The Pretense of Intuition

Tyler Cown

By Peter G. Klein

Joe's excellent critique of "state capacity libertarianism" picks up on something I also noticed when reading Tyler Cowen's piece. As Joe puts it, Cowen's ideal state is "a nonmarginal actor whose task is to achieve certain collective outcomes intuited by Cowen or some other political philosopher." Cowen provides a laundry list of societal challenges he claims only a highly capable state can solve—traffic congestion, secondary education, climate change, etc.—without discussing any in detail. Of course, each issue has been analyzed many times in the libertarian literature, using the standard concepts, theories, and frameworks such as marginal analysis, demonstrated preference, opportunity costs, Austrian price theory, comparative institutional analysis, and so on, and no evidence for "market failure" has surfaced. But Cowen's intuition tells him markets aren't good enough in one area or another. 

This is actually Cowen's long-held view. You may remember his 2014 article "The Lack of  Major Wars May Be Hurting Economic Growth," which echoed the Mariana Mazzucato position that government spending is the main source of technological progress. I remember a friendly argument with Cowen some twenty years ago about NASA, which he insisted was an example of benevolent government intervention. I brought up the standard counterarguments—theoretical (how do you measure benefits and costs, including opportunity costs?), empirical (lots of case study evidence suggesting widespread waste, fraud, and long-term negative effects on the direction of science and technology), and deontological (is it okay to coerce people to support transfer payments that they see as against their self interest?). He wasn't buying it. Space exploration is just so cool that the usual arguments don't apply.

Many influential writers and thinkers are like this, relying on intuition over analysis and evidence. "I can't explain exactly why this case is different (e.g., immune from public choice considerations), it just is." It's a common problem among academics, elite media, government officials, etc. "People are biased and highly irrational, except for me and my friends." "Inequality is wrong and should be addressed through redistribution, except in the case of academic positions at elite universities or slots in the top journals." "Powerful special interests have too much influence on policy, except for antitrust which is apolitical." Watch for this.
The above originally appeared at Mises.org.
Also see: Tyler Cowen is Wrong,There Are Immediate Free Market Solutions to Climate Change and Public Education

Socialism: Is It Different This Time?

In a new essay, Noah Smith, a columnist for Bloomberg News, gives a begrudging nod to capitalism, or at least capitalism with low-level interventions and Keynesianism, over communism:

The 20th century represented the triumph of mixed economies over central planning...
Communist states, such as the Soviet Union, Mao’s China, North Korea and so on suffered various degrees of economic failure amid rigid central control of the economy. Meanwhile, countries that relied on government regulation and fiscal redistribution simply to smooth out capitalism’s rough edges -- the U.S., France, Germany, Japan, South Korea -- experienced political stability and rising living standards.

I guess this is progress, at least he recognizes the failures of past central planning. But this does not mean he is against central planning. He argues that things are different now:

Would [Bernie]Sanders’s brand of socialism fail the way 20th century communism failed? To think about that, it’s important to consider why markets tend to work in the first place.

Economists generally think that markets have three big advantages over Soviet-style central planning. The first is information. Market prices tell companies what consumers want, preventing them from wasting resources on useless stuff. Prices also tell producers how to be more efficient and hold down costs. All of that tends to increase the productivity of an economy. The second benefit of markets is competition. This pushes down consumer prices, and it also drives companies to innovate, develop new products and find better ways of making things. The third benefit is trade. Different regions can specialize in making different products, allowing greater efficiency and more variety.

Information, competition and trade were all sorely lacking in the insular, centrally planned economies of the communist bloc during the Cold War; collective agriculture led to the starvation of millions, while communist manufacturing was famously inefficient.

But developed economies look little like the industrial economies of the mid-20th century. Private manufacturing is only 11% of the U.S. economy, while farm output is just 1%. Meanwhile, health care has been steadily climbing as a share of gross domestic product...Most developed countries show a similar pattern. They’re also spending more on education. These industries are responsible for a growing share of employment...

It’s very possible, therefore, that the future of advanced economies will be a plateau in the output of manufactured goods and food and an increase in the consumption of services...

And the service industries of the future may not be as subject to the magic of free markets as agriculture and manufacturing. Prices in health care are not very good signals of cost and value because of asymmetric information, uncertainty and other problems; this is why you don’t often see people price-shopping for health services. As for education, its benefits lie in the distant future and are hard to gauge in advance; many people derive great benefit from college, but the economic gains don’t seem closely related to the price paid. And when people don’t know what they’re getting or aren’t able to shop around, competition can’t work its magic.

So the service industries of the future may not benefit nearly as much from market discipline as the physical industries of the past. That may be why prices for big-ticket service items haven’t been driven down the way prices for physical goods have...

So if the new socialists can stick to the service industries, they may find success where their 20th century predecessors failed.

Smith suffers from what I call the "Post Office problem before Federal Express." In the old days, before Federal Express, it was very difficult to get people to accept the idea that mail could be delivered without a government monopoly doing it.

That changed after the FedEx envelope:

The FedEx envelope was just enough of a development to trigger in most the understanding that, "Yeah, the government is not necessary for mail delivery." No one even raises the cost of the FedEx letter as an objection, they now seem to get that private carriers for regular surface mail could deliver mail at a reasonable rate.

Smith appears to be stuck in this "Post Office problem before Federal Express" when it comes to education and healthcare but it is a worse form of the disease. At least when it came to the post office question, everyone understood, and still understands, that the U.S. Post Office is for all practical purposes a government entity.

Smith appears to have no understanding of how involved government currently is in education and healthcare, from heavy regulation to extensive subsidies that distort the delivery of the services.

In other words, government has gotten much slicker since the creation of the post office. Even a high information, generally astute guy like Smith, doesn't seem to make the government connection.

He writes:

Prices in health care are not very good signals of cost and value because of asymmetric information, uncertainty and other problems; this is why you don’t often see people price-shopping for health services. As for education, its benefits lie in the distant future and are hard to gauge in advance; many people derive great benefit from college, but the economic gains don’t seem closely related to the price paid.

No, it is not a case of asymmetric information. It is about the government-manipulated structure of  the healthcare system, which limits the incentive for patients to search out price differences, and the regulations which block out low priced competition  (Starting with the limit of medical schools in the country).

And, no, it is not education benefits that lie in the distant future that make them hard to gauge but the heavily government-subsidized nature of education which distorts the cost structure. There is no room for consumer surplus in the education field and no room for innovation in government-subsidized education. It is squeezed out by government subsidies and regulations.

What Smith argues caused the boom in 20th century economies over communism, especially market competition that "pushes down consumer prices, and...also drives companies to innovate, develop new products and find better ways of making things," would occur in healthcare and education if markets were free and unhampered by regulations and subsidies. But like the post office supporters of old, it is just too big of a paradigm shift for many to think about these alternatives. Though there are significant technological advances in both healthcare and education that work around the government regulations that maybe, just maybe, we might at some future point see the "FedEx envelope trigger" that will cause people to understand how we can get better product and lower prices via free markets in education and healthcare.

-RW

Carbon Footprint Madness: Kaiser Rolls Edition

Kaiser rolls at a 1760 court banquet

The concern about carbon footprints, despite shaky science, appears to have infected a good chunk of Americans.

I mean there must be people walking around actually thinking about their personal carbon footprint.

Which brings me to a review of a new sandwich shop in booming downtown Oakland, which is just on the other side of San Francisco across the East Bay ( a 12-minute BART ride).

The shop, Binney Park, was recently reviewed in the East Bay Express.

It was a decent and thorough review, 19 paragraphs long.

Early in the review, the writer reported:

At Binney Park, [Chris]Silverman is inspired by sandwiches from his childhood. An East Coast sandwich, according to Silverman, should have quality, straightforward ingredients — nothing funky or out of the ordinary. Most ingredients at Binney Park are locally sourced — the meat comes from Zoe's Meat in Petaluma, and most of the bread comes from The Acme Bread Company and Le Boulanger.

But for the kaiser roll that Silverman felt was essential to his New York breakfast sandwich, Bay Area versions simply wouldn't do. Instead, he turned to his favorite New York bakery and convinced the unidentified bakery to ship their bread to California.

I read the full review, I am looking for a good sandwich shop in Oakland.

This stunned me at the bottom of the review:

 For me, a Binney Park sandwich seems like a worthwhile occasional indulgence — because, let's face it, for the sake of minimizing our carbon footprint, we probably shouldn't be eating kaiser rolls shipped from New York on a regular basis.

The carbon footprint of a single kaiser roll?

These people need to grab a breakfast bacon, egg, and cheese sandwich on a kaiser roll and watch this commentary by Richard Lindzen, an atmospheric physicist,  professor emeritus at the Massachusetts Institue of Technology, who was the Alfred P. Sloan Professor of Meteorology at MIT.

-RW

Congressional Budget Office Projects Trillion-Dollar Deficits Indefinitely: This is What It Will Mean for the Economy

According to the 2020 budget outlook released this week by the Congressional Budget Office, the deficit for this year is projected to reach $1.015 trillion.

Whatsmore, the CBO projects that the deficits will grow every year for the remainder of the 10-year budget window, topping $12.4 trillion of cumulative new deficits by the end of the decade.

“Not since World War II has the country seen deficits during times of low unemployment that are as large as those that we project — nor, in the past century, has it experienced large deficits for as long as we project,” said CBO Director Phillip Swagel in a press conference on Tuesday.

And my view is that the CBO is being conservative relative to how high the deficits could go.

It should be noted that these deficits suck money away from private sector productivity. The CBO gets it right when it says that with increasing federal deficits, “crowding out of private investment occurs gradually, as interest rates and the funds available for private investment adjust in response to increased federal deficits.”

Overall, the CBO projects that the accelerating level of debt, which is slated to more than double as a share of GDP over the next 30 years, will “dampen economic output over time.” It also warns that “rising interest costs associated with that debt would increase interest payments to foreign debt holders and thus reduce the income of U.S. households by increasing amounts.”

-RW

AOC With Some Serious Capitalist Hate---And the People Cheer

The amount of economic nonsense sputtered by Alexandria Ocasio-Cortez recently in Harlem is just stunning.

At a Martin Luther King, Jr. Day event at Riverside Church, she told an audience in reference to the capitalist system that it is "this thing we live in" and that "No one ever makes a billion. You take a billion dollars."

In this clip alone, she demonstrated that she has no understanding about entrepreneurship, market wages, the problems with central planning, the nature of government organizations and central power, that democracy is just the tyranny of the majority, and she has no seeming awareness that the governments launched in the name of socialism and communism resulted in collapsed economies with millions dead.

She is a very dangerous demagogue who talks fabooty with tremendous skill.



-RW

BREAKING Federal Reserve Holds Interest Rates Steady

Fed Open Market Committee

As expected, the Federal Reserve has announced that, at the monetary policy committee meeting of the Fed Open Market Committee, it decided to leave the interest rates it controls at current levels.

That is, the target range for the Federal Funds rate will remain at 1.50% to 1.75%.

All members voted in favor of the policy.

Deep dive coverage in the EPJ Daily Alert.

-RW

Thank You, Federal Reserve: Super Bowl Tickets Going For as High as the $11,000 Range

Sideline tickets for Super Bowl LIV this Sunday between the San Francisco 49ers and the Kansas City Chiefs are selling in the $11,000 range on StubHub.

And I do mean, thank you Federal Reserve.

The San Francisco 49ers represent the greater Silicon Valley area, where the Fed has a direct spigot pumping money into the region. If you aren't one of the shit on the sidewalk homeless in SF, $11,000 is nothing.

And for others who aren't in the direct flow of a Fed money spigot, StubHub is going to help with that.

The ticket seller this week began offering ticket buyers the option to pay for various event tickets in monthly installments, rather than at purchase, over as long as a year.

The monthly payment option, essentially a short-term loan (indirectly the result of the Fed money pump), carries interest rates of between 10% and 30% depending on a buyer's credit score and other determinants of creditworthiness. The feature can be used to finance purchases between $99 and $17,500.

Yes, borrow the money to buy the tickets, now that is getting as close to the Fed money pump as most people are going to get.

-RW

The Manufacturing Economy, The Service Economy, Tariffs and a Few Other Points

Chick emails:

I understand that any tariffs that Leviathan puts on imports into the US are ultimately paid by consumers here. But apologists for Leviathan say we need to do that to protect US manufacturers from other countries that unfairly subsidize their exports to undercut our domestic production. I also accept your point that "protecting" US manufacturing selects for the inefficient and possibly obsolete processes and products and is ultimately counterproductive in the long run. It is also understood that the US is no longer primarily a manufacturing economy but a consumer economy, which is also what China is striving to switch to. I realize this is a very broad and general question but, would you please explain if US manufacturing vanishes due to more efficient and cheaper manufacturing in other countries along with specialization, what will workers in a consumer economy do for work...become primarily a service economy [learn to code ]? 

RW response:

Wow, there is a lot to unpack here.

First, a tariff is often paid for by consumers but not always.

I explained the different impact that tariffs can have here:



The contrast between a manufacturing economy and a consumer economy is a misleading contrast.

The goal of all manufacturing is ultimately consumption. People work so that they can buy things (or to save so they can buy even more things at a later time).

The idea that China is striving to switch from a manufacturing economy to a consumer economy is just Keynesian babble. The more that is manufactured, the more that is consumed. If they sell goods to us, well then they have more money to buy goods (or to save so they can buy even more goods at a later date).

If someone wants to just work and not consume, they are just what I am looking for, send them over, I have plenty of work for them.

Finally, when you ask, "I realize this is a very broad and general question but, would you please explain if US manufacturing vanishes due to more efficient and cheaper manufacturing in other countries along with specialization, what will workers in a consumer economy do for work...become primarily a service economy [learn to code ]?"

My answer is I have no idea.

The point that needs to be understood is that we do not live in the Garden of Eden and, therefore, there is always plenty to do.

What exactly? No one knows in advance.

For example, when the automobile was driving buggy whip drivers out of work, it is doubtful I would have predicted that jobs for taxi cab drivers would emerge or that it would have freed up more men to become doormen at hotels and at luxury buildings.

-RW

Trump Says the Fed Should Cut Interest Rates Even More

As the Federal Reserve monetary policy committee, the FOMC, meets today and tomorrow, President Trump put out a tweet this morning calling on the Federal Reserve to cut interest rates.

The Fed should get smart & lower the Rate to make our interest competitive with other Countries which pay much lower even though we are, by far, the high standard. We would then focus on paying off & refinancing debt! There is almost no inflation-this is the time (2 years late)!

— Donald J. Trump (@realDonaldTrump) January 28, 2020

Trump is an ignoramus when it comes to economic and monetary policy.

The idea that the Fed can just lower interest rates without repercussions in the economy is just very shallow thinking. The more money the Fed prints, the more the capital-consumption structure is distorted leading to an eventual bust. See: Austrian School Business Cycle Theory

As far as price inflation, as I point out regularly in the EPJ Daily Alert, it is a myth to think price inflation isn't climbing. For this cycle, price inflation bottomed in January 2015. Now, it is threatening to break out with a major spike first to 3% then 5% that could happen at any time.

-RW

How Radical of a Socialist is Bernie Sanders?

Bernie Sanders

It is getting bad out there.

With Bernie Sanders soaring in the Iowa polls a week before the Democratic Iowa caucuses, even some New York Times columnists are getting concerned.

NYT columnist Bret Stephens writes:

[T]he argument understates the radicalism of what [Bernie] Sanders and [Elizabeth] Warren propose. Theirs is not a painless policy massage in the direction of a kinder, gentler economy. It’s a frontal and highhanded assault on American capitalism. If it succeeded, it would entail devastating dislocations to millions of workers lasting for years. If it failed, it would have devastating effects on the country lasting for decades.

How devastating? In October, Brian Riedl of the Manhattan Institute tallied the costs of Mr. Sanders’s policy goals. By his calculations, the federal government would double in size. Half the American work force would be employed by the government, Mr. Riedl writes. Government spending as a percent of G.D.P. would rise to 70 percent (in Sweden, it’s less than 50 percent). The 15.3 percent payroll tax would hit 27.2 percent to help pay for Medicare for All. Total additional outlays would reach $97.5 trillion on top of the nearly $90 trillion the federal, state and local governments are projected to spend over the next decade.

At least Sanders is honest enough to call this what it is: socialism.

The Iowans are getting suckered by Bernie. He is a very radical socialist, I would say just one notch below that of Lenin. Like Lenin, he doesn't understand basic economics and why government planned economies can't work (See: The Most Important Book For Our Age on Socialism).

It is probably unlikely he will get the Democratic nomination but that so many support his socialist proposals is a serious concern long-term

The socialist Alexandria Ocasio-Cortez is campaigning in Iowa with Sanders and apparently to enthusiastic crowds.

Does @AOC excite the midwest like she does NYC? @ChristRobbins and I followed her on the trail in Iowa this weekend to find out. Everywhere she went, the young Rep brought packed rooms, thrilled young voters, and a deep focus on solidarity and organizing https://t.co/6kfUmETHyJ

— Scott Heins (@scottheins) January 27, 2020

She is one very dangerous socialist. Probably, more dangerous than even Sanders and Warren. And she will be around a lot longer.

Somehow, someway, this absurd idea that central planning by government can work has to be crushed or the central planning idea, itself, will crush us all.

-RW

Harvard Economist Endorses Giving Away Money to Everyone

Bill Kristol and Greg Mankiw

In late November 2019, Harvard economist Greg Mankiw, who also happens to be the greatest economic textbook salesman ever, was interviewed by Bill Kristol on Kristol's show, "Conversations with Bill Kristol."

I watched the entire one-hour interview over the weekend, while sober, so you don't have to. It hurt.

Mankiw is extremely bright. You can tell he has every free market argument down but while making free market arguments he tends to finish with a technocratic claim that some type of government intervention in the economy is required.

The only place he put his foot down against government intervention is when Kristol said something positive about Elizabeth Warren's wealth tax. Mankiw attacked it good and hard. But then immediately, he went on to say positive things about Democratic presidential candidate Andrew Yang's universal basic income proposal. The Yang income bang calls for giving every American, over the age of 18, $1,000 per month---$12,000 a year. That would be two trillion, three hundred fifty billion per year!

Mankiw called the idea "attractive."

Yang wants to fund the Yang bang with the introduction of a value-added tax. Mankiw called the VAT "quite desirable."

It should be noted that a VAT hits consumers very hard.

The Tax Policy Center writes:

A value-added tax (VAT) is a tax on consumption. Poorer households spend a larger proportion of their income. A VAT is therefore regressive if it is measured relative to current income and if it is introduced without other policy adjustments...

Although a value-added tax (VAT) taxes goods and services at every stage of production and sale, the net economic burden is like that of a retail sales tax. Sales taxes create a wedge between the price paid by the final consumer and what the seller receives. Conceptually, the tax can either raise the total price (inclusive of the sales tax) paid by consumers or reduce the amount of business revenue available to compensate workers and investors. Theory and evidence suggest that the VAT is passed along to consumers via higher prices. Either way, the decline in real household income is the same regardless of whether prices rise (holding nominal incomes constant) or whether nominal incomes fall (holding the price level constant).

Got that? Yang wants to take away from consumers and give it back to them.

Mankiw told Kristol, "I have always been attracted to the UBI."

I am really not sure how Mankiw could support such a massive government involved bizarre transfer of funds.

I don't see any edge in his supporting this with the Republican elite that he generally is an apologist for.

My suspicion is that there is something similar to the Stockholm Syndrome at Harvard. Call it the "Harvard Interventionist Syndrome."

I mean he knows every free market argument but then always comes down at the last minute in favor of some government intervention and then he is all in on the nutty Yang bang.

One has to wonder what is in the air at Harvard Yard.

-RW

(ht to Bill Kristol for the title to this post)

My Intrepid Colleague Veronique de Rugy

Call me crazy, but I am going back in. pic.twitter.com/7xMwY6aeCa

— Veronique de Rugy (@veroderugy) January 21, 2020

By Don Boudreaux

I’m often asked why I regularly refer to Veronique de Rugy as “my intrepid Mercatus Center colleague.” The answer is that she is just that. Never have I met anyone as dogged as is Vero at exposing the economic fallacies and factual errors that are always to be found at the root of cronyism and fiscal irresponsibility.

My moniker for Vero occurred to me about five or six years ago when she, with remarkable determination, led the charge that nearly succeeded in permanently plugging that great geyser of cronyism, the U.S. Export-Import Bank. Although this absurd and crony agency is now again gushing out taxpayer dollars at full force, Vero’s efforts were instrumental at slowing it down for years. This tireless and deeply principled American émigré from France alone is responsible for resource savings over the past few years likely measuring in the tens of millions of dollars.

Vero writes streams of papers, columns, and letters-to-the-editor. She, seemingly without stop, speaks publicly and debates. She testifies often before Congress, despite the personal distaste that she experiences whenever she addresses those officious czars and czarinas. She eagerly appears on radio, t.v., and podcasts to make the case for free markets and against statism. And in the tradition of her native country, Vero’s home is a salon for intelligent and interesting people to try out, discuss, debate, and sharpen their ideas.

In short, Veronique de Rugy is one of today’s most important champions of liberty and of economic literacy, and opponents of cronyism and fiscal incontinence.

The above originally appeared at Cafe Hayek.

Trump Calls On the New York Times to Fire Paul Krugman

President Trump and Paul Krugman

Two economic ignoramuses go at it:

Paul Krugman is a lightweight thinker who doesn’t have a clue. Caused huge economic damage to his follower’s pocketbooks. He, and others, should be fired by @nytimes! https://t.co/1K5AtQbmrp

— Donald J. Trump (@realDonaldTrump) January 26, 2020

I usually ignore Twitter trolls, but it’s kind of amazing how much rent-free space I seem to occupy in Trump’s head. Shouldn’t he be focused on threatening Adam Schiff?

— Paul Krugman (@paulkrugman) January 26, 2020

Of course, Trump is correct, Krugman is an economic lightweight, but Krugman is correct in pointing out that Trump holds idiotic mercantilist trade views.

-RW

Trump Admits That It Would Have Been Tougher to Beat Hillary If She Had Picked Bernie Sanders as VP...

...because he has the same trade position as Trump.

And Trump is correct, they are both central planners when it comes to trade.

Leaked audio of Trump: “If Bernie would have been VP it would have been tougher...I got 20% of Bernie vote b/c of trade. He's a big trade guy. Basically says we’re getting screwed on trade, and he’s right...He is the only one I didn't want her to pick.” pic.twitter.com/7foIE6F046

— Every Billionaire Is A Policy Failure (@DanRiffle) January 26, 2020

-RW

Bernie Sanders: ‘It’s Impossible to Predict’ How Much My Health Care Plan Will Cost

Some truth out of Bernie.



He should have also said that no one knows how a centrally planned healthcare system will distort and suffocate healthcare but that it will.

-RW

Bloomberg News Blast Michael Bloomberg's Trillion Dollar Government Spending Programs and It's Lack of a Plan

Michael Bloomberg

This is awesome.

Bloomberg reporter Mark Niquette lays it all out:

Ask Democratic presidential candidate Michael Bloomberg how he’ll pay for his plans to create jobs, provide health insurance and repair roads and bridges, and you get the same answer: Wait until you see my tax plan.

Bloomberg has released almost 20 proposals since joining the race on Nov. 24: $1.2 trillion for infrastructure. $70 billion of federal spending in low-income neighborhoods to aid black homeownership. Another trillion and a half for health care. He hasn’t detailed where the money for the ambitious proposals will come from...

Bloomberg’s campaign says that it plans to release further details about the tax proposal as soon as next week and that it will show how he plans to pay for his proposals.

That would mean details come out before 14 U.S. states vote March 3 on Super Tuesday, the contests on which Bloomberg is staking his campaign. But until then, voters have only heard him say he supports “taxing wealthy people like me” to pay for a growing list of policy proposals.

The approach is at odds with Bloomberg’s pitch -- that his three terms as New York mayor and in building the company that bears his name show he’s a practical problem solver, someone who takes a data-driven approach to running government efficiently.

It’s also at odds with his Democratic rivals who often explain revenue streams when they propose big programs...

-RW

Defending Walter Block

Walter Block

At the post, Walter Block Says Milton Friedman Was a Socialist and Twitter Erupts, I want to address a couple of points made by commenters that need further contextual understanding.

One commenter writes:

And FA Hayek and Wilhelm Rokpe called for even more intervention than Friedman did. Hayek's Constitution of Liberty is much more socialistic than Friedman's Capitalism and Freedom. But waiting to hear Austrians call Hayek "socialist".

 I am not suggesting there are not legitimate points of differences but why some Austrians have this obsession with Friedman when there are plenty of other fire worse targets to focus on makes me think something else is at work here.

RW note:

Well, it just so happens that Dr. Block did call out Hayek. See:  WALTER BLOCK. On Socialist Tendencies in Hayek and Friedman.

And in a 27 page critique of Hayek's Road To Serfdom, Dr. Block concluded:

For a long time, until I read him more carefully, I too considered Hayek one of the champions of free enterprise. Unfortunately, it will not suffice. There were
many other authors writing at about the same time, several of whom wrote even before Hayek, when the prospects for liberty were, if anything, even worse. Consider the works of Ayn Rand, Henry Hazlitt, Ludwig von Mises, Lysander Spooner, Leonard
Read, Benjamin Tucker. These scholars made far fewer compromises with state intervention into the economy than Hayek. Thus, it is problematic to resort to the epoch in which he wrote as an explanation for Hayek’s interventionistic views. The
long and the short of it is that he was a rather weak and conflicted supporter of the market—one who for some reason was widely interpreted as a staunch and radical proponent of economic freedom. 

Then, we have Astro-Punk who comments:

Unfortunately for Block, Friedman called for abolishing the Fed. Right from his mouth:



RW note:

But this clip is misleading. Friedman may have been against the Fed but that is because he wanted a different method of government intervention with the money supply. He was not advocating a free market in money. He wanted government-controlled constant growth in the money supply. As this clip makes clear  (Sarts at 3:49 mark).



In other words, he was, indeed, a statist when it comes to monetary policy.

The Role of Austrian School Economists in the Founding of the G30

After reading the Jeff Deist review of The Marginal Revolutionaries: How Austrian Economists Fought the War of Ideas by Janek Wasserman. I picked the book up.

I have to say, Deist nailed it in his review. Here are some snippets:

 The Marginal Revolutionaries: How Austrian Economists Fought the War of Ideas is indeed a critique of the broad school of economic thought now colloquially referred to as “Austrian,” but it is not only that. It is also a lively and well-paced history of the astonishing influence prewar Viennese intellectuals had on the greater world, and continue to have in areas far beyond economics. The author’s ideology intrudes at times, but never quite so obtrusively as to derail the book’s mission. The Marginal Revolutionaries first and foremost is a worthwhile historical account of major figures from the Austrian school, and not primarily an attempt at academic or ideological refutation...

But Wasserman cannot help indulging himself in the book’s concluding chapter, with its tedious concerns about a so-called Libertarian-to-Alt-Right Pipeline, laughably worried references to supposedly controversial libertarian figures like Murray Rothbard and Ron Paul, and tut-tutting details of internecine fights between the Koch-funded Cato Institute and the Koch-free Mises Institute (your reviewer’s employer)...

[O]ne senses Wasserman’s heart is not in examining the sociology of late twentieth-century libertarianism and issuing indictments. As an historian of central Europe, he’s happier considering the familiar turf of coffeehouse Vienna, and thus finds firmer footing at the beginning of the book — particularly in his opening chapters on the early period and then “golden age” of Austrian economists.

Here we find a fairly robust account of Carl Menger, widely considered the father of the Austrian school owing to his seminal 1871 Principles of Economics, published in Vienna. Menger was less prolific than most of his successors, and almost reclusive later in life. As a result, Principles was not fully appreciated for two decades, until Menger’s publication of a second major book on method in 1883 revived interest in his work. But Wasserman seems to grasp the enormity of Menger’s contribution to a theory of value, an understanding desperately missing from classical and Marxist economics in the late nineteenth century. Wasserman duly credits Menger with helping to birth the “Marginal Revolution,” the critical understanding of how consumers determine the value of any good subjectively, based on the importance of the final, marginal unit of that good to them...

But The Marginal Revolutionaries is a history, not a novel, and thus the central portion of Wasserman’s book deals with dozens of other figures as well. Names like Morgenstern, Haberler, and Machlup will escape most lay readers, while the dates, places, and myriad controversies fade into obscurity. So while Mises and Hayek stand today as the best-known Austrian economists, and giants in their field, the book is a survey with no one figure taking prominence.

I will second Deist's complaint about the final chapter. The earlier chapters of the book reflect significant research and deep contemplation about the advances of the Austrian school and the different players involved but the last chapter is a completely different animal. It seems to be thrown together after just a short read of some Twitter feeds.

That said, the overall depth of reporting in the rest of the book is detailed and original enough that for anyone interested in the history of the Austrian school the book is a must read.

One example is Wasserman's reporting on the role of Fritz Machlup (a member of the Mises Circle in Vienna) in the founding of the G30, which is now a major international group of leading financiers, policymakers and academics. I had known of Machlup's role in the formation of the G30 but there is much more detail in the book:

Writing to Haberler and the economists Willy Fellner and Robert Triffin in 1982, [Fritz] Machlup reminisced about the decades-long collaboration on advisory boards: “the four of us were once called ‘the Quartet’...I can assure you I miss the presence of you [at the group of 30 or G30].”  The G30, a powerful consulting group formed in 1978 to address the problems in the global economy, evolved out of a series of conferences on the international monetary system that “the Quartet’ had orchestrated in the early 1960s. Over twenty-seven meetings Machlup and his colleagues reshaped the Bretton Woods landscape, providing the intellectual foundation for the shift from the post-war gold exchange standard to floating exchange rates and financial liberalization. In coordinating elite networks of academics, government officials and financial leaders, the Machlup Group proved as significant to the neoliberal order as Hayek and the MPS or Habereler and GATT. 

Of course, neither Ludwig von Mises nor Murray Rothbard would have supported the anti-gold direction that Machlup took governments, but this is the history that includes, and helps to understand, the breaks and different directions that former students of Mises and Hayek made, for good and bad.

-RW

Hey AOC, It is Going to Be an Ice Age

Nutty climate change forecasts delivered with supposed scientific backing are not new.

Back in the 1970s, legendary national news anchor Walter Cronkite warned in AOC style that there were only a few years left before climate catastrophe would strike. But back then it was a forecast that a new Ice Age was imminent.

Like Cronkite, “the most trusted man” in news, reporter and commentator Howard K. Smith also brought up the threat of a new ice age. Smith did so repeatedly.



-RW

Walter Block Says Milton Friedman Was a Socialist and Twitter Erupts

Dr. Walter Block has a legitimate case for calling Milton Friedman a socialist in the sense that Friedman was a supporter of many central planning schemes, including a call for the Federal Reserve to print a fixed amount of money every year out of thin air.

Twitter has erupted, but no one discusses Dr. Block's points, it is all ad hominem attacks against him.

Just take a look at this sorry thread.

-RW

It's Happening: Greater Productivity with Fewer Resources Used

Johan Norberg explains in one minute and 58 seconds:





-RW

The New York Times Exposes President Trump's Tax Con Game

New York Times editorial board room

The problem with President Trump's corporate tax cut is that it was not matched by a cut in government spending. Thus it has resulted in an explosion in government debt.

The New York Times in an editorial today made exactly this point:

This week, [Treasury Secretary Steven] Mnuchin repeated the risible fantasy that the Trump administration’s 2017 tax cuts will bolster economic growth sufficiently for the government to recoup the revenue it has lost by lowering tax rates.

“I’ll stick with my projections that the tax deal will pay for itself,” he said from Switzerland.

The claim that tax cuts don’t cost money is a lie that won’t die, because proponents of tax cuts have learned that many voters like to hear it. Republicans have steadily insisted for almost four decades that tax cuts are free, even as each new round of tax cuts fails to pay for itself. Mr. Mnuchin and other proponents of the most recent tax cuts were already peddling a delusion when they made the claim in 2017.

Two years later, the results are in. The annual federal budget deficit has topped $1 trillion. And it is even more difficult to understand how anyone could make such a claim.

Of course, The Times is a supporter of big government so they don't see the solution as a cut in spending but rather an increase in taxes.

Sadly, they ended the editorial this way:

 The economy doesn’t need another round of Keynesian stimulus at the moment, and the federal government needs more tax dollars, not fewer.

The Trump administration instead could press Congress to reverse the 2017 cuts.

The administration also could make a meaningful difference by collecting more of the taxes that corporations and the wealthy still owe.

It wasn't always this way at The Times.

Henry Hazlitt, who was once an editorial writer for The New York Times, got the full picture right, what is needed is tax cuts accompanied by cuts in government spending, he wrote:

Taxes, in other words, are a purely derivative problem. The real problem is to cut expenditures. But nobody wants to face this. So everybody can be a cheap Santa Claus by voting for tax cuts while voting for more expenditures.

-RW

JP Morgan CEO Jamie Dimon Slams Socialism

The clip below is really an excellent commentary from Jamie Dimon.

He gets it. He takes a look at just one angle of socialism but it is an angle that is not often considered.

It is the angle of how and why socialism distorts incentives so that companies no longer attempt to serve consumers.

The clip is 1 minute and 59 seconds.



-RW

Escape From San Francisco: When the Sh*t Hits the Sidewalks

After years of rapid growth, San Francisco Bay Area rents continue to increase but are finally showing signs of a dramatic slowdown.

Overall rent in the greater Bay Area in 2019 increased just 1.2 percent year-over-year, according to Rent Cafe.

Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley, is noticing the slow growth, reports The San Francisco Chronicle.

"Several years ago, we had year-over-year growth exceeding 10 percent, so [this is] sharp deceleration," Rosen said.

Rosen cites three main factors impacting prices. First, new supply is flooding the market, especially in Oakland and the Silicon Valley. Second, skyrocketing rents in the last decade mean the region has finally "reached a rent level that pushes against affordability ceiling for many households," he said.

Finally, a substantial increase in "out-migration," with people and jobs leaving the region, is making the market less competitive, partially because of "The general deterioration of quality of life."

Apparently, there is only so much wacko lefty nonsense that many people can take, especially when it leads to regular sh*tting on the streets.

The slowdown is particularly remarkable given that rent controls limit construction in the region and have a tendency to push prices higher for new apartments.

-RW

Paul Krugman Admits Social Security is a Ponzi Scheme

Charles Ponzi

Well, New York Times columnist Paul Krugman is too much of a wimpy establishment apologist to use the P-word but nevertheless, he does make the point.

Consider.

The Merriam-Webster Dictionary explains a Ponzi scheme this way:

A Ponzi scheme is an investment scam that pays existing investors out of money invested by new investors, giving the appearance of earnings and profits where there are none. 

In his private email newsletter, Krugman writes this:

Social Security is America’s oldest major social program, and it’s a crucial support for older Americans, a majority of whom depend on it for more than half their income, and a quarter of whom depend on it for almost all their income. The program is structured to look like a pension fund, where what you get out depends on what you paid in, but that’s bit of a Noble Lie. For the most part it’s a pay-as-you-go system, in which Americans of working age support retirees.

And he knows the problem:"[T]he long-term finances of Social Security look a bit dodgy... [becasue] the aging of the population, with a rising ratio of older Americans to those of working age." That is there are more funds flowing out in the scheme than flowing in.

Krugman, again:

All of this means that something will probably have to be done to keep Social Security sustainable...if the Social Security trust fund is eventually exhausted, it will be necessary either to raise taxes or to cut benefits.

-RW

CONSPIRACY THEORY: Did the Sinking of the Titanic Play a Key Role in the Founding of the Federal Reserve?

I haven't heard this conspiracy theory in some time.

The Mobi Spirt reports:

Thanks to its appeal as a luxury liner, many of England and America's who's-who's were on board for its maiden voyage.

Including American millionaire John Jacob Astor IV and his wife, Denver mining millionaire "Unsinkable" Margaret Brown, son of wealthy mining magnate Meyer Guggenheim, Benjamin Guggenheim, actress Dorothy Gibson, Olympic Medalist Sir Cosmo Duff-Gordon and his wife, Lady Duff-Gordon, fashion designer for the royal family, and many more.

Many of these early 20th century figures managed to make it off the ship, but many didn't, either - and their well-known status helped fuel public interest in the disaster, as well as several conspiracy theories…

One Titanic passenger is notable not for his part in the voyage, but for his last-minute cancellation of it.

American millionaire J.P. Morgan was the owner of White Star Line's parent company, and had a lavish suite of rooms waiting for him aboard the Titanic. He was supposed to board the ocean liner in Southampton, England and sail to New York along with the rest of the passengers - but cancelled his journey shortly before the ship set sail, saying he was ill. While extremely fortuitous, people can fall ill, and this fact in and of itself doesn't do much to bolster the conspiracy - but some rumors claimed that Morgan warned Milton Hershey (of chocolate fame) not to board the ship either.

In addition to Morgan's vested interest in claiming insurance money for the sinking of the Titanic, as conspiracy theorists claim, he stood to benefit from it in another way as well…

At Morgan's scale of business, American national economics and politics were major factors influencing his fortune and revenue. One of Morgan's major points of concern at the time was the establishment of the Federal Reserve, which would provide an additional layer of protection for banks - of which Morgan owned several.

Three influential men who opposed the establishment of the Reserve were aboard the Titanic: Benjamin Guggenheim, Isidor Straus, and David Astor. Some conspiracy theorists believe this was due to Morgan's machinations, and a way to ensure the Federal Reserve would indeed be founded a year later, in 1913.

-RW

From Davos, Switzerland, Trump Supports the Wacky Planting of a Trillion Trees Initiative

President Trump at the World Economic Forum

President Trump is in Davos, Switzerland at the World Economic Forum. It's the biggest gathering of crony capitalists you are likely to see in any year.

They are all here, from the Trump entourage to George Soros to Han Zheng.

This morning Trump delivered a speech to the gathered.

During the speech, he took credit for U.S. economic growth that had little to do with him:

America’s economy was in a rather dismal state. Before my presidency began, the outlook for many economies was bleak. 

The economic ignorance in the above comment is astounding. The president has little to do with economic performance. He cam help only be staying out of the way--laissez faire. And Trump is nothing close to staying away from interventions in the economy with his silly trade wars and attempts to intimidate the Fed into more money printing.

To be sure, in the down phase of the Federal Reserve created business cycle there is elevated unemployment as the economy shifts to adjust to the new capital/consumption structure. But this is only for a limited period. The period can be extended by bad economic policy but that is another story.

In the current boom phase of the business cycle, you wouldn't expect significant unemployment and negative economic numbers even if the man in the White House did little but sit on the four-year throne and watch baseball on television.

But Trump, given his limited intellectual curiosity and abilities, probably does think he is responsible for the boom.

And although Trump denounced climate change alarmists in his speech. The erratic, inconsistent president then went on to announce, in the same damn speech, that the U.S. would join the economically illiterate World Economic Forum initiative to plant 1 trillion trees worldwide.

-RW

The Problem With Oren Cass and His Inebriated Ass Argument

Donald Boudreaux writes:

 Now to Cass’s foundational error, which is this: he completely misses the market’s role at gathering and processing information. This error is revealed when he equates the competitive market to the meanderings of a drunk donkey. In fact, it is no such thing.

As many economists – from Adam Smith in the 18^th century through Carl Menger in the 19^th and Ludwig von Mises, F.A. Hayek, Armen Alchian, Milton Friedman, Julian Simon, Deirdre McCloskey, and Vernon Smith in the 20^th and 21^st – have revealed, the competitive market price system at every moment marshals and acts in accordance with an amount of dispersed information so detailed, vast, and frequently changing that no government officials could possibly hope to outperform the results of this market process. These economists’ argument is not that the market process works perfectly; of course it doesn’t. The argument instead is that no amount of conscious planning or intervention can hope to match, and much less to surpass, the performance of decentralized and competitive markets over time.

Cass might disagree with these economists and their arguments. But for this disagreement to obtain any measure of legitimacy requires that he advance a substantive argument to the contrary. Instead, though, he writes in apparent unawareness of this vast scholarly literature. He simply offers two twin assertions: on one hand, market processes are akin to an intoxicated ass, and on the other hand, government officials somehow (by what mysterious means we aren’t told) have uniquely excellent access both to information about the current state of the economy as well as to knowledge about the future. (Cass also ignores public-choice considerations – that is, the bias of government officials to serve special interests at the expense of the general interest – but that’s a tale for another time.)

Assertions such as those made by Cass are easy to offer. Dreamers, dirigistes, and demagogues have done so since the dawn of the industrial age. These assertions are not, though, a sufficient reason to ignore economic theory and to empower state officials to superintend and to override the results of competitive markets in which individuals, as both consumers and producers, spend their own money – and the results of which have proven, without exception, to be far superior to consciously imposed schemes of politicians and bureaucrats.

The above originally appeared at Cafe Hayek.

This is How Big Crony Climate Change Finance is Getting

From Goldman Sachs Sustainable Finance:

We believe that sustainability has evolved from aspirational ideals to commercial solutions.

Today, sustainable finance is no longer on the sidelines, but increasingly core to a company’s business. We are helping our clients accelerate climate transition and advance inclusive growth, bringing the full strength of the firm across our commercial expertise, capabilities and knowledge to deliver results that help contribute to broader growth and opportunity.

Sustainability is a firmwide mandate with a focus on the dual and inter-connected themes of climate transition and inclusive growth, and at the center is the Sustainable Finance Group which is partnering with our global businesses to harness capital markets to drive the transition to an inclusive, low-carbon economy. 

We are committed to helping our clients position themselves for a future in which sustainability is core to all industries and integrated across markets, with successful commercial solutions. We will achieve this vision by doing what we do best — invest, finance, advise, and innovate — to drive global climate transition and inclusive growth strategies that accelerate positive change. That’s why we’re targeting $750 billion in sustainable finance growth themes by 2030.

• Clean Energy
• Sustainable Transport
• Sustainable Food & Agriculture
• Waste & Materials
• Ecosystem Services

No doubt there is a good chunk of government finance payouts to corporations in these Salem Climate Hunt expenditures that Goldman Sachs expects to advise on.

-RW

The World's Largest Economies by 2030

A bold forecast in a complex world from PwC, as highlighted by The World Economic Forum:

-RW

Peter Schiff's Bitcoin Investment Totally Wiped Out

I just lost all the #Bitcoin I have ever owned. My wallet got corrupted somehow and my password is no longer valid. So now not only is my Bitcoin intrinsically worthless; it has no market value either. I knew owning Bitcoin was a bad idea, I just never realized it was this bad! pic.twitter.com/6SJvDJOZU6

— Peter Schiff (@PeterSchiff) January 19, 2020

There are a lot of obvious problems with Bitcoin, especially from a lack of privacy perspective, but it has not been tested over history which means only time will tell what other problems may emerge.

Has Peter experienced a new problem?

-RW

Trump Goes After Paul Krugman

President Trump tweeted last night:

If you listened to the flawed advice of @paulkrugman at the @nytimes, a newspaper that was going broke until I came along, you would have entirely missed the RECORD BREAKING Stock Market (and other) numbers produced since Election Day, 2016. Sorry, those are the FACTS.....

— Donald J. Trump (@realDonaldTrump) January 19, 2020

And Trump is correct. Politico reported right after the election:

The economic fallout of a Donald Trump presidency will probably be severe and widespread enough to plunge the world into recession, New York Times columnist Paul Krugman warned in a New York Times opinion piece published early Wednesday.

Calling Trump the "mother of all adverse effects," the Nobel Prize-winning economist predicted that the GOP nominee's administration could quickly undo the progress that the markets around the world have made in the eight years since the financial crisis.

In other words, Paulie blew the call big time. Krugman's problem is, of course, that he doesn't understand Austrian School Business Cycle Theory and that the fact that the Federal Reserve is the primary driver of the boom-bust business cycle, not whoever happens to be sitting in the Oval Office at 1600 Pennsylvania Ave.

It's not that other economic policies don't have impact, they do, but the Fed is generally the most important factor unless the President or legislators take truly draconian policy steps.

The Fed is been pumping the money out to keep the economy in the manipulated boom phase now as it was when Trump was elected.

-RW

Stunning: Minneapolis Fed President Put Out Tweet Indicating He Doesn't Know How the Fed Creates Money

Neel Kashkari

This is simply astounding.

Minneapolis Fed President Neel Kashkari put out the below tweet:

Be sure to read the tweet carefully. It clearly shows that Kashkari has no idea why the Fed is doing repo operations and why banks would want to swap T-bills for Fed reserves.

Here is the New York Fed explaining why they do repo transactions (my bold):

In a repo transaction, the [New York Fed's Open Market Trading] Desk purchases Treasury, agency debt, or agency mortgage-backed securities (MBS) from a counterparty subject to an agreement to resell the securities at a later date. It is economically similar to a loan collateralized by securities having a value higher than the loan to protect the Desk against market and credit risk. Repo transactions temporarily increase the quantity of reserve balances in the banking system.

So why would the Fed want to increase the reserve balances in the banking system?

Because it increases the money supply and generally puts short-term downward pressure on interest rates.

This is pretty basic stuff that Kashkari appears to be clueless about.

Even Paul Krugman, with Robin Wells, in their college text,  Microeconomics, explain the process:

The monetary base is the sum of currency in circulation and bank reserves...Each dollar of bank reserves backs several dollars of bank deposits, making the money supply larger than the monetary base. 

That is the monetary base acts as a multiplier of the money supply.

Treasury bills don't have the multiplier effect that bank reserves do. That's why a bank may need additional Fed reserves to support its loan portfolio.

The full discussion about Fed reserves could go on for hours. There are, for example, excess reserves that are not in the system acting as a direct money supply multiplier. Only required reserves do but the key is that banks seek these reserves because T-bills and other assets don't act as multipliers. This is very important to understand. Because of the way the fractional reserve system is structured, Federal reserve balances support the entire bank credit system

This is the primary function of the Federal Reserve, through various methods to manipulate the money supply generally via different types of reserve operations.

Since the financial crisis of September 2008, the Federal Reserve has been pumping massive amounts of reserves into the system, some ended up for technical reasons as excess reserves that don't have an impact on the money supply, but nearly 100 billion dollars has ended up as required reserves---thus supporting the spectacular growth in the money supply. This expanded money supply base is what is causing the climb in equity prices.

The tweet from Kashkari indicates he doesn't understand any of this.

He was torched on Twitter:

If I buy T-bills, my cash is tied up. But the Fed can buy my T-bills with new cash through a financial intermediary like one of the big banks that can hold reserves. The bank can then use leverage to generate investable cash and the bank and I are both bidding up the markets. QED

— Gary A. Gordon (@GaryAGordon) January 17, 2020

If all you are doing is SWAPPING This ST Risk Free Asset for That ST Risk Free Asset then it should be ZERO SUM Swap

BUT that is not the case because
Repo Operations create Liquidity for financial institutions
Thus, an additive operation = Fed Driven Rally

— 0range Crush (@0rangeCru5h) January 17, 2020

Okay fair, So stop your Overnight Repo Operations, Your Term repo operations and your monthly purchase of bills and SEE What happens........Market should be fine then based on your logic

— Jim Orr (@_TheYank) January 17, 2020

 and this tweet said it all:

Neel: I hope you read the responses to these tweets of yours! Almost everyone has a better understanding of how liquidity works, 'except you'! I believe you'll regret these tweets and they'll haunt you in life, Forever!

— Sulaiman S Lalani (@sulaimanslalani) January 17, 2020

And get this, Federal Reserve regional bank presidents rotate as voting members of the Federal Open Market Committee, the monetary policy-setting committee of the Federal Reserve, which includes setting reserve policy, and clueless Kashkari is actually a voting member this year.

-RW