The Circle Bastiat
Peter Boettke has an excellent commentary over at Coordination Problem, “Is This How the Myth of the Laissez Faire Herbert Hoover Was Invented?”. He concludes, “Herbert Hoover was as much of a laissez faire president as Barack Obama has been or the leaders in Europe have been. From a free market perspective, the steps taken since 2007 have turned a market correction into an economy wide crisis and then a global crisis. Those steps were anything but ‘do nothing,’ and they were taken first by a Republican President and then pursued further by a Democratic President. We have never given ‘nothing’ a chance. But mythologies need to be created in order to tell neat historical tales. Laissez faire Hoover is replaced by activist FDR and the nation is saved.”
Pierre Lemieux in Somebody in Charge: A Solution to Recessions? provides a detailed and enlightening discussion of how the issues Peter raises in his post played out in the recent crisis. Policy failure, not market failure generated the malinvestments and crisis. The rush to do something slowed recovery.
From my review essay (pdf available on request), in The Independent Review “A Crisis of Authority: Pierre Lemieux’s Somebody in Charge: A Solution to Recessions?, the SUMMARY”
“The roots of the recent financial crisis, according to economist Pierre Lemieux, lay not in greed and self-interest running amuck in unhampered markets, but in the policy and regulatory structure that created and enabled excessive leverage and risk taking. If Lemieux’s latest book were widely read, more people would believe that financial regulators and central banks are not needed to avoid financial crises and economic recessions.
And the conclusion:
“Lemieux’s conclusion that “The causes and legacy of the economic crisis of 2007-2009 reveal a deeper underlying crisis, which is a crisis of authority” (p. 162). If this book was widely read and widely used in classrooms, it could be very useful in awaking more of the public that we do not need somebody in charge. What we need is ‘Wicksteed’s car of collectivism’ to ‘be stored on a sidetrack” (p. 163).”
In 1845, Frédéric Bastiat penned a satirical masterpiece with the long lumbering title of “A PETITION From the Manufacturers of Candles, Tapers, Lanterns, sticks, Street Lamps, Snuffers, and Extinguishers, and from Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting.”
This faux open letter to the French Parliament told its members that they were on the right track in not worrying about low prices and abundance for customers, but in their concern and protection of the nation’s producers.
Forget theory and principle, and the common man’s well-being, what’s best for the producer must be the parliament’s primary concern. And of course, from the title, one can figure out that the petition addresses the wholly uncompetitive way the sun provides lighting.
Bastiat is brought to mind by the case of tanning customer Patricia Krentcil of Nutley, New Jersey, who is charged with taking her 5-year-old daughter inside a tanning bed. Ms. Krentcil is now dubbed the “Tanning Mom,” is the brunt of late night comedy sketches, the subject of a parody action figure and has reportedly been banned from local tanning salons.
New Jersey law prohibits children under the age of 14 to tan in a tanning booth. Teenagers between 14 and 17 in that state can tan in a booth, but must be accompanied by an adult, which seems like it would be a little crowded.
Of course this whole brownhaha started when a teacher at the 5-year old’s school was concerned when the child came to school with a sunburn. The little girl was telling her classmates that she “went tanning with Mommy.”
Upon hearing this, the conscientious teacher swung into action, not by grabbing some Aloe Vera, but by calling the cops to report child endangerment.
“This whole big thing happened, and everyone got involved,” Rick “Tanning husband” Krenteil said. “It was 85 degrees outside, she got sunburned. That’s it. That’s all that happened.”
Tell that to politicians who have already slapped a 10% tan tax on the industry. NJ.com reports,
But at the Statehouse today, lawmakers and health experts said they’re now trying to channel Patricia Krentcil’s notoriety into another cause: jump-starting a stalled bill that would ban anyone under 18 from using a tanning salon.
With prom season approaching, [Blair] Horner said he hopes lawmakers will act. “Parents will feel more comfortable saying no if there is a law against it,” he said.
Assemblyman Herb Conaway (D-Burlington), sponsor of bill (A21422) said the episode in Nutley “will raise attention among my colleagues … Unfortunately, this is how change comes.”
Chicago pols also want to ban teen tanning. ”We regulate cigarettes being sold to minors under the age of 18 mainly because they are harmful to our youth. I do not see why this should not be extended to barring minors under the age of 18 from tanning facilities,” 50th Ward Alderman Debra Silverstein said in a news release.
North of the border, Conservative MP James Bezan wants to stop Canadians under the age of 18 from tanning indoors. Bezan and his wife admit to tanning via a tanning bed in their younger years, but with more and more young Canadians browning up for prom season, Bezan says, “That is a disturbing fact, and also that melanoma is the number three cancer among women under the age of 30.”
But one wonders if these assorted local politicians are not setting their sights high enough. Are tanning beds really the biggest bogeyman to eradicate in the concern for melanoma? Isn’t there a big red ball in the sky throwing off lots of heat and light that damages people’s skin, and not to mention, makes everyone sweat. That thing that rises in the east and sets in the west.
Assemblyman Conaway, Alderman Silverstein, and MP Bezan, it is the sun that is the real problem. And short of shutting off the sun’s harmful rays, the only way to protect our kids is to make it unlawful for any and all children under the age of 18 to be outside exposed to the sun’s rays at any time. Young people’s delicate skin must be protected and laws must be passed requiring children to stay indoors.
Early reports describe Facebook’s much-ballyhooed IPO as a dud. This seems to support The Economist’s worries about the future of the public company, a theme raised by Michael Jensen in a famous 1990 article. Indeed, the corporate form has been hammered lately, the victim of particularly burdensome regulation under the Sarbanes-Oxley Act and other schemes. As noted in the Economist piece, the number of public companies, as well as the number of IPOs, have declined sharply over the last decade.
I’m certainly a fan of private equity (along with proprietorships, partnerships, cooperatives, and other organizational forms). But, as Art Carden and I discussed in a recent Mises Academy course, reports of the death of the public company are greatly exaggerated. Despite the additional regulatory scrutiny, the agency problems associated with diffused ownership, and other challenges, the corporate form is still an effective means of raising large amounts of capital.
To be sure, corporations benefit from a number of state interventions (though I don’t think the corporate form itself is one of them, contrary to a widespread view in “left-libertarian” circles). So do all forms of organization. With a diminution of the regulatory state we would see a flourishing of a variety of firms, both public and private.
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.
Bloomberg.com columnist Caroline Baum reports some interesting statistics drawn from the the Bureau of Labor Statistics’ job openings and labor turnovers survey, or JOLTS. These figures illuminate the enormous flexibility and dynamism of U.S. labor markets. Last year, 48.2 million Americans lost or left a job, while 50 million Americans found a new one. The new hires represented 38.1 percent of total employment, which was down from 47.2 percent in 2005 at the peak of the Fed-fueled bubble economy. Now this figure does involve some double counting because some workers may have experienced multiple job separations and findings during the year. Still in all this is a notable performance with the economy still languishing in the doldrums in the aftermath of a major financial crisis, the effects of which are being prolonged by government and central bank interventionism. One can only imagine how much more creative job churning and productivity and employment growth we would have, if labor markets were completely freed from stifling government regulations and mandates as well as the massive uncertainty and distortions imposed by Fed monetary policy.
I posted last week on Organizations and Markets about the tepid,and entirely predictable, reaction of the higher education establishment to the information technology revolution. Mainline universities loudly proclaim their love of online learning — and pedagogical innovation more generally — while doing everything possible to retard it. The strategy has been to make a few easy, low-cost, conservative moves that preserve the status quo, such as putting some existing courses online, while trying to suppress the innovative outsiders like Phoenix, DeVry, TED, Kahn Academy, etc. It’s a classic example of what Clayton Christensen calls sustaining innovation — incremental changes that keep the existing market structure intact. The last thing the higher-ed establishment wants is disruptive innovation that challenges its dominant incumbent position.
As Morgan Brown wrote earlier this year, universities are guilds, and it’s this organizational structure, not bad leadership or the wrong ideology, that underlies the universities’ hostility to markets. If there is fundamental reform, it will surely come from outside the guild system, not within it. It’s great that Harvard and MIT and other elite universities are offering some classes online. But look instead to bolder experiments like the Mises Academy — not a duplicate of the standard degree program, but a modular, flexible, focused approach to teaching Austrian economics and related subjects. Call it guerrilla teaching. Let’s see where this new movement can go!
In a piece for Bloomberg, reporter Sanat Vallikappen begins, “Go away, American millionaires.” Valliikappen then goes on to explain that wealth management firms the world over are declining to open offshore accounts for Americans.
“I don’t open U.S. accounts, period,” said Su Shan Tan, head of private banking at Singapore-based DBS, Southeast Asia’s largest lender, who described regulatory attitudes toward U.S. clients as “Draconian.”
It hadn’t been easy for Americans doing financial business overseas, but since the 2010 passage of the Foreign Account Tax Compliance Act, known as Fatca, which seeks to prevent tax evasion by Americans with offshore accounts, opening a foreign bank account has become mission impossible.
The 2010 law, to be phased in starting Jan. 1, 2013, requires financial institutions based outside the U.S. to obtain and report information about income and interest payments accrued to the accounts of American clients. It means additional compliance costs for banks and fewer investment options and advisers for all U.S. citizens living abroad, which could affect their ability to generate returns.
The Institute of International Bankers and the European Banking Federation said in an April 30 letter to the IRS, that the 400 pages of rules and regulations issued by the American tax authority create Unnecessary burdens and costs.”
Massachusetts Democrat Richard Neal says the government needs to crack down on offshore tax dodgers. Mr. Neal wants tax money and doesn’t care much about privacy and all that.
“People should know, and the IRS should know, what money is being held offshore and for what purpose,” Neal said. “I don’t think there’s anything unreasonable about that.”
One young gentleman that believed Rep. Neal and the other thieves on Capitol Hill to be a bit too greedy and unreasonable is Eduardo Saverin, the billionaire co- founder of Facebook Inc. Before Facebook does its public offering, and the price of Facebook stock is quoted daily, making Saverin’s wealth undistributable, he decided to renounce his American citizenship and head for Singapore.
Saverin, 30, joins a growing number of people giving up U.S. citizenship, a move that can trim their tax liabilities in that country. The Brazilian-born resident of Singapore is one of several people who helped Mark Zuckerberg start Facebook in a Harvard University dorm and stand to reap billions of dollars after the world’s largest social network holds its IPO.
Singapore doesn’t have a capital gains tax. It does tax income earned in that nation, as well as “certain foreign- sourced income,” according to a government website on tax policies there.
Saverin has to pay the U.S. government an exit tax but doing it before the IPO was wise. Renouncing your citizenship well in advance of an IPO is “a very smart idea,” from a tax standpoint, said Reuven S. Avi-Yonah, director of the international tax program at the University of Michigan’s law school. “Once it’s public you can’t fool around with the value.”
There are a few Mises Institute supporters who have paid the American exit tax and now live in Singapore. None I’ve spoken with regret it.
“It’s a loss for the U.S. to have many well-educated people who actually have a great deal of affection for America make that choice,” said Richard Weisman, an attorney at Baker & McKenzie in Hong Kong. “The tax cost, complexity and the traps for the unwary are among the considerations.”
While Mr. Neal chases away taxpayers, the only ones left will be tax eaters.
Many left-libertarians have wanted to redefine “capitalism” negatively for a while: basically to mean “corporatism.” Now self-styled bleeding heart libertarians want to redefine “social justice” positively: basically to mean “concern for the poor.”
Both seem like rhetorical ploys of the same feather: an attempt to sound appealing to non-libertarians who also happen to frown on “capitalism” and smile on “social justice”. Both sets of non-libertarians happen to broadly line up with “the left”.
It is as if to say, “You on the left hate capitalism? So do we libertarians! You on the left love social justice? So do we libertarians! Therefore, you should consider being a libertarian!”
The problem is, most non-libertarians who say they are against capitalism really mean they are against the free market, and not against only corporatism. And most non-libertarians who say they are for social justice really mean they are for redistributionism, and not for narrowly “the well-being of the poor.”
So any “camaraderie” that can be effected by such bait-and-switch ploys can only ever be ephemeral “agreements” based solely on terminological confusion. You may get some head-nods at certain cocktail parties when you say you are against “capitalism” and for “social justice”. But once it is clear that you have very unconventional meanings for those terms, it will be clear that there is no true agreement at all.
Let us libertarians focus on actual arguments, and leave the word tricks to those with weaker positions.
There is word of more capital destruction in South America. It’s hard to keep up with the Chavzes, but down Argentina way, President Cristina Kirchner announced that her government is seizing a majority stake in oil company YPF SA, owned by Repsol YPF of Spain, the largest oil company in the world. The New York Times reports from Rio De Janeiro,
The expropriation would reassert state control over an important pillar of Argentina’s economy, but it has already increased diplomatic tensions with Spain and the European Union. Mrs. Kirchner quickly ousted Sebastián Eskenazi as YPF’s chief executive, naming two top aides, Julio de Vido and Axel Kicillof, to run the company.
Argentina’s government founded the company in the 1920s and it was then privatized in the 1990s. She says the taking of YPF is a “recovery of sovereignty and control.” She said the move would allow Argentina to raise production, after the country recently became an energy importer.
The people of Argentina are all about the seizing. Because of price caps and other regulatory uncertainty, supply is not keeping up with demand. The government has pressured YPF to increase production and threatened to revoke its oil field concessions, but the price caps make increased production uneconomic.
However, Kirchner’s deputy economy minister, Axel Kicillof, told the Senate, “It’s a common practice of the producer [or] exporter that he holds back production, the treasure, because they have a chance to obtain a higher price,”
Kicillof has a doctorate in economics from the University of Buenos Aires, where he won a faculty prize in 2006 for his thesis on John Maynard Keynes’s famous work, “The General Theory of Employment, Interest and Money.”
So it’s not surprising that in his testimony to the Senate, he included, ”When there’s a crisis, the worst thing that can be done is to say the state is the problem. The state is the solution. When there is recession and economic crisis, the state becomes a key actor to revitalize demand and investment.”
There’s already too much government mucking things up in Argentina, but the 40-year-old minister, described as ”Attractive, good dad, geek and brain behind the expropriation of YPF,” provides the thinking behind Kirchner’s imposition of new restrictions on foreign-currency transactions and tightening of import controls. In her prior term, she nationalized private pension funds and the flagship airline. “We’re giving YPF to the same kids who bankrupted Aerolineas,” quips Congressman Omar de Marchi.
YPF thinks it’s only fair that the government pay $10 billion for the majority stake, but Mr. Kicillof, according to the Wall Street Journal, “scoffed at that figure, saying compensation determines on what a federal tribunal decides after it evaluates YPF, including possible environmental damage. ‘Let’s see what we will find when we open the black box,’ he said.”
So what are the prospects for investment in Argentina?
“I worry less about Apache’s operations in Egypt than in Argentina,” said Fadel Gheit, a senior oil analyst at Oppenheimer & Company in New York. “The oil industry in Argentina is just getting ready to take off, but this may be a way to kill it in its infancy.”
“You have to be clever to do business in Argentina,” Federico MacDougall, an economist at the University of Belgrano in Buenos Aires told the NYT. “It was hard to do business in Argentina before. Now it is even harder.”
Capital goes where it’s treated best. When the capital leaves, the people are left to starve.
In the modern world, a country’s natural resources have very little to do whether goods are on the nation’s shelves for people to buy. Singapore isn’t rich in resources, neither is Hong Kong, but both have vibrant market economies and shoppers can find whatever their collective heart’s desire on the shelves of stores in these two cities.
On the other hand, there is Venezuela, a country rich in resources. It is one the world’s top oil producers at the same time gas prices are soaring. The rich soil and temperate climate allow for productive agriculture and the country is rich in gold and other minerals.
One could only imagine that high tides would be lifting all boats, but yet the cupboards are bare. There are shortages of staples like milk, meat and toilet paper. In the country’s largest city, Caracas, residents must arrange their calendars around the once-a-week deliveries made to government-subsidized stores.
The shortages affect both the poor and the well-off, in surprising ways. A supermarket in the upscale La Castellana neighborhood recently had plenty of chicken and cheese — even quail eggs — but not a single roll of toilet paper. Only a few bags of coffee remained on a bottom shelf.
Asked where a shopper could get milk on a day when that, too, was out of stock, a manager said with sarcasm, “At Chávez’s house.”
Money printing has created chronic price inflation in Venezuela and last year the office rate was 27.6 percent. According to Hugo Chávez’s socialist government, these price increases were caused by runaway capitalism. So in response, Chávez instituted price controls, which like night turns to day, created shortages.
But, of course, goods would appear on the black market at higher prices, so Chávez’s government blames speculators for causing the shortages.
As the Times points out, there is no reason that shoppers shouldn’t be able to buy staples in a city and surrounding area of over four million people.
Venezuela was long one of the most prosperous countries in the region, with sophisticated manufacturing, vibrant agriculture and strong businesses, making it hard for many residents to accept such widespread scarcities.
Mr. Chávez and his ministers say “companies cause shortages on purpose, holding products off the market to push up prices. This month, the government required price cuts on fruit juice, toothpaste, disposable diapers and more than a dozen other products.”
El Presidente must believe that somehow suppliers make money by not supplying.
“We are not asking them to lose money, just that they make money in a rational way, that they don’t rob the people,” Mr. Chávez said recently, presumably with a straight face.
Clearly Chávez’s prices are too low for companies to make money so they either curtail production or stop all together. And, as the Times mentions, “some of the shortages are in industries, like dairy and coffee, where the government has seized private companies and is now running them, saying it is in the national interest.”
Chávez is up for election in the fall and he is threatening to nationalize companies that stop production. And the Venezuelan media is also under fire with the government accusing them of frightening the public into hoarding. “Government advertisements urge consumers not to succumb to panic buying, using a proverbial admonition: Bread for today is hunger for tomorrow.”
Only three years ago, the country was a coffee exporter. Now, Venezuelans can’t find it on the shelves. The government price is too low, driving planters and roasters to stop production and not invest in new plantings or fertilizer.
It is incredible that in this day and age, a government could be so blind, stupid, and cruel toward its own people. It’s one thing to teach this sort of nonsense at expensive universities, but another to put it in practice and ruin people’s lives.
Appropos of my recent blog earlier this week on the causes of China’s inflation, it has just been reported that March saw a surge in internal (yuan) currency loans by Chinese banks of 1.01 trillion yuan (equal to $160.1 billion) far above the 710.7 billion yuan lent in February. More significantly, this was the biggest deviation of actual from forecast loans in more than a year. New yuan lending clocked in at 21 percent above the median estimate of 797.5 billion yuan calculated from a Bloomberg survey of 28 economists. This is no accident since the Chinese government began loosening restrictions on lending capacity for three of its four biggest banks last month in an effort to preempt the fall of the economy’s growth rate in the last quarter, which is expected to be announced today as 8.4 percent, the lowest in eleven quarters. The government has also committed to cutting the reserve/deposit ratio of lenders by an additional 50 basis points this month, further loosening its monetary policy that caused a 13.4 percent year-over-year growth in the money supply in March. This latest news makes it likely that the People’s Bank of China will exceed its broad money growth target of 14 percent for this year.
It has now become clear that the Chinese government has made its choice to avoid a “hard landing” by attempting to ride the unloosed inflationary tiger for as long as it can. But its strategy of massively expanding fictitious bank credit unbacked by real savings will cause added distortions and exacerbate unsustainable imbalances in China’s real economy. As the Austrian theory of the business cycle teaches, this will only postpone the needed recession-adjustment process and will precipitate a “crash landing” that may well shatter China’s burgeoning market economy. This would be a tragedy of the first order for the entire global economy.