Why ObamaCare Will Fail

A tremendous reading list with works by scholars affiliated with the Ludwig von Mises Institute. Everything you want to know about the economics of ObamaCare.

Do Not Hate Us Because We Are Free

It has come to this. In the land of the free and the home of the brave, the supreme arbiters of all things constitutional have once again told us that the rule of law is a sham. Every time I am tempted to believe I think too cynically about the state, one of its bodies does something to reveal that, to the contrary, I am not cynical enough.

With yesterday's Judicial affirming of President Obama’s healthcare socialization scheme, we are reminded once again that we truly live in a nation much more totalitarian than we think. We have embraced the age of the Pharaoh and kissed it full on the mouth. Once again we must face the dismal fact that there is no such thing as truly inviolable private property. If the state wants to take anything from anyone, it merely has to invent a right, pass a law, and there it is. “So let it be written. So let it be done.” The only right to private property we enjoy is very fleeting and only exists until the government decides it needs some more of what is ours.

I feel like Charlie Brown at the beginning of A Charlie Brown Christmas. He tells Linus that he knows he should be happy, but he always ends up feeling depressed. I increasingly get the same feeling this time of year as people gear up for 4th of July celebrations. Independence Day used to be my favorite holiday when I was a boy. I spent a lot of my childhood reading about the Colonial era, the lives of people like Sam Adams, Paul Revere, Thomas Jefferson, Patrick Henry, and George Washington. I learned all about our American forebears struggle for liberty against a King who merely treated them as revenue generating pawns. I was nine years old when the U.S. celebrated its bi-centennial and my mother wallpapered my room with a red, white, and blue colonial American themed paper.

Now, much older and, I think wiser, when I hear the popular media talking about our freedoms, the Declaration of Independence, the Liberty Bell, Celebrate America concerts, and all the rest on the Fourth of July, instead of being happy, I am filled with sadness. They clearly have no idea what they are talking about. Most seem to not even know what liberty really is. The only politician at the national level who spoke about freedom and the Constitution with actual conviction was Ron Paul and they laughed him off the stage. The talking heads try to make us believe that we are free because we are allowed to have other people vote away our liberties.

That it is wrong and even unconstitutional to force people to buy a product they do not want from a business they do not intend to support merely because they are citizens should not even need to be disputed. Addressing the nation after Obamacare was upheld by the Supreme Court, the President said his law was much needed reform that benefited all Americans. Since when is forcing people to buy things they do not want beneficial? Such a state mandate is a clear act of coercion separating man from his property. It is legalized theft. If I was to hold my neighbor at gun point until he bought a product I thought he should buy, I would rightly be arrested and put in jail for assault with a deadly weapon. When our current rulers do the same thing to us, it is championed as enlightened social policy, and we are expected to just lie back and enjoy it. Orwell would be proud. Marx and Lenin would congratulate us on our deft use of a bit of the old dialectic.

Meditate on such corruption of liberty when you hear Lee Greenwood sing he’s proud to live “where at least I know I’m free.” To sing that with sincerity is to sing under server delusion. Think about the joys of socialized health care, socialized education and our socialized monetary system the next time you hear someone thank military personnel for defending our freedoms. If radical Muslims really do hate us because we are free, someone should tell them what is still dirty, but is no longer our little secret,—We are not that free!

That is all I have today. A lament for our society. Over a decade ago I remember the venerable Paul Harvey quipping that Madison Avenue has been busy selling homemade taste to a generation that does not even know what homemade tastes like. Similarly, our rulers and their propagandists always busy themselves this time of year selling liberty to a people who do not even know what liberty is. I know I should be happy with all the fireworks, family gatherings, and patriotic songs, but I end up being depressed. Nevertheless, Tu ne Cede Malis. As the Apostle Paul exhorted the Corinthians, “Quit you like men.”

The Importance of Economic Theory

One of the points I stress in my Foundations of Economics course is the importance of one's economic framework and its consequences for economic theory. When faced with an economic problem the first inclination of most people is to jump right to the policy prescription that they think will solve the problem. The trouble is, as I tell my students, any economic policy is only as good as the economic theory from which it springs. Bad economic theory tends toward bad economic policy.

Economic theory, on the other hand is only as good as one's theory of human action because human action is the root of all economic phenomena. One's theory of human action, furthermore, depends on a person's understanding of human nature, which is heavily informed by beliefs about, what we might call, ultimate things: theology and philosophy.

If a person thinks that there is no God and that humans are basically more advanced animals ruled by biology, then he is more likely to think what we call human action is more like human behavior reacting to various stimuli in some prescribed manner. Such a view of man implies modeling economic activity as the result of behavior driven by, in Veblen's term, "lightning fast calculators of pleasure and pain."

On the other hand, if someone thinks that man is a creature made in the image of God who thinks, plans, and acts with a purpose, he is more likely to view man as a being who continually manifests purposeful behavior. He recognizes that, while man is a biological entity, he is not merely that. He is a being who acts according to his volition, not merely biological instinct. He is a being who is free to respond to various stimuli according to his will. Such an understanding of man points toward the causal-realist (Austrian) economic framework.

All of this is important, because economists' policy recommendations are reflective of their economic theory. A good example of this importance of economic theory can be found in a recent National Association of Business Economists survey.  The survey contains a lot of information about the thoughts of contemporary economists and the survey report contains a very revealing graph illustrating what economists think of current fiscal policy:

Economists are almost evenly split between thinking the government spending is too much, is too little, and is just right. Who can blame people for treating economists with severe cynicism.

This failure to get their policy act together is not due to economists' disagreement in their desired ends. No doubt all of the participants in the survey prefer life to death and prosperity to poverty. The reason for their division is differences in their understanding of economic theory. If one gets their theory wrong, they will recommend bad policy.

As mentioned above, good economic theory begins with a proper understanding of human action, which requires a proper understanding of man. Such sound economic theory allows us to understand that the consequences of fiscal stimulus are useless at best and destructive at worst. Such a consideration is one more reason why the way we do economics at Grove City College is important.

Epistemological Problems

Gordon H. Clark

During the panel session devoted to assessing my book, Foundations of Economics: A Christian View, at the Christian Scholars Conference, one of the participants wondered if on page 8 I did not make too abrupt a leap from Kant's apriorism to Gordon Clark's Christian theist presuppositionalism. He suggested that a humanist perspective, along the lines of what Mises does in Human Action would work just as well. He was afraid that some students might bristle if they suspected they were being force fed an epistemological theory unnecessarily.

I responed by saying that upon re-reading page 8 of my book, I fully admit that my pace is brisk and the transition too abrupt. I also noted that I am not a philosopher even though I play one from time to time in the classroom. Nevertheless regarding epistemology I find the arguments of philosopher Gordon Clark and theologian Herman Bavink compelling.

Herman Bavink

It is Gordan H. Clark in his A Christian View of Men and Things who convinced me of the problem of Kant’s subjective mental categories. In my book I repeat Clark’s solution to the knowledge problem. It turns out that Clark's solution was also recognized and affirmed by Bavink, noting in his Reformed Dogmatics, that science requires a common innate disposition toward learning which includes possession of “the laws of thought” (Bavink 2004, pp. 70–71).

Like Clark, however, Bavink understood that appealing to a common human trait is not enough. We must be confident that our perception of human cognition is correct. He writes:

It seems strange, even amazing, that converting mental representations into concepts and processing these again in accordance with the laws of thought, we should obtain results that correspond to reality. Still, one who abandons this conviction is lost. But that conviction can, therefore, rest only in the belief that it is the same Logos who created both the reality outside of us and the laws of thought within us and who produced an organic connection and correspondence between the two. Only in this way is science possible, i.e. knowledge not only of the changing appearances but of the universal, the logical connections inherent in things (Bavink 2003, p. 231). 

In light of these considerations, it does seem to me, as I argue in my book, that a sound epistemology must begin with presupposing the God of the Bible creating nature and man in a way that allows us to perceive reality. Ludwig von Mises' work is attractive to me because he begins with reason and the reality of human action. This begs the question, why do we accept reason? How do we defend it? It is my conviction that is the Biblical view of man and creation that allows us to use our laws of thought with confidence that we can indeed perceive reality. I embrace Mises' work, therefore, because it is compatible with the Christian view of man.

How Fed Stabilization Policies De-Stabilizes

One of the commonly-cited reasons for the existence of the Federal Reserve is to stabilize financial markets and thereby the economy. Ben Bernanke repeated this claim during one of his recent lectures at Georgetown.

Those who understand sound capital theory recognize, however, that the Fed is actually in the de-stabilization business. At the macroeconomic level, the Fed, when it acts to lower interest rates, bankrolls artificial credit expansion (lending not funded by voluntary savings), this stimulates malinvestment by encouraging too much investment at production stages away from consumption and not enough investment at stages closer too consumption. The stock of existing capital goods gets stretched both ways, until a crisis occurs, resulting in recession and liquidation.

A story from Bloomberg news last month documents a certain path some of the malinvestment takes at the microeconomic level. Because the Fed has done everything it can to drive interest rates into the ground, individual investors are taking on more risk is search of higher returns. No doubt this behavior is encouraged because the U. S. Government has a recent track record that clearly communicates it is ready to bail out any investment that is big and bad enough.

Summary of Foundations of Economics

Dr. J's chapter-by-chapter summary of Foundations of Economics is now available on his "Reading Economics" page at his blog, Western Tradition. Dr. J was the driving force behind the session devoted to my book at the recent Christian Scholars Conference.

Ron Paul in the Financial Times

A few of weeks ago, I noted one of the greatest pieces economic commentary that had appeared in the Wall Street Journal in some time. Although I am a late with this, I still am happy to direct you to what has to be the best economic commentary that the Financial Times has published in just as long. U. S. Congressman Ron Paul has written an outstanding essay explaining that "Our central bankers are intellectually bankrupt."

He correctly notes the following:

• Way too many mainstream economists inconsistently oppose wage and price controls, but embrace Fed manipulation of interest rates.
• Printing unlimited amounts of money does not result in prosperity.
• Re-inflating the economy in response to an inflation-induced business cycle merely sows the seeds for another boom/bust cycle. 

He concludes his essay with a powerful plea warning against state-controlled money.

Control of the world’s economy has been placed in the hands of a banking cartel, which holds great danger for all of us. True prosperity requires sound money, increased productivity, and increased savings and investment. The world is awash in US dollars, and a currency crisis involving the world’s reserve currency would be an unprecedented catastrophe. No amount of monetary expansion can solve our current financial problems, but it can make those problems much worse.

All in all, a very impressive achievement and the best economic analysis to appear in the Financial Times in years.

How to Put a Waitress Out of Work

Michael Saltsman, a research analyst from the Employment Policy Institute, explains that an easy way to do so is to raise the minimum wage. Saltsman in his excellent Wall Street Journal piece is responding to Tom Harkin's "Rebuild America Act" which will raise the minimum wage for workers who receive tip income by 220%. 

It boggles the mind that contemporary policy makers and a large set of the intelligentsia still think that raising the minimum wage helps the working poor. In a free market there is a tendency for workers to be paid according to the economic contribution of the marginal laborer. Increasing the minimum wage does not make workers more productive. Therefore, if the government raises a wage floor above the market wage, the quantity of workers hired will decrease and unemployment will occur. This is the last thing we want to do if we are unhappy with our continuing high unemployment rate.

In saying this, I do not mean to be callous to the concerns of the working poor and unemployed. Far from it. Real compassion requires telling the truth. As I said in the paper I presented last week:

Many Christians think, for example, that, because Christians are called to care for the poor and because they think that increasing the incomes of the working poor will greatly help the poor, they advocate raising the minimum wage. Economic theory, however, demonstrates definitively that if the government imposes a minimum wage above the market wage, unemployment will occur and those who lose their jobs or are not hired to begin with will be the least productive, and hence, most poor of all. As I write in my book:

When attempting to formulate economic policy that best fosters sustained economic progress, prevents recession, or encourages recovery in the middle of a recession, policy makers must keep in mind that economic law is indeed economic law. It is not merely economic opinion or economic suggestion. Sound economic principles are sound because they are derived from the reality of human action. Just as Congress cannot repeal the law of gravity, it cannot repeal the laws of economics either. For a policy to effectively achieve its goal, it must be in full accord with sound economic analysis (Ritenour 2010, pp. 382–83).

The bottom line is that raising the minimum wage above the market wage results in unemployment. At best, some people are helped at the expense of the most economically vulnerable. Harrkin's bill would be better titled the Keep America Out of Work Act.

The Ethics of Capital and Interest

Today I am lecturing on the ethics of capital and interest at this year's Acton University. The course description says "Capital and interest are often viewed as morally suspect. This course will examine interest and capital from an ethical framework with a focus on its positive moral contributions to society."

In order to accomplish this objective, I must first explain the economic nature of capital and interest, demonstrating how each contribute to fulfilling the cultural mandate and human flourishing, not misery. I then examine and counter several ethical charges leveled at the private accumulation of capital and the paying of interest.

A fuller description of my lecture can be found in this post from last year.

Rothbard on Mises

Here is a treat: a video of a speech Murray Rothbard gave at the 1984 Libertarian Party convention. His address is entitled, "A Tribute to Ludwig von Mises." He discusses Mises' contributions to economics and his thoughts on political philosophy. You can watch the entire thing here:

Acton University 2012

I will be lecturing again this year at The Acton Institute's Acton University 2012. I will be reprising my lecture on The Ethics of Capital and Interest. I will be explaining the social benefit of capital as well as responding to various ethical criticisms of capital accumulation and interest. Alejandro Chafuen, Jeff Tucker, Peter Boetkke, Sam Gregg and others will also be lecturing there.

Free Markets, Flexibility, and Economic Recovery

Last Friday I was honored to participate in a panel session devoted to discussing my book Foundations of Economics: A Christian View. Four reviewers presented their review of my book and then I responded to the reviewers. The lone financial practitioner on the panel asked that I discuss the long-term picture of US employment – since the recovery we have had has not been a jobs recovery. I responded by saying:

As long as the state continues to intervene in the economy, I am not overly optimistic. We should not expect the employment situation to improve very quickly as long as the state makes it more difficult, more risky, and less economically feasible to hire workers on the one hand, and also pay people not to work on the other.

If, however, the state does significantly reduce its presence in the economy by halting monetary inflation, cutting spending, and reducing business regulation, we would move toward a better outcome. There would be increased liquidation of malinvested capital. There could be increased unemployment in the short run, as increased lay-offs would be likely. If, however, markets for products and labor were kept flexible, workers would more quickly find their way into those occupations that are needed by successful entrepreneurs who are profitable precisely because they are producing what people want. In a free society, unemployment that results from a recession need not be prolonged and especially agonizing. If that does happen, it is a sure sign that the government is not allowing the market to function properly.

These remarks are presently being born out in Spain. Flexibility in labor markets is exactly what Spain needs notes business analyst, Mariano Guindal. One of the main reasons for rigid labor markets in Spain is unionism. He writes:

The unions have enjoyed a social prestige and power that was not seen anywhere else in Europe.They were very politicized and were very protectionist of those who had jobs, but they didn't think about the jobless.

Guindal's point that flexible, dynamic labor markets are important for any sort of real economic recovery echo's Joseph Salerno's reminder that "If we want want laborers and employers to come together to  discover and create value-productive jobs, then the prescription is simple:  leave labor markets alone and let them churn."

Bad News for China

Chinese industrial output and retail sales are slowing as reported by Bloomberg. Note that faulty Keynesian analysis by the report also sees lower price inflation as bad sign. In fact, the Chinese are in the same Keynesian position between a rock and a hard place with not much they can do via stimulus. So says the Financial Times. Previous government inflation has fostered massive malinvestment. Now China's business cycle is turning from the inflationary boom phase to the bust and its government is trying to prop up the boom by lowering interest rates for the first time since 2008. It is following the same path of the United States. There is good reason to expect the same dismal results.

Fulfilling the Cultural Mandate

Dr. J at the Western Tradition has finished reading and live-blogging about my book in preparation for tomorrow's session devoted to the same at the Christian Scholars Conference. The final chapter of my book is entitled "Fulfilling the Cultural Mandate" and brings everything together. As such, Dr. J's summary provides a good overall description of my approach through the entire book.

The Fed HAS Failed

When we fail to achieve our goals, it is human nature for us to try to make ourselves feel better by comparing ourselves to someone who has failed even worse. I thought of this when I saw yesterday's Chart of the Day at Business Insider. Fed apologist Joe Weisenthal uses the chart below to argue that it is the Bank of Japan that really has failed since 1995.

Weisenthal notes that the Bank of japan has had a much harder time hitting its inflation target of 1% than the Fed has of hitting its target of 2%. The Fed is relatively much more capable and credible. QED.

I would argue, however, that to measure an institution's effectiveness, one should not compare its performance to someone else, but rather should examine whether it has fulfilled its stated purpose. The Employment Act of 1946 stated that the official economic policy of the United States Government was "to promote maximum employment, production, and purchasing power." This general directive was explicitly applied to the Fed by the The Federal Reserve Reform Act of 1977 which identified price stability as a monetary policy goal. The following year, the Full Employment and Balanced Growth Act was approved and established full employment as a second goal of monetary policy.

Let's see how well the Fed has fulfilled its mandate. The chart below shows what has happened to the Consumer Price Index since the Fed's inception.

So how well has the Fed maintained price stability during its almost 100-year tenure? Not so well. The dollar has lost over 95% of its purchasing power since the advent of the FED. The increase in prices has been especially steep since leaving the last gasp of the international gold standard. The chart below shows what has happened to consumer prices since August of 1971 when Nixon closed the Gold window:

It is almost a continual climb upward. The performance for the period after August 1971 is very important, because once the international gold standard was abandoned, the only constraint on monetary policy was the Fed itself. It is one thing for the Fed to keep prices relatively stable when it knew that profligacy meant significant gold drain. Indeed even that threat proved too weak by the late 1960s, which prompted Nixon to abandon our obligations and cut the dollar free from gold. It is easy to see how successfully the Fed has stabilized prices since then.

The Fed clearly has failed in its mandate to maintain price stability. What about employment? It turns out that the unemployment rate has been wildly erratic since 1948, the farthest back unemployment data goes at FRED, the St. Louis Federal Reserve Data Base.

This is not a picture of stability. Instead the track record is one of repeated economic cycles which manifest significant unemployment.

Not withstanding the claims of Joe Weisenthal, the clear conclusion is that the Fed is  a failure. It clearly has not fulfilled its mandate. Sound monetary theory and business cycle theory teaches that the Federal Reserve has failed because it has caused price inflation, a massive shrinkage of the purchasing power of the dollar and the business cycle.