Higgs on the Persisitence of the Welfare State

A few weeks ago, I wrote a brief post discussing why it is so hard for politicians to cut spending, even if they wanted to. I noted that there is what seems to be an ever-increasing percentage of our population receiving a significant portion of their income from the government.

Robert Higgs has just provided additional excellent commentary affirming this very point. Using data compiled at the Heritage Foundation, Higgs notes,

[I]n 1962, 21.7 million persons depended on the programs they included in their index for benefits. By 2009, the corresponding number of dependents had grown to 64.3 million. Adding dependents not included in the Heritage study might easily increase the number to more than 100 million, or to more than a third of the entire population. Thus, the parasites verge ever closer to outnumbering their hosts.

This is shockingly scary. As I said in my earlier post, turning society back toward a free society and the prosperity that follows will require an ever-growing segment of the population to vote out of moral conviction and less out of pecuniary interest. It requires repentance.

Free Market vs. Government Intervention

The full report of the Economic Panel discussion sponsored by Slippery Rock University's Young Americans for Liberty is now available. It includes photos of the event, images of reports from local newspapers, and a video of the entire event. You can watch the video below:

Interest Rates and a Lender of Last Resort

A few days ago Joe Weisenthal at Business Insider posted a chart of the day article, "The Infection of Europe Is Now Complete." He is responding to a German government bond issue that failed to draw the anticipated number of buyer/lenders. Weisenthal thinks this especially remarkable given Germany's assumed status as a relatively safe haven in Europe.

Then he concludes with this:

Seeing Germany not catch this flight-to-quality bid is a major break in the pattern. And when it's combined with the lack of interest at the auction, then it hits you: Germany is more like Greece than the U.S. in the sense that neither it nor Greece has a central bank as a lender of last resort.

Given Weisenthal's economic and political biases, I assume he is here implying that the American banking system should get the nod over the European system because our central bank, the Federal Reserve, not only has a mandate to keep prices stable, but also is charged with maintaining financial stability by serving as a lender of last resort. Having a lender of last resort soothes fears some might have about a house made up of too many too-highly-leveraged financial cards.

There is another way to look at the situation. In the first place, it is not clear that the European Central Bank (ECB) is not acting, at least informally, as a lender of last resort. On the other hand, if the lack of demand for German bonds is due to a perception that the ECB is not a lender of last resort, this just means that interest rates should be higher than they are both here and abroad.

Magnanimous Review of Foundations of Economics

Jeffrey Herbener's magnanimous and very charitable review of my book Foundations of Economics: A Christian View is now available online. It was published in the Fall 2009 issue of The Journal of Faith and the Academy and that issue was just recently made accessible for internet readers everywhere. Herbener's piece is actually a review essay in which he discusses not only characteristics of my book but places the book in its historical context. In so doing, he masterfully provides a concise, yet tremendously insightful history of economic thought in the first ten pages of the review.

Herbener concludes his essay with the following:

Foundations of Economics stands in the august tradition of economic thought. Economics began in the High Middle Ages as a science of causal-realist laws about society built within a Christian framework and used in analyses of the ethics of commercial and political activity. In the nineteenth century, many economists were carried away by the errors of the British Classical School, which proved to be a dead end, and wasted their efforts. In similar fashion, the twentieth century has seen the efforts of many economists who have followed the Neoclassical School come to nothing. Yet, throughout the long history of economic thought, there have always been champions of the causal-realist view. Their numbers are swelling as dissatisfaction with the neoclassical approach grows. Perhaps we are on the cusp of another revolution in economic thought in which the causal-realist tradition will have opportunity as it did nearly 140 years ago to assert itself as the mainstream. For those who seek to study God’s natural social order, Foundations of Economics is now the gold standard of introductory treatments of economics in the causal-realist tradition.

You can read the review essay in its entirety by clicking here.

The FED Is Not the Only Central Bank Printing Money

In a Bloomberg interview, James Grant, editor of Grant's Interest Rate Observer and one of the top-drawer financial writers working today, talks about inflation and asset prices. He notes that the European Central Bank has "mightily expanded" its balance sheet and he anticipates that the ECB will further inflate in an attempt to deal with the European debt problem. Even the Swiss National Bank is increasing bank reserves "at astonishing rates of speed."

 

Thanks to Lew Rockwell.

Give Thanks to the One who Deserves It

Back in 2002 Gary Hull, a senior writer for the Ayn Rand Institute from 1997-2002, wrote a piece on Thanksgiving that has since appeared in many periodicals, including the Allied News and the Pittsburgh Tribune-Review.  He entitled the essay "Thanksgiving: The Producer's Holiday" Hull, devout Randian that he is, argues that God should have nothing to do with the holiday. Instead we should pay homage merely to human productivity.

Keeping God out of Thanksgiving is problematic to say the least because holiday is a word that derives directly from an Old English word that indeed means "holy day." In other words, it is by nature a day in which we turn our attention to the Lord of all creation to give thanks for His many blessings to us. 

Nevertheless, Hull argues that

Thanksgiving, a uniquely American holiday, celebrates man's productive ability. It is not a day of national guilt or a religious festival. This holiday is designed to celebrate, not faith and charity, but thought and production.

Hull goes on to say that by making the holiday a religious festival "is a slap in the face of any person who has worked an honest day in his life."

As the French say, au contraire. Hull's argument is entirely without reason. I wrote a letter in response to Hull's op-ed to editor of the Pittsburgh Tribune Review who kindly published it. Today I reproduce the letter in its entirety below.

Gary Hull's Thanksgiving commentary is an all-too-typical example of what happens when a free-market supporter rejects God ("The Producer's Holiday," Nov. 28). Hull rightly suggests that we should all be very thankful for our ability to produce wealth in this country. However, because of his hostility to God, he makes several key errors.

Hull begins by asserting that "Thanksgiving celebrates man's ability to produce." More correctly, Thanksgiving is a feast during which we give thanks to God for the blessings (material and spiritual) He has poured out upon us giving us the ability to produce.

Hull also claims political freedom is the precondition of production. While this is a common belief, it is nonetheless incorrect. Democratic elections do little to ensure that people are able to produce and accumulate wealth. The institution of private property is what makes exchange, the division of labor, saving and investment and capital accumulation possible.

Hull makes his grossest error, however, when he argues that "Many Americans make Thanksgiving into a religious festival," ascribing "our material abundance to God's efforts, not man's" and that "That view is a slap in the face of any person who has worked an honest day in his life."

It is true that production would not be possible without human effort. Giving thanks to God does not ignore this. It does, however, recognize that the ultimate source of all material wealth is God.

Thanking God for His blessings is not a slap in the face to anyone, but is simply giving credit where credit is definitely due.

Shawn RitenourGrove City

Austrian Economics Versus the Mainstream

The night before last in Slippery Rock, Pennsylvania, Jeffrey Herbener and myself were privileged to participate in a panel discussion with two economics professors from Slippery Rock University, David Culp and Frederick Tannery. It was sponsored and hosted by SRU's new chapter of Young Americans for Liberty.

An audience of over 300 students and community members were presented a fair-minded exposition of some similarities and key distinctions between conventional and Austrian, causal-realist economic analysis.

The panelists debated issues related to higher education tuition, health care policy, the 2008 economic crisis, and macroeconomic policy. I explained how government subsidization for higher education in the form of Pell Grants and government guaranteed student loans artificially stimulates demand for schooling and, consequently drives up tuition. Jeff Herbener compellingly argued that the best way to reform health care is to move it to a more market oriented system and then brilliantly explained why tax increases are never a good thing, because they take wealth away from those who are able to economize using market prices and puts it in the hands of bureaucrats who have neither the ability nor the incentive to economize.

It was then my turn to explain how the 2008 financial crisis was a product of government intervention from start to finish and not the fault of a free market (hint: we did not have a free market), and then went on to explain how the interventionist responses by both George W. Bush and President Obama have merely slowed the necessary capital restructuring process, thereby hampering economic recovery. Jeff Herbener finished by arguing that the best thing the Fed could do right now to mitigate the possibility of tremendous inflation is to raise legal reserve requirements to 100% and then transform the system to a free monetary, 100% reserve banking system.

Those in attendance seemed attentive and engaged in the discussion. It was an honor to be asked to be a part of the event. A video of the entire panel discussion should be posted in the days to come.

Do Corprations Have Too Much Power?

Many people (like many in the Occupy Wall Street movement) think so. If they do, a good question to consider is why?

An interesting story on Tech Ticker should give one pause before swallowing the line that corporations are powerful to control consumers. They document 15 disastrous product introductions that were quickly killed. The list includes the infamous new Coke and most recently Netflix's abandonment of Quickster before it even began.

If, as people like John Kenneth Galbraith used to claim, corporations do have tremendous power to force people to buy their products by shaping their demand, it is hard to explain such flops. Perhaps corporations are not all-powerful after all. In a free society, the only way for corporations to reap profits and maintain market share is to more successfully satisfy customers.

If, however, a corporation receives special privilege from the state, it is clear that we are not in a free society. In such circumstances, a favored firm would be able to reap profits without serving others. The root of this problem is the granting of state privilege, not the existence of the corporation per se.

Less Keynesian, More Austrian

In the same week that J. Brad DeLong irresponsibly accuses Ludwig von Mises of a "monetary mental disorder," Amity Shlaes does just the opposite. In a column in the San Francisco Chronicle, Amity Shlaes gives her suggestions for how introductory macroeconomics can be improved at Harvard. She is writing in response to the "dozens of students Harvard University undergrads who walked out of the school's famous introductory economics course this month." Part of the students' complaint is that in the current class there is a lack of diversity of economic opinion and that conventional economic opinion helped contribute to the economic mess of 2008-11.

Shlaes acknowledges that the students had a right to be dissatisfied with economists and their models that together failed to predict the financial meltdown and Great Recession and still cannot explain why it happened. She rightly recommends including more Austrian economics in formal macroeconomics courses. After citing Joseph Schumpeter's observations about the cyclical nature of the economy and the importance of entrepreneurship, she gets to the heart of the matter.

Schumpeter's fellow Austrian Ludwig von Mises noted that credit expansions and booms lead to misallocations of cash. The Austrian School of economics, of which Mises is the modern father, called such misallocations "malinvestment and overconsumption." Malinvestment, in turn, ensures that the boom is doomed. No better example has existed than the money that poured into obscure mortgage securities in 2006 and 2007. But there was no Schumpeter and no famous Austrian School philosopher at Harvard at the time.

Shlaes also notes the crony capitalist aspect of the economic crisis in the form of Fannie Mae among others.That leads her to commend insights from public choice economics as well. She concludes by recommending, "Add in more Schumpeter, Austrian economics and public-choice theory in Ec 10, and at Harvard generally, and you'll be offering next year's freshmen diversity worthy of America's leading university."

Once More with Feeling: Fannie Mae Gets Another $7.8 Billion from the U.S. Treasury

Back in the old days before the housing crisis, bonds issued by Fannie Mae were considered almost risk-free. This was because, it was thought, while the company was a private entity, it was backed up by the full faith and credit of the U.S. government. Were those investors right! Fannie Mae, just got another $7.8 billion infusion. That brings the total Fannie bailout to $112.6 billion so far, with no end in sight in the near future. 

This is the sort of crony capitalism that the Occupy Wall Street movement is justified in protesting against. When one considers the examples from God's people such as Job, Abraham, and Solomon, it is clear that there is nothing evil about prosperity per se. Getting rich by ripping people off, is another matter. As James says,

Come now, you rich, weep and howl for the miseries that are coming upon you. Your riches have rotted and your garments are moth-eaten. Your gold and silver have corroded, and their corrosion will be evidence against you and will eat your flesh like fire. You have laid up treasure in the last days. Behold, the wages of the laborers who mowed your fields, which you kept back by fraud, are crying out against you, and the cries of the harvesters have reached the ears of the Lord of hosts. You have lived on the earth in luxury and in self-indulgence. You have fattened your hearts in a day of slaughter. You have condemned and imurdered jthe righteous person. He does not resist you (James 5:1-6).

You're a Mean One, Mr. Grinch

This just in from the "You've GOT to be kidding me!" department. According to the Federal Register, the US Department of Agriculture will assess a fifteen cent tax on the sale of Christmas trees to fund research on how to stimulate demand for real Christmas trees.

This is a classic case of fixing a tax small enough so that each individual family will not feel much pain, but will benefit the interested parties enough that they will lobby for it.

As Condy Raguet wrote in Essay No. XCVII of his Essays on the Principles of Free Trade, published in 1831,

Every one who has examined the subject, knows, that the reason why restrictive laws have been introduced into the commercial policy of most nations, is, that those who have a great and direct interest in the enactment can always bring their influence and power to bear upon the government more efficiently, than those, even thou vastly more numerous, whose interest is small and indirect (Itallics in the original).

The restrictive laws Raguet was speaking of included taxes on imports designed to make the price of imported goods higher.

Even if the per person cost of the tax is small, it is bad on principle. If live Christmas tree growers want to have someone study ways to increase demand for their product, they can fund it themselves. They have no right to have the USDA coercively take money from someone--even if it is only fifteen cents. No where is it written in Scripture, "Thou shalt not steal, except if it is a really small amount."

Expect Unemployment to Rise

In the unskilled labor sector anyway. CNN reports that the minimum wage is scheduled to increase in eight states. This means, of course, that it will make unskilled labor more expensive to hire for businesses. For those workers who do not generate enough income for their firms, they will be let go, adding to our nation's unemployment woes.

Some might argue that increased wages is just what the laboring poor need. While that sentiment is certainly understandable, the problem is that higher legal minimum wages make it harder to employ these very people. That is the main reason why the minimum wage does not reduce poverty. Those interested in more on the issue of the minimum wage might be interested in a piece I wrote a few years ago, "What You Need to Know About the Minimum Wage."

Costs of War

Today is Veteran's Day, a national holiday that used to be called Armistice Day, a day celebrating the end of World War I. In 1954 the name was changed to Veterans Day and the focus turned toward honoring all those who fought in all wars for the United States.

On days such as this, I think it important to remember that wars do come with a tremendous cost. Former CIA analyst Michael Scheurer reminds us, for instance, that our interventionist foreign policy bring with it serious costs as well as perceived benefits. Robert Higgs also recently noted that so-called monetary waste in war expenses winds up in someone's pocket. For those who would like a definitive word on the economics of war, I recommend Chapter XXXIV from Ludwig von Mises's Human Action.

In some of his most urgent prose, Mises finishes this chapter with the following:

How far we are today from the rules of international law developed in the age of limited warfare! Modern war is merciless, it does not spare pregnant women or infants; it is indiscriminate killing and destroying. It does not respect the rights of neutrals. Millions are killed, enslaved, or expelled from the dwelling places in which their ancestors lived for centuries. Nobody can foretell what will happen in the next chapter of this endless struggle.

This has little to do with the atomic bomb. The root of the evil is not the construction of new, more dreadful weapons. It is the spirit of conquest. It is probable that scientists will discover some methods of defense against the atomic bomb. But this will not alter things, it will merely prolong for a shorttime the process of the complete destruction of civilization.

Modern civilization is a product of the philosophy of laissez faire. It cannot be preserved under the ideology of government omnipotence. Statolatry owes much to the doctrines of Hegel. However, one may pass over many of hegel’s inexcusable faults, for Hegel also coined the phrase “the futility of victory” (die Ohnmacht des Sieges).3 To defeat the aggressors is not enough to make peace durable. The main thing is to discard the ideology that generates war.

Joseph Salerno on International Monetary Systems

The Ludwig von Mises Institute has recently posted videos of several lectures from this summer's Mises University. While all appear intriguing, I highly recommend Joseph Salerno's lecture on international monetary systems. He provides a masterful taxonomy of the various monetary systems that nations have used to facilitate exchange. In light of the uncertainty of the future value of the dollar and the viability of the Euro, Salerno's lecture is of more than mere academic interest.

Ideology Matters

Yesterday I argued that one reason that it is so hard to cut government spending is that so many people no are direct recipients of government money. Another important obstacle to a more sound economic system is our contemporary ideology of state provision.

Robert Higgs explains a significant change in American ideology that has taken place during the past 120 years. He uses a recent speech by President Obama in which the President warns, "if we don’t work even harder than we did in 2008, then we’re going to have a government that tells the American people, ‘you are on your own.'"

Higgs responds,

How horrible the prospect! On your own to pay for your own health care; on your own to pay for your own college expenses; on your own to pay for a lawsuit against a corporation that has harmed you unlawfully. How can anyone with an ounce of humanity in his body expect people to take such self-responsibility? The next thing you know, those callous, reactionary Republicans—you know, the ones who ran up the size, scope, and power of government consistently under every Republican president since Chester Arthur—will demand that people take care of their own children and aged parents! Where will it end? 

Higgs' shows how contrary Obama's rhetoric is to the historic American tradition by quoting from remarks made in 1887 by President Grover Cleveland as he vetoed a bill that authorized $10,000 to help farmers struggling with drought. "I can find no warrant for such an appropriation in the Constitution, and I do not believe that the power and duty of the general government ought to be extended to the relief of individual suffering which is in no manner properly related to the public service or benefit."

Higgs concludes:

No politician seriously seeking the presidency today would dare to say what Cleveland—an exceptionally courageous and honest politician even in his day—said in the late nineteenth century. American politcos have learned that the people have come to crave government paternalism, indeed, that they pant for it and demand it at every turn. Obama is not the brightest light, yet he understands how to get elected, and in that quest he is pandering to the same personal irresponsibility and desire to prey on one’s fellows that have been the hallmarks American politics from the Progressive Era to the present.

This discussion brings to mind a passage from Ludwig von Mises' Human Action. When discussion the importance of a person's ideology on his actions he uses a anthropomorphic allusion:

If we hypostatize or anthropomorphize the notion of ideology, we may say that ideologies have might over men. Might is the faculty or power of directing actions. As a rule one says only of a man or of groups of men that they are mighty. Then the definition of might is: might is the power to direct other people's actions. He who is mighty, owes his might to an ideology. Only ideologies can convey to a man the power to influence other people's choices and conduct. One can become a leader only if one is supported by an ideology which makes other people tractable and accommodating. Might is thus not a physical and tangible thing, but a moral and spiritual phenomenon. A king's might rests upon the recognition of the monarchical ideology on the part of his subjects (pp. 188-89).

Given the power of ideology as described by Mises, if Obama is right and we have adopted dependency as a reigning ideology, I am less than optimistic that we live amongst a people who will be willing to abide shrinking the size of government. Alas, drastic shrinking is necessary for a return to true economic prosperity.

Why Is It So Hard to Cut Spending?

One reason is that so many people rely on government largesse. As a story at Bloomberg News points out,

A record 49 percent of Americans live in a household where someone receives at least one type of government benefit, according to the U.S. Census Bureau. And 63 percent of all federal spending this year will consist of checks written to individuals for which the government receives currently no services, the White House budget office estimates. That’s up from 46 percent in 1975 and 18 percent in 1940.

With so many people receiving so noticeably direct financial benefits from the government, it is easy to see why congressmen elected by the people do not find it in their interest to cut spending. It would be like taking the knives away from those who butter their bread.

Reduce spending in this environment will require the people to possess a significant amount of character. I am not sure we have the right stuff. I would be happy to be wrong.

Review of Foundations of Economics

The Fall 2010 issue of Faith & Economics includes a very charitable review by K. Brad Stamm of my book, Foundations of Econocmics: A Christian View. Faith & Economics is a journal published by the Association of Christian Economists. The review is on pages 148-52 of Volume number 56. Unfortunately an on-line version of the review is not yet available, but should be in January.

Right off the bat, Stamm's review made me glad by describing my book as "both a text and a treatise combining various scriptures with the philosophical contributions of free market advocates such as Ludwig von Mises [and] Murray Rothbard. . ." That shows me that Stamm understands the nature of the book. It is not meant to be merely a text in the conventional sense, but it also is not meant to be a work of theology. It is meant to be an introduction to the foundations of economics and economic principles within a Christian theological and ethical framework.

Stamm concludes his review by putting me in some rather distinguished company:

As we move further away from a market-oriented economy, the likelihood of Friedrich A von Hayek, Peter J. Boettke of George Mason University, or Shawn Ritenour, being vindicated, seems to be ever increasing. Finally, Foundations of Economics adds to the literature important concepts and applications that could assist Christian economists in developing a Christian economics taxonomy. . . .

I did note is that there is an error when Stamm quotes me on the issue of poverty on page 151 of the review. He quotes me as saying "God does not make it clear that we are to help the poor" p. 441). My text actually reads as follows:

God does make it clear that we are to help the poor. We are to be imitators of God and he tells us that he cares for the poor (Ps. 35:10). God tells us that the poor and orphaned are to be defended from would-be oppressors (Ps. 82:3). We definitely should not turn a deaf ear to the cry of the poor. In fact, God tells us that whoever ignores the plight of the poor himself shall not be heard when he calls for help (Prov. 21:13). God tells us that in times of trouble, he will deliver the one who has consideration on the poor (Ps. 41:1). Whoever is charitable to the poor lends to the Lord and God will repay him for his generosity (Prov. 19:17). The mandate to minister to the poor even includes our poor enemies (Prov. 25:21).

Economic Freedom and the Quality of Life

This weekend I am participating in a colloquium sponsored by the new Institute for Faith, Work, and Economics. At the end of the remarks of the opening evening's speaker, he showed the following video, which makes the case for economic freedom very succintly.

Good News From Cuba

The Cuban government is going to allow its citizens to buy and sell property. This will be the first time such exchanges will be legal since Fidel Castro came to power. The new rules are set to go into effect on November 10. This past Valentine's Day, I noted that there appeared to be hope for entrepreneurship due to legal reforms. May the movement toward real private property continue.

Energy Policy and the Cost of Good Intentions

Timothy Terrell is one of the most insightful economists writing and lecturing on environmental economics today. He is to be commended for his outstanding new policy paper published by the Cornwall Alliance. The paper is entitled "The Cost of Good Intentions: The Ethics and Economics of the War on Conventional Energy" and is a tremendous exposition and critique of contemporary energy policy with the goal of helping Christians, and especially pastors, make sense of energy issues. Everyone interested in the stewardship of creation should read it.

The following is from the paper's Executive Summary:

The pastoral call requires shepherding a congregation through difficult circumstances, including challenges from the spiritual message and economic consequences of environmentalism. It is difficult to develop the knowledge and wisdom necessary to give biblical counsel on such issues, especially in light of complex scientific problems and intense policy debates. Yet the church must evaluate alarms raised about the environment and policies to address them. This paper is intended to assist ministry leaders, policy makers, regulators, and the public in understanding and applying biblical worldview, theology, and ethics, coupled with excellent science and economics, to promote a free, prosperous, and just society in a fruitful, beautiful, and safe environment.

Did the Repeal of Glass-Steagall Make Possible the Financial Crisis?

Noted historian Tom Woods says no, it was irrelevant. The Glass-Steagall Act of 1933 separated commercial banking and investment banking. The so-called repeal in 1999, Woods notes, revoked only one paragraph of the original law and allowed the same holding company to control both investment and commercial banks.

Woods argues:

Because Glass-Steagall was passed during the Depression, it is assumed that it was addressing a pressing need of the time. In fact, the lack of government-enforced division between commercial and investment banking had precisely zero to do with bank problems during the Great Depression. The 9,000 bank failures during the early 1930s had far more to do with the damage done by government regulation — namely, the unit-banking laws that made it difficult for banks to diversify their portfolios (by limiting them to a single office and making branching illegal) — than with a lack of regulation. These were small banks, not the behemoths for which Glass-Steagall would have been relevant. Canada had none of these stifling regulations, and had zero bank failures. (Incidentally, Canada also avoided all the post-Civil War bank panics that struck the U.S., even though Canada did not have a central bank until 1934 — yet again, reality refuses to conform to the where-would-we-be-without-our-wise-overlords comic-book version of events.)