arm resling

When Employers Compete, Workers Win — When They Can’t, Workers Lose by Donald J. Boudreaux

David Henderson does a very nice job summarizing why stripping workers of the right to offer X as part of an employment contract makes most workers worse off, even if the intention of the government officials who do the stripping is to help workers — and, indeed, even if a Nobel laureate economist misses this reality.

Here’s another part of the picture.

Workers’ bargaining power ultimately is tied positively to workers’ alternatives: the greater the number, and the better the quality, of a worker’s employment options, the stronger is that worker’s bargaining power. If many different employers are competing for your services — each by offering you good pay, good benefits, and good work conditions — you as a worker have splendid bargaining power.*

It follows that government interventions that reduce the creation of good jobs— that is, interventions that reduce firms’ incentives to create better opportunities for employing human labor — reduce workers’ bargaining power. In turn, it follows that if overtime-pay arrangements of the sort that emerge in the absence of government restrictions on employment contracts are for many firms and workers the most efficient sorts of labor contracts available — as they are likely to be in a competitive economy — then government prohibitions that make those contract terms illegal will reduce firms’ efficiencies and, hence, dampen their willingness to create new jobs that pay as much as jobs would pay in the absence of those prohibitions.

Put differently, government restrictions that shrink the ways that employers can squeeze more efficiency into their operations shrink the number of jobs that are created, or reduce the maximum pay that employers can offer to employers who perform newly created jobs.

Over time, therefore, regulations such as the newly imposed overtime-pay diktats dampen workers’ bargaining power by reducing the number of high-as-possible-quality jobs created by employers. With fewer such jobs, there’s less competition for workers.  And with less competition for workers, workers’ bargaining power shrinks.

Note that empirically documenting this reduced competition for workers, as well as documenting its effects on workers’ pay (lower than otherwise), fringes (lower than otherwise), and work conditions (worse than otherwise) would be practically impossible. Because the consequences of these diktats play out fully only over a long span of time, it is simply too difficult for an empirical investigator to uncover, amidst all the countless other changes that occur in the economy, the details of what pay, fringes, and work conditions would beotherwise — that is, had such diktats not been imposed.

Yet unless you think you can say nothing absent empirical evidence about the effects on workers’ well-being of a reduction in the intensity and quality of competition for labor, then you should worry that these new overtime-pay diktats will, over time, make many workers worse off than they would otherwise be.

* Note that if, in this situation, you as the worker (whose services employers are competing for) agree to reduce the value that you will receive on one margin (say, pay) in order to increase the value you will receive on another margin (say, working conditions), it would be wholly mistaken for an outside observer to notice your agreement to work for lower pay and conclude from that observation that youremployer has undue bargaining power over you. And it would harm you if this outside observer, arrogant in his or her ignorance of the details of your and your employer’s affairs, orders your employer to increase your pay to some level higher than you agreed to accept.

Cross-posted from the indispensable Cafe Hayek.

Donald J. Boudreaux

Donald J. Boudreaux

Donald Boudreaux is a senior fellow with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University, a Mercatus Center Board Member, a professor of economics and former economics-department chair at George Mason University, and a former FEE president.

GIC-Housing-Finance

It’s Time to Put the Market Back in Housing Finance

Today’s government-centric housing finance system is an “economics free zone” indifferent to supply and demand. Composed of an alphabet soup of agencies, this system has fostered a massive liberalization of mortgage terms and provided countless trillions of dollars in lending in up and down markets. At the same time, other government polices constrain supply. As a result, housing has become less, not more affordable or accessible. Here’s why.

“[In a seller’s market] it is more likely that the liberalization of mortgage terms will increase both price and the amount of the debt, with debt service remaining approximately unchanged. … Thus, the liberalization of terms easily becomes capitalized in higher prices.” (Fisher 1951).

Because of a reliance on excessive leverage, US homeownership policy has failed to broaden homeownership access, failed to achieve wealth accumulation for low- and middle-income homeowners, and led to 11 to 12 million foreclosures since 1973.

US multifamily policy failed to promote plentiful rental housing opportunities at rents accessible to low- and moderate-income tenants (Fisher 1975; Jakabovics et al. 2014). With the supply of unsubsidized, economical, workforce housing stagnating, there are calls for large expansions in subsidies.1 Building hundreds of thousands of high-cost apartment units—with inflated costs because of federal, state, and local regulations as well as layers of subsidies to lease to extremely low and very low income households—is not viable (Fisher 1975).

The Case against Current US Homeownership Policy

For 60 years, policymakers have loosened mortgage lending standards ostensibly to promote broader homeownership and wealth accumulation, particularly for low- and moderate-income households.

  • In 1954, Federal Housing Administration (FHA) borrowers had an average loan-to-value of 79.9 percent, an average loan term of 21.4 years, and an average housing debt-to-income ratio of 15 percent.
  • By 1964, these metrics had risen to 92.8 percent, 29.9 years, and 16.5 percent, respectively.
  • Today, the average figures are 96 percent, 29.5 years, and 28 percent, respectively.

Today’s FHA borrowers spend nearly twice as much of their income—2.15 times the debt, for a home at 1.79 times the price, with 6 times the default risk under stress—compared with typical 1954 FHA borrowers with the same nominal income.

It not surprising that the FHA has experienced 3.4 million foreclosures from 1973 to 2014 (one in eight purchase borrowers) compared with a near-zero rate in its first 25 years.2 For the 25 percent of FHA borrowers living in the highest default rate zip codes, an estimated one in five lost their homes, with untold neighborhood devastation (Pinto 2012).

Fact 1: The US homeownership rate is no higher today than in the early 1960s and is only marginally higher than in 1956, before FHA loans with low down payments or 30-year terms became broadly available.3

Fact 2:  Homes are less affordable today, standing at a multiple of 3.32 times median home price and median income compared with 2.95 times in 1979 or 2.86 times in 1992.  A new round of increasing loan leverage began after 1992, the year Congress imposed government-sponsored enterprise (GSE) affordable housing mandates. This helped drive home prices to unsustainable levels (4.05 times in 2006). After hitting a trough of 3.03 times in 2012, the ratio now stands at 3.32 times.4

Fact 3: Low- and middle-income households have lost wealth since 1989.

Fact 4: Liberalizing credit terms during a seller’s market inflates home prices and sets up future price volatility and higher default rates under stress.5 Extended periods of increasing leverage fuel a price boom that makes homes unaffordable, promotes price volatility, and leads to unforgiving mean reversion.6

Figure 2 confirms FHA’s first chief economist Ernest M. Fisher’s 1951 prediction that in a seller’s market, liberalized credit terms easily translate into higher prices. During the current up cycle, real home prices are up 16 percent.

In January 2015, the FHA announced a mortgage insurance premium cut during a seller’s market. It had the effect predicted by Fisher: nearly three-quarters of the additional buying power was absorbed by price (18 percent) and quality/quantity (55 percent) effects.7 Because the price effect increased the cost for all FHA buyers, the marginal cost of attracting each new first-time buyer was high ($82,000).8

Fact 5: Averages are misleading, and home prices are volatile.

National averages are misleading because they mask price volatility (figure 3) and price dispersion at the metro, zip code, and neighborhood levels (figures 4 and 5).

Lower-priced homes, generally owned by low-income and minority households, experience higher price volatility and lower nominal gains. In figure 5, the bottom price tier of all 28 cities had a lower nominal price increase per year than the top tier (computed over 18 years). These borrowers also experience higher default rates because of the higher leverage.9

Fact 6: Post crisis credit is not tight;10 underwriting and regulatory changes promote rather than constrain a boom.11 Whether leverage is exotic is less relevant than the relative change in buying power generated by increasing leverage, which drives deviation from the price mean.

Fact 7: Federal, state, and local policies increase home-building costs (Jakabovics et al. 2014).  The 10 metros with the lowest multiples of 2013 median home price and 2013 median household income had less restrictive land-use regulations.  The 15 metros with the highest multiples had more restrictive land-use regulations.12 Even California has recognized that public policies are largely responsible for it being the most expensive housing market in the country (Taylor 2015). Burgeoning impact fees have a disproportionate impact by constraining the construction of entry-level homes. 13

The Case against Current US Multifamily Policy

Fact 1: Rents are increasingly less affordable. In 1979 (earliest Zillow data available), median rents nationally stood at 24 percent of median incomes (Los Angeles rents stood at 30 percent of median incomes).  Today, the national rate stands at 30percent with Los Angeles at 49 percent.

Fact 2: Federal, state, and local policies increase apartment construction costs.  Eight of the 10 metros with the lowest multiples of 2015 median rent and median household income had less restrictive land-use regulations.  Thirteen of the 15 metros with the highest multiples of 2015 median rent and median household income had more restrictive land-use regulations.14

Fact 3: Multifamily debt (in 2010 dollars) is rising much faster than the number of total units because of liberal financing from Fannie Mae, Freddie Mac, FHA, and Ginnie Mae, as well as highly accommodative monetary policy.15

Fact 4: While the Low-Income Housing Tax Credit (LIHTC) is the primary means of promoting the construction of “affordable” apartments, it’s expensive and opaque.

New LIHTC credits total $10 billion annually, funding about 100,000 LIHTC units.

  • These units have high construction costs (estimated $175,000 to $200,000 per unit).
  • These units serve few low-income tenants; 80 percent are either extremely low income (area median income less than or equal to 30 percent) or very low income (area median income from 31 to 50 percent); only 7 percent have an area median income greater than 60 percent but less than or equal to 80 percent (Furman Center 2012).
  • These units benefit from layers of subsidies, driving subsidy costs to $12,000 per unit, raising questions about unfair distribution of scarce resources. These subsidies include government-aided financing, state and local subsidies, and rental assistance (e.g., Section 8 and Housing Choice Vouchers) targeted to very low and extremely low income households.
  • This tax credit risks repeating same errors as previous housing subsidy programs.
    • Tenants are overwhelmingly minority households (61 percent), and nonelderly units are concentrated in metropolitan statistical area census tracts with high minority concentrations (Office of Policy Development and Research 2016).
    • Many developments face fiscal challenges to avoid blight that sets in after 16 to 20 years.

Market-Based Solutions to Bring Home Prices Back in Line with Median Incomes and Improve Accessibility

Objective: A more stable housing finance market that provides a reliable path to wealth building and broader low- and middle-income access to homeownership.

  • Repeal Title XIV (qualified mortgage) and section 941 (qualified residential mortgage) provisions of Dodd-Frank (Pinto 2016) (legislative action needed)
  • Require the FHA and GSEs to adopt sound underwriting, pricing, and capital standards (legislative and administrative action needed)
  • Repeal the GSE affordable housing goals (see replacement Low-Income First-Time Buyer tax credit below) to end destabilizing competition between the FHA and the GSEs (legislative action needed)
  • Adopt policies to support market stability by ensuring a high preponderance of good-quality mortgages (administrative action needed)
  • Help low- and middle-income families with wealth-building strategies
    • The American Enterprise Institute’s Wealth Building Home Loan offers such a path, but the 30-year mortgage does not.16(administrative action needed)
  • Enact the Low-income First Time Homebuyer (LIFT Home) tax credit (legislative action needed)
    • This credit would allow low-income,17 first-time buyers to forgo the interest deduction and receive a one-time refundable tax credit.
    • This credit is equal to 4 percent of the mortgage loan ($10,000 maximum) and can be used to buy down the loan’s interest rate for at least seven years on loans with terms of 20 years or less.
    • The legislation would funnel $4.5 billion per year to fund 500,000 LIFT Home buyers, 250,000 of whom would be incremental low-income, first-time buyers. This assumes that 150,000 live in apartments (freed-up units would be a bonus).
    • Funding LIFT Home would require the following:
      • Reductions in the US Department of Housing and Urban Development’s budget
      • Repurposing other budgeted amounts that support affordable housing to push tax dollars directly to homebuyers instead of having the money siphoned off by bureaucracies and advocacy groups
      • Restructuring home mortgage interest deductions to promote wealth, not debt accumulation
        • For future homebuyers, this restructuring would
          • limit interest deductions to purchase loans and exclude second mortgages and cash-out refinances (also for existing homeowners) and
          • cap mortgage interest deductions to amounts payable on a loan with a 20-year amortization term.
      • For existing home loan borrowers, the restructuring would
        • grandfather current interest deductions, ameliorating impact of change on current home prices; and
        • direct any interest savings (from refinancing an existing loan at a lower rate) toward shortening the loan term.

Over 10 years, these solutions would reduce capital needs by 60 percent and allow weaning off the federal government’s overwhelming loan guarantee role. Outstanding debt would be reduced by approximately 20 percent, and risk-absorbing capital per loan would be reduced by 50 percent.

  • With less interest rate risk and lower capital requirements, these loans would be safer and easier for depository institutions to hold in portfolio.  Today, these institutions hold about 50 percent of total single-family mortgage debt.

Market-Based Rental Housing Solutions to Bring Rents Back in Line with Median Incomes and Improve Accessibility: the “Blight Preventer” Loan

Objectives: Shift from the current debt- and government-centric finance system to a rental housing market where supply is permitted and encouraged to meet demand; establish life cycle underwriting18and the “Blight Preventer” Loan as best practices in financing subsidized multifamily housing.

  • Repeal GSE affordable housing policies and the Community Reinvestment Act
  • Increase supply of unsubsidized economical workforce and entry-level apartments
  • Use lifecycle underwriting and 15- and 20-year self-amortizing first mortgage—the “Blight Preventer” Loan (White and Wilkins 2016):
    • Excessively long loan terms used to finance affordable multifamily properties leave many properties unable to fulfill affordability commitments without additional public subsidies and leaves those properties poorly maintained, leading to blight and urban decay.
    • Most affordable multifamily housing is located in lower-income neighborhoods, leaving public funders to accept blight or throw good money at bad investments.

Bending the Cost Curve to Increase the Supply of Unsubsidized Economical Workforce and Entry-Level Houses and Apartments

  • Local and state governments should
    • authorize expedited permitting and “just-in-time” building inspections;
    • identify building code interpretations to reduce cost impact;
    • review and amend density and parking requirements, height maximums, size minimums, and other provisions that increase barriers and raise costs;
    • expand permitted uses in a zoning district that are not subject to special review and approval by local government;
    • review and amend building codes that dictate costs and amenities that put economical workforce developments at a disadvantage;
    • reduce regulatory complexity and include staff flexibility in applying and interpreting burdensome requirements (direct staff to be as flexible as possible);
    • adjust impact and permitting fees to reflect any reduced impact of such housing;
    • establish a “good enough to be economical” standard; and
    • reduce the expenses calculated as a percentage of costs.
  • Designers and  builders should implement innovative and economical techniques for
    • design and construction,
    • sustainability,
    • utilizing existing infrastructure,
    • repurposing existing structures, and
    • management.

Notes

  1. “Cantwell Launches National Campaign to Increase Federal Resources for Affordable Housing,” press release, March 24, 2016, https://www.cantwell.senate.gov/news/press-releases/cantwell-launches-national-campaign-to-increase-federal-resources-for-affordable-housing; Peter Dreier, “How to House the Working Poor,” How Housing Matters, last updated April 7, 2016, http://howhousingmatters.org/articles/house-working-poor/.
  2. FHA Actuarial Studies and author. See Pinto (2012).
  3. Edward J. Pinto, “Housing finance fact or fiction? FHA pioneered the 30-year fixed rate mortgage during the Great Depression?” AEIdeas (blog), June 24, 2015,http://www.aei.org/publication/housing-finance-fact-or-fiction-fha-pioneered-the-30-year-fixed-rate-mortgage-during-the-great-depression/.
  4. Zillow and author.
  5. Liberalization of credit terms takes many forms, including smaller down payments, higher debt-to-income ratios, longer loan terms, lower interest rates, quantitative easing, and reduced mortgage insurance premium.
  6. Mean reversion is a theory suggesting prices and returns eventually move back toward the mean.
  7. The 0.50 percent decrease in premium increased buying power by 6 percent. This could be “spent” in three ways: price effect (seller raises price), quality/quantity effect (buyer purchases larger or better-quality home), or expanded access (attracts new buyers).
  8. Forthcoming research to be published by Stephen Oliner, Edward Pinto, and Tobias Peter.
  9. Default risk increased in zip codes where median family income and median home prices are low. See Pinto (2012).
  10. First-time buyer credit metrics are follows: 69 percent of buyers have a combined loan-to-value ratio less than or equal to 95 percent, 97 percent have a 30-year loan, 29 percent have a debt-to-income ratio less than 43 percent, and 22 percent have a FICO score below 660. See “Mortgage Risk Index Release of March 2016 Data,” American Enterprise Institute’s International Center on Housing Risk, last updated April 26, 2016.  As an up real estate cycle ages, credit maximums usually become minimums, thus leading to calls for even more liberal credit terms, including less traditional ones. See Fisher (1951).
  11. For example, income leverage (measured by borrower debt-to-income ratio) is largely unconstrained by Dodd-Frank’s qualified mortgage regulation. Its 43 percent limit is swallowed by agency exemptions (Fannie, Freddie, FHA, the US Department of Veterans Affairs, and the Rural Housing Service guarantee some 85 percent of all primary home purchase loans). An effective income leverage limitation operates to “take the punch bowl away” before a leverage-fueled price boom goes too far.
  12. Demographia.com and author. “Regulations Add a Whopping $84,671 to New Home Prices,”NAHBNow (blog), May 9, 2016, http://nahbnow.com/2016/05/regulations-add-a-whopping-84671-to-new-home-prices/.
  13. Nick Timiraos, “How City Hall Exacerbates the Entry-Level Housing Squeeze,” The Wall Street Journal, May 5, 2016, http://blogs.wsj.com/economics/2016/05/05/how-city-hall-exacerbates-the-entry-level-housing-squeeze/.
  14. Demographia.com and author.
  15. Paul Bubny, “CRE Debt Increase Hits 8-Year High,” Law.com, March 15, 2016,http://www.law.com/sites/paulbubny/2016/03/15/cre-debt-increase-hits-8-year-high/?slreturn=20160419120431.
  16. Edward Pinto and Stephen Oliner, “WBHL,” American Enterprise Institute’s International Center on Housing Risk, accessed May 19, 2016, http://www.housingrisk.org/category/wealth-building-home-loan/.
  17. Incomes below 80 percent of the area median income.
  18. Lifecycle underwriting considers a property’s ability to cover its long-term capital needs (e.g., replacing worn-out roofs, air conditioners, and appliances) over the property’s life cycle. See Brennan and colleagues (2013).

References

Brennan, Maya, Amy Deora, Ethan Handelman, Anker Heegaard, Albert Lee, Jeffrey Lubell, and Charlie Wilkins. 2013. “Lifecycle Underwriting: Potential Policy and Practical Implications. Working paper. Washington, DC: Center for Housing Policy.http://media.wix.com/ugd/19cfbe_891b4788e2e64d0cb71a75940a101f2f.pdf.

Fisher, Ernest M. 1951. “Financing Home Ownership.” In Urban Real Estate Markets: Characteristics and Financing, edited by Ernest M. Fisher, 61–90. Cambridge, MA: National Bureau of Economic Research. http://www.nber.org/chapters/c3180.pdf.

———. 1975. Housing Markets and Congressional Goals. Westport, CT: Praeger Publishers Inc.

Furman Center for Real Estate and Urban Policy. 2012. “What Can We Learn about the Low-Income Housing Tax Credit Program by Looking at the Tenants?” New York: New York University.http://furmancenter.org/files/publications/LIHTC_Final_Policy_Brief_v2.pdf.

Jakabovics, Andrew, Lynn M. Ross, Molly Simpson, and Michael Spotts. 2014. Bending the Cost Curve: Solutions to Expand the Supply of Affordable Rentals. Washington, DC: Urban Land Institute.http://uli.org/wp-content/uploads/ULI-Documents/BendingCostCurve-Solutions_2014_web.pdf.

Office of Policy Development and Research. 2016. Data on Tenants in LIHTC Units as of December 31, 2013. Washington, DC: US Department of Housing and Urban Development.https://www.huduser.gov/portal/sites/default/files/pdf/LIHTC-Tenants-2013.pdf.

Pinto, Edward J. 2012. How the FHA Hurts Working-Class Families and Communities. Washington, DC: American Enterprise Institute. http://www.nightmareatfha.com/how-the-fha-hurts-working-class-families-and-communities/.

———. 2016. “Repealing Dodd-Frank’s Qualified Mortgage and Qualified Residential Mortgage.” InThe Case Against Dodd-Frank: How the “Consumer Protection” Law Endangers Americans, edited by Norbert J. Michel, 31–38. Washington, DC: The Heritage Foundation. http://thf-reports.s3.amazonaws.com/2016/The%20Case%20Against%20Dodd-Frank.pdf.

Taylor, Mac. 2015. California’s High Housing Costs: Causes and Consequences. Sacramento, CA: Legislative Analyst’s Office. http://www.lao.ca.gov/reports/2015/finance/housing-costs/housing-costs.pdf.

White, Tom, and Charlie Wilkins. 2016. “‘Blight Preventer’ Loan: Property Lifecycle Underwriting and 15–20 Year Self-Amortizing First Mortgage Debt as a Best Practice for Financing Subsidized Multifamily Housing.” Washington, DC: American Enterprise Institute.http://www.housingrisk.org/wp-content/uploads/2016/05/White-Wilkins-MF-debt-paper-final.pdf.

EDITORS NOTE: This column originally appeared on the Urban.org website.

WA_16051_Experiment_Interest_Rate

BELOW ZERO: What does ‘negative interest rates’ mean and will the policy work?

A friend of mine sent me a video concerning negative interest rates and the positive and negative impacts they may have on the economy. There are six foreign banks that have adopted negative interest rates. European countries offering negative interest rates include Denmark, Sweden, Switzerland, Hungary and the European Central Bank (ECB). Japanese banks also offer negative interest rates. Taken together these countries and the ECB represent 1/4 of global economic output.

Question: Are zero interest rates good or bad? 

CLICK HERE FOR A INTERACTIVE GLOBAL MONETARY POLICY TRACKER

Here are two videos that answer the above question:

What does ‘negative interest rates’ mean and will the policy work?

Video on negative interest rates from Bloomberg:

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Below Zero: The World Experiments with Negative Interest Rates

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How Sweden’s negative interest rates experiment has turned economics on its head

less_is_more_2_by_ausman101-d6yider

Paul Krugman, Now Mistaking Less for More by David R. Henderson

This is from Paul Krugman, “Obama’s War on Inequality,” New York Times, May 20.

The other story was about a policy change achieved through executive action: The Obama administration issued new guidelines on overtime pay, which will benefit an estimated 12.5 million workers.

What both stories tell us is that the Obama administration has done much more than most people realize to fight extreme economic inequality. That fight will continue if Hillary Clinton wins the election; it will go into sharp reverse if Mr. Trump wins.

Step back for a minute and ask, what can policy do to limit inequality? The answer is, it can operate on two fronts. It can engage in redistribution, taxing high incomes and aiding families with lower incomes.

It can also engage in what is sometimes called “predistribution,”strengthening the bargaining power of lower-paid workers and limiting the opportunities for a handful of people to make giant sums. In practice, governments that succeed in limiting inequality generally do both. (Emphasis added.)

It is clear from the context that Krugman is claiming that the new Obama regulation on overtime pay is an example of “strengthening the bargaining power of lower-paid workers.”

He’s wrong. It does just the opposite.

Probably the best way to help him see the point — if, as I doubt, he wants to see the point — is to consider his situation with his employer, the City University of New York. Krugman is a salaried rather than an hourly worker, so he doesn’t have to punch a clock, and no one is keeping track of his hours.

He can work on his lunch break if he wants, he can work on an airplane, he can work any time and anywhere.

I don’t know the specifics of his deal with his employer, but I am virtually certain of the above claims.

Imagine that you are making between $40K and $45K — much less than Krugman’s $225K. You are salaried. You don’t want or need as much flexibility as Paul Krugman has, but you do want some flex. You want to be able to have an occasional long lunch hour some days and a short lunch hour other days. But this won’t always works out to 40 hours a week. Some weeks you will work 38 hours, some 42 hours, some 45 hours, some 34 hours. You ask your employer for that flexibility, and your employer answers, “Fine, as long as the work gets done. And, in return, there might be times — not often, but sometimes — when you need to come in on a Saturday morning.”

You think about that. You respond, “OK, as long as I can take a few hours off in a day, when there’s a lull, but I guarantee that the work will get done.” Your employer and you agree.

Is there anything in this story that sounds implausible?

What just happened?

You exercised your bargaining power.

Now someone who doesn’t know you from Adam comes along and says,

Your agreement with your employer means that some weeks you will work 45 hours. In the weeks that you earn 45 hours, the employer must pay you for 47.5 hours. (Overtime rules require that the employee be paid time and a half for any hours over 40 in a week.)

You may think that those cancel out so that your average is 40 hours a week. Tough. We don’t think the same way. Your deal is illegal. The employer must pay you overtime any week that you work more than 40 hours, no matter what happens in the other weeks.

Now the employer has to rethink his earlier agreement. Paying overtime wasn’t part of the plan. He can adjust by lowering your base pay so that some weeks you earn less than before and some weeks (the weeks with overtime) you earn more than before. And he must keep track of all these hours, whereas he didn’t before. He reluctantly goes along and cuts your base pay.

The arrangement has been altered. You might not like that. You have rent to pay in the 4-bedroom house you share with 3 other single people and you like the certainty of that weekly income. But now the employer, in response to that regulation, has removed that certainty.

Your bargaining power is now less. QED.

Cross-posted from Econlog.

David R. HendersonDavid R. Henderson

David Henderson is a research fellow with the Hoover Institution and an economics professor at the Graduate School of Business and Public Policy, Naval Postgraduate School, Monterey, California. He is editor of The Concise Encyclopedia of Economics (Liberty Fund) and blogs at econlib.org.

jet plane taking off

Corporations Should Flee America: High Tax Rates Help Politicians, Not the Country by Doug Bandow

Every day in Congress, it seems, a member who created a problem demands more power and money to “solve” the resulting crisis. So it is with “tax inversions,” by which companies change their tax domicile — their country of residence, for tax purposes — to escape Washington’s clutches. Doing so deprives Uncle Sam of money to waste, which naturally drives politicians into a frenzy.

Left-wing activists tend to favor corporate taxation. They imagine a society divided between businesses and people. However, firms are owned by people, employ people, sell to people, and contract with people. Taxing companies means taxing people.

Politicians like to target business in order to disguise the incidence of taxes. At least shareholders know they are paying government twice. Employees and consumers, in particular, usually don’t know that they are earning less and paying more, respectively, because of government. In effect, everyone is taxed twice, first at the corporate level and then at the personal level.

America’s current corporate income tax rate is roughly 40 percent — it varies a bit by state and locality — and is second highest in the world. Only the United Arab Emirates is higher. Just six economic laggards — Argentina, Chad, Iraq, Malta, Sudan, and Zambia — match the federal government’s 35 percent rate. In fact, America is one of only three states in the Organisation for Economic Co-operation and Development (OECD) not to reduce rates over the last 15 years.

The US tax code includes loopholes to lower the effective burden for many companies, but trading complexity for lower effective levies is dubious policy. Virtually every other nation on earth has a lower rate. According to tax firm KPMG, the global average is 23.87 percent. Asia’s is 22.59 percent. Europe averages 20.12 percent. The tax rate for OECD countries, America’s most obvious competitors, is 24.86 percent. Several states in Europe come in at 10 to 15 points lower. The rate in Czech Republic and Hungary is 19 percent, in Switzerland 17.92 percent, in Taiwan and Singapore 17 percent, and in Ireland 12.5 percent.

The United States makes the situation worse by taxing a company’s global earnings. Most countries claim only money earned within their boundaries. Although Americans can take a credit for foreign taxes paid, most firms owe extra. Only five other OECD countries also tax worldwide income.

It should surprise no one, then, that companies seek to escape Washington’s grasp. As Judge Learned Hand, no radical libertarian, pointed out in 1934: “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury.” Hand criticized the idea of “a patriotic duty to increase one’s taxes.”

Companies “avoid” taxes simply by conforming to the law as written by Congress and regulations as drafted by the IRS. A recent tool of choice has been inversions, whereby a merger moves a firm’s tax domicile overseas. Doing so actually makes it more cost-effective for companies to invest in the United States. About 50 major firms have “inverted,” more than half of those since 2008. Another 20 may be considering the idea. Among the recent controversial deals have been Liberty Global–Virgin Media, Burger King–Tim Hortons, Pfizer–Allergan, CF Industries–OCI, and Johnson Controls–Tyco Industries (British, Canadian, Irish, Dutch, and Irish partners, respectively).

High tax rates help politicians, not the country. An old-fashioned highwayman grabbed your money and went on his way. Uncle Sam seizes your cash and then uses it to boss you around in the name of helping you and everyone else. Moreover, higher corporate rates directly reduce business investment and indirectly cut consumer spending, thereby slowing job creation and economic growth.

High rates also put American enterprises at a competitive disadvantage. They can try to make do while bearing a greater burden — some simply keep their money abroad. The share of profits attributed to low-tax jurisdictions has more than doubled over the last three decades, and an estimated $2.1 billion in US multinational profits have not been repatriated. Some of that cash may be held overseas for business reasons, but avoiding high US tax rates is a powerful incentive.

Even the White House has acknowledged the problem:

Our system has one of the highest statutory tax rates among developed countries to generate about the same amount of corporate tax revenue as our developed country partners as a share of our economy; this, in turn, hurts our competitiveness in the world economy.

But, so far, the administration has done nothing to redress the situation.

The best response would be to lower corporate tax rates and adopt a “territorial” tax system, hitting only domestic earnings. Although this change would make the United States more competitive, the problem is not just tax rates. Throughout the latter half of the 20th century, America was the freest OECD nation. However, the US rating has fallen over the last decade and has dropped in every category; it is weakest on size of government, business regulation, and rule of law/property rights. The latest Economic Freedom of the World index ranks America at only 16.

Instead, most politicians decry “economic treason” and “desertion” and want to punish American firms. It’s not the first time Uncle Sam has sought to bar the door to tax escapees. The Treasury Department has been tweaking rules since the 1990s without much success.

The Obama administration has made the issue a priority. President Barack Obama said of corporate inversion, “I don’t care if it’s legal; it’s wrong.” He called it an “unpatriotic tax loophole.”

Treasury Secretary Jack Lew denounced the lack of “economic patriotism.” His department issued rules each of the last two years in a largely unsuccessful attempt to prevent inversions, but, complained Lew, “Our actions can only slow the pace of these transactions. Only legislation can decisively stop them.” Nevertheless, he reportedly has another 150 pages worth of regulatory changes in the works. Some observers believe the administration is drawing out the process to create uncertainty in order to discourage more inversions.

These tactics create a substantial danger of unintended consequences. Inversions usually reflect a mix of motivations, of which taxes are only one. Penalizing inversions may discourage economically motivated changes. European firms worried that the 2014 regulations would cover them because of their corporate structure, even if it was not a product of an inversion. Nestle’s senior vice president of taxes, Alex Spitzer, warned that new restrictions could result in “unintended consequences, creating disincentives for inbound investment.”

Nevertheless, corporate critics are revving up their campaign. Billionaire GOP presidential candidate Donald Trump called Pfizer’s departure “disgusting.” Senate Minority Leader Harry Reid contended that Pfizer “is gaming the system and will avoid paying its fair share of US tax dollars.” Senator Bernie Sanders denounced the “corporate deserters.”

Hillary Clinton attacked the Pfizer–Allergan deal, complaining that it and other inversions will “erode our tax base” and “leave US taxpayers holding the bag.” She proposed taking “specific steps to prevent these kinds of transactions,” such as imposing an “exit tax” on firms that leave and impeding the transfer of multinational profits to US subsidiaries.

Other ideas include continuing to impose US taxes if management control remains in America; if a certain percentage of assets, employees, or sales stay here; if the new company doesn’t do substantial business in its new location; or if its foreign ownership is less than half the shares (the current rule is 20 percent) in the combined operation. Some critics have suggested taxing money earned and kept overseas, imposing higher capital gains tax rates on sale of shares in inverted companies, limiting federal contracts for “inverted” firms, organizing consumer boycotts, and criticizing low-tax nations for, as the New York Times puts it, “their beggar-thy-neighbor tax policies.”

Some politicians propose industry-specific penalties. For instance, to favor domestically produced pharmaceuticals in FDA approvals and federal purchasing, which would hurt patients. Senator Sherrod Brown (D-Ohio) urged a boycott of Burger King. Last year, New Jersey’s legislature voted to punish inversions, which would encourage companies to shift to other states.

Washington has taken much the same approach to individuals who renounce their citizenship to avoid excessive regulations and taxes, attempting to penalize them on their way out. Nor is the US government alone in wanting to squeeze more cash out of the productive. Big-spending European states are engaged in a constant war with their lower-tax neighbors. It doesn’t matter how much governments collect from taxpayers; it never is enough.

It is the height of chutzpah for politicians to act as if providing them with money is evidence of patriotism. 

Despite Washington’s sustained campaign to squeeze more money out of hapless taxpayers, firms have good reasons for resisting the taxman. First, the more cash they have, the better able they are to invest in both capital and labor. That means more and higher-paying jobs. Second, the more money they keep, the fewer resources politicians have to waste on pernicious purposes. That means greater liberty.

Indeed, it is the height of chutzpah for politicians to act as if providing them with money is evidence of patriotism. The real outrage is what goes on every day in Washington: essentially looting and pillaging. Politicians are greedy, stirring up envy in other people for their own advantage. In such circumstances, cutting Washington’s take is a moral imperative.

America long was known globally as a land of opportunity. Now, its government is driving the creative and productive abroad. Policymakers should acknowledge their responsibility and reform the punitive policies that are changing America for the worse.

Doug BandowDoug Bandow

Doug Bandow is a senior fellow at the Cato Institute and the author of a number of books on economics and politics. He writes regularly on military non-interventionism.

National-Debt

Dear Presidential Candidates: The National Debt is your Running Mate

WASHINGTON, D.C. /PRNewswire-USNewswire/ — With voters going to the polls in several key primary and caucus states on March 15, The Concord Coalition reminded all candidates today that regardless of party affiliation or ideology the rising national debt will affect the feasibility of their policy proposals.

“The debt is your running mate,” said Concord Co-Chairs Bob Kerrey (D-NE) and Jack Danforth (R-MO) former U.S. senators, and John Tanner (D-TN) and Mike Castle (R-DE), former U.S. House of Representatives members.

Their full statement.

Our nation’s budget policies simply don’t add up. And judging by what the leading 2016 presidential candidates are promising on the campaign trail, this sobering fact has not sunk in.

Republicans are proposing major tax cuts and higher defense spending. Their proposed spending cuts are nowhere near as large or specific. Democrats are proposing an array of expanded domestic programs that even if paid for with higher taxes would leave large and growing deficits.

This may seem like good campaign rhetoric, but it calls for a hard reality check. Whoever is elected president in 2016 will face a deep fiscal hole.

Failure by the new president and the next Congress to take quick and effective action on this fundamental problem could hurt the economy, lower American living standards, strangle investments on national priorities like infrastructure and medical research, leave critical entitlement programs on unsustainable paths, and put our position of global leadership at risk.

Even more shameful, we would be passing on the unfair burden of an enormous government debt to our children, grandchildren and future generations.

Projections by the Congressional Budget Office (CBO), based on current law, demonstrate that the government is in an increasingly difficult position:

  • The budget deficit is projected to begin rising this year reaching $1 trillion (4.4 percent of GDP) by 2022 at the end of the next president’s first term.
  • Debt held by the public is projected to grow from 76 percent of GDP this year to 86 percent over the coming decade, far above the 39 percent average for the past half-century.
  • According to CBO, “Beyond the coming decade, the fiscal outlook is significantly more worrisome,” with debt rising further to 155 percent of GDP by 2046.

Population aging and rising health care costs mean that spending growth on the major entitlement programs is outpacing revenue growth, squeezing out other programs and adding to the debt. Under current law:

  • The CBO projects that most of the spending growth over the next 10 years will be driven by major health care programs (32 percent of the increase), Social Security (28 percent of the increase), and interest on the debt (23 percent of the increase).
  • Mandatory spending — which grows on autopilot and includes the major entitlement programs — along with interest on the debt will consume 99 percent of all revenues by 2026.
  • The projected rise in interest payments on the debt, from $255 billion in 2016 to $830 billion in 2026, is attributable to growing government borrowing and interest rates gradually increasing to more typical levels.
  • Social Security and Medicare continue to pay out more than they take in from their designated revenues, putting a growing strain on general revenues. The programs’ trustees warn that, “Social Security as a whole as well as Medicare cannot sustain projected long-run program costs under currently scheduled financing.”

Owing in large part to tight caps agreed to in the Budget Control Act of 2011, discretionary spending — which includes defense, education, transportation, justice, environment and certain veterans’ benefits – will actuallydecline from 6.5 percent of GDP in 2016 to 5.2 percent in 2026. By that year, discretionary spending and the deficit will both amount to roughly $1.4 trillion.

That means that cutting “waste, fraud and abuse,” as so many candidates advocate, is not the answer; Congress would have to eliminate all discretionary spending to balance the budget that year (assuming there were no entitlement cuts or tax increases).

The next President and Congress will not have the luxury of putting off the hard choices. Voters must ask some tough questions about the totality of the candidates’ fiscal plans and whether they add up. Candidates must do more than rail against the debt; they must give voters credible plans to rein it in and put the country’s finances on a sustainable path.

So our message to the candidates is this: The debt is your running mate. It will be there when this year’s winning candidate takes the Oath of Office. Your campaign promises need to reflect that reality. So far, they don’t.

ABOUT THE CONCORD COALITION

The Concord Coalition is a nonpartisan, grassroots organization dedicated to fiscal responsibility. Since 1992, Concord has worked to educate the public about the causes and consequences of the federal deficit and debt, and to develop realistic solutions for sustainable budgets. For more fiscal news and analysis, visit concordcoalition.org and follow us on Twitter: @ConcordC

nazis at brandenberg gate

The Economic Policy of the Nazis by Ludwig von Mises

The doctrines of Nazism swept the developed world long before the Nazis took power.

[Excerpt from Omnipotent Government: The Rise of Total State and Total War (1944), chapter 7]

Hitler and his clique conquered Germany by brutal violence, by murder and crime. But the doctrines of Nazism had got hold of the German mind long before then. Persuasion, not violence, had converted the immense majority of the nation to the tenets of militant nationalism.

If Hitler had not succeeded in winning the race for dictatorship, somebody else would have won it. There were plenty of candidates whom he had to eclipse: Kapp, General Ludendorff, Captain Ehrhardt, Major Papst, Forstrat Escherich, Strasser, and many more. Hitler had no inhibitions and thus he defeated his better instructed or more scrupulous competitors.

Nazism conquered Germany because it never encountered any adequate intellectual resistance. It would have conquered the whole world if, after the fall of France, Great Britain and the United States had not begun to fight it seriously.

The contemporary criticism of the Nazi program failed to serve the purpose. People were busy dealing with the mere accessories of the Nazi doctrine. They never entered into a full discussion of the essence of National Socialist teachings. The reason is obvious. The fundamental tenets of the Nazi ideology do not differ from the generally accepted social and economic ideologies. The difference concerns only the application of these ideologies to the special problems of Germany.

These are the dogmas of present-day “unorthodox” orthodoxy:

  1. Capitalism is an unfair system of exploitation. It injures the immense majority for the benefit of a small minority. Private ownership of the means of production hinders the full utilization of natural resources and of technical improvements. Profits and interest are tributes which the masses are forced to pay to a class of idle parasites. Capitalism is the cause of poverty and must result in war.
  2. It is therefore the foremost duty of popular government to substitute government control of business for the management of capitalists and entrepreneurs.
  3. Price ceilings and minimum wage rates, whether directly enforced by the administration or indirectly by giving a free hand to trade-unions, are an adequate means for improving the lot of the consumers and permanently raising the standard of living of all wage earners. They are steps on the way toward entirely emancipating the masses (by the final establishment of socialism) from the yoke of capital. (We may note incidentally that Marx in his later years violently opposed these propositions. Present-day Marxism, however, endorses them fully.)
  4. Easy money policy, i.e., credit expansion, is a useful method of lightening the burdens imposed by capital upon the masses and making a country more prosperous. It has nothing to do with the periodical recurrence of economic depression. Economic crises are an evil inherent in unhampered capitalism.
  5. All those who deny the foregoing statements and assert that capitalism best serves the masses and that the only effective method of permanently improving the economic conditions of all strata of society is progressive accumulation of new capital are ill-intentioned and narrow-minded apologists of the selfish class interests of the exploiters. A return to laissez faire, free trade, the gold standard, and economic freedom is out of the question. Mankind will fortunately never go back to the ideas and policies of the nineteenth century and the Victorian age. (Let us note incidentally that both both Marxism and trade-unionism have the fairest claim to the epithets “nineteenth-century” and “Victorian.”)
  6. The advantage derived from foreign trade lies exclusively in exporting. Imports are bad and should be prevented as much as possible. The happiest situation in which a nation can find itself is where it need not depend on any imports from abroad. (The “progressives,” it is true, are not enthusiastic about this dogma and sometimes even reject it as a nationalist error; however, their political acts are thoroughly dictated by it.)

With regard to these dogmas there is no difference between present-day British liberals and the British labor party on the one hand and the Nazis on the other. It does not matter that the British call these principles an outgrowth of liberalism and economic democracy while the Germans, on better grounds, call them antiliberal and antidemocratic. It is not much more important that in Germany nobody is free to utter dissenting views, while in Great Britain a dissenter is only laughed at as a fool and slighted.

We do not need to deal here with the refutation of the fallacies in these six dogmas. This is the task of treatises expounding the basic problems of economic theory. It is a task that has already been fulfilled. We need only emphasize that whoever lacks the courage or the insight to attack these premises is not in a position to find fault with the conclusions drawn from them by the Nazis.

The Nazis also desire government control of business. They also seek autarky for their own nation. The distinctive mark of their policies is that they refuse to acquiesce in the disadvantages which the acceptance of the same system by other nations would impose upon them. They are not prepared to be forever “imprisoned,” as they say, within a comparatively overpopulated area in which the productivity of labor is lower than in other countries.

Both the German and foreign adversaries of Nazism were defeated in the intellectual battle against it because they were enmeshed in the same intransigent and intolerant dogmatism. The British Left and the American progressives want all-round control of business for their own countries. They admire the Soviet methods of economic management.

In rejecting German totalitarianism they contradict themselves. The German intellectuals saw in Great Britain’s abandonment of free trade and of the gold standard a proof of the superiority of German doctrines and methods. Now they see that the Anglo-Saxons imitate their own system of economic management in nearly every respect. They hear eminent citizens of these countries declare that their nations will cling to these policies in the postwar period. Why should not the Nazis be convinced, in the face of all this, that they were the pioneers of a new and better economic and social order?

The chiefs of the Nazi party and their Storm Troopers are sadistic gangsters. But the German intellectuals and German labor tolerated their rule because they agreed with the basic social, economic, and political doctrines of Nazism. Whoever wanted to fight Nazism as such, before the outbreak of the present war and in order to avoid it (and not merely to oust the scum which happens to hold office in present-day Germany), would have had to change the minds of the German people. This was beyond the power of the supporters of etatism.

It is useless to search the Nazi doctrines for contradictions and inconsistencies. They are indeed self-contradictory and inconsistent; but their basic faults are those common to all brands of present-day etatism.

One of the most common objections raised against the Nazis concerned the alleged inconsistency of their population policy. It is contradictory, people used to say, to complain, on the one hand, of the comparative overpopulation of Germany and ask for more Lebensraum and to try, on the other hand, to increase the birth rate. Yet there was in the eyes of the Nazis no inconsistency in these attitudes. The only remedy for the evil of overpopulation that they knew was provided by the fact that the Germans were numerous enough to wage a war for more space, while the small nations laboring under the same evil of comparative overpopulation were too weak to save themselves. The more soldiers Germany could levy, the easier it would be to free the nation from the curse of overpopulation. The underlying doctrine was faulty; but one who did not attack the whole doctrine could not convincingly find fault with the endeavors to rear as much cannon fodder as possible.

One reason why the objections raised to the despotism of the Nazis and the atrocities they committed had so little effect is that many of the critics themselves were inclined to excuse the Soviet methods. Hence the German nationalists could claim that their adversaries—both German and foreign—were being unfair to the Nazis in denouncing them for practices which they judged more mildly in the Russians. And they called it cant and hypocrisy when the Anglo-Saxons attacked their racial doctrines. Do the British and the Americans themselves, they retorted, observe the principle of equality of all races?

The foreign critics condemn the Nazi system as capitalist. In this age of fanatical anticapitalism and enthusiastic support of socialism no reproach seems to discredit a government more thoroughly in the eyes of fashionable opinion than the qualification pro-capitalistic. But this is one charge against the Nazis that is unfounded. We have seen in a previous chapter that the Zwangswirtschaft is a socialist system of all-round government control of business.

It is true that there are still profits in Germany. Some enterprises even make much higher profits than in the last years of the Weimar regime. But the significance of this fact is quite different from what the critics believe. There is strict control of private spending.

No German capitalist or entrepreneur (shop manager) or any one else is free to spend money on his consumption than the government considers adequate to his rank and position in the service of the nation. The surplus must be deposited with the banks or invested in domestic bonds or in the stock of German corporations wholly controlled by the government.

Hoarding of money or banknotes is strictly forbidden and punished as high treason. Even before the war there were no imports of luxury goods from abroad, and their domestic production has long since been discontinued. Nobody is free to buy more food and clothing than the allotted ration. Rents are frozen; furniture and all other goods are unattainable.

Travel abroad is permitted only on government errands. Until a short time ago a limited amount of foreign exchange was allotted to tourists who wanted to spend a holiday in Switzerland or Italy. The Nazi government was anxious not to arouse the anger of its then Italian friends by preventing its citizens from visiting Italy.

The case with Switzerland was different. The Swiss Government, yielding to the demands of one of the most important branches of its economic system, insisted that a part of the payment for German exports to Switzerland should be balanced by the outlays of German tourists. As the total amount of German exports to Switzerland and of Swiss exports to Germany was fixed by a bilateral exchange agreement, it was of no concern to Germany how the Swiss distributed the surplus. The sum allotted to German tourists traveling in Switzerland was deducted from that destined for the repayment of German debts to Swiss banks. Thus the stockholders of the Swiss banks paid the expenses incurred by German tourists.

German corporations are not free to distribute their profits to the shareholders. The amount of the dividends is strictly limited according to a highly complicated legal technique. It has been asserted that this does not constitute a serious check, as the corporations are free to water the stock. This is an error. They are free to increase their nominal stock only out of profits made and declared and taxed as such in previous years but not distributed to the shareholders.

As all private consumption is strictly limited and controlled by the government, and as all unconsumed income must be invested, which means virtually lent to the government, high profits are nothing but a subtle method of taxation.

The consumer has to pay high prices and business is nominally profitable. But the greater the profits are, the more the government funds are swelled. The government gets the money either as taxes or as loans. And everybody must be aware that these loans will one day be repudiated.

For many years German business has not been in a position to replace its equipment. At the end of the war the assets of corporations and private firms will consist mainly of worn-out machinery and various doubtful claims against the government. Warring Germany lives on its capital stock, i.e., on the capital nominally and seemingly owned by its capitalists.

The Nazis interpret the attitudes of other nations with regard to the problem of raw materials as an acknowledgment of the fairness of their own claims. The League of Nations has established that the present state of affairs is unsatisfactory and hurts the interests of those nations calling themselves have-nots.

The fourth point of the Atlantic Declaration of August 14, 1941, in which the chiefs of the governments of the United Kingdom and of the United States made known “certain common principles in the national policies of their respective countries on which they base their hope for a better future of the world,” reads as follows: “They will endeavor, with due respect for their existing obligations, to further the enjoyment by all States, great or small, victor or vanquished, of access, on equal terms, to the trade and to the raw materials of the world which are needed for their economic prosperity.”

The Roman Catholic Church is, in a world war, above the fighting parties. There are Catholics in both camps. The Pope is in a position to view the conflict with impartiality. It was, therefore, in the eyes of the Nazis very significant when the Pope discovered the root causes of the war in “that cold and calculating egoism which tends to hoard the economic resources and materials destined for the use of all to such an extent that the nations less favored by nature are not permitted access to them,” and further declared that he saw “admitted the necessity of a participation of all in the natural riches of the earth even on the part of those nations which in the fulfillment of this principle belong to the category of givers and not to that of receivers.”

Well, say the Nazis, everybody admits that our grievances are reasonable. And, they add, in this world which seeks autarky of totalitarian nations, the only way to redress them is to redistribute territorial sovereignty. It was often contended that the dangers of autarky which the Nazis feared were still far away, that Germany could still expand its export trade, and that its per capita income continued to increase. Such objections did not impress the Germans. They wanted to realize economic equality, i.e., a productivity of German labor as high as that of any other nation.

The wage earners of the Anglo-Saxon countries too, they objected, enjoy today a much higher standard of living than in the past. Nevertheless, the “progressives” do not consider this fact a justification of capitalism, but approve of labor’s claims for higher wages and the abolition of the wages system. It is unfair, said the Nazis, to object to the German claims when nobody objects to those of Anglo-Saxon labor.

The weakest argument brought forward against the Nazi doctrine was the pacifist slogan: War does not settle anything. For it cannot be denied that the present state of territorial sovereignty and political organization is the outcome of wars fought in the past. The sword freed France from the rule of the English kings and made it an independent nation, converted America and Australia into white men’s countries, and secured the autonomy of the American republics. Bloody battles made France and Belgium predominantly Catholic and Northern Germany and the Netherlands predominantly Protestant. Civil wars safeguarded the unity of the United States and of Switzerland.

Two efficacious and irrefutable objections could well have been raised against the plans of German aggression. One is that the Germans themselves had contributed as much as they could to the state of affairs that they considered so deplorable. The other is that war is incompatible with the international division of labor. But “progressives” and nationalists were not in a position to challenge Nazism on these grounds. They were not themselves concerned with the maintenance of the international division of labor; they advocated government control of business which must necessarily lead toward protectionism and finally toward autarky.

The fallacious doctrines of Nazism cannot withstand the criticism of sound economics, today disparaged as orthodox. But whoever clings to the dogmas of popular neo-Mercantilism and advocates government control of business is impotent to refute them. Fabian and Keynesian “unorthodoxy” resulted in a confused acceptance of the tenets of Nazism. Its application in practical policies frustrated all endeavors to form a common front of all nations menaced by the aspirations of Nazism.

Ludwig von MisesLudwig von Mises

Ludwig von Mises (1881-1973) taught in Vienna and New York and served as a close adviser to the Foundation for Economic Education. He is considered the leading theorist of the Austrian School of the 20th century.

iceburgs

A Scientific Consensus on What Now? by Robert P. Murphy

Authority versus Science in the Climate Change Debate.

When it comes to the climate change debate, many of the loudest voices are confidently making assertions that are not backed up by the actual evidence — and in this respect, they are behaving very unscientifically.

One obvious sign that many people in the climate change debate are appealing to emotions rather than facts is their reliance on pejorative terminology. For example, rather than make an informative statement that they support subsidies for wind and solar, and taxes on coal and oil, they may instead say they support “clean energy” while their opponents favor “dirty energy.”

The coup de grâce, of course, occurs when partisans in the debate refer to their opponents as “climate deniers.” This is a nonsensical slur that would have impressed Orwell. Obviously, nobody denies climate. Furthermore, nobody denies that the climate is changing. And, when it comes to the serious debate among published climate scientists, people on both sides agree that human activities are contributing to warmer temperatures; the dispute is simply overhow much. (Those who think the change is mild have embraced the label “lukewarmers.”)

To label critics of a carbon tax or EPA regulations on power plants as “climate deniers” is utterly destructive of rational inquiry and tries to link legitimate skepticism to Holocaust denial. Those who use this term without irony demonstrate that they have no interest in scientific discovery.

Related to this lack of nuance, and the appeal to an exaggerated consensus, is the oft-repeated claim that “97 percent of climate scientists agree” on the state of human-generated climate change. Physicist-turned-economist David Friedman (among others) has investigated the methods used to generate such claims, and finds that they are seriously lacking.

Using the very data (on abstracts from published papers) that forms the basis of these headline announcements, Friedman reckons that more like 1.6 percent of the surveyed papers explicitly endorse humans as the main cause of global warming since the 1800s. Friedman further argues that this confusion — where the actual findings of the paper ended up being misinterpreted by the media — appears to have been deliberately produced by the survey’s authors.

“Hottest Year on Record” and “the Pause”

A January 2016 New York Times article epitomizes the advocacy disguised as reporting in the climate change debate. The very title lets you know that a serious case of scientism is coming, for it announces, “2015 Was Hottest Year in Historical Record, Scientists Say.”

Now, we must inquire, what is the purpose of adding “Scientists Say” at the end? Does any reader think that the Times would be quoting plumbers or accountants on whether 2015 was the hottest year on record? The obvious purpose is to contrast what scientists say about global warming with what thosenonscientist deniers are saying. The article goes on to let us know exactly what “the scientists” think about global warming and manmade activities:

Scientists started predicting a global temperature record months ago, in part because an El Niño weather pattern, one of the largest in a century, is releasing an immense amount of heat from the Pacific Ocean into the atmosphere. But the bulk of the record-setting heat, they say, is a consequence of the long-term planetary warming caused by human emissions of greenhouse gases.

“The whole system is warming up, relentlessly,” said Gerald A. Meehl, a scientist at the National Center for Atmospheric Research in Boulder, Colo.

It will take a few more years to know for certain, but the back-to-back records of 2014 and 2015 may have put the world back onto a trajectory of rapid global warming, after a period of relatively slow warming dating to the last powerful El Niño, in 1998.

Politicians attempting to claim that greenhouse gases are not a problem seized on that slow period to argue that “global warming stopped in 1998,” with these claims and similar statements reappearing recently on the Republican presidential campaign trail.

Statistical analysis suggested all along that the claims were false, and that the slowdown was, at most, a minor blip in an inexorable trend, perhaps caused by a temporary increase in the absorption of heat by the Pacific Ocean.

This excerpt is quite fascinating. We have something reported as undeniable fact when it actually relies on assumptions of what might happen in the future (“may have put the world back onto a trajectory of rapid global warming”) and offers conjectures to explain why the measured warming suddenly slowed down (“perhaps caused by a temporary increase in the absorption of heat”).

The “statistical analysis” did not establish that the critics’ claims were false. It is undeniably true that the official NASA GISS records showed, for example, that the average annual global temperature in 2008 was lower than the annual temperature in 1998, and that’s why people at the time were saying, “There has been no global warming in the last ten years.”

Here is a NASA-affiliated scientist arguing that such claims are misleading, and perhaps they were, but it is similarly misleading to turn around and claim that the pause didn’t exist.

If you asked a bunch of Americans whether they gained weight over the last 10 years, their natural interpretation of that question would be, “Do I weigh morenow than I weighed 10 years ago?” They wouldn’t think it involved construction of moving averages since birth. In that sense, the people referring to the pause were not acting dishonestly; they were pointing out to the public a fact about the temperature record that would definitely be news to them, in light of the rhetoric of runaway climate change.

However, the more substantive point here is that the popular climate models predicted much more warming than has in fact occurred. In other words, the question isn’t whether the 2000s were warmer than the 1990s. Rather, the issue is given how much concentrations of greenhouse gases have risen, is the actualtemperature trend consistent with the predicted temperature trend?

To answer this, consider a December 2015 Cato Institute working paper from two climate scientists, Pat Michaels and Paul Knappenberger: “Climate Models and Climate Reality: A Closer Look at a Luke warming World.” They avoid the accusation of cherry-picking by running through trend lengths of varying durations, and they compare 108 model runs with the various data sets on observed temperatures. They conclude, “During all periods from 10 years (2006–2015) to 65 (1951–2015) years in length, the observed temperature trend lies in the lower half of the collection of climate model simulations, and for several periods it lies very close (or even below) the 2.5th percentile of all the model runs.”

Thus we see that the critics arguing about the model projections aren’t simply picking the very warm 1998 as a starting point in order to game the results. The standard models produced warming projections well above what has happened in reality, and for some periods the observed warming was so low (relative to the prediction) that there is less than a 2.5 percent chance that this could be explained by natural volatility. This is the sense in which the current suite of climate models is on the verge of being “rejected” in the statistician’s sense.

To be sure, I am not a climate scientist, and others would no doubt dispute the interpretation of the data that Michaels and Knappenberger give. My point is to show how utterly misleading the New York Times piece is when it leads readers to believe that “scientists” were never troubled by lackluster warming and that only politicians were trying to confuse the public on the matter.

Climate Economists Don’t Believe Their Models?

Finally, consider a December 2015 Vox piece with the title, “Economists Agree: Economic Models Underestimate Climate Change.” Furthermore, the URL for this piece contains the phrase “economists-climate-consensus.” We see the same appeal to authority here as in the natural sciences when it comes to climate policy.

The Vox article refers to a survey of 365 economists who had published in the field of climate economics. Here is the takeaway: “Like scientists, economists agree that climate change is a serious threat and that immediate action is needed to address it” (emphasis added).

Yet, in several respects, the survey reveals facts at odds with the alarmist rhetoric the public hears on the issue. For example, one question asked, “During what time period do you believe the net effects of climate change will first have a negative impact on the global economy?” With President Obama and other important officials discussing the ravages of climate change (allegedly) before our very eyes, one might have expected the vast majority of the survey respondents to say that climate change is having a negative impact right now.

In fact, only 41 percent said that. Twenty-two percent thought the negative impact would be felt by 2025, while an additional 26 percent would only say climate change would have net negative economic effects by 2050. Would anyone have expected that result when reading Vox’s summary that immediate action is needed to address climate change?

To be clear, the Vox statement is not a lie; it can be justified by the responses on two of the other questions. Yet the actual views of these economists are much more nuanced than the pithy summary statements suggest.

Authority versus Science

On this particular survey, I personally encountered the height of absurdity in the context of scientism and appeal to authority. For years, in my capacity as an economist for the Institute for Energy Research, I have pointed out that the published results in the United Nations’ official “consensus” documents do not justify even a standard goal of limiting global warming to 2 degrees Celsius, let alone the over-the-top rhetoric of people like Paul Krugman.

In order to push back against my claim, economist Noah Smith pointed to the survey discussed earlier, proudly declaring, “Apparently most climate economists don’t believe their own models.” Thus we have reached the point where partisans on one side of a policy debate rely on surveys of what “the experts say,” in order to knock down the other side who rely on the published results of those very experts.

This is the epitome of elevating appeals to scientific authority over the underlying science itself.

In the climate change debate, legitimate disputes are transformed into a battle between Noble Seekers of Truth versus Unscientific Liars Who Hate Humanity. Time and again, references to “the consensus” are greatly exaggerated, while people pointing out enormous problems with the case for policy action are dismissed as “deniers.”

Robert P. MurphyRobert P. Murphy

Robert P. Murphy is research assistant professor with the Free Market Institute at Texas Tech University.

RELATED ARTICLE: College Professor Advocating Climate Change May Have Mismanaged Millions in Tax Dollars

oregon minimum wage bill signing

Governor of Oregon signs ‘Economic Death Warrant’ for Her State

Without consulting any economists or reviewing the past performance of government interference from the manipulation of wages against labor and productivity, Oregon’s governor Kate Brown on March 2nd 2016 signed a potential economic death warrant for her state.

She picked up her black and gold stylus, with the hammer and sickle engraved in the nib, and signed legislation that will raise the minimum wage to nearly $15 an hour over a six year incremental three tiered system.

Now this has never been tried before anywhere in the United States. Probably for good reason. Even the emerging capitalist nation of the Russian Federation has stayed clear of this type of folly.

The Governor said today the new law “Is a path forward – so working families can catch up, and businesses have time to plan for the increase.”

ERR, no. This is a massive Socialist Marxist mindset economic mistake. Small business owners will stop hiring and families will be left even further behind.

Besides; one DOES not raise a family in a minimum wage job. This is entry level work of none skilled labor. A stepping stone to better things.

When governments artificially raise wages and eliminate competition they suffer massive economic problems.

Increasing the minimum wage this high in Oregon, is way above the threshold for small business owners to sustain employees and this action by the Governor will cut off and eventually block many roads to greater prosperity for many poor families, kids working their way through college and the like.

Kate Brown oregon governor

Governor Kate Brown

This action by Governor Kate Brown the born again Marxist in Oregon will delay if not eliminate the entry of other workers, including youth, into non skilled paid work by needlessly increasing the cost of unskilled labor. Totally un American and Marxist in nature.

Employers; especially small business owners will not be able to afford to hire as many unskilled workers, and will respond by cutting back services or replacing workers with machinery or computers.

The expert matter subjects in this field of study refer to this as the “elasticity” of demand for labor to describe the ratio of jobs gained or lost when wages change.

Increasing wages on low skilled entry level jobs such as those that help college kids get through their growing years in college on Ramon noodle dinners will now be making the kids just heat the water. No job. No more Ramon noodles…..

Economic experts estimate this “elasticity” will vary, but the average estimate is that for a 10 percent increase in the minimum wage, employment crashes by 5 percent.

If the minimum wage is increased from $9.00 to $15.00 per hour, as is now the case in Oregon the demand for unskilled labor could drop by as much as 35 percent in jobs that earn the said current minimum wage.

The outcome of this is the loss of hundreds if not thousands of jobs making it more difficult for small business owners to hire.

It will close down many non skilled entry level workers access to a job and it will put up a road block to people who want escape poverty.

My friend started working at McDonalds making $3.15 an hour flipping burgers. With the knowledge he acquired and as a capitalist risk taker he went on to now 35 years later to own seven McDonald franchises in Baton Rouge. His net worth today exceeds $12 million dollars.

His hard work and his risk taking paid off. The fact he made minimum wage when he first started out did not stop him from achieving financial success. There was no interfering with and artificially manipulating the cost of labor when he was sticking the fryer in the hot oil.

Mom and pop stores will soon stop hiring in Oregon and instead will perhaps just use family members to run the front counter. Large franchise like Wal-Mart and fast food chains will install self check out stations and machines to take burger orders.

This action by the Governor of Oregon will destroy jobs and perhaps force some companies to move across state lines.

Increasing the minimum wage will eliminate entry-level jobs for unskilled workers, more people will become a burden upon the state funded welfare rolls thus reducing productivity, and thus reducing the available job market and making it more difficult for those who want to work to find jobs.

There is no such thing as a dead end job.

Low-wage entry level jobs provide the poor with an escape route from poverty. Now in Oregon the new law means to make an honest living is now much harder and more folks will be unable to get hired will be living off the dole..

Entry level positions will either be eliminated, moved out of state of replaced with technology.

This action by the Governor has done nothing but to bash the working poor over the head with a hammer and has made an escape route from poverty more difficult for them to follow.

RELATED ARTICLES:

An Economist’s 10 Objections to the Minimum Wage by Mark J. Perry

The Minimum Wage Fairy Tale by Donald J. Boudreaux

Low-Skilled Workers Flee the Minimum Wage: How State Lawmakers Exile the Needy by Corey Iacono

The Minimum Wage Hurt the Young and Low-Skilled almost as Much as the Recession by Preston Cooper

EDITORS NOTE: What are the specific objections of economists to the minimum wage and why do they generally favor market wages instead? Here are ten reasons in favor of market wages over a government-mandated minimum wage:

  1. Proposed minimum wages are almost always arbitrary and never based on sound economic analysis. Why $10.10 an hour and not $9.10? Why $15 an hour and not $16 an hour?
  1. A uniform federal minimum wage may be sub-optimal for many states, and uniform state minimum wages may be sub-optimal for many cities. A one-size-fits-all approach to the minimum wage is really a “one-size-fits-none.”
  1. Minimum wage laws require costly taxpayer-funded monitoring and enforcement mechanisms, whereas market wages don’t.
  1. Minimum wage laws discriminate against unskilled workers in favor of skilled workers, and the greatest amount of discrimination takes place against minority groups, like blacks.
  1. Adjustments to total compensation following minimum wage laws will disadvantage workers in the form of reduced hours, reduced fringe benefits, and reduced on-the-job training.
  1. Many unskilled workers will be unable to find work and will be denied valuable on-the-job training and the opportunity to acquire experience and skills.
  1. Minimum wage laws prevent mutually advantageous, voluntary labor agreements between employers and employees from taking place.
  1. To the extent that higher minimum wages result in lower firm profits and higher retail prices, that’s a form of legal plunder by workers from employers and consumers that is objectionable.
  1. Market-determined wages are efficient, whereas government-mandated wages create distortions in the labor markets that prevent labor markets from clearing.
  1. Like all government price controls, minimum wage laws are distortionary. If you trust government officials and politicians to legislate and enforce a minimum wage for unskilled workers, you should logically trust those same bureaucrats to set all prices, wages and interest rates in the economy. Realistically, if you agree that those economy-wide price controls would be undesirable, then you should also agree that the minimum wage law is also undesirable.
deportation

How much would it cost to deport every single illegal alien in the U.S.?

The pro-amnesty American Action Forum (AAF) found it would cost the federal government $400 to $600 billion to remove all illegal aliens currently living in the United States within a two year period and to prevent all future unlawful entry.

In its research paper, AAF examined the personnel and infrastructure implications of removing all 11.3 million illegal aliens in a two-year time frame. In order to remove all illegals, each each one would have to be apprehended, detained, legally processed, and transported to their country of origin. In order to remove all illegals in two years, the U.S. government would have to expand each of those stages of the removal process.

The current annual budget for U.S. Customs and Border Protection is $13.5 billion. This does not include the costs of federal, state and local law enforcement agencies dealing with apprehending, detaining and processing illegals on a daily basis.

Based upon FY 2013 levels it would require:

  • Federal immigration apprehension personnel to increase from 4,844 positions to 90,582 positions;
  • The number of immigration detention beds to increase from 34,000 to 348,831;
  • The number of immigration courts to increase from 58 to 1,316;
  • The number of federal attorneys legally processing undocumented immigrants to increase from 1,430 to 32,445; and
  • A minimum of 17,296 chartered flights and 30,701 chartered bus trips each year.

George Fuller, an expert on immigration issues, notes, “Put in E-Verify and take away Childbirth citizenship and they will self deport. There will be no rounding up necessary. The AAF report is designed to make people think we have to accept them being here because the cost to deport them is high, but that is not true. When they get hungry they will leave. The same goes for visa over stayers!”

The Federation for America Immigration Reform (FAIR) in a 2013 study estimates the annual costs of illegal immigration at the federal, state and local level to be about $113 billion; nearly $29 billion at the federal level and $84 billion at the state and local level.

The FAIR study also estimates tax collections from illegal alien workers, both those in the above-ground economy and those in the underground economy. Those receipts do not come close to the level of expenditures and, in any case, are misleading as an offset because over time unemployed and underemployed U.S. workers would replace illegal alien workers.

Key Findings of the FAIR study:

  • Illegal immigration costs U.S. taxpayers about $113 billion a year at the federal, state and local level. The bulk of the costs — some $84 billion — are absorbed by state and local governments.
  • The annual outlay that illegal aliens cost U.S. taxpayers is an average amount per native-headed household of $1,117. The fiscal impact per household varies considerably because the greatest share of the burden falls on state and local taxpayers whose burden depends on the size of the illegal alien population in that locality
  • Education for the children of illegal aliens constitutes the single largest cost to taxpayers, at an annual price tag of nearly $52 billion. Nearly all of those costs are absorbed by state and local governments.
  • At the federal level, about one-third of outlays are matched by tax collections from illegal aliens. At the state and local level, an average of less than 5 percent of the public costs associated with illegal immigration is recouped through taxes collected from illegal aliens.
  • Most illegal aliens do not pay income taxes. Among those who do, much of the revenues collected are refunded to the illegal aliens when they file tax returns. Many are also claiming tax credits resulting in payments from the U.S. Treasury.

Read the FAIR full report here.

It appears from the two reports that the costs of deporting all illegals would be recouped within 4 to 6 years.

The AFF report notes that, “[I]n just two years it would shrink the labor force by 10.3 million workers and reduce real GDP by $1 trillion.” However, this does not take into account the reduction of payments to those not working by the government, who would now be able to back fill those jobs opened by the mass deportation of illegals.

Please leave your comments on this column. There are two options, the status quo or deportation. Which would be better for America and American workers?

UPDATE: Robert A King left the following comment on our Facebook page.

The straw man argument against enforcing immigration laws against illegals already here is that we can’t practically deport some 20 Million, illegal aliens. Poppy cock! Don’t fall for it!

Most illegals would go home of their own accord, without having to physically deport them, if we:

1) Build the fence – the WHOLE fence!

2) Make it illegal to hire an illegal, backed by stiff fines escalating to jail time for repeat/multiple offenses, and with culpability extending to corporate officers and board members;

3) Pass mandatory e-Verify in order to implement 2);

4) Make it illegal to provide educational, health (except for emergency care), or social welfare benefits to illegals, backed by stiff fines escalating to jail time for repeat/multiple offenses, and with culpability extending to corporate officers and board members;

5) Revise the visa system to make location recording and check-in tracking mandatory for all here under the various visas. Once expired and not renewed, require mandatory departure enforced by arrest and deportation for violation.

6) Eliminate the law that allows “Birthright Citizenship”, aka “Anchor Babies”. Congress NEVER intended that a person sneaking over the border to have their baby in the US should be allowed to be granted automatic and immediate citizenship. Amend the constitution, if necessary;

7) Make aiding and abetting an illegal itself illegal, backed by stiff fines escalating to jail time for repeat/multiple offenses, and with culpability extending to all involved, especially corporate officers and board members;

8) Illegals wanting to return to the US must apply under the legal immigration system, and follow the law like all other, legal immigrants;

9) Deport all criminal illegal aliens, whom make up over 30% of the federal prison population.

These things alone would cause most illegals to go home of their own accord, due to lack of “goody” incentives and the inability to work.

Next, we must also:

10) Make English our official language. E Pluribus Unum – out of many, one. It’s our national motto.

No more government voting ballots or other forms in anything other than English.

You want to be here? Become an AMERICAN!

bernie sander podium

Will a ‘Socialist’ Government Make Us Freer? by Jason Kuznicki

“Socialism” is a weasel word.

Consider that the adjective “socialist” applies commonly — even plausibly — to countries with vastly different ex ante institutions and with vastly different social and economic outcomes. Yet Canada, Norway, Venezuela, and Cuba can’t all be one thing. Does socialism mean substantial freedom of the press, as in Norway? Or does it mean the vicious suppression of dissent, as in Venezuela?

We need more clarity here before we decide whether socialism is a worthwhile social system, and whether, as Will Wilkinson recommends, we ought to support a socialist candidate for president.

An approach that clearly will not do is to apply the term “socialism” to virtually all foreign countries. Shabby as that definition may be, some do seem to use it, both favorably and not. The result is that “socialism” has grown popular largely because a lot of people have concluded that the American status quo stinks. Maybe it does stink, but that doesn’t endow “socialism” with a proper definition.

Let’s see what happens when we drill down to the level of institutions.

Now, we might personally wish that the word “socialism” meant “the social system in which the state owns the means of production and runs the major industries of the nation.”

This is a workable definition: It has a clear genus and differentia; it includes some systems, while excluding others; and it’s not obviously self-referential. It’s also the definition preferred by many important political actors in the twentieth century, including Vladimir Lenin.

Lenin’s definition was not a bad one. But it’s far from the only current, taxonomically proper definition of socialism. As Will Wilkinson rightly notes, socialism also commonly means “the social system in which the state uses taxation to provide an extensive social safety net.”

And yet, as Will also notes, “ownership of the means of production” and “provision of a social safety net” are logically independent policies. A state can do one, the other, both, or neither. Of these four possibilities, there’s only one that can’t plausibly be called a socialism — and not a single state on earth behaves this way!

Better terms are in order, but I know that whatever I propose here isn’t going to stick, so I’m not going to try. Instead I want to look at some of the consequences that may arise from our fuzzy terminology.

One danger is that we may believe and support one conception of “socialism” —only to find that the agents we’ve tasked with supplying it have had other ideas all along: We may want Norway but get Venezuela. Wittingly or unwittingly.

Before we say “oh please, of course we’ll end up in Norway,” let’s recall how eager our leftist intelligentsia has been to praise Chavez’s Venezuela — and even declare it an “economic miracle” — until the truth became unavoidable: The “miracle” of socialism in Venezuela turned out to be nothing more than a transient oil boom. Yet leftist intellectuals are the very sorts of people who will be drawn, by self-selection, to an administration that is proud to call itself socialist.

There’s some resemblance to a “motte-and-bailey” process here: they cultivate the rich, desirable fields of the bailey, until they are attacked, at which point they retreat to the well-fortified motte. The easily defensible motte is the comfortable social democracy of northern Europe, which we all agree is pretty nice and happens to have quite a few free-market features. The bailey is the Cuban revolution.

This motte-and-bailey process does not need to be deliberate; it may be the result of a genuinely patchwork socialist coalition. No one in the coalition needs to have bad faith. An equivocal word is all that’s needed, and one is already on hand.

Even when we look only at one country, the problem remains: We may only want some institutional parts of Denmark — and we may want them for good reasons, such as Denmark’s relatively loose regulatory environment. But what we get may only be the other institutional parts of Denmark — such as its high personal income taxes. (Worth noting: Bernie Sanders has explicitly promised the higher personal income taxes, while his views on regulation are anything but Danish.)

Will thinks that electing someone on the far left of the American political spectrum could be somewhat good for liberty, but I’m far from convinced. Remember what happened the last time we put just a center-leftist in the White House: By the very same measures of economic freedom that Will uses to tout Denmark’s success, America’s economic freedom ranking sharply declined. And that decline was the direct result of Barack Obama’s left-wing economic policies. We got a larger welfare state and higher taxes, but we also got much more command-and-control regulation.

Faced with similar objections from others, Will has already performed a nice sidestep: He has replied that voting for Sanders is — obviously — just a strategic move: “Obviously,” he writes, “President Bernie Sanders wouldn’t get to implement his economic policy.” Emphasis his.

To which I’d ask: Do you really mean that Sanders would achieve none of his economic agenda? At all? Because I can name at least two items that seem like safe bets: more protectionism and stricter controls on immigration. A lot of Sanders’s ideas will indeed be dead on arrival, but these two won’t, and he would be delighted to make a bipartisan deal that cuts against most everything that Will, the Niskanen Center, and libertarians generally claim to stand for. Cheering for a guy who would happily bury your legislative agenda, and who stands a good chance of actually doing it seems… well, odd.

There is also a frank inconsistency to Will’s argument: The claim that Sanders will make us more like Denmark can’t be squared with the claim that Sanders will be totally ineffective. Arguing both is just throwing spaghetti on the wall — and hoping the result looks like libertarianism.

Would Sanders decriminalize marijuana? Or reform the criminal justice system? Or start fewer wars? Or spend less on defense? Or give us all puppies? I don’t know. Obama promised to close Guantanamo. He promised to be much better on civil liberties. He promised not to start “dumb wars” or bomb new and exotic countries. He even promised accountability for torture.

In 2008, I made the terrible mistake of counting those promises in his favor. We’ve seen how well that worked out.

It’s completely beyond me why I should trust similarly tangential promises this time around — particularly from a candidate like Sanders, whose record on foreign policy is already disturbingly clear. None of the rest of these desiderata have anything to do with state control over our economic life, which would appear to be the one thing the left wants most of all. (Marijuana: illegal in Cuba. Legal in North Korea. Yay freedom?)

Ultimately, I think that electing someone significantly further left than Obama will not help matters in any sense at all, except maybe that it will show how little trust we should put in anyone who willingly wears the socialist label. The only good outcome of a Sanders administration may be that we’ll all say to ourselves afterward: “Well, we won’t be trying that again!”

Now, I am prepared to believe, exactly as Will writes, that “‘social democracy,’ as it actually exists, is sometimes more ‘libertarian’ than the good old U.S. of A.” That’s true, at least in a few senses. Consider, for instance, that Denmark isn’t drone bombing unknown persons in Pakistan using a type of algorithm that can’t seem to deliver interesting Facebook ads. (One could say that, as usual, Denmark is letting us do their dirty work for them, with their full approval, but I won’t press the point.)

Either way, that’s still a pretty low bar, no? Meanwhile, there remains plenty of room for us to imitate some other bad things — things that we aren’t doing now, but that Denmark is doing, like taxing its citizens way, way too much. The fact that these things are a part of the complex conglomerate known as northern European social democracy doesn’t necessarily make them good, exactly as remote control assassination doesn’t become good merely by virtue of being American.

In short: Point taken about social democracy. At times, some of it isn’t completely terrible. But that only gets us so far, and not quite to the Sanders slot in the ballot box.

Jason KuznickiJason Kuznicki

Jason Kuznicki is the editor of Cato Unbound.

girl with phone

The Average American Today Is Richer than John D. Rockefeller by Donald J. Boudreaux

This Atlantic story reveals how Americans lived 100 years ago. By the standards of a middle-class American today, that lifestyle was poor, inconvenient, dreary, and dangerous. (Only a few years later — in 1924 — the 16-year-old son of a sitting US president would die of an infected blister that the boy got on his toe while playing tennis on the White House grounds.)

So here’s a question that I’ve asked in one form or another on earlier occasions, but that is so probing that I ask it again: What is the minimum amount of money that you would demand in exchange for your going back to live even as John D. Rockefeller lived in 1916?

21.7 million 2016 dollars (which are about one million 1916 dollars)? Would that do it? What about a billion 2016 — or 1916 — dollars? Would this sizable sum of dollars be enough to enable you to purchase a quantity of high-quality 1916 goods and services that would at least make you indifferent between living in 1916 America and living (on your current income) in 2016 America?

Think about it. Hard. Carefully.

If you were a 1916 American billionaire you could, of course, afford prime real-estate. You could afford a home on 5th Avenue or one overlooking the Pacific Ocean or one on your own tropical island somewhere (or all three). But when you traveled from your Manhattan digs to your west-coast palace, it would take a few days, and if you made that trip during the summer months, you’d likely not have air-conditioning in your private railroad car.

And while you might have air-conditioning in your New York home, many of the friends’ homes that you visit — as well as restaurants and business offices that you frequent — were not air-conditioned. In the winter, many were also poorly heated by today’s standards.

To travel to Europe took you several days. To get to foreign lands beyond Europe took you even longer.

Might you want to deliver a package or letter overnight from New York City to someone in Los Angeles? Sorry. Impossible.

You could neither listen to radio (the first commercial radio broadcast occurred in 1920) nor watch television. You could, however, afford the state-of-the-art phonograph of the era. (It wasn’t stereo, though. And — I feel certain — even today’s vinylphiles would prefer listening to music played off of a modern compact disc to listening to music played off of a 1916 phonograph record.) Obviously, you could not download music.

There really wasn’t very much in the way of movies for you to watch, even though you could afford to build your own home movie theater.

Your telephone was attached to a wall. You could not use it to Skype.

Your luxury limo was far more likely to break down while you were being chauffeured about town than is your car today to break down while you are driving yourself to your yoga class. While broken down and waiting patiently in the back seat for your chauffeur to finish fixing your limo, you could not telephone anyone to inform that person that you’ll be late for your meeting.

Even when in residence at your Manhattan home, if you had a hankering for some Thai red curry or Vindaloo chicken or Vietnamese Pho or a falafel, you were out of luck: even in the unlikely event that you even knew of such exquisite dishes, your chef likely had no idea how to prepare them, and New York’s restaurant scene had yet to feature such exotic fare. And while you might have had the money in 1916 to afford to supply yourself with a daily bowlful of blueberries at your New York home in January, even for mighty-rich you the expense was likely not worthwhile.

Your wi-fi connection was painfully slow — oh, wait, right: it didn’t exist. No matter, because you had neither computer nor access to the Internet. (My gosh, there weren’t even any blogs for you to read!)

Even the best medical care back then was horrid by today’s standards: it was much more painful and much less effective. (Remember young Coolidge.) Antibiotics weren’t available. Erectile dysfunction? Bipolar disorder? Live with ailments such as these. That was your only option.

You (if you are a woman) or (if you are a man) your wife and, in either case, your daughter and your sister had a much higher chance of dying as a result of giving birth than is the case today. The child herself or himself was much less likely to survive infancy than is the typical American newborn today.

Dental care wasn’t any better. Your money didn’t buy you a toothbrush with vibrating bristles. (You could, however, afford the very finest dentures.)

Despite your vanity, you couldn’t have purchased contact lenses, reliable hair restoration, or modern, safe breast augmentation. And forget about liposuction to vacuum away the results of your having dined on far too many cream-sauce-covered terrapin.

Birth control was primitive: it was less reliable and far more disruptive of pleasure than are any of the many inexpensive and widely available birth-control methods of today.

Of course, you adore precious-weacious little Rover, but your riches probably could not buy for Rover veterinary care of the sort that is routine in every burgh throughout the land today.

You were completely cut off from the cultural richness that globalization has spawned over the past century. There was no American-inspired, British-generated rock’n’roll played on electric guitars. And no reggae. Jazz was still a toddler, with only few recordings of it.

You could afford to buy the finest Swiss watches and clocks, but even they couldn’t keep time as accurately as does a cheap Timex today (not to mention the accuracy of the time kept by your smartphone).

Honestly, I wouldn’t be remotely tempted to quit the 2016 me so that I could be a one-billion-dollar-richer me in 1916. This fact means that, by 1916 standards, I am today more than a billionaire. It means, at least given my preferences, I am today materially richer than was John D. Rockefeller in 1916. And if, as I think is true, my preferences here are not unusual, then nearly every middle-class American today is richer than was America’s richest man a mere 100 years ago.

This post first appeared at Cafe Hayek.

Donald J. BoudreauxDonald J. Boudreaux

Donald Boudreaux is asenior fellow with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University, a Mercatus Center Board Member, a professor of economics and former economics-department chair at George Mason University and, a former FEE president.

punch bowl with hand made of ice

Housing Finance’s Two Punch Bowls by the Federal Government Should Be Removed

As famously stated by Fed Chairman William McChesney Martin in 1955: “The Federal Reserve, after the recent increase in the discount rate, is in the position of the chaperon who has ordered the punch bowl removed just when the party was really warming up.”

As the Fed is now finding out, removing the punch bowl can be problematic if the party is already past warming up. Since it announced a ¼ point increase in the Fed funds rate on December 16, 2015, the two year and ten year Treasury notes have dropped 33 basis and 54 basis points respectively. The ten year rate is at 1.76%, near its all-time low of 1.58%. 30-year mortgage rates, which are priced off of it, have declined to 3.72%, the lowest level in 9 months and only marginally above the all-time low of 3.35% set in November 2012. Clearly the interest rate punch bowl has not been removed.

But housing finance benefits from a second punch bowl spiked by a plethora of federal housing guarantee agencies— Federal Housing Administration, Fannie Mae, Ginnie Mae, Freddie Mac, Federal Housing Finance Agency, etc. Today these agencies guarantee 85% of all primary home purchase loans. Loan leverage, as measured by the Pinto-Oliner National Mortgage Risk Index (NMRI) for agency home purchase loans, has been steadily increasing on a year-over-year basis since January 2014. Increases in first-time home buyer leverage have led the way, benefiting from the particularly liberal lending standards of the Federal Housing Administration (FHA). Seven in eight FHA loans to first-time buyers have an NMRI rating of high risk. Add in the fact that the FHA, to a great extent, neither prices nor underwrites for loan risk, making this is a punch bowl that can give quite a hangover.

The result has been a rapid increase in real (inflation adjusted) home prices, with prices up nationally about 16.5% since the home price trough in 2012. History teaches us that once the divergence hits 20% or more, the process of reverting to the mean becomes quite painful, as it is achieved through a drop in home prices. Such divergence can continue for a long time—in the recent boom it lasted 12 years and resulted in a 62% increase in real home prices. Of equal concern is that real prices since the 2012 trough have gone up even more—up 19% for entry-level homes. This makes it harder for low-income borrowers to buy without taking out a high risk loan.

It is well known why this phenomenon occurs. Liberalization of credit terms such as lower downpayments, increasing debt-to-income ratios, or declining interest rates increases demand. When undertaken in a seller’s market where supply is constrained (defined as an inventory relative to sales of six months or less), there is a tendency for this liberalization to be absorbed in price increases rather than increased access. The National Association of Realtors has reported an existing home seller’s market for 40 straight months.

The housing market, like others, is subject to the law of supply and demand. In the same 1955 speech Chairman Martin observed: “It is true that in a great emergency we have been willing to make a departure from our market structure…. The law of supply and demand is suspended temporarily, but it cannot be permanently repealed. It is always with us just as is the law of gravity.”

While this situation is bullish in the near term for continued housing price gains, in the end the taxpayer and low income buyers are the ones taking on the risk. It is time for the Fed and federal guarantee agencies to start removing the punch bowls and acknowledge that home prices are subject to the law of gravity—what goes up must come down.

EDITORS NOTE: This column originally appeared om InsideSources.com.

S

Progress Will Hurt Blameless People by Aaron Ross Powell

There’s an unfortunate tendency among some free market advocates to blame the victim: If you can’t find work, it’s because you’re lazy or you somehow screwed up. Hard work’s all that’s necessary to succeed. But of course that’s not true. It’s quite easy to think of counterexamples. We know creative destruction is a necessary part of a well-functioning economy. Market churn means people lose their jobs through no fault of their own, and shifts in technology and consumer preferences mean that skills once lucrative can suddenly become relatively worthless. Markets are overwhelmingly good, yes, and are responsible for the astonishing amelioration of poverty we’ve seen since the Industrial Revolution, but they have their victims.

A changing global economy has meant a changing American economy and a changing American economy has meant that some people who did well in the old pattern are having a harder time in the new. This harder time is felt by, among others, a segment of America’s lower-middle class who used to be able to find decent-paying jobs that demanded physical labor and the kinds of skills you don’t learn in school.

That segment increasingly faces a fact about the modern economy: Unless you’re a knowledge worker, it’s become a whole lot harder to find a well-paying, stable, long-term job because the skills you bring to an employer aren’t as in demand as they used to be.

And that’s awful for the people going through it. We can say that free markets change over time and that those changes lead to more prosperity in the long term, and that’s true. But it doesn’t make life better for the machinist or construction worker without a college degree and without much retirement savings. Empathy seems an appropriate response by those of us not facing such hardship.

That even well-functioning markets hurt some people some of the time makes selling market solutions to policy problems often a difficult task. We know that the solution to unemployment or underemployment is more economic freedom. Get rid of the barriers to entry and the protectionist policies keeping afloat what would otherwise be failing firms. Enable private schools to create a robust and successful educational system so more people have the skills needed to succeed in a modern economy. Open trade with the rest of the world, so we can grow our economy, buy goods at lower prices, and sell into more markets.

But here’s the thing. Every one of those solutions ends up sounding, to the person economically hurting now, like saying, “Leave it alone and things will work themselves out. Don’t know quite how or when, but they will.”

Market solutions are emergent solutions, and emergence takes time and can’t be planned or predicted. In fact, it’s the attempt to plan and predict that leads so many non-market-based policies to fail. Economists understand this and so largely trust markets. But most Americans aren’t economists.

I think this explains, in part, the appeal of people like Donald Trump or Bernie Sanders. We see them as misdiagnosing the problems and offering counter-productive, and sometimes abhorrent, “solutions.” Immigrants are taking your jobs. (They aren’t.) So let’s fix it right now by closing the borders. Trade with China is making us poor. (It isn’t.) So let’s fix it now by establishing quotas and tariffs.

But to people hurting right now, people like Trump or Sanders offer something free markets can’t: certainty, even if illusory. These people right here are the cause of your problems. Punish or stop them and your problems will go away. America will go back to being great, with “great” meaning the way it was when low-information, low-skill Americans could spend their lives comfortably in the middle class. In other words, before America’s economy became modern.

We don’t want that, of course. The economic visions of Trump and Sanders aren’t just backwards, but are dangerously retrograde policies that will hurt everyone without doing much to improve the lives of those who support such policies.

Liberty struggles when confronted with this combination of widespread economic ignorance and the political incentive for politicians to pander and promise solutions that are anything but. And I don’t know how to solve that. Nor do I believe there’s an easy solution. The incentives in politics run against us, and so we somehow need to get better at articulating the story of markets, of the voluntary and the emergent, and do it in a way that’s as compelling and hopeful in its rhetoric as the false hopes sold by those pitching meretricious intervention.

Part of that means consciously avoiding a panglossian picture of markets, and recognizing that sometimes people get hurt by them, and that often that hurt is blameless.

Cross-posted from Libertarianism.org.

Aaron Ross PowellAaron Ross Powell

Aaron Ross Powell is a research fellow and editor of Libertarianism.org.

usaspending gov logo

Have some fun at USA Spending.gov: $296 million went to Lutherans since Obama took office!

The other day I suggested that each and every one of you can be an investigative reporter, see that post by clicking here.

So here we are, a winter weekend, can’t do much outdoors, and maybe you aren’t into the Super Bowl, so how about having fun searching for how much of your hard earned tax dollars are going to charities—especially to ‘religious’ charities pretending to be doing the Lord’s work while spending your money!

USA Spending graphicI haven’t written about USA Spending.gov for awhile, so last night when a reader asked about a local Catholic Charity, I tried that government website again.  It is much improved because it now contains the sub-grants in addition to the amounts that are direct grants.  I think there was a grace period for grantees to get their information on sub-grants to USA Spending.gov, but they are there now.  (Here is a bit of information about how grantees need to be ready to provide sub-grant information.)

So back to the USA Spending.gov website I looked up the specific Catholic Charities my reader was interested in and was blown away when I saw the millions of dollars just one little local Catholic Charities was getting.

I then decided to just pick one of the nine federal refugee resettlement contractors (which have in the vicinity of 350 sub-grantees or sub-contractors), to see what the biggies were getting.  Here (below) is Lutheran Immigration and Refugee Service which resettles refugees in your towns and cities and also agitates for amnesty for illegal aliens.

LIRS is lobbying (with your money!) as we speak for 100,000 Syrians to be admitted to the U.S. before Obama leaves office.

Prepare to be shocked!  Since August 2008, this one ‘religious’ non-profit received $296 MILLION dollars from you in 143 transactions with federal agencies.(And, I will bet you LIRS is not the wealthiest!)

Click here and see for yourself!  (Sorry the screenshot isn’t very clear!)

Screenshot (22)

I urge you all to try the website.  Unfortunately for PRO-Open Borders Catholic agencies, there are too many of them and they aren’t all in one place. So try your local Catholic Diocese first.  Then think of all the other non-profits that have their hands in your wallet and see how much and from where their grants are flowing.

They will all say they help the poor with your money, but I repeat, they are also lobbying for more (poor) migrants to be admitted to the US!  Our founding fathers must be rolling in their graves to see the federal treasury used in this way.

Then you must get the information you learn out to others beyond your circle. Maybe take your facts and write a letter to the editor. Ask to write an Op-ed for your local paper. Go on talk radio. Write a blog!  Send what you learn to your elected officials and ask why on earth they are giving your money to Open Borders Leftwing organizations masquerading as religious charities.

Come to think of it, where is the ACLU on the separation of church and state?

And, while you are there, be sure to see yesterday’s post about Marco Rubio and his fan boy Grover Norquist (or is it the other way around?).

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