Brazil Is the New Greece by Tyler Cowen

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At 70% of GDP, public debt is worryingly large for a middle-income country and rising fast. Because of high interest rates, the cost of servicing it is a crushing 7% of GDP. The Central Bank cannot easily use monetary policy to fight inflation, currently 10.5%, as higher rates risk destabilising the public finances even more by adding to the interest bill. Brazil therefore has little choice but to raise taxes and cut spending.

Too often, at the popular level, there is a confusion between “austerity is bad” and “the consequences of running out of money are bad.”

Sophisticated analysts of fiscal policy do not make this mistake.

By the way, here is a long study of how Brazilian fiscal policy has been excessively pro-cyclical.

And how is Brazilian output doing you may wonder?

By the end of 2016 Brazil’s economy may be 8% smaller than it was in the first quarter of 2014, when it last saw growth; GDP per person could be down by a fifth since its peak in 2010, which is not as bad as the situation in Greece, but not far off.

Two ratings agencies have demoted Brazilian debt to junk status. Joaquim Levy, who was appointed as finance minister last January with a mandate to cut the deficit, quit in December.

Any country where it is hard to tell the difference between the inflation rate — which has edged into double digits — and the president’s approval rating — currently 12%, having dipped into single figures — has serious problems.

Don’t forget this:

Since the constitution’s enactment, federal outlays have nearly doubled to 18% of GDP; total public spending is over 40%. Some 90% of the federal budget is ring-fenced either by the constitution or by legislation.

Constitutionally protected pensions alone now swallow 11.6% of GDP, a higher proportion than in Japan, whose citizens are a great deal older. By 2014 the government was running a primary deficit (ie, before interest payments) of 32.5 billion reais ($13.9 billion).

Brazilian commodity prices have fallen 41% since their 2011 peak, so I say Ed Prescott has earned his Nobel Prize right there.

The first underlying article/op-ed also is from the Economist. Without intending any slight to their other recent issues, the January 2-8 issue is one of their best in a long time. (I am very pleased to have bought it in advance at the airport rather than waiting to get to my copy back at home.)

This post first appeared at Marginal Revolution.

Tyler CowenTyler Cowen

Tyler Cowen is an American economist, academic, and writer. He occupies the Holbert C. Harris Chair of economics, as a professor at George Mason University, and is co-author, with Alex Tabborak, of the popular economics blog Marginal Revolution.

The Future of Travel Is Cheaper, Faster, Safer, and Autonomous by Ryan Hagemann

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In a classic op-ed, “Why Software Is Eating the World,” Marc Andreessen argued “that we are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy.”

From service and retail to manufacturing and the public sector, innovation in software has become a powerful source of increased productivity, efficiency, and economic growth. Many industries have been disrupted — and in some cases upended entirely — as a result of this software revolution. The transportation industry is on the verge of a massive software-driven market disruption, setting the stage for a significant change in the way we work and the way we think about travel, city design, and transportation more broadly.

Take driverless cars. This technology holds the potential to significantly drive down a variety of costs associated with human-operated vehicles. The most striking is the human toll: nearly 100 Americans die every day as a result of human error on the roadways. Automated cars could reduce this number by significant orders of magnitude.

But the benefits don’t stop there. As Adam Thierer and I noted in a research paper last year, the rise of automated vehicles on American roadways could ultimately cause 90 percent of the cost of insurance premiums to vanish, prevent over 4 million car crashes annually, and save more than $350 billion every year.

Despite the regulatory hurdles standing in the way of their widespread adoption, the arrival of autonomous vehicles on our roads is not a question ofif but when. As driverless cars become more cost-effective and socially accepted, the transportation sector will undergo dramatic changes. Over time, it may become cheaper and more convenient to simply hire the services of circulating robot cars than to own, insure, store, and maintain personal fleets. The days when owning a car is the norm are likely coming to an end, for better or worse.

But autonomous vehicles are just one example of transformative innovation in transportation technology.

Electric cars are beginning to find their stride in the market. It’s not clear, at this point, whether they’re really more efficient or eco-friendly than gas-powered cars, but Tesla Motors has shown that people will buy electric cars. Elon Musk has combined savvy reliance on government subsidies and municipal tax breaks with high-quality design and manufacturing, leaving Tesla Motors well-positioned to become a market leader in electric vehicles. The primary consideration when assessing the prospects electric cars is not the current or potential future valuation of Tesla Motors, or other electric car manufacturers, but the price and efficiency of the battery storage technology.

Currently, Tesla motors is estimated to have the lowest per-kWh (kilowatt-hour) price for lithium ion batteries (Li-ion), which is estimated to be about $200 per-kWh. As recently as May 2013 McKinsey Global Institute report examined the future of Li-ion energy storage. It predicted that once per-kWh prices fell to approximately $160, plug-in hybrids and electric vehicles could finally be cost competitive with traditional internal combustion engine vehicles.

However, McKinsey argued that the $160 price point wasn’t likely to be achieved until 2025. Given how low Tesla Motors’ current per-kWh price point is already, that cost-competitive price could very well be achieved sometime in 2016-2017–almost ten years ahead of predictions.

So autonomous cars are heading our way and battery storage technology is making electric vehicles competitive on the market. But the disruptions don’t stop there. Musk is leading the pack in the electric car market, but he also has a grandiose mass transportation project in the works: the Hyperloop.

The Hyperloop was first announced back in 2013, and was touted by Musk as the future of cross-continental and inter-city transportation. The idea is to use electromagnetic propulsion in a closed tube to accelerate pods at speeds in excess of 700 miles per hour. To put that into context, an average commercial airliner travels at speeds up to 500 miles per hour. Musk’s open source design proposal was floated as a challenge to engineers, largely in response to what he viewed as an outdated, disruption-prone, and costly American rail system.

Many companies are now proposing designs for an upcoming prototype test in January. Bibop Gabriele Gresta, Chief Operating Officer of Hyperloop Transportation Technologies, hopes that the project will not only consume less electricity than it produces, allowing for the resale of the excess energy, but will allow the company to recoup its $100-150 million investment within a decade. Now one knows if this untested technology will pan out, but it’s possible that we are about to witness the dawn of the age of the hyperloop.

Looking even further ahead, drones could alter the way we think of inter- and intra-city transportation. It may not be that far-fetched to imagine advances in drone technology that take advantage of underutilized, low altitude airspace in new ways. Drone delivery is exciting, but consider the possibilities of the drone as a low-cost, efficient, and speedy form of transportation.

Advances in battery life, autonomous flight software, and sensor suite technologies could lead to orderly flows of traffic along “highways” in the skies above cities. The energy costs associated with such systems are currently prohibitively expensive. But as energy storage costs continue to decline, and as drone technology continues to develop, we could very well one day find ourselves in a world where regular people commute through the air.

Whether the future of transportation is autonomous, electric, looped, airborne, or some combination of all these is uncertain. What is certain, however, is that whatever form the future of transportation takes, it’s likely to be of immeasurable benefit to ordinary people. To paraphrase Andreessen’s sentiments, the future can’t come soon enough.

This post originally appeared at CapX.

Ryan HagemannRyan Hagemann

Ryan Hagemann is a civil liberties policy analyst at the Niskanen Center.

The Barbarianism of Paternalism by Aaron Ross Powell

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Lots of people do lots of things I wish they wouldn’t. And lots of people don’t do lots of things I wish they would. In fact, I’m rather certain the world would be a better place for me and people just like me if more people were willing to go along with my desires and tastes, instead of stubbornly pursuing their own thing.

Take drinking tons of soda. For the life of me, I can’t figure out why people consider sugar water a multiple-times-a-day beverage. It’s like wanting to pour chocolate sauce on everything, or eat brownies with every meal. In short, to my sensibilities, it’s gross. And it’s way less healthy than drinking water — which tastes a whole lot better, too.

Part of being civilized — arguably most of being civilized — is recognizing that different people do things differently and that such differences deserve respect. Respecting difference means allowing behaviors we find disagreeable, provided those behaviors don’t cause us harm. This covers big stuff like religious toleration — those people of other faiths sure do eat weird things and have a funny way of talking, but that’s their business — to, yes, even the dreadful behavior of drinking half-a-dozen Cokes a day.

Of course, civilized people aren’t prevented from making their opinions known. I just did, with my quips about soda, and if I happen to see you drinking one, I’m free to tell you what I think. (Though I risk coming across as an officious jerk if I’m not careful.) What civilized people don’t do is hit each other with clubs over such differences.

That’s why the paternalism Sarah Conly offers three cheers for in the pages of the New York Times amounts to a rah-rah for barbarism. Conly, an assistant professor of philosophy at Bowdoin College and author of Against Autonomy: Justifying Coercive Paternalism, wants those upstanding chaps of the NYPD to flex their might to stop Americans from getting so fat.

To support her preference for state interference, Conly turns to the great classical liberal John Stuart Mill.

In his great work, On Liberty, Mill advances the “harm principle” as a crucial limit on the authority of the state:

The only purpose for which power can be rightfully exercised over any member of a civilised community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant. He cannot rightfully be compelled to do or forbear because it will be better for him to do so, because it will make him happier, because, in the opinions of others, to do so would be wise, or even right.

Which sounds pretty bad for the soda ban. But not so fast, Conly says. She tells us Mill endorsed preventing our freely chosen actions “when we are acting out of ignorance and doing something we’ll pretty definitely regret. You can stop someone from crossing a bridge that is broken, he said, because you can be sure no one wants to plummet into the river.”

From that, she gets to the idea that, because people underestimate the dangers of drinking lots of soda, they’re (often/usually) acting out of ignorance when they drink it, and so we’re justified in at the very least making it much more difficult for them to consume the stuff in bulk.

But read the full passage from Mill:

If either a public officer or any one else saw a person attempting to cross a bridge which had been ascertained to be unsafe, and there were no time to warn him of his danger, they might seize him and turn him back, without any real infringement of his liberty; for liberty consists in doing what one desires, and he does not desire to fall into the river.

Nevertheless, when there is not a certainty, but only a danger of mischief, no one but the person himself can judge of the sufficiency of the motive which may prompt him to incur the risk: in this case, therefore (unless he is a child, or delirious, or in some state of excitement or absorption incompatible with the full use of the reflecting faculty), he ought, I conceive, to be only warned of the danger; not forcibly prevented from exposing himself to it.

It seems Conly left out the bit about such interference requiring first “no time to warn him of his danger.” Nor does she seem at all bothered by the important limit that, “when there is not a certainty, but only a danger of mischief, no one but the person himself can judge of the sufficiency of the motive which may prompt him to incur the risk.”

Even accounting for the cognitive biases — which Conly says, if only he’d known about them, would’ve led Mill to support soda nannyism — it’s difficult to square the harm caused by a large Coke with the imminent danger and certainty of effect needed to override the harm principle.

In fact, a great deal of On Liberty seems perfectly aimed at exposing the immorality of Conly’s paternalism. She should’ve read not only the rest of that passage, but also the rest of On Liberty. Mill warns of an increasing inclination to stretch unduly the powers of society over the individual, both by the force of opinion and even by that of legislation: and as the tendency of all the changes taking place in the world is to strengthen society, and diminish the power of the individual, this encroachment is not one of the evils which tend spontaneously to disappear, but, on the contrary, to grow more and more formidable.

The disposition of mankind, whether as rulers or as fellow-citizens to impose their own opinions and inclinations as a rule of conduct on others, is so energetically supported by some of the best and by some of the worst feelings incident to human nature, that it is hardly ever kept under restraint by anything but want of power; and as the power is not declining, but growing, unless a strong barrier of moral conviction can be raised against the mischief, we must expect, in the present circumstances of the world, to see it increase.

This “mischief” results from that urge to have others prefer the same thing we prefer, to have others behave the way we behave. But, like I said above and like Conly seems to forget, civilization means recognizing the primacy of individual choice, even choices we think silly.

There is no reason that all human existences should be constructed on some one, or some small number of patterns. If a person possesses any tolerable amount of common-sense and experience, his own mode of laying out his existence is the best, not because it is the best in itself, but because it is his own mode.

Human beings are not like sheep; and even sheep are not undistinguishably alike. A man cannot get a coat or a pair of boots to fit him, unless they are either made to his measure, or he has a whole warehouseful to choose from: and is it easier to fit him with a life than with a coat, or are human beings more like one another in their whole physical and spiritual conformation than in the shape of their feet?

If it were only that people have diversities of taste, that is reason enough for not attempting to shape them all after one model. But different persons also require different conditions for their spiritual development; and can no more exist healthily in the same moral, than all the variety of plants can in the same physical, atmosphere and climate.

The same things which are helps to one person towards the cultivation of his higher nature, are hindrances to another. The same mode of life is a healthy excitement to one, keeping all his faculties of action and enjoyment in their best order, while to another it is a distracting burthen, which suspends or crushes all internal life.

Such are the differences among human beings in their sources of pleasure, their susceptibilities of pain, and the operation on them of different physical and moral agencies, that unless there is a corresponding diversity in their modes of life, they neither obtain their fair share of happiness, nor grow up to the mental, moral, and aesthetic stature of which their nature is capable.

Is drinking large sodas a way of life, though? Conly mocks the idea: “Large cups of soda as symbols of human dignity? Really?” But consider that if you drink 32 ounces of Coca-Cola, you’ll rack up 388 calories. A 20-ounce Iced White Chocolate Mocha from Starbucks has 500. Both aren’t good for you, but the Mocha’s worse. The difference is that the kinds of people who want to use government to save ignorant Americans from the harms of soft drinks are the kinds of people who prefer an Iced White Chocolate Mocha to a Coca-Cola.

That Conly calls for a ban on Cokes and not Mochas indicates that what really bothers her is the behavior of those low-brow folks who slam giant soft drinks, but not so much the worse behavior of the middle-class and educated who just can’t start the day without a latte. About this tendency to use ourselves as the moral yardstick, Mill noted, “our idea of improvement chiefly consists in persuading or forcing other people to be as good as ourselves.”

So the real trouble is people aren’t acting like Conly — or the majority Conly imagines agrees with her — would like them to. Thus it’s time to call in the law. To which Mill says this:

A theory of “social rights,” the like of which probably never before found its way into distinct language — being nothing short of this — that it is the absolute social right of every individual, that every other individual shall act in every respect exactly as he ought; that whosoever fails thereof in the smallest particular, violates my social right, and entitles me to demand from the legislature the removal of the grievance.

So monstrous a principle is far more dangerous than any single interference with liberty; there is no violation of liberty which it would not justify; it acknowledges no right to any freedom whatever, except perhaps to that of holding opinions in secret, without ever disclosing them: for the moment an opinion which I consider noxious, passes any one’s lips, it invades all the “social rights” attributed to me by the Alliance.

The doctrine ascribes to all mankind a vested interest in each other’s moral, intellectual, and even physical perfection, to be defined by each claimant according to his own standard.

To which Conly likely offers another three cheers. Especially when the individual rights she wants violated in the name of social rights are so, well,dumb. “As irritating as it may initially feel, the soda regulation is a good idea,” she writes. “It’s hard to give up the idea of ourselves as completely rational. We feel as if we lose some dignity. But that’s the way it is, and there’s no dignity in clinging to an illusion.”

Writing in The Subjection of Women — regarding a different group then burdened with the charge of irrationality — Mill had this to say about a Conly-style disregard for personal choice: “The yoke is naturally and necessarily humiliating to all persons, except the one who is on the throne, together with, at most, the one who expects to succeed to it.”

Conly may cheer the power of the throne, but the civilized among us should not.

This essay first appeared at Libertarianism.org.

Aaron Ross PowellAaron Ross Powell

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

‘Le Grand Guignol’ Comes to Town – Political Corruption

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By Wallace Bruschweiler and William Palumbo

Grand_Guignol_poster

Promotional poster for a Grand Guignol performance. Courtesy of Wikipedia.com.

Over the last several years, the American people have witnessed one perplexing political shenanigan after another – a never-ending story.  Instead of standing up for principles, for democracy itself, our elected leaders routinely sell-out the same country to which they swore an oath to protect.

The most recent enormous sell-out was the passage of a budget that served only the government, not the country.  It began with the election of a new Speaker, whom many hoped would serve the country better than his predecessor.  Instead of a political savior, we got yet another total political loser.

Once in power, the Speaker raised the curtain on a most appalling political horror, a true grand guignol: a budget that funds a government which is already standing on financial quicksand, and that has an abysmal, out-proportion debt.  So much for “we won’t get fooled again.”

Indeed, many of the men and women whom we once considered true patriots have, in recent years, months, and weeks, shown that their own personal agenda and banks accounts take priority over the safeguarding and destiny of our nation.  Their treachery – their betrayal­ – of the American people is forcing a major geopolitical realignment.  Under rule of the current political establishment, the United States is a leading contender in whatever Oscar equivalent is awarded to banana republics.

How and why did all this happen?  Without access to personal records, such as bank accounts domestically and on an international level, including tax shelters, it is impossible to say with certainty.  But, if past is prologue, then bribery facilitated by a government-entrenched mafia is what greases this political machinery.

Welcome to Our Real World: Today’s Ugly Reality

It is not pleasant at all to think that a mafia-type government runs Washington, D.C.   Yet it exactly explains why, despite widespread disapproval of Barack Hussein Obama and Congress, both parties continue working shamelessly against the interests and well-being of the American electorate.

Take, for example, the so-called Iranian nuclear deal.  By legitimizing Iran, the world’s preeminent sponsor of terrorism, Obama has opened the Iranian markets (especially oil and natural gas) to the western world.  In the long run, this deal has the potential to generate trillions of dollars in international trade.  Companies represented by extremely well-financed and influential lobbyists see Iran as the mother-of-all potential markets.

Despite the overwhelming dangers that emanate from enriching a brutal regime with not-so-veiled nuclear ambitions and a proven worldwide terrorist network, the Republican-led Congress refused to try anything which would have effectively postponed and/or killed the deal.

Again, how and why could this have happened?  The answer is unfortunately obvious: money (and, in the case of the Iranian nuclear deal, close family connections between the negotiating members from both sides).

There are other examples that come to mind: a multi-trillion dollar “stimulus” package, a $700 billion dollar bank bailout, countless “green” energy loans that have ended in bankruptcy, etc.

How likely is it that some of this money has been used to line pockets for political favors on both sides of the aisle?  All of this was paid and financed by the people’s tax dollars.

“A government of the mafia, by the mafia, and for the mafia” – that seems to be today’s motto

Mafia is non-ideological: it does not embrace political ideals.  It cynically espouses ideals from time to time, but ultimately it will not uphold virtues that interfere with the strict pursuit of money and power.  So, when (not if) necessary, ideals and decency are conveniently forgotten.

The public at large calls this process “a bipartisan compromise.”  However, in reality, there is only one party.  It is a political animal which puts your God-given rights on the auction block, to be sold to the highest willing and able bidder.

It’s also indisputably true that politicians, on both sides of the aisle, are taking bribes.  Wherever power accumulates, corruption immediately follows. Widespread corruption is the defining trait of Washington’s establishment today.  There is no principled leader among them.

Politicians, like everyone else, have a price.

FEE’s Top 10 Articles of 2015 by Jeffrey A. Tucker & Daniel Bier

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FEE was founded in 1946 to be a voice for liberty in our world, and today FEE makes ideas on freedom, markets, and ethical principles familiar and credible to the rising generation.

This year FEE’s outreach broke all records in achieving that goal. You can see the progress in programs, publications, and media appearances by FEE faculty and staff. This has coincided with major progress in how we reach the world through FEE.org.

Here is a roundup of activities on FEE.org this year.

Top Ten Articles

FEE has been a leading commentary on current affairs, using everything from technological trends to popular culture to politics as a way to illustrating the usefulness of good economics backed by evolved norms.

Hundreds of articles, blog posts, books, and other resources have been published on FEE.org this year, all contributing to record-breaking traffic performance. Here are our top 15 performers of 2015:

10) New York’s Taxi Cartel Is Collapsing. Now They Want a Bailout.

Ride sharing apps are fundamentally changing transportation, dethroning taxi monopolies and replacing them with human choice. Note that this isn’t happening through any political reform. Innovation is the force that is making the difference.

9) The Economics of a Toddler and the Ethics of a Thug

This headline neatly sums up so much of the “progressive” political mindset, particularly socialist supporters of Sen. Bernie Sanders. They scream about the need to plunder the rich, using massive police-state power, without a thought given to where new wealth is going to come from.

8) “Jesus Christ Was a Progressive Because He Advocated Income Redistribution to Help the Poor”

This piece by FEE president Larry Reed dealt squarely with an intellectual confusion that dates nearly to the beginning of Christianity itself. He shows that Jesus did not advocate income redistribution. “One can scour the Scriptures with a fine-tooth comb and find nary a word from Christ that endorses the forcible redistribution of wealth by political authorities.”

7) How Policing Works in a Privatized City

We are fortunate to have examples of the success of liberty all around us. Many cities today are carving out areas that are purchased by private developers. The results are spectacular, and Atlanta’s “Atlantic Station” is one such case: private streets, private policing, private housing. Surprise: these places are not walled gardens but rather hugely welcoming to all.

6) Supreme Court to DoJ: Fourth Amendment Is Not a “Useless Piece of Paper”

When the Supreme Court actually does something right, it’s worth noting. A sound opinion from the Court said that police can’t use a traffic stop to do search missions that are completely unrelated, without having some reasonable and specific suspicions. It’s a good start.

5) Alabama Senate Votes to End State Marriage Licenses

This article covered a possible solution to the marriage debate: get rid of licenses completely and replace them with regular contracts. Opponents of same-sex marriage favored the bill too, but, ironically, such a step would help de-politicize the entire subject. Sadly, the bill died in the House.

4) The Eugenics Plot of the Minimum Wage

How many times have you heard that a higher minimum wage will help the poor? The original architects of wage floors actually knew the truth. They favored the laws in order to exclude the poor, whom they wanted swept out of the population. This is chilling material and completely forgotten history.

3) America Isn’t Getting More Liberal — It’s Getting More Libertarian

This piece documents public polling on a range of issues: immigration, drugs, taxes, gay rights, guns, environment, the draft, and federal power. In most cases, it finds that people are becoming more libertarian over time. It’s another case where mainstream narrative is completely wrong.

2) How Many Children Are You Required to Save?

Just when you think only current news goes viral, this serious philosophical piece rocked the traffic hard. The post showed how the popular argument by Peter Singer relies on false intuitions and casuistry.

1) 6 Reasons to Welcome Refugees after Paris

Our most popular piece of the year! The more you look at the arguments over immigration and refugees, the more you realize that so much of what people think they know is wrong. There is no evidence that vetted US refugees are likely to become terrorists. In fact, refugees tend to become more successful in America than economic immigrants. ISIS sees Syrian refugees as traitors to their cause, so there’s every reason to welcome them as a part of stopping violent extremism.

Other big hits this year included “7 Habits of Highly Effective Libertarians,” “Millions in Brazil Follow a Teen Leader to Freedom,” “Handcuffed and Helpless,” and “Bernie Sanders’ Anti-Immigration Crankery.”

And don’t forget, you can also check out the beautiful and completely redesigned quarterly Freeman magazines online.

Best Books on FEE.org in 2015

The entire book Liberalism by Ludwig von Mises is online at FEE.org. Also, a lost work, Interventionism: An Economic Analysis, is now available. Planned Chaos also made its first online appearance this year.

The first book that FEE ever published, Essays on Liberty, is available as an ePub.

The classic by Henry Hazlitt, What You Should Know About Inflation, is now free to download. FEE also has the full text of Henry Hazlitt’s classic Economics in One Lesson online.

Our five most popular books are available on iTunes and Amazon.

In the physical world, FEE’s edition of Economics in One Lesson is still one of our most popular among young adults — 70 years after its first publication.

Web Development

FEE.org went through dramatic redesign and restructuring this year, and part of this included the building of a platform for leveraging content from like-minded institutions. This has multiplied the reach of great content many times over.

2015 was also the first year that FEE.org became part of the “Creative Commons”, allowing anyone to repost, republish, remix, adapt, sell, or do anything else with FEE’s original content. This move has enormously increased the reach and impact of FEE’s content, which has been published in many new outlets, such as Newsweek.com.

We also took steps to move all web development in house, using the best talent to make FEE.org an ever greater platform. You can look forward to a more comprehensive front page, a member center, tools for finding related material, online learning, and much more.

We’ve also released a major new program for networking: the FEE Faculty Network!

One more thing: we are now distributing some awesome swag in our fancy store. Have a look!

Thank you for an amazing year. Let’s continue to build a freer world in 2016.

Jeffrey A. Tucker

Jeffrey A. Tucker

Jeffrey Tucker is Director of Digital Development at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World.  Follow on Twitter and Like on Facebook.

Daniel BierDaniel Bier

Daniel Bier is the editor of Anything Peaceful. He writes on issues relating to science, civil liberties, and economic freedom.

Why Is the Middle Class Shrinking? 2 Arguments in Favor of Economic Inequality by Steven Horwitz

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Economic inequality continues to be a major political issue even as the headlines scream about terrorism and climate change. Bernie Sanders has made it a centerpiece of his presidential campaign, and other candidates have addressed it along the way. And a recent study by the Pew Research Center has added new, though misplaced, fuel to the fire of those concerned about inequality.

The Pew study has been discussed in the media, and one key point has been grossly misunderstood. Among other things, the study found that the American middle class is shrinking and is now just under half of the population. Commentators quickly began to refer to the “hollowing out” of the middle class and to tie this study to the concerns about growing inequality.

However, a close look at the data shows that the middle class has shrunk since 1971 because more members of the middle class have moved up the income ladder than down it.

Don’t believe me? Look for yourself at the terrific graphic that the Financial Times created to illustrate the data:

You can watch as the folks on the left slowly slide to the right over 44 years. When you compare the 1971 distribution with the 2015 one, what do you see? A growth in households earning around $80,000 or above, adjusted for inflation, since 1971 and a significant decline in those making less than that amount (with the exception of the folks right around $0). It’s true that there’s not a fat middle class anymore, but why should that trouble us if there are more high-income households and fewer low-income households overall?

The funny part of this is that if you read the story in the Financial Times that accompanies this graphic, it’s as if they never actually looked at the graphic they produced. Their narrative is at odds with it, as the narrative proclaims the doom-and-gloom story that the graphic actually refutes. As they say, never let the facts get in the way of a good story.

This growth in household income may, to some extent, be a by-product of the same economic processes that have produced the concerns about inequality, illustrated in this graphic by the significant growth of the ultra-rich.

There are far more very rich people today than there were 44 years ago, but the growth of the upper class has gone hand in hand with the enrichment of a large number of less-well-off households. Are there ways in which economic inequality is good, then? I think the answer to that question is yes. If so, then, what are they? Here are two defenses of economic inequality that proponents of the free market could make.

First is the more obvious one: growing inequality is good because it might be a consequence of economic institutions that produce all kinds of results that we think are desirable. For example, if competitive markets lead to peace and rising prosperity for all but also create inequality along the way by allowing some folks to get very rich, then we should at least tolerate that inequality because the things that produce it also produce other things we like.

This is the usual defense libertarians invoke, and it’s a good argument. The critic, however, might say that even if the defense is true, it doesn’t prove that inequality is necessary for that result. There’s a difference between saying, “Good economic institutions will produce inequality while creating good economic outcomes for all,” and saying, “Good economic outcomes for all can’t be produced without inequality.” The critic would likely ask how reducing the inequality that markets produce will harm their ability to produce those good results.

And here is where we come back to the Pew study and get a second defense of inequality. One way the middle class (and all of us) has become richer in the last generation is that the cost of so many goods and services has dropped in terms of the number of hours we have to work at the average wage in order to purchase them. The lower price of basic goods has enabled more and more people to afford things like large TVs, smartphones, and new, cheaper medications.

One thing that has made this process happen is inequality. In The Constitution of Liberty, F.A. Hayek argued,

A large part of the expenditure of the rich, though not intended for that end, thus serves to defray the cost of the experimentation with the new things that, as a result, can later be made available to the poor.… Even the poorest today owe their relative material well-being to the results of past inequality.

Having a group of very rich people is what enables yesterday’s luxuries to become today’s basics.

There are two parts to this process: cost bearing and discovery. The very rich are able to afford the high prices of new technologies, thereby providing an incentive for firms to market new and expensive products. Once the rich pay the high initial price and cover the fixed costs of research and development, sellers can begin to price closer to the much lower marginal cost of producing additional units, making the good much more affordable to more people.

But the rich are also an economic canary in the coal mine that informs producers whether they are getting it right.

For example, a critic of inequality might complain that no one “really needs” a $100,000 luxury car with all kinds of new high-tech gadgets on it. But the fact that some can afford it and want to buy it helps the car companies figure out which new features might be popular. Rear-view cameras were once only available on top-end cars, but they have slowly become a standard feature. The same may soon be true of collision warning systems now available on high-end models of some cars.

In fact, everything we think of as basics today was once the province of only the well-off. The first microwaves were expensive and bought mostly by the rich. I can remember my parents paying about $900 for a VCR in the late 1970s. VCRs, of course, fetch a price close to zero these days. The rich who bought the early LCD TVs helped manufacturers defray the fixed production costs and figure out what people wanted, and now these TVs are in the vast majority of houses at a more affordable price.

The inequality at any point in time is a key part of the process that creates wealth for the rest of society over the years to follow. The very rich enable producers to experiment and cover their costs, and that makes more goods more affordable for the rest of us, from fun toys to life-saving necessities.

The inequality produced by the market is a key part of how the market moves forward, enriching all of us in the process. And that’s why the middle class is shrinking: the rich, through the competitive market, have helped make the middle class richer.

Steven HorwitzSteven Horwitz

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Hayek’s Modern Family: Classical Liberalism and the Evolution of Social Institutions.

He is a member of the FEE Faculty Network.

Five Housing Market Predictions for 2016

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aei housing risk center logoMy predictions for 2016:

  1. The National Mortgage Risk Index (NMRI), particularly for First-Time Buyers (FTBs), will continue its upward trend that is now nearly 3 years old.
  2. Demand pressure resulting from continuing moderate economic growth combined with increasing leverage and limited housing supply growth will extend the seller’s market that is now over 3 years old.
  3. This will cause home prices to once again grow faster than inflation and incomes; expectation is for nominal home prices to increase about 5% in 2016.
  4. Expect the FHA to further decrease its premium sometime in 2016.
  5. If mortgage rates increase moderately in 2016, debt ratios will grow to accommodate the impact on monthly payments.

Also, the key findings in this month’s National Mortgage Risk Index (NMRI) release for Agency purchase loans:

  • Mortgage credit has continued to loosen, especially for first-time buyers
    • The NMRI for first-time buyers hit 15.81%, a new series high; the November level is up 1.0 percentage point from a year earlier and is well above the Repeat Primary Homebuyer NMRI of 9.83%.
  • The pace of homebuying continued to be strong, with loan volume in November up 15% from a year earlier. The overall volume was buoyed by strengthening demand from first-time buyers, driven by looser lending and an improving job market.
    • About 135,000 purchase loans for first-time buyers were added in November, up 19% from a year earlier, bringing the total in the NMRI to 3.6 million since April 2013.
  • Fueled by historically low mortgage rates and high and growing leverage, a seller’s market has now prevailed for 38 straight months.
    • As a result, real home prices are up 14.2 percent since 2012:Q2 trough, far outstripping real income growth and crimping affordability
  • Credit standards for first-time home buyers are not tight.
    • In November, 70% had down payments less than or equal to 5%, 27% had DTIs greater than the QM limit of 43%, and the median FICO score was 706, a bit below the median for all individuals in the U.S.
  • The cut in FHA’s annual insurance premium early this year boosted its market share to 29.3% in November from 22.9% in March.
    • This increase has come largely at the expense of Fannie Mae and the Rural Housing Service.
  • The seismic shift in market share from large banks to nonbanks continued in November, boosting overall risk as nonbanks have a much higher MRI.
    • In November, the large bank share was 27%, down from more than 60% three years earlier.

Link to December 2015 Mortgage Risk Index briefing presentation.

Florida: Legislature wants to roll property taxes into state sales tax

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Florida comes in at #25 for property taxes with a rate of 1.06%. New Jersey has the highest rate at 2.38 percent.  Hawaii has the lowest rate at 0.28 percent.

There have been efforts to eliminate Florida’s property taxes and rolling it into the state sales tax. The Florida legislature will be looking into doing just that during the 2016 session, which starts in January.

CBS News Miami reports:

A House committee is looking at ways to replace property taxes with a higher state sales tax.

The House Finance & Tax Committee on Wednesday started to explore different scenarios that would shift the tax burden to shoppers by eliminating or reducing the number of Floridians paying property taxes.

Committee Chairman Matt Gaetz, R-Fort Walton Beach, said any scenarios will need “many hours to fine tune,” with economists expected to address the committee before anything is advanced for the 2016 legislative session.

Read more.

We will see who comes out in opposition of this effort.

What is the property tax rate in your state? A new map from the Tax Foundation has the answer:

property_taxes-01-1024x893

Kate Scanlon from The Daily Signal reports:

The Tax Foundation, a non-partisan research think-tank based in Washington, D.C., notes that states tax property in a variety of ways and that the rates listed are the “effective rate” paid by the taxpayer.

Jared Walczak, a policy analyst with the Center for State Tax Policy at the Tax Foundation, writes that the map “cuts through this clutter, presenting effective tax rates on owner-occupied housing.”

“This is the average amount of residential property tax actually paid, expressed as a percentage of home value,” Walczak wrote.

New Jersey has the highest rate at 2.38 percent.

Illinois has the second highest rate at 2.32 percent, followed by New Hampshire at 2.15 percent and Connecticut at 1.98 percent.

Hawaii has the lowest rate at 0.28 percent. Alabama has the second lowest rate at 0.43 percent, then Louisiana at 0.51 percent and Delaware at 0.55 percent.

Read more.

11 Outrageous Failures in the GOP’s Trillion Dollar Bill by James Bovard

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Republican congressional leaders are like a football coach who believes the secret to winning is to punt early and often. House Speaker Paul Ryan and others are claiming victory over the 2,000-plus page appropriations bill, but this is a “no boondoggle left behind” $1.1 trillion nightmare.

House Appropriations Committee Chairman Hal Rogers’ press release claims that the omnibus bill “helps to stop waste and administrative overreach.” Instead, the bill ravages both paychecks and freedom. No wonder White House spokesman Josh Earnest gushed Wednesday: “We feel good about the outcome.”

Here’s the tip of the iceberg of the bill’s outrages:

  1. The bill fails to block President Obama from delivering up to $3 billion to the United Nations Green Climate Fund, a partial product of the Paris climate summit. Republicans initially planned to block such funding unless the Senate was permitted to vote on the U.N. climate treaty. But since the omnibus bill failed to prohibit such payments, Obama will soon deliver $500 million in U.S. tax money to the fund — despite the legendary record of U.N. programs for corruption worse than Chicago.
  2. The bill fails to block perhaps the Environmental Protection Agency’s greatest land grab — its “waters of the United States” decree that seizes federal jurisdiction over 20 million acres that are sometimes wet. The EPA’s wetland crackdowns have been trounced by numerous judges. Republicans faltered even though the Government Accountability Office reported Monday that EPA had engaged in illegal “covert propaganda” to promote this policy.
  3. It provides more than $3.7 billion for economic and military aid to Afghanistan, though an Agency for International Development study recently warned that some projects “actually had the perverse effect of increasing support for the Taliban.” Afghan relief continues to be a hopeless mess; the AID inspector general reported last week that the agency’s highly touted new monitoring system was used for less than 1% of grants and contracts.
  4. It fails to block the imminent proclamation of Food and Drug Administration regulations that could severely impact the sale of most of the cigars now marketed in the U.S., as well as ravaging the burgeoning e-cigarette industry (which experts say provides a healthier alternative to cigarettes).
  5. The omnibus bill failed to include a provision to end Operation Choke Point, a Justice Department-Federal Deposit Insurance Corporation’s crackdown that pressured banks to cancel the accounts of gun stores, coin dealers, payday lenders and other disfavored industries in what Rep. Sean Duffy, R-Wis., derided as “weaponizing government to meet their ideological beliefs.”
  6. The average federal worker is already paid more than $100,000 a year in total compensation, but the budget deal failed to block Obama from giving them a 1.3% raise — though many, if not most, taxpayers received zilch raise this year.
  7. The bill extends the earned income tax credit without reforming it — though the IRS estimates that up to 25% of all handouts under the law are fraudulent or otherwise improper.
  8. The omnibus bill dropped a House provision that would have required stronger evidence for federally proclaimed Dietary Guidelines for Americans. Earlier official guidelines have been widely discredited and are often blamed for contributing to the nation’s obesity crisis, but the same dubious evidence standard can be used in the future.
  9. The bill provides almost $27 billion for public housing and Section 8. That includes an almost half a billion dollar increase for subsidized rental vouchers, despite the long record of havoc in neighborhoods where recipients cluster. The omnibus bill also dropped provisions to curb the Department of Housing and Urban Development from bankrolling fair housing entrapment-like operations or enforcing new regulations to bludgeon localities with a lower percentage of minorities than the national averages.
  10. Some provisions of the bill seem harebrained even by Beltway standards. Republicans were justifiably outraged by the Bureau of Alcohol, Tobacco, Firearms and Explosives’ “Fast and Furious” operation, which authorized sending more than a thousand guns to Mexican drug cartels.
    Section 276 of the omnibus bill prohibits federal agents from providing guns to anyone he “knows or suspects … is an agent of a drug cartel, unless law enforcement personnel of the United States continuously monitor or control the firearm at all times.”
    So the G-man is supposed to keep his finger on the suspect’s trigger at all times, or what? Perhaps it would be too easy to cease giving weapons to drug dealers.
  11. Perhaps the most appalling part of the omnibus are the provisions that authorize tech and communication companies to secretly provide your personal data to federal agencies — no search warrant required.
    The American Civil Liberties Union warns that this information “can be used for criminal prosecutions unrelated to cyber security, including the targeting of whistle-blowers under the Espionage Act.”
    Rep. Justin Amash, R-Mich., rightly warns that a vote for the omnibus bill is a “vote to support unconstitutional surveillance on law-abiding Americans.”

While Congress made scant effort to protect average Americans from rampaging regulators, it hustled to include a provision requesting the Capitol Police to permit sledding on Capitol Hill. The “sled free or die” provision was a “bipartisan win,” according to the Washington Post. It is regrettable that there was little or no bipartisan interest in curbing federal power beyond spitting distance from the Capitol Dome.

House Freedom Caucus member Tim Huelskamp, R-Kan., summarized the GOP leadership’s wacky reasoning: “Give the Democrats what they want now so next time they won’t want as much.”

Republicans have been thunderously promising for decades to protect Americans against federal waste, fraud and abuse. At this rate, Republicans’ credibility gap will soon rival the $18 trillion federal debt.

Reprinted with permission from USA Today.

James Bovard

James Bovard

James Bovard is the author of ten books, includingPublic Policy Hooligan, Attention Deficit Democracy, and Lost Rights: The Destruction of American Liberty. Find him on Twitter @JimBovard.

Technology, Not Politics, Is the Future of Progress by Nima Sanandaji

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A branch of Google has recently partnered with medical devices manufacturer Ethicon to form Verb Surgical Inc. The new company aims to develop robotic technology for operating rooms. Robot-assisted surgery is at the cutting edge of technical development, an idea from science fiction that is coming to life.

This is one of several examples of how Google is betting on ideas that have little to do with browsing the Internet. The firm is applying the same bold approach that gave rise to its web browser to new fields such as longevity and automated cars.

But will regulators allow these radical innovations? Information technology is the market which comes closest to the ideal of economic freedom, with little government intervention and limited regulation. When the same approach to innovation is taken to other fields, red tape becomes a much greater concern.

It has only been 20 years since the two PhD students Larry Page and Sergey Brin began a research project about understanding the mathematical properties of the World Wide Web. Most researchers would have been content with publishing their results in academic journals, letting others reap the fruit of their ideas. Page and Brin chose to realize their vision of a better search engine. Soon the Google search engine reached a global audience, and became quite valuable.

Rather than sticking to the development of search engines, or for that matter related technologies such as browsers, the firm decided to use its funds and pool of talents to push for other innovations. Sergey Brin today not only runs Alphabet — Google’s parent company — together with Larry Page, he also oversees Google[x], a semi-secret research and development facility.

Google[x] aims to find major challenges facing humanity, identify radical proposed solutions to those problems, and attempt to realize them. One example of its ventures is the Google driverless car project. Currently a number of different cars — including the Toyota Prius, Audi TT, and Lexus RX450h —have been fitted with self-driving equipment and the Google Chauffeur program. Google has also developed their own custom vehicle.

However, regulations hinder automated cars. A lot of energy has been spent lobbying legislators to allow this new innovation. Gradually, progress is being made in the US, as well as a number of other countries, including the UK. But much of the global market still remains closed to automated cars, and will likely remain so for years to come.

A more humble innovation launched by Google was to offer coach services to its own workers in San Francisco. Alongside other tech-firms such as Facebook, Genentech and Apple, Google decided to deploy private buses to transport its employees to and from their places of work. This alleviated the traffic problem, by reducing the number of cars on the streets, reduced the strain on public buses, and made it possible to introduce coaches which function as mobile offices.

Critics however accused the private coaches of insulating a privileged class from the plight of the average commuters, which led to the city of San Francisco deciding to tax and regulate Google’s vehicles. Challenging the dominance of public buses proved more policially risky than challenging search engines such as Altavista and Yahoo.

Perhaps the most interesting venture created by Google is Calico, a biotech firm focused on health, wellbeing and longevity. The core idea is to use modern biotechnology to prolong a healthy life span. This, Calico hopes, can be accomplished by enhancing the ability of human cells to regenerate themselves. If successful, such technologies can have a profound impact on how healthy and how long lives we live.

However, the unique freedom under which the Google search engine and other forms of information technology developed under have little to do with pharmaceutical development. In the US it takes an average of 12 years for an experimental drug to travel from the laboratory to the consumer market. Many pharmaceuticals are banned, sometimes arbitrarily. The regulatory issues surrounding robotic surgery have likewise been discussed for many years, and are still awaiting a resolution.

There are, of course, good reasons to regulate new pharmaceuticals, automated cars, and robot surgeries. Indeed, robotics is probably one of the fields where we should be most concerned with the possible future risks of new technologies.

At the same time, it is important that a slow pace of regulatory change, outright bans, and government meddling in markets are not allowed to hinder innovations such as pharmaceuticals that can prolong our healthy life span. There is good reason to draw inspiration from information technology.

Funding of basic and military research have historically played a key role in promoting computer technology and the Internet. In the long run however, computers, computer games and online ventures have become the most innovative markets in the world precisely since regulations and government involvement have been kept at minimal levels.

It is no surprise that a successful Internet firm is aiming to revolutionize also other fields. Hopefully, regulations will not prove too steep from hindering Googles promising moonshot projects.

This piece first appeared at CapX.

Nima SanandajiNima Sanandaji

Nima Sanandaji is a research fellow at CPS,  and the author of Scandinavian Unexceptionalism available from the Institute of Economic Affairs.

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

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One of the biggest political issues right now nationwide, and one that will likely be an important issue in next year’s presidential election is the minimum wage.

Economists are generally in agreement that increases in the minimum wage, especially large increases to $15 an hour like in Seattle, will reduce employment opportunities for unskilled workers.

Despite the inevitable negative outcomes that will surely result from a $15 minimum wage — we’ve already seen negative effects in Seattle’s restaurant industry — politicians and unions seem intent on engaging in an activity that could be described as an “economic death wish.”

Proponents of a higher minimum wage point to the obvious and visible benefits to some workers — those who may find a job at the higher wage or keep their existing job and get a higher wage.

But that is only part of the story — there are many less obvious downsides to an artificially high minimum wages that take longer to recognize, and it’s those inevitable negative effects that lead economists to generally oppose minimum wage laws.

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.

In summary, economists are not unconcerned about unskilled workers, we are actually very concerned about those workers. And it is because of that concern to maximize employment opportunities that economists oppose the minimum wage.

Simply put, we would rather see unskilled workers employed at a market wage — even if that wage is only $5, $6 an hour — that allows them to gain valuable work experience and on-the-job training, than to be unemployed at $0.00 an hour. And unfortunately, a $15 minimum wage maximizes the probability that an unskilled worker will be unemployed at $0.00 an hour instead of being gainfully employed.

This post first appeared at InsideSources. Reprinted with permission.

Mark J. PerryMark J. Perry

Mark J. Perry is a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan’s Flint campus.

Who Do Economic Profits Belong To? by Sandy Ikeda

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Do we deserve to keep the profits that result from our actions?

Most libertarians would maintain that any economic profit — the residual of revenue over cost — that you earn from voluntary exchange is indeed moral and rightly belongs to you. The puzzling thing is that standard microeconomic theory, which libertarians as well-known as Milton Friedman have used to defend their free-market beliefs, is completely irrelevant in justifying that belief.

I attended a talk recently given by Professor Israel Kirzner in which he addressed the question of whether economics can tell us who does and doesn’t deserve profit. I won’t summarize the entire lecture here, which I expect Professor Kirzner intends to publish, but I will touch on an important and often-neglected point he made.

Specifically, it’s that because microeconomic theory is utterly useless in morally justifying economic profit, we need to look beyond one of the most cherished slogans of economics: There ain’t no such thing as a free lunch, or TANSTAAFL for short. Indeed, in order even to begin seeing economic profit as moral, you have to set TANSTAAFL aside. (I wrote on a related theme in “But There ARE Free Lunches!” in May 2011.) Now, how does that relate to the question of who, if anyone, deserves economic profit?

The Value of the Marginal Product

Let’s say you want to sell a new kind of musical instrument. You buy or hire every single ingredient you need to produce it: the various kinds of skilled labor and equipment, the working space, management and financial knowhow, and whatever computing and power needs you require. You also contribute to production as the owner of the firm, and your contribution includes the risk you take to start the business as well as your industriousness, tenacity, and courage.

You then pay each and every one of these factor owners, including yourself, its “marginal value product,” which is the revenue the business earns from selling what each input produces. You pay wages or rents to everyone and a return to yourself to compensate for the resources you bring. Economists since John Bates Clark have used the marginal value product and continue to do so to explain how income from production is distributed. But there’s a problem.

Suppose, after paying all the input owners including yourself, there’s still something left over. That something, the residual of all actual revenue over all actual costs, is economic profit.

Again, you’ve paid every factor owner all of what each has contributed to the value of the musical instruments produced. That means that the value of the marginal product, the central concept in the modern microeconomic theory of income distribution, cannot explain who deserves to keep the economic profit because it cannot explain profit.

It’s important to keep in mind that economic profit is not “earned” in the same sense that wages and rents are earned. It is what’s left over after all other earned income has been paid out according to the value of its marginal product.

To whom then does economic profit properly belong?

The Concept of Entrepreneurship Offers a Clue

For Kirzner and other economists working in the tradition of Austrian economics, the key to answering that question, though not the complete answer, begins with the concept of discovery.

There is knowledge that we don’t possess because we choose not to know it. If someone asked me for the phone number of a person whose name is drawn randomly out of the New York City telephone directory, the chances are very good that I won’t know it. Although I’m aware of the existence of the directory, I haven’t memorized it, simply because I haven’t deemed it worthwhile. I’ve chosen not to know.

But if I didn’t even know of the existence of such a directory and I needed to call a particular person, my learning about the directory would come as a revelation. Moreover, I would have found out that I didn’t even know what I didn’t know — what Professor Kirzner calls “sheer ignorance.” He then defines entrepreneurship as that aspect of human action that discovers, and thereby removes, sheer ignorance.

What does the discovery of sheer ignorance result in? Economic profit!

Why marshal all the resources to produce a new musical instrument? Because you believe you see what no one else sees. You believe that it offers a better investment for you than what you’re doing now. Why do you think that? Because you’ve realized — made the discovery — that after compensating all the factors of production with the value of their marginal product, there will still be a pure residual left over that you couldn’t have gotten doing anything else. If you’re right, you get that residual, the economic profit; if you’re wrong, you suffer the economic loss.

This means, of course, that TAANSTAFL is wrong. Opportunities to make economic profit do exist. There are free lunches. In fact, in a world of sheer ignorance, such as ours, free lunches are everywhere.

Toward an Answer

I haven’t mentioned how Professor Kirzner addresses the issue of whether economic profit is moral or deserved. To get a good sense of what he says in the remainder of that lecture, have a look at his 1989 book, Discovery, Capitalism, and Distributive Justice.

(Also, see this book review by FEE writer Charles W. Baird.)

A good economist needs to have a firm grasp on standard microeconomic theory: supply-and-demand analysis and all that. At the same time, it’s important for her to appreciate its limits, which are severe indeed on the question of the morality, or even the origin, of economic profit.

Sandy Ikeda
Sandy Ikeda

Sandy Ikeda is a professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism. He is a member of the FEE Faculty Network.

VIDEO: Trump’s plan to cut the deficit, balance the budget, and restore fiscal sanity

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WASHINGTON, D.C. /PRNewswire-USNewswire/ — Donald Trump, the front-runner for the Republican presidential nomination, will discuss his federal budget plans in a live studio interview at 5 p.m. EST ,Dec. 1, as part of Fiscal Fridays, the public affairs television series on the New Hampshire-based NH1 News Network.

Here is a video of the interview:

In the interview, which will also be aired this Friday, Dec. 4, Trump will respond to questions about the growing national debt and the specific fiscal and economic policies he would pursue as president.

The program can be seen and heard live on WBIN-TV, 99.1 NH1 News, and on the NH1 website. A video will be available later on both NH1 and First Budget‘s websites.

Fiscal Fridays — a project of First Budget, a joint nonpartisan initiative of the Campaign to Fix the Debt and The Concord Coalition — gives New Hampshire primary voters and the country at large the opportunity to hear directly from the candidates on the policies they would include in their first budget as president. Other co-sponsors of the series are NH1, the Business and Industry Association of New Hampshire, and the Warren B. Rudman Center at the University of New Hampshire’s Law School.

Questions for Trump can be submitted via Twitter to @NH1News or with the hashtag #FiscalFriday.

Paul Steinhauser, political director and anchor for NH1, is conducting the half-hour live television interviews. Videos of previous candidate interviews on Fiscal Fridays can be found here.

“With the federal debt continuing to grow on an unsustainable path, it is essential for the 2016 presidential candidates to clearly explain their budget plans to the public and to ensure that those plans will put the country on a more responsible course,” said Robert L. Bixby, Concord’s executive director. “The Fiscal Fridays interview series is helping voters around the country understand and evaluate the candidates’ proposals.”

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

A Letter to the Next President

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To: The 45th President of the United States
From: The U.S. Chamber of Commerce

Dear 45,

Welcome to the neighborhood! Well, not quite yet, but you’ll have to forgive us for being excited. A new administration represents a potential fresh start for America, and on behalf of the U.S. business community, we’re eager to work with you. After all, there’s a lot of important work ahead.

Dear 45 logo

Of course, we don’t yet know your name, nor do we know what party you represent. But that’s not what’s important. We’re interested in talking policy, not politics, and we hope you are, too. Because if we’ve learned anything over the past century, it’s that entrepreneurs and small business owners don’t think in terms of left and right, liberal and conservative; they’re too busy thinking about their next sale, their next client, their next hire – and they need policies that help them get there.With that in mind, we want to take the opportunity to introduce you to the issues that are most important to the employers, executives and entrepreneurs who will soon call you their president. So over the next year, as you traverse the campaign trail, we’ll be sending letters your way to get you up to speed on some of the most important issues, so that you’re ready to hit the ground running on Day One.

These ideas include bipartisan proposals for streamlining and improving our nation’s unruly regulatory system. This “fourth branch” of government has grown so massive and intrusive that it is driving jobs away, discouraging business investment and stifling small businesses. The good news is that there are ways we can cut through all that red tape without shortchanging the health and safety protections Americans need.

In addition, U.S. businesses will benefit from your leadership abroad. They need a president who is committed to building stronger ties with our partners overseas, paving the way for more exports of American goods around the world – including a portion of our vast energy resources. They also need a president who will stand up for their interests in foreign countries, helping to protect their investments andintellectual property.

On other important issues, you won’t be able to go it alone. You’ll have to work hand-in-hand with Congress, and, as we have seen in recent years, that can be easier said than done. That’s why it’s so important you arrive ready and willing to forge a cooperative relationship with lawmakers on both sides of the aisle. Only then can we break through the gridlock in Washington.

Working with Congress, it will be up to you to set an agenda that addresses our country’s most important unfinished business, including modernizing our immigration rules while protecting our borders, cementing a long-termtransportation and infrastructure plan, rewriting our tax code, and securing entitlement programs through reasonable, sustainable reforms. Business leaders also will be counting on you and lawmakers to address serious shortcomings in recent efforts to reform our health care and financial services sectors, as well as to promote changes to the U.S. education system that better prepare tomorrow’s workforce for tomorrow’s job market.

These are just a few of the many issues on which our nation’s businesses will look to you for leadership. It won’t be easy, but then, easy isn’t what you signed up for when you announced your candidacy. You signed up to lead the most free and most prosperous nation in the world – a country that celebrates risk, rewards hard work and embodies the spirit of free enterprise.

We may not always agree, but we’ll always be straightforward with our advice and we’ll always strive to work together.

But you’re not alone. We’ll be here to help, and we’re right across the street. We may not always agree, but we’ll always be straightforward with our advice and we’ll always strive to work together. No matter what problems our country may face, we hope you’ll remember that America’s businesses can be a big part of the solution.

So please keep an eye out for more correspondence from us. In the meantime, best of luck out there on the campaign trail. We’re ready to get to work, and we know you are, too.

Until next time,

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3 Mistakes Free Marketers Often Make by Sandy Ikeda

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Libertarians like to think of themselves as economically literate, at least when compared to other political groups, and for the most part, I believe that’s true. But there are at least three mistakes that I keep hearing even libertarians make when talking about the free market.

Mistake #1: “The free market doesn’t need regulation.”

One of the dangers of talking with someone who disagrees with you, or sometimes even with someone who seems to agree with you, is that you talk past each other. I find that’s true in discussions about regulation.

Even among libertarians, whether and to what extent we need government regulation — for example, to prevent environmental catastrophe, to prosecute violent criminals, to defend against territorial aggression — is a subject of heated debate.

We’re fooling ourselves if we think that even in a free market, there won’t be unscrupulous sellers who will try to sell to unsuspecting buyers unsafe food and drugs, dangerous cars, and shoddy housing, or that there won’t be unscrupulous buyers who will try to cheat unsuspecting sellers with false claims about their ability to pay.

In the real world, knowledge is imperfect. It’s impossible always to know when someone is telling the truth, and people are vulnerable to opportunists. Such unsociable behavior, if not restrained by internal norms, requires external constraints — regulation — of some kind. But even libertarians too often concede that regulation means expanding the role of the state.

If, by “regulation,” we mean external constraints on harmful behavior by buyers and sellers, then people in free markets do need regulation to protect them. The mistake is to assume that only government — that is, a monopoly over the legitimate initiation of violence — can do the regulating.

Free markets unleash forces not only to lower costs and to innovate; they also unleash the resourcefulness of ordinary people to regulate antisocial behavior.

Mistake #2: “Markets will regulate themselves.”

Now, this statement isn’t a mistake if you understand that it’s shorthand for a more complex argument. The trouble is, to someone innocent of basic economics, it makes the free market sound like a magical black box. Worse, opponents of the free market like to twist it into the straw-man idea that sellers and buyers will exert enough self-control to regulate themselves individually, or that markets would form trade associations to maintain the quality and practices of members — which is true sometimes, but not always.

Better, then, to spell things out.

In a free market, a great deal of potentially unscrupulous behavior by sellers and buyers is indeed restrained by constraints that we internalize, called “norms.” They’re lessons we learn, usually early in life, about why it’s important to trust and to be trustworthy, and to be honest and play fair even when no one is looking. A free market wouldn’t flourish without these “non-market foundations of market processes.”

Again, while necessary, they won’t always be enough to keep buyers and sellers in line, and so we do need regulation. But…

In a free market, the heavy regulatory lifting, the lion’s share of constraining unscrupulous behavior, comes not from government but from competition. Competition pressures buyers and sellers to be trustworthy and to make fair and attractive deals or else risk losing business to their rivals.

So what does this market competition consist of?

Mistake #3: “Buyers and sellers compete with each other.”

In a free market, buyers do not compete with sellers, nor do sellers compete with buyers. In a free market, buyers compete with other buyers to offer sellers the best deal, and sellers compete with other sellers to offer buyers the best deal.

Now, because buyers and sellers often find themselves sitting on opposite sides of the bargaining table — when buying a car, selling a house, or closing a business deal — we sometimes associate that with market competition. It is not. There’s a difference between a buyer and a seller bargaining within a range of prices and the competition among buyers and buyers and among sellers and sellers that creates that price range.

Let’s say Jack would sell his house for as low as $100,000, and Jill would pay as much as $125,000 for it. Within those terms of trade, Jack and Jill will bargain for the best price from their point of view and, if the exchange is voluntary, both will gain from the transaction. But if Ralph would sell a similar house to Jill for $90,000, that would certainly help Jill (at the expense of seller Jack). Or if Alice would pay Jack as much as $140,000, that would certainly help Jack (at the expense of buyer Jill). Bargaining happens in the interstices left over from competition. And notice that competition disrupts bargaining situations, as happens when an OPEC cartel bargaining agreement gets disrupted by competition from non-OPEC oil producers.

Putting It All Together

So why isn’t government regulation superior to regulation via competition, especially when knowledge is imperfect and buyers and sellers are vulnerable?

First, markets do not require accurate and complete knowledge to work. Quite the contrary. Buyers and sellers have an incentive to discover mistakes and profit from them. If Jill erroneously thinks she can’t do any better than paying $100,000 for a house, Ralph has an incentive to see this and undersell Jack, keeping Jill from paying too much. Competition is an error-discovery and error-correction process.

Second, even if the men and women in government are no more or less selfish than the buyers and sellers they regulate, why should they have better information than profit-seeking buyers and sellers on the market, and why should they have a greater incentive to acquire it? If a product is defective, who is more likely to discover and correct the problem: a self-interested regulator who can’t profit from doing so, or a host of self-interested competitors who could profit from offering a better product?

Third, who effectively regulates the regulators? What checks and balances there are in government — voting, party politics, whistle-blowing — are cumbersome and much less effective than regulation by consumers and producers. And how do you make sure that the coercive power you give to good government regulators doesn’t get misused by opportunistic and self-interested regulators?

In the market, buyers regulate buyers and sellers regulate sellers via peaceful, competitive rivalry. In government, such an effective error-correction process is absent.

Sandy Ikeda
Sandy Ikeda

Sandy Ikeda is a professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism. He is a member of the FEE Faculty Network.