspects of our life the more we are confined within and made to conform to the hierarchy of values and goals that the political authorities are determined to impose on each and every one of us. By taxing way our income and wealth, and by dictating what may be produced and to whom it will be supplied, the government reduces the members of society to a homogeneous mass made to fit the mold that the political elite thinks is best for us.

Gone is the diversity and pluralism of human difference that is usually considered one of the hallmarks and benefits of the open and free society. We all become interchangeable parts of an economic plan designed by others to reflect their conception of “fairness” and “social justice.” The death of individual liberty is the end point of our new road to serfdom under which we are reduced to subservient and obedient subjects of our political masters.

The Rationality of the Market vs. Government Chaos

There is another equally dangerous dimension to this growth in government and the resulting destruction of economic liberty and the free market: the loss of any rationality to the working of the country’s entire economic system. As Hayek and his fellow Austrian economist, Ludwig von Mises, cogently argued, without a competitive pricing system based on the free play of supply and demand, there is no way of knowing whether the scarce resource of the society are being utilized in the most economically efficient manner.

Market-based prices serve as the information steering mechanism to determine how resources, labor, and capital should be allocated among all the alternative and competing uses for which they may be applied to manufacture desired goods and services.

President Obama’s “pay czar” has dictated the maximum cash salaries that may be paid to senior executives in the part of the financial sector in which the government has a stake. This means that the use of executive talent will be irrationally employed in this part of the economy. Unless people may freely convey on the market what they think someone’s abilities and talents are worth as expressed in the wage they are willing to pay that person to perform a valuable service, the right people will not be performing the right job in the right place. There will be mismatches between work to be done and the best person assigned in the market to get it accomplished.

Now extrapolate that to the entire economy and the use all types of labor, land, resources, and capital equipment. The government will then be mandating, manipulating and distorting the pricing system though controls, regulations, and artificial subsidies for more and more of all the things people want in society, whether it be health care, automobiles, a functioning financial sector, or all types of manufactured goods.

The end result is a dysfunctional economy with growing waste, inefficiency, and imbalances between supplies and demands for various the goods and services desired by all of us as income earners and consumers. The profit motive is undermined, the incentive for innovation is weakened, and improvements in material prosperity are slowed down and in the extreme finally may grind to a halt.

Prices have work to do. When government commands and controls replace the free price system generated by peaceful market competition, people not only find themselves reduced to a new form of serfdom but discover they are living in a world that Ludwig von Mises once called politically created “planned chaos.”

This is a very high price to pay for the false promises of political paternalism and the illusionary security of the welfare state. Liberty and prosperity are too precious to trade away even during the emotional times of economic crisis and uncertainty.

Our task must be to reason with our fellow Americans before we have traveled so far down that new road to serfdom that it becomes almost impossible to turn back.

Tuesday, November 24, 2009

"On the Radio" -- The Importance of Economic Freedom and the Dangers from Government Control by Richard M. Ebeling

The current economic crisis has resulted in a radical and dangerous turn back in the direction of greater government control, regulation, and command. The drift away from individual liberty, private property, free enterprise, and limited government is intensifying.

The collectivist turn is impacting not only the United States but many other parts of the world. In the middle of November I was invited to deliver some talks in the Bahamas under the sponsorship of the Nassau Institute.

My themes were how government monetary and regulatory policies caused the artificial financial, housing, and the consumer debt bubbles that have now burst; why government policies in the U.S. and other countries are not only retarding real economic recovery but worsening the economic problems; and what would be appropriate market-based policies for sustainable growth and employment in the years ahead.

While in Nassau I appeared on one of the most popular and widely listened to radio talks shows in the Bahamas, the Jeff Lloyd Show. In a wide ranging interview, I discussed the nature of individual liberty, the role and importance of the market economy, the dangers from bigger government; the fallacies and illusions in government interventionist policies and "stimulus" spending; and why the only answer to our economic problems is allowing free men to interact in the open, competitive arena of free market capitalism.

The link to listen to the interview is:

And about half way through the show, I even sing a few bars. Hey, there have been "singing cowboys" like Roy Rogers and Gene Autry. Why not a "singing economist"?

Monday, November 23, 2009

The True Meaning of Thanksgiving: The Birth of Private Enterprise in America by Richard M. Ebeling

This time of the year, whether in good economic times or bad, is when Americans gather with their families and friends and enjoy a Thanksgiving meal together. It marks a remembrance of those early Pilgrim Fathers who crossed the uncharted ocean from Europe to make a new start in Plymouth, Massachusetts. What is less appreciated is that Thanksgiving also is a celebration of the birth of free enterprise in America.

The English Puritans, who left Great Britain and sailed across the Atlantic on the Mayflower in 1620, were not only escaping from religious persecution in their homeland. They also wanted to turn their back on what they viewed as the materialistic and greedy corruption of the Old World.

In the New World, they wanted to erect a New Jerusalem that would not only be religiously devout, but be built on a new foundation of communal sharing and social altruism. Their goal was the communism of Plato’s Republic, in which all would work and share in common, knowing neither private property nor self-interested acquisitiveness.

What resulted is recorded in the diary of Governor William Bradford, the head of the colony. The colonists collectively cleared and worked land, but they brought forth neither the bountiful harvest they hoped for, nor did it create a spirit of shared and cheerful brotherhood.

The less industrious members of the colony came late to their work in the fields, and were slow and easy in their labors. Knowing that they and their families were to receive an equal share of whatever the group produced, they saw little reason to be more diligent in their efforts. The harder working among the colonists became resentful that their efforts would be redistributed to the more malingering members of the colony. Soon they, too, were coming late to work and were less energetic in the fields.

As Governor Bradford explained in his old English (though with the spelling modernized):

"For the young men that were able and fit for labor and service did repine that they should spend their time and strength to work for other men’s wives and children, without recompense. The strong, or men of parts, had no more division of food, clothes, etc. then he that was weak and not able to do a quarter the other could; this was thought injustice. The aged and graver men to be ranked and equalized in labor, and food, clothes, etc. with the meaner and younger sort, thought it some indignant and disrespect unto them. And for men’s wives to be commanded to do service for other men, as dressing their meat, washing their clothes, etc. they deemed it a kind of slavery, neither could husbands brook it."

Because of the disincentives and resentments that spread among the population, crops were sparse and the rationed equal shares from the collective harvest were not enough to ward off starvation and death. Two years of communism in practice had left alive only a fraction of the original number of the Plymouth colonists.

Realizing that another season like those that had just passed would mean the extinction of the entire community, the elders of the colony decided to try something radically different: the introduction of private property rights and the right of the individual families to keep the fruits of their own labor.

As Governor Bradford put it:

"And so assigned to every family a parcel of land, according to the proportion of their number for that end . . . This had a very good success; for it made all hands very industrious, so as much more corn was planted then otherwise would have been by any means the Governor or any other could use, and saved him a great deal of trouble, and gave far better content. The women now went willingly into the field, and took their little-ones with them to set corn, which before would a ledge weakness, and inability; whom to have compelled would have been thought great tyranny and oppression."

The Plymouth Colony experienced a great bounty of food. Private ownership meant that there was now a close link between work and reward. Industry became the order of the day as the men and women in each family went to the fields on their separate private farms. When the harvest time came, not only did many families produce enough for their own needs, but they had surpluses that they could freely exchange with their neighbors for mutual benefit and improvement.

In Governor Bradford’s words:

"By this time harvest was come, and instead of famine, now God gave them plenty, and the face of things was changed, to the rejoicing of the hearts of many, for which they blessed God. And the effect of their planting was well seen, for all had, one way or other, pretty well to bring the year about, and some of the abler sort and more industrious had to spare, and sell to others, so as any general want or famine hath not been amongst them since to this day."

Hard experience had taught the Plymouth colonists the fallacy and error in the ideas that since the time of the ancient Greeks had promised paradise through collectivism rather than individualism. As Governor Bradford expressed it:

"The experience that was had in this common course and condition, tried sundry years, and that amongst the Godly and sober men, may well convince of the vanity and conceit of Plato’s and other ancients; -- that the taking away of property, and bringing into a common wealth, would make them happy and flourishing; as if they were wiser than God. For this community (so far as it was) was found to breed confusion and discontent, and retard much employment that would have been to their benefit and comfort."

Was this realization that communism was incompatible with human nature and the prosperity of humanity to be despaired or be a cause for guilt? Not in Governor Bradford’s eyes. It was simply a matter of accepting that altruism and collectivism were inconsistent with the nature of man, and that human institutions should reflect the reality of man’s nature if he is to prosper. Said Governor Bradford:

"Let none object this is man’s corruption, and nothing to the curse itself. I answer, seeing all men have this corruption in them, God in his wisdom saw another course fitter for them."

The desire to “spread the wealth” and for government to plan and regulate people’s lives is as old as the utopian fantasy in Plato’s Republic. The Pilgrim Fathers tried and soon realized its bankruptcy and failure as a way for men to live together in society.

They, instead, accepted man as he is: hardworking, productive, and innovative when allowed the liberty to follow his own interests in improving his own circumstances and that of his family. And even more, out of his industry result the quantities of useful goods that enable men to trade to their mutual benefit.

In the wilderness of the New World, the Plymouth Pilgrims had progressed from the false dream of communism to the sound realism of capitalism. At a time of economic uncertainty, it is worthwhile recalling this beginning of the American experiment and experience with freedom.

This is the lesson of the First Thanksgiving. This year, when we, Americans sit around our dining table with family and friends, we should also remember that what we are really celebrating is the birth of free men and free enterprise in that New World of America.

The true meaning of Thanksgiving, in other words, is the triumph of Capitalism over the failure of Collectivism in all its forms.

Thursday, November 19, 2009

Should College Students Use Food Stamps?

I recently asked my economics class whether they thought college students should use food stamps. For many of them, this is not just a hypothetical question. An informal survey revealed that approximately 1 in 5 students were currently using them. Many others appeared to be eligible, but had not signed up for the program for one reason or another. Some were simply unaware of their eligibility, and at least one student was discouraged by the 20 page application. But many of them reported that choice was based on their personal values. This led to a lively discussion in which students expressed a wide variety of opinions. Most arguments expressed by the students could be classified as on of the following 4 types:

1. The need argument: College is expensive, and low income students need all the help they can get.

2. The opportunist argument: It is irrational to turn down free money.

3. The individual responsibility argument: Students can and should provide for their own needs.

4. The net donor argument: Since college students expect to have higher than average lifetime earnings, they expect to pay more in taxes over their lifetime than they receive in benefits. Therefore, they should take advantage of every government program for which they are eligible.

The need argument is not persuasive. Students are not “needy” in any real sense; they just have a cash flow problem. According the U.S. Census bureau data from 2004, the average college graduate makes $51, 206 per year, compared to the $27,915 reported for those with high school diplomas. Food stamps provide about $2000 per year in benefits. If credit markets are functioning properly, students could borrow against future earnings to cover this shortfall. If borrowing constraints are unreasonably tight, then the the appropriate policy response would appear to make credit more available, not more food stamps. In fact, government does intervene extensively in the student loan market, and as a result, student access to credit has remained high in spite of the recent financial crisis. Note, I am not endorsing current policy, just pointing out that the wide availability of credit weakens the “need” argument.

The opportunist argument is more difficult to refute, but it is it is surprisingly unpopular with students. Most of them have ethical beliefs which cause them to distinguish between different types of opportunities. Finding a $20 bill on the sidewalk is considered good luck and most people will gladly keep it. Finding and keeping a wallet with a $20 bill and an identification card inside is a different story.

For the most part, students who favor the individual responsibility argument felt that dealing with the financial challenges using their own resources was honorable and contributed to their personal development. Students felt that it would be possible for them to cover a $2000 shortfall by taking steps appropriate to their circumstances. The opportunities vary from student to student, but these were some of the commonly cited strategies: cutting back on unnecessary spending, asking family for more assistance, working more hours, taking advanced placement tests during high school, or borrowing. Many also objected to “reverse Robin Hood” effect of the redistributing wealth to college students who have expected lifetime earnings that are higher than average.

Students who support the net donor argument counter that the food stamp decision should not be viewed in isolation, but in the larger context of the welfare state. They believe the rules of the welfare state are biased against those with high lifetime incomes. Many also cited their lack of confidence in the future of social security, and felt that the current system was rigged against their generation. They ask how one can be expected to borrow against future income, when government will confiscate a significant portion of it? In a sense, they are treating the welfare state as a substitute for private credit markets. However, unlike private credit markets, they expect to withdrawl significantly less than they deposit.

I was left with two distinct impressions after this particular discussion. First, regardless of their choice, students felt strongly that it had to conform to clear ethical standard of behavior. Financial considerations were of secondary importance. Secondly, in spite of their different conclusions, they seemed to agree on a particular ethical standard- no one should take more than they give.

So if they agreed that ethics were important, and if they agreed on a particular standard, how can we account for their different conclusions? Their conclusions depended strongly on how they viewed themselves and their position in society. Those that considered themselves an anonymous component of an impersonal system over which they had no personal control supported the net donor argument. Those that focused more on their individual circumstances and their ability to influence them by their own actions were more likely to support the individual responsibility argument.

It doesn’t take much imagination to foresee the future of a society in which one of these two perspectives becomes the dominant view.

-posted by Dale Matcheck

Monday, November 16, 2009

The Menace and Immorality of the Welfare State by Richard M. Ebeling

In the United States policies are being promulgated by those with political power in Washington, D. C. that will involve a massive and dangerous growth in the size and scope of government. At the core of the Obama administration’s push for implementing a comprehensive national health care system and related programs is a radical ideological belief in political paternalism and the welfare state.

In the face of the euphoria of those demanding such a huge expansion of “Big Brother” over even more of our lives, it is worthwhile reminding ourselves of the premises behind and the realities of welfare statism.

Power and Paternalism
First and foremost, the guiding idea behind political paternalism is that the individual cannot be trusted to be a free and responsible human being. Those who wish to socially engineer our lives consider us too ignorant, too irresponsible, and too narrow in our own personal planning horizons to intelligently and reasonably take care of our own health care, our own retirement, our own family’s education, or our own spending and consumption choices.

These political paternalists who are proposing to enlarge the agenda of the welfare state implicitly consider themselves superior to the rest of us. With arrogance and immeasurable hubris, they presume to know what is good for us, better than we know ourselves. They are nothing less than would-be tyrants and despots determined to make the world over in their own ideological image – and, of course, all for our own good, whether we want it or not.

In addition, they are willing to use force against their fellow human beings to attain their paternalistic ends. That is, they believe that it is morally right for the state to use its coercive powers to take the income and wealth of some to give to others.

If an innocent citizen were to resist having his income and wealth redistributed, the paternalists clearly believe that the state has the right to even kill him (since the police agents of the state have the legitimized authority to use lethal force against those who resist its power) so someone else can have his or her food stamps, or public housing apartment, or the government pay their visit to the doctor’s office.

If this seems like an "extreme” or an exaggerated statement, see how the government will react if on the day your income taxes are due you inform the tax authority that you are sending in a tax payment to pay your contribution for police, courts and national defense, but you’re withholding any amount that would fund a national health care plan because you consider it unnecessary and immoral. You soon may be facing jail time or physical harm if you resist their confiscatory seizure of your property for unpaid taxes.

Political Plunder
Second, a number of economists, such as Nobel Laureate, James Buchanan, have taught us that the actual politics of government intervention and redistribution has little to do with high-minded notions concerning some hypothetical "public good" or "general interest." The reality of democratic politics is that politicians want campaign contributions and votes to be elected and reelected, and they offer in exchange other people's money. Those who supply those campaign contributions and votes want the money of those others, which they are not able to honestly earn through the free play of open competition in the market place.

The bias in the democratic process toward political plunder is due to what is called a “concentration of benefits and a diffusion of burdens” that results from various government interventions. Suppose that in a country of 30 million people, the government taxes each citizen $1, and then redistributes that $30 million among a special interest group of 30 individuals. Each taxpayer will have one extra dollar taken away from them by the government for the year, while each of the 30 recipients of this wealth transfer will gain an extra $1 million.

The 30 recipients will collectively have a strong incentive to lobby, influence and even corruptly “buy” the votes of the politicians able to pass this redistributive legislation. Each individual taxpayer, on the other hand, will have little incentive to spend the time and effort to counter-lobby, influence, and petition members of the legislature merely to save $1 off his or her annual tax bill.

Thus, modern democracy has degenerated into a system of political plunder and special privilege at the expense of consumers, taxpayers, and competing producers in society.

The Mirage of Social Justice
Third, as another Nobel Prize-winning economist, Friedrich A. Hayek, persuasively argued, even if we assumed that the political paternalists has the most benevolent motives in mind, there is no real meaning to ideas such as "social justice" or politically enforced “fairness.” They are all "mirages," Hayek warned. The market does not reward some hypothetical notion of "merit" or "goodness." The market rewards "service," i.e., did an individual succeed in offering to others some specialized product in the market system of division of labor that was valued by those others who were willing to pay a particular price for it?

There is, in fact, no objective measure of an individual's "real merit" or "worth" or "need," and therefore there is no impartial and unbiased way the state can bestow on each member of society some fraction of national income that reflects their "socially just" and deserved amount.

Hence, it is far better to leave such issues to the private-sector charity of individuals and voluntary associations, who in spending their own money will do so based on their own evaluation of who may or may not deserve charitable support guided by their own personal standards of benevolence.

Plus, private charity, precisely because it relies on voluntary contributions, is far more efficient in their tasks than the coercive monopoly welfare state. Why? Because private charities must demonstrate to their voluntary supporters that their dollars have been spent effectively; otherwise, their support diminishes over time in competition with other charities and other uses the donors have for their own money.

Moral Hazard
Fourth, the welfare state produces over time perverse incentives and behavior among the members of society. Economists call this "moral hazard." If the costs and consequences of someone's mistakes and bad judgment are paid for and subsidized by others, then the person making those mistakes or acts of bad judgment has no incentive to learn from his mistakes and act more carefully and wisely in the future. Thus, you create an incentive for such individuals to do the same thoughtless or reckless actions again in the future. Plus, you signal to others in society that they, too, can act in the same irresponsible ways, and have someone else – the taxpayer – pick up the tab for their mistakes in the future, as well.

Because of earlier government bailouts, the “too big to fail” financial institutions on Wall Street believed they could act recklessly with their depositors’ and investors’ money, because they were confident (and have been right for the most part) that government would bail them out, also, if their “creative” investment strategies were to turn into big losses.

If individuals expect the government to plan for their old age, provide their healthcare needs, oversee the education of their children, guarantee them a job, monitor what they eat, drink, watch and read, as well as cover their losses from bad decisions, then why or how shall those individuals ever learn or be motivated to be more self-responsible in these and related affairs of everyday life? This does not make for a healthy and productive society in the longer run.

Government Deficits and Growing Debt
Fifth, an expanding welfare state generates growing financial demands on the regulatory and redistributive powers of the state. With no "fiscal constitution" imposing a balanced budget or other limits on the expenditures of the government, modern democratic society has plunged further and further into deficit spending and mounting government debt. We are right now witnessing that government debt grow by the trillions of dollars.

Government debt is a lean on citizens' income in the future, since the principle and interest is supposed to be paid off at some point as the government's IOUs come due. Thus today’s deficits mean higher taxes or even more government borrowing tomorrow to at least pay the growing interest on that accumulated debt.

But we also need to remember that we pay for that deficit spending not only tomorrow when the borrowed sums and interest payments are supposed to paid. We pay for it in the present, as well. Every dollar borrowed today by the government siphons off a dollar that, otherwise, would have been available for private sector investment and use. The society's resources are finite at any moment in time. Those scarce resources are used either by individuals in the private sector or by those running the government. They cannot be used by both of these potential users at the same time.

Thus, every dollar borrowed by the government today (and the real resources that dollar's purchasing power represents in the market place) is a dollar not being used for, say, capital formation, technological innovation, or improvements in private sector job skills so workers may earn higher wages in the future.

Instead, that dollar (and the real resources it represents) is used by government for current consumption: government employee salaries, welfare payments, or the fuel to fly the president's "Air Force One.”

As a result, we are that much poorer as a society due to those resources being used for current consumption rather than future-oriented capital formation for higher and better standards of living tomorrow.

The New Road to Serfdom
All of these factors, and others that could be listed, show the menace and the immorality of the welfare state. The welfare state has been and will continue to lead us down a dangerous new “road to serfdom” in which our lives are more and more controlled, managed and manipulated by those in political power who claim the right to dictate how we are to live and work.

It encapsulates an evil immorality in which political force continues to claim the authority to deny us our individual rights to life, liberty, and honest acquired property. The interventionist-welfare state has been creating a new feudalism with political and special interest elites who serve as the “lords” who rule over and ruin the rest of us, the modern serfs who are expected to toil for their benefit under strangling regulations, burdensome taxes, and most likely worsening inflation as the years go by.

All of us who prefer to be free men in a free society with a free market need to do all in our intellectual power to stop and reverse this reactionary counter-revolution against the ideal of human liberty. Otherwise, our civilization may be heading for a terrible collapse that will leave nothing but tyranny and poverty for generations to come.

Tuesday, November 10, 2009

Quick Fixes and Economic Fallacies by Richard M. Ebeling

The famous English economist Alfred Marshall is reported to have once remarked that:

"Students of social science must fear popular approval; evil is with them when all men speak well of them. If there is any set of opinions by the advocacy of which a newspaper can increase its sales, then the student . . . is bound to dwell on the limitations and defects and errors, if any, in that set of opinions; and never to advocate them unconditionally even in an ad hoc discussion. It is almost impossible for a student to be a true patriot and have the reputation of being one at the same time."

Alfred Marshall's warning never needs to be heeded so much as during bad economic times. In times of rising unemployment, unprofitable enterprises, declining sales and idle factories, public debate is soon crowded with a plethora of panaceas — all promising quick solutions and painless remedies for society's economic ills.

Economists who favor governmental intervention in economic activity appear on television talk-shows and on the opinion-editorial pages of the nation's newspapers to offer their insights on why "the free market" has failed once again — and why only wise governmental supervision and manipulation can end the bad times. The politicians of both political parties pontificate and pronounce on how the policies of the other party have caused all the problems and how only they and their own party can save the country from collapse and decay. And the network evening news, night after night, airs the same human-interest story of the unemployed autoworker and his seven children (at least one of whom invariably has some incurable disease), with the inevitable message that he and his family can be saved only by some new or expanded government program.

After a while, the panaceas take on the quality of established wisdom that only the uninformed or the stonehearted can possibly reject. Yet, rejected they should be, because rather than offering solutions to our economic ills, most of them lead down roads to even bigger economic folly. It is worthwhile, then, to take Professor Marshall's advice — run against the tide and challenge the panaceas.

Government-Business Partnerships. Government partnerships with business inevitably run the risk of degenerating into governmental control of business. Increasingly dependent upon government for aid and assistance, private industry finds itself in the position of having to go along with what its governmental partner "suggests." Economic decision-making becomes politicized — that is, investment decisions, employment opportunities and pricing decisions become less market-oriented and increasingly determined by what is believed to be acceptable to the government, thereby assuring the continued flow of governmental benefits.

Furthermore, the presumption behind the notion of government-business partnerships is that government possesses the ability and the wisdom to pick "winners" and shun "losers." In this presumption can be found all the fallacies of central planning. The superiority of a free economy over socialism is precisely that only decentralized, private competition offers a way of discovering which producers in the market have the ability to make the better and less expensive products to satisfy consumer wants.

The government’s recent interventions in both the auto industry and the financial markets are the latest examples of the failure of Washington’s “helping hands.” The political paternalists have declared that they know what types of automobiles we should drive, and with what features and design -- whether or not we, the buying public, want such “politically correct” and ideologically fashionable means of transportation.

Our social engineers also claim to know what pay should be received by top executives in the financial institutions in which the federal government has obtained shares. They have little understanding and no regard for the fact that there is no way to know what anyone is worth in any particular job other than what the market views as his value in serving the consumers. Instead, the ideology of envy and a political pandering to emotion-based vote getting is dictating what an executive may earn for services rendered.

Fair Trade vs Free Trade. In this world of unfree trade, it is said that the United States cannot afford to follow a unilateral free-trade policy. Government must see to it that our trading partners follow a policy of fair trade, and this often may require the United States government to impose higher tariffs and import restrictions, and to offer various export subsidies to American producers. This, it is claimed, “punishes” the offending foreign government and somehow “levels” the global market playing field.

Whenever domestic producers feel the stiff and successful competition of some foreign rival, they invariably see in it the workings of dark forces. But the fact remains that regardless of whether a foreign producer is offering a better and cheaper product because of competitive efficiency or because of governmental support, that foreign producer's product is offered to the American consumer at a lower price than the domestic seller is willing to offer it. And to prevent American consumers from buying at the most attractive price is to infringe upon their liberty to trade with whom they want.

Nor does a fair-trade policy protect or add to the number of jobs in the American economy. For every job saved in the protected industry, other job opportunities are lost or fail to come into existence. Limiting imports means that the foreign producer earns fewer dollars than otherwise would have been the case. And with fewer dollar-earnings, the foreigners will buy fewer American exports, with a resulting loss of jobs in the exporting sectors of the economy.

At the same time, because American consumers must pay the higher prices charged by American producers, the standard of living of Americans in general is lower than it could have been. This also means that the dollars that could have been saved if the less expensive foreign product had been bought are not available to American consumers to buy more of other products; as a consequence, jobs that would have come into existence to meet the demand for these other products never have a chance to materialize.

The U.S. government's decision to impose import restrictions on various goods from a country like China seriously runs the risk of retaliation that would further reduce the field of gains from trade for both Americans and Chinese. Such restrictons also threaten to justify trade wars that would undermine the rising standards of living that have been made possible for tems of millions of people around the world from the benefits resulting from international trade, commerce, and investment.

Lower Interest Rates and Easy Money for Economic Recovery. The political authorities and the monetary central planners in Washington, D.C. argue that job opportunities are restricted in the economy due supposed “tight credit” and high costs of borrowing by businesses for investment. The Federal Reserve, as the nation's central bank, must supply a greater amount of money to the banking system so that banks are stimulated to lower their interest charges and, thus, induce more borrowing and job creation. Since the current recession began in 2007-2008, the Federal Reserve has increased reserves in the banking system by nearly $2 trillion to meet the “needs of business” as a time of economic “distress.”

The fundamental fallacy in this argument is that it confuses money with savings. When individuals choose to save part of their income, they free resources (that otherwise would have been used to make consumer goods) for the production of capital goods, i.e., plant equipment and machinery. And it is through investment in the production of more and better capital goods that the society creates the ability to make more and better consumer goods over time. Savings — and the wise investment of that savings by private businesses — is what is the source of a rising standard of living and real job opportunities in the long run.

Money is the medium of exchange — it is the means through which individuals are more able to more easily and efficiently exchange with one another, including transferring savings from lenders to borrowers. Creating more money does not create more capital goods. Creating more money merely means that people have more pieces of paper with which to bid against each other in the attempt to acquire control over resources and commodities in the market. In other words, the ultimate result of a monetary expansion, in an attempt to stimulate industry and jobs, is a rise in prices in general in the economy, i.e., price inflation.

But in the intermediary stage between the time the supply of money is increased and prices in general in the economy have also increased, there often appears the illusion of economic prosperity and productive investment. But it is a transitory prosperity and an unstable investment climate. The prosperity lasts only as long as the inflationary process keeps selling-prices rising sooner and faster than cost-prices. Artificial profit margins are the source of the appearance of prosperity, but inevitably cost increases catch up with rising sales prices, and the boom ends.

Furthermore, the lower rates of interest resulting from the monetary expansion made available for lending purposes in the banking system, induce a large number of additional investment projects to be undertaken that turn out to be unsustainable in the long run. Investment requires savings, i.e., the availability of resources for the construction and maintenance over time of new and improved capital goods and enterprises. But some of these investment projects will have been started purely on the basis of the illusion of greater savings created by the availability of more money for lending purposes. When the inflation finally ends or slows down, these investments will be found to lack the necessary savings base to sustain them. Hence, the investment boom produced by the monetary expansion has within it the seeds of a future investment recession.

All the current concerns and fears of dangerous deflationary tendencies are misplaced. Once the types of investment, housing, and consumer credit booms that we have experienced finally burst, there is no way to avoid significant “downsizing” in those parts of the economy in which there was excessive, misdirected capital, labor and resources.

Without these necessary readjustments the economy cannot return to stable growth and sustainable full employment in the long run. Inevitably, prices, wages and asset values that had been artificially pushed up in the bubble years have to back down to earth to reflect the market’s real supply and demand conditions. Trying to prevent these “deflationary” price, wage and asset value adjustments only succeeds in delaying the correction process.

Illusionary “stimulus” programs and massive reflationary monetary expansion, like the Federal Reserve’s policy since the summer of 2008, merely threaten to add more mistakes and misallocations of labor and capital that ends up intensifying the severity of the economic crisis and prolonging the inescapable real adjustments across the market.

Unfortunately, the apparent simplicity of political quick fixes, and the emotional appeal to find easy ways out of the problems through governmental intervention, suggest that the quack medicines and phony elixirs that too often pass as insightful economic policy will continue be applied. And equally unfortunate, less freedom and worse economic conditions likely will be the inevitable result.

Thursday, November 5, 2009

Predatory Pricing - Real and Imagined

The irony of our antitrust laws is that remedies used to promote competition almost always have the opposite effect. When successful competitors increase market share by offering consumers a better deal, they’re often subject to legal complaints from their less successful rivals. Unfortunately, just as a race handicapping system requires the fastest horses to carry extra weight in order to give the other horses a fair chance, the legal “remedy” normally raises the costs and prices of the most efficient firm.
Mark Perry has posted an an excellent column describing the latest example involving retail book sales. It seems that everybody’s favorite corporate villain, Wal-Mart, as well as rivals and Target, have been pricing many books by popular authors below cost. This has caused smaller retailers to allege that they are engaged in that old anti-competitive ploy used by unscrupulous corporations: predatory pricing. Predatory pricing is based on the hope that the monopolist will be able to recoup its losses by raising prices later on. Both logical and historical evidence suggests that this is nonsense. Actual attempts at predatory pricing are rare, and successful attempts are rarer still. However, there is a significant exception - government services that are priced significantly below the cost of provision.
As economist John Lott has written, our method of providing public education must be counted as one of the most successful predatory pricing schemes of all time. It doesn’t matter how efficient private schools are, they can never compete on equal terms when their rival is offering a zero price and will continue to do so in perpetuity! This artificial disadvantage has caused the demise of many worthwhile private schools and deters new entry from educational entrepreneurs.
At first, this may not appear to fit the model of predatory price cutting. After all, what self-respecting monopolist would maintain their low prices once they’ve driven their rivals from the market? But in fact, free from the threat of competition, the costs of public schools inevitably rise. For example, in the Washington D.C. school district, the cost per student has been estimated to be $25,000 per child. As taxpayers, consumers are responsible for covering these higher costs one way or another. By contrast, the voucher program used to enable Washington D.C. cost only $6000 per student. In spite of evidence that the program was effective, and in spite of the massive increase in spending undertaken as part of the stimulus package, the Senate decided not to renew the program. This is only the latest in a sad series of recent cases where teachers unions have successfully used their political clout to prevent competition. The result has been persistently higher costs and limited choice for consumers. Now that’s the kind of market power that Wal-Mart can only dream of! Where’s the Dept. of Justice when you really need it?

- posted by Dale Matcheck

Wednesday, November 4, 2009

The Fall of the Berlin Wall and the Tyranny of the State by Richard M. Ebeling

This November marks the 20th anniversary of the fall of the Berlin Wall. On November 9, 1989, as the shaky East German communist government resigned, the Berlin Wall came tumbling down. Large crowds formed on both sides of the Wall. East and West Berliners climbed on top, and then people began using sledgehammers and pickaxes to cut holes in it. People started to move back and forth through the Wall, capturing the spirit of a freedom to move without political barriers standing in the way.

It is worth recalling how and why the Berlin Wall was constructed in the first place, and what it meant in the great struggle between freedom and tyranny in the stream of 20th century political events.

On August 10, 1961, Nikita S. Khrushchev, the premier of the Soviet Union, attended a birthday party in Moscow for Sergei S. Verentsov, the Soviet marshal in charge of the missile program of the Union of Soviet Socialist Republics. Khrushchev informed the celebrating assembly of leading Soviet military and political dignitaries that something momentous was about to occur.

“We are going to close Berlin,” Khrushchev announced. “We’ll just put up serpentine barbed wire and the West will stand there like dumb sheep. And while they’re standing there, we’ll finish a wall.” The crowd broke into an enthusiastic applause.

The city of Berlin had been divided into four Allied occupation zones at the end of the Second World War in Europe. The eastern half of the city was the Soviet zone. The western half was divided into American, British, and French zones, surrounded by the Soviet zone of occupation in eastern Germany. The closest British or American zone of occupation in western Germany was 110 miles to the west. The Soviets had established a “people’s republic” in their zone — the German Democratic Republic, with East Berlin as its capital.

Between the late 1940s and 1961, more than 4 million East Germans and East Berliners took advantage of the relative ease of crossing from the Soviet zone in Berlin to one of the Western zones to “vote with their feet” not to live in the “workers’ paradise” that Moscow had been generous enough to impose upon them. This mass exodus was a huge embarrassment to both the Soviet and the East German governments. It also represented a huge loss in skilled labor and in many of the professional occupations.

The Soviets had been almost completely successful in keeping the secret that West Berlin was to be sealed. On Saturday, August 12, 1961, 1,573 East Germans crossed the line separating East and West Berlin and registered as refugees desiring to live in the West. They were the last group to be allowed to freely depart. The Soviets stretched barbed wire across the Brandenburg Gate facing the Western zones in the center of the city. And at 2:30 on the morning of August 13, the border between East and West Berlin was closed.

“Successes” and “Failures” of the Wall
Two days later, on August 15, work began on the Berlin Wall; it was made of brick and concrete and took two years to complete. When finished it was 28 miles long and 9 feet high, with barbed wire at the top. East German guards armed with machine guns fired upon any who attempted to cross it. There was also a 200-yard area leading up to the Wall covered with land mines and patrolled by police dogs.

Yet, in spite of this, during the 28 years of the Wall’s existence, between 1961 and 1989, an estimated 5,000 people managed to escape either over, under, or through the Wall. Some escaped through the sewer system under the Wall. Others dug tunnels — the longest one was 500 feet long through which 57 people made their getaway to West Berlin in 1964.

One woman sewed Soviet military uniforms for three male friends, who drove through one of the Wall’s border checkpoints with her crammed under the front seat. An archer used an arrow to shoot a cable over the Wall from a building in East Berlin and slid along it to freedom.

Some constructed hot-air balloons and crude flying machines using bicycle motors to power their flight over the Wall. Others swam across canals or rivers that separated parts of East and West Berlin.

There also emerged a smuggling business that ran ads in West German newspapers. One such company, Aramco, with headquarters in Zurich, Switzerland, gave out press releases referring to their “most modern technical methods.” The company’s prices were not that unreasonable: $10,000 to $12,000 per person, with “quantity discounts” for families, payable into a numbered account in a Swiss bank. If an escape attempt failed, the company refunded most of the money to the person financially sponsoring the breakout.

The East German government issued “wanted” posters on the East Berlin side of Checkpoint Charlie, offering 500,000 German marks for the director of Aramco, Hans Ulrich Lenzlinger. The “wanted” posters negatively referred to him as a “trader in people.” In February 1979, someone collected the bounty on Lenzlinger’s head, after he was shot repeatedly in the chest and killed at his home in Zurich.

He was not the only victim of escape attempts. During those 28 years of the Wall’s existence, 80 people lost their lives trying to get to the western side of the Wall. And more than 100 others lost their lives trying to escape along other points of the highly fortified East German border.

One of the most inhuman border killings happened in August 1962. Peter Fechter, an 18-year-old bricklayer, was shot while attempting to climb over the Wall. For 50 minutes he begged for help as he slowly bled to death from his wounds in sight of soldiers and journalists watching from one of the western border checkpoints. Only after he died did the East German guards retrieve his body.

The Berlin Wall came to symbolize the Cold War and its division of the world into halves, one half still relatively free and the other half under the most brutal and comprehensive tyranny ever experienced by man in modern history. Nothing was supposed to cross the Iron Curtain of barbed- wire fences, land-mined farm fields, and machine-gun watchtowers that cut across central Europe from the Baltic to the Adriatic Sea, without the permission of the Soviet masters in Moscow.

The Wall vs. the Right to Move
What the Berlin Wall epitomized was the 20th century idea of the individual as the property of the state. Behind that Wall the East German government told the people where to live and work, what goods they could consume, and what enjoyments and entertainments they would be permitted. The state determined what they read and watched and said. And they could not leave the country — either for a visit or forever — unless it served the goals and interests of their political masters. And if anyone attempted to leave without permission, he could be shot and left to die, alone and helpless, with others forced to stand by as horrified observers.

In the 19th century, the great triumph of classical liberalism had been the abolition of the last of the ancient restrictions on the right of the individual to his life, liberty, and honestly acquired property. This had included the right of people to freely travel without undo government interference or control.

In earlier times not only the physical difficulties of transportation prevented men from widely moving from one region or continent to another. Matching these physical barriers were the legal barriers of taxes, tolls, passports, and serfdom, which bound the vast majority of people to the land owned by the privileged and titled political castes.

Classical liberals and classical economists of the early 19th century argued for the removal of such restraints on people’s freedom. The guiding principle was that a man has a property right in himself, that he owns himself. As the classical economist John R. McCulloch expressed it in the 1820s:

"Of all the species of property which a man can possess, the faculties of his mind and the powers of his body are the most particularly his own; and these he should be permitted to enjoy, that is, to use and exert, at his discretion . . . in any way, not injurious to others, [as] he considers most beneficial for himself."

A logical extension of the right of self-ownership over one’s mind and body and its use to further his personal and peaceful purposes was the right to move to where he believed he could best improve his circumstances. As the 19th century progressed the various restrictions on the freedom to move were removed. Passports were virtually eliminated throughout the major countries of Europe and North America, and legal barriers to both emigration and immigration were almost completely abolished in these same nations.

Tens of millions of people, on their own personal account and with private funding, left their places of birth in pursuit of better lives and fortunes in countries and on continents of their own choice. Free trade in people matched the increasingly free trade in goods and capital. About 60 million people took advantage of the greater freedom of movement between 1840 and 1914, when the First World War began.

Barriers to Freedom
But with the coming of World War I, governments reinstituted passport and other restrictions on the freedom of movement. And with the rise of the totalitarian ideologies in the years following the end of the First World War, the freedom to move was abolished. Communism, fascism, and Nazism all worked from the premise that the individual was subordinate to and lived and worked only for the advancement of the interests of the state. As an “object” owned by government, the individual stayed put or was forcibly removed to some other location under the brutal orders of the political authority.

Even outside the totalitarian systems of the 20th century, barriers to migration have been logical extensions of the emergence and growth of the interventionist-welfare state. When the government influences the direction of production, has responsibility for both the amount and types of employment in the society, and is the paternalistic administrator of a redistribution of wealth and income for retirement, health care, unemployment, housing, and education, it is inevitable that the same government will be concerned about and responsible for the amount, types, and demographics of any individuals or groups desiring to move into a country under that government’s jurisdiction.

The growth and development of the regulated economy, in other words, has provided the rationale for barriers to free migration. They stand as legal and political walls far higher that the Berlin Wall in preventing people from passing freely and unmolested from one part of the world to another. The passport that each and every one of us is forced to apply for and carry on our person whenever traveling outside the territorial jurisdiction of our own country, and which we must present upon our attempt to return to our own land, clearly shows that we are all in fact subjects under — not citizens above — the political authorities controlling our lives.

The conservative, German free market economist, Wilhelm Roepke, once pointed out that,

“Modern nationalism and collectivism have, by the restriction of migration, perhaps come nearest to the ‘servile state.’. . . Man can hardly be reduced more to a mere wheel in the clockwork of the national collectivist state than being deprived of the freedom to move. . . . Feeling that he belongs now to his nation, body and soul, we will be more easily subdued to the obedient state serf which nationalist and collectivist governments demand.”

It has become a cliché that the world, every day, becomes a little smaller. Methods of global transportation improve the quality of travel and reduce the time between any two distances around the world. Computer technology — the Internet and email — have made virtually everything written, said, or photographed a simple and almost instantaneous mouse click away. The expanding worldwide network of business, trade, and capital markets is increasingly making the globe a single market for commerce and culture.

On this 20th anniversary of the fall of the Berlin Wall, we should remember all that it represented as a symbol of tyranny under which the individual was marked with the label: property of the state. He not only was controlled in everything he did and publically said, but his every movement was watched, commanded or restricted.

Freedom in all its forms – to speak, write, associate, and worship as we want; to pursue any occupation, profession, or private enterprise that inclination and opportunity suggests to us; and to visit, live, and work were our dreams and desires lead us to look for a better life – are precious things.

The history of the Berlin Wall and the collectivist ideology behind it should remind us of how important a loss any of our freedom can be as we determine in what direction – toward greater individual freedom and private enterprise or more government command and control – we wish our country to move in the 21st century.

(A slightly different version of this essay appeared in Freedom Daily [November 2001], published by the Future of Freedom Foundation, Fairfax, Virginia.)