A Higher Minimum Wage Will Make Us Meaner by Scott Sumner

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In a recent post, I argued that government monopolies often offered worse service to customers than competitive private firms. In this post (which will have something to offend both progressives and conservatives), I’ll look at a different but related problem.

A few days ago there was a big debate about a New York Times expose on working conditions at Amazon.com. (By the way, it would have been useful for the NYT to compare labor practices at the Seattle company to working conditions at firms operating in the Amazon region of Brazil.)

Many liberals were appalled, while conservatives often wondered why, if working conditions were so bad at Amazon, people didn’t simply “get another job.” I have sympathy for both sides, but probably a bit more for the conservative side.

One liberal objection might be that it’s not easy to get another job. (And perhaps that’s because monetary policy since 2008 has been too contractionary. And perhaps that’s because conservatives have complained about the Fed’s QE/low interest rate policies, which has made the Fed reluctant to do more.)

Regardless of how you feel about monetary policy, it’s clear that if employers feel they have a “captive audience” of workers, who are terrified of losing their jobs, it would be easier for the employer to crack the whip and drive the employees to work extremely hard. One advantage of a healthy job market is that workers have more power to negotiate pleasant working conditions.

But progressives also have some major weaknesses in this area. They tend to favor policies such as New York City’s rent controls, and the new $15 minimum wage being gradually phased in in some western cities.

I like to think of these policies as engines of meanness. They are constructed in such a way that they almost guarantee that Americans will become less polite to each other.

In New York City, landlords with rent controlled units know that the rent is being artificially held far below market, and thus that they would have no trouble finding new tenants if the existing tenant is unhappy. So then have no incentive to upgrade the quality of the apartment, or to quickly fix problems. They do have an incentive to discriminate against minorities that, on average, are more likely to become unemployed, and hence unable to pay the rent. Or young people, who might damage the unit with wild parties.

Wage floors present the same sort of problem as rent ceilings, except that now it’s the demanders who become meaner, not the supplier. Firms that demand labor in Los Angeles in the year 2020 will be able to treat their employees very poorly, and still find lots of people willing to work for $15/hour.

Even worse, this regulation will interact with the migrant flow from Latin America, to produce another set of unanticipated side effects. In some developing countries there is a huge army of unemployed who go to the cities, hoping to get one of the few high wage jobs available in the “formal” sector of the economy. With a $15 minimum wage, migrants will come from Mexico until the disutility of waiting for a good job just balances the expected utility of landing one of those good jobs. You’ll have lots more angry, frustrated, young Mexican illegal immigrants with lots of time on their hands. What could go wrong?

One reason that I am what Miles Kimball calls a “supply-side liberal” is that I believe my preferred policy mix (NGDP targeting, plus free markets) is most likely to produce the sort of “nice” society I grew up with (in Madison, Wisconsin).

This post first appeared at Econlog. ©

Scott Sumner
Scott Sumner

Scott B. Sumner is the director of the Program on Monetary Policy at the Mercatus Center and a professor at Bentley University. He blogs at the Money Illusion and Econlog.

Obama Administration Declares War on Franchisors and Subcontractors by Walter Olson

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In a series of unilateral moves, the Obama administration has been introducing an entirely new regime of labor law without benefit of legislation, upending decades’ worth of precedent so as to herd as many workers into unions as possible.

The newest, yesterday, from the National Labor Relations Board, is also probably the most drastic yet: in a case against waste hauler Browning-Ferris Industries, the Board declared that from now on, franchisors and companies that employ subcontractors and temporary staffing agencies will often be treated as if they were really direct employers of those other firms’ workforces: they will be held liable for alleged labor law violations at the other workplaces, and will be under legal compulsion to bargain with unions deemed to represent their staff.

The new test, one of “industrial realities,” will ask whether the remote company has the power, even the potential power, to significantly influence working conditions or wages at the subcontractor or franchisee; a previous test sought to determine whether the remote company exercised “ ‘direct and immediate impact’ on the worker’s terms and conditions — say, if that second company is involved in hiring and determining pay levels.”

This is a really big deal; as our friend Iain Murray puts it at CEI, it has the potential to “set back the clock 40 years, to an era of corporate giants when few people had the option of being their own bosses while pursuing innovative employment arrangements.”

  • A tech start-up currently contracts out for janitorial, cafeteria, and landscaping services. It will now be at legal risk should its hired contractors be later found to have violated labor law in some way, as by improperly resisting unionization. If it wants to avoid this danger of vicarious liability, it may have to fire the outside firms and directly hire workers of its own.
  • A national fast-food chain currently employs only headquarters staff, with franchisees employing all the staff at local restaurants. Union organizers can now insist that it bargain centrally with local organizers, at risk for alleged infractions by the franchisees. To escape, it can either try to replace its franchise model with company-owned outlets — so that it can directly control compliance — or at least try to exert more control over franchisees, twisting their arms to recognize unions or requiring that an agent of the franchiser be on site at all times to monitor labor law compliance.

Writes management-side labor lawyer Jon Hyman:

If staffing agencies and franchisors are now equal under the National Labor Relations Act with their customers and franchisees, then we will see the end of staffing agencies and franchises as viable business models.

Moreover, do not think for a second that this expansion of joint-employer liability will stop at the NLRB. The Department of Labor recently announced that it is exploring a similar expansion of liability for OSHA violations. And the EEOC is similarly exploring the issue for discrimination liability.

And Beth Milito, senior legal counsel at the National Federation of Independent Business, quoted at The Hill: “It will make it much harder for self-employed subcontractors to get jobs.”

What will happen to the thriving white-van culture of small skilled contractors that now provides upward mobility to so many tradespeople? Trade it in for a company van, start punching someone’s clock, and just forget about building a business of your own.

What do advocates of these changes intend to accomplish by destroying the economics of business relationships under which millions of Americans are presently employed? For many, the aim is to force much more of the economy into the mold of large-payroll, unionized employers, a system for which the 1950s are often (wrongly) idealized.

One wonders whether many of the smart New Economy people who bought into the Obama administration’s promises really knew what they were buying.

This post first appeared at Cato.org.

Walter Olson
Walter Olson

Walter Olson is a senior fellow at the Cato Institute’s Center for Constitutional Studies.

Obama’s Econ Advisers: Occupational Licensing Is a Disaster by Mikayla Novak

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Libertarians received a rare pleasant surprise when President Obamaʼs Council of Economic Advisers issued a report highly critical of occupational licensing.

The report cited numerous problems arising from this increasingly burdensome regulatory practice, which requires ordinary Americans to obtain expensive licenses and permits to perform ordinary jobs.

It is a belated recognition by the administration that government has long been acting against the best interests of workers and consumers.

And it might give us something of a warm inner glow to consider, as the Wall Street Journal recently did, that reforming occupational licensing could catalyze important economic reforms that transcend traditional political and ideological divides.

And reform is vital: each and every day, occupational licensing destroys the ability of individuals to freely and peacefully pursue their own livelihoods.

Licensing hurts workers

Occupational licensing locks countless of people out of dignified and meaningful job opportunities.

The CEA report indicates that more than a quarter of all workers in the United States need a government license or permit to legally work. Two-thirds of the increase in licensing since the 1960s is attributable to an increase in the number of professions being licensed, not to growth within traditionally licensed professions like law or medicine.

The data show that licensed workers earn on average 28 percent more than unlicensed workers. Only some of this observed premium is accounted for by the differences in education, training and experience between the two groups. The rest comes from reducing supply, locking competitors out of the market and extracting higher prices from consumers.

What makes professional licensing so invidious is that it serves as a barrier to entry in the labor market, simply because it takes so much time and money to obtain a license to work.

For young people, immigrants, and low-income individuals, it can be extremely difficult to stump up the cash and find the time — sometimes hundreds or even thousands of hours — to get licensed. The fees to maintain a license can also be exorbitant.

Compounding the problem is that licensing requirements are spreading into more industries, such as construction, food catering, and hairdressing — occupations where it used to be easy to start a career.

Today, there is arguably no more lethal poison for labor market freedom and upward mobility than occupational licensing.

Licensing hurts consumers

Defenders of occupational licensing say that workers need to be licensed because without it consumers would be harmed by poor service.

In the absence of licensing, children will be taught improperly at school, patients won’t get adequate health care in hospital, home owners will not get their leaky sinks fixed, and somebody could fall victim to an improper haircut.

But, in the name of promoting quality, licensing regulations perversely raise costs and reduce choices for consumers.

The CEA concludes that, by imposing entry barriers against potential competitors who could undercut the prices of incumbent suppliers, licensing raises prices for consumers by between 3 and 16 percent.

Moreover, the effect of licensing on product quality is unclear. The report notes that the empirical literature doesn’t demonstrate an increase in quality from licensure.

By restricting supply, licensing dulls the incentive for incumbents to provide the best quality products because the threat of new entrants competing with better offerings is diminished.

Perversely, the inflated prices offered by licensed providers may force some consumers to seek unlicensed providers, or to use less effective substitutes, or to do jobs themselves — in some cases increasing the risk of accidents.

In a blow to the notion of efficient government bureaucracy, the CEA indicates that government licensing boards routinely fail in monitoring licensed providers, contributing to the lack of improvement in quality.

Ending the war on livelihood freedom

To restore a climate friendly to economic liberty, people must feel they have a direct, personal stake in what Deidre McCloskey calls “market-tested betterment” — that is to say, in capitalism.

There is no better way to achieve this than to allow individuals to build their own livelihoods, finding decent jobs serving customers with the goods and services they want, at prices they mutually agree on.

The argument for economic liberty is also grounded in the moral imperative of respecting the freedom of other people to lead their own lives as they see fit, including their right to choose their own livelihood.

Proponents of occupational licensing can always serve up a parade of hypothetical horribles about things that could go wrong if people didn’t need the state’s permission to work, but nothing has been more harmful to workers and consumers than occupational licensing.

Mikayla Novak
Mikayla Novak

Mikayla Novak is a senior researcher for the Institute of Public Affairs, an Australian free market think tank, and holds a doctorate in economics. She specializes in public finance, economic history, and the history of classical liberal thought.

Bernie Sanders Is Wrong: Trade Is Awesome for the Poor and for America by Corey Iacono

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Sen. Bernie Sanders, the Democratic presidential hopeful, is no fan of free trade. In an interview with Vox, Sanders’ made his anti-trade position clear: “Unfettered free trade has been a disaster for the American people.”

He also noted that he voted against all the free trade agreements that were proposed during his time in Congress and that if elected President he would “radically transform trade policies” in favor of protectionism.

Sanders and his ilk accuse their intellectual opponents of promoting “trickle-down economics,” but that is precisely what he is advocating when it comes to trade. The argument for protectionism ultimately relies on the belief that protecting domestic corporations from foreign competition and keeping consumer prices high will somehow benefit society as whole.

However, the real effect of protectionism is to increase monopoly and consequently reduce overall economic welfare. In fact, according to a paper by economists at the Federal Reserve Bank of Minneapolis, “Government policies…such as tariffs and other forms of protection are an important source of monopoly” that lead to “significant welfare losses.”

In contrast to Sanders’ assertion that the expansion of free trade has been a disaster for the American people, there is a near unanimous consensus among economists that the opposite is true.

An IGM Poll of dozens of the most renowned academic economists found that, weighted for each respondent’s confidence in their answer, 96 percent of economists agreed, “Freer trade improves productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on employment.”

When the vast majority of economists of all sorts of ideological stripes agree that free trade is a good thing, maybe, just maybe, they’re onto something.

In fact, they surely are. Using four different methods, economists at the Petersen Institute for International Economics estimated the economic benefits from the expansion of technology that facilitates international trade (such as container ships), as well as the removal of government imposed barriers to international trade (such as tariffs). Since the end of World War II, they generated “an increase in US income of roughly $1 trillion a year,” which translates into an increase in “annual income of about $10,000 per household.”

This result is mostly driven by the fact that foreign businesses produce many goods which are used in the production process at a lower cost than their domestic competitors. Access to these low-cost foreign inputs allows American businesses to decrease their production costs and consequently increase their total output, making the nation as a whole much wealthier than it otherwise would have been.

Moreover, contrary to common conjecture, the benefits of international trade haven’t simply accrued to the wealthy alone. Low and middle income individuals tend to spend a greater share of their income on cheap imported consumer goods than those with higher incomes. As a result, international trade tends to benefit these income groups more so than the wealthy.

Indeed, according to the President’s Council of Economic Advisers, middle income consumers have about 29 percent greater purchasing power as a result of international trade.

In other words, middle income consumers can buy 29 percent more goods and services as a result of the access to low-cost imports from foreign countries.

Low income consumers see even greater gains with 62 percent higher purchasing power as a result of trade. In contrast, the top 10 percent of income earners only saw an increase in purchasing power of 3 percent as a result of trade.

On top of that, international trade has provided benefits by bringing new and innovative products to American consumers.

According seminal research by Christian Broda of the University of Chicago and David E. Weinstein of Colombia University, the variety of imported goods increased three-fold from 1972 to 2001. The value to American consumers of this import induced expanded product variety is estimated to be equivalent to 2.6 percent of national income, about $450 billion as of 2014. That’s not exactly small change.

The spread of free trade has also made considerable contributions to environmental protection, gender equality, and global poverty reduction. As a result of the spread of clean technology facilitated by freer trade, “every 1 percent increase in income as a result of trade liberalization (the removal of government imposed barriers to trade), pollution concentrations fall by 1 percent,” according to the Council of Economic Advisers.

The CEA also has found that “industries with larger tariff declines saw greater reductions in the [gender] wage gap,” suggesting that facilitating foreign competition through trade liberalization reduces the ability of employers to discriminate against women.

In regards to global poverty reduction, research has shown that in response to US import tariff cuts, developing countries, such as Vietnam, export more to the US, leading to higher incomes and less poverty.

Despite the large gains from trade America has already reaped, there is still room for improvement (contrary to Sen. Sanders’ accusations of “unfettered” free trade). The PIIE economists estimate that further trade liberalization would increase “US household income between $4,000 and $5,300 annually,” leading the them to conclude that, “in the future as in the past, free trade can significantly raise income — and quality of life — in the United States.”

Ultimately, the conclusion that most economists seem to reach is that, from being a disaster, the expansion of free trade has been a tremendous success, and that further trade liberalization would most likely make Americans, and the rest of the world, considerably better off.

Don’t let fear-mongering about foreigners and China scare you: free trade benefits everyone, especially the poor, while protectionism benefits only the politically powerful.

Corey Iacono

Corey Iacono is a student at the University of Rhode Island majoring in pharmaceutical science and minoring in economics.

New York’s Taxi Cartel Is Collapsing — Now They Want a Bailout! by Jeffrey A. Tucker

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An age-old rap against free markets is that they give rise to monopolies that use their power to exploit consumers, crush upstarts, and stifle innovation. It was this perception that led to “trust busting” a century ago, and continues to drive the monopoly-hunting policy at the Federal Trade Commission and the Justice Department.

But if you look around at the real world, you find something different. The actually existing monopolies that do these bad things are created not by markets but by government policy. Think of sectors like education, mail, courts, money, or municipal taxis, and you find a reality that is the opposite of the caricature: public policy creates monopolies while markets bust them.

For generations, economists and some political figures have been trying to bring competition to these sectors, but with limited success. The case of taxis makes the point. There is no way to justify the policies that keep these cartels protected. And yet they persist — or, at least, they have persisted until very recently.

In New York, we are seeing a collapse as inexorable as the fall of the Soviet Union itself. The app economy introduced competition in a surreptitious way. It invited people to sign up to drive people here and there and get paid for it. No more standing in lines on corners or being forced to split fares. You can stay in the coffee shop until you are notified that your car is there.

In less than one year, we’ve seen the astonishing effects. Not only has the price of taxi medallions fallen dramatically from a peak of $1 million, it’s not even clear that there is a market remaining at all for these permits. There hasn’t been a single medallion sale in four months. They are on the verge of becoming scrap metal or collector’s items destined for eBay.

What economists, politicians, lobbyists, writers, and agitators failed to accomplished for many decades, a clever innovation has achieved in just a few years of pushing. No one on the planet could have predicted this collapse just five years ago. Now it is a living fact.

Reason TV does a fantastic job and covering what’s going on with taxis in New York. Now if this model can be applied to all other government-created monopolies, we might see genuine progress toward a truly competitive economy. After all, it turns out that the free market is the best anti-monopoly weapon ever developed.

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.

Are CEOs Overpaid? by Gary M. Galles

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Are corporate managers and CEOs overpaid?

Many politicians rail against “overpaid” corporate managers. But these attacks overlook the issues of risk and uncertainty.

Workers agree to compensation before performing their work. Consequently, their compensation reflects not a known value but their expected value when arrangements are made.

Managers who turn out more productive than expected will have been underpaid, those less productive than expected will have been overpaid. But examples of the latter don’t prove managers are generally overpaid.

As performance reveals productivity, competition will also bid compensation of superior managers up and inferior managers down. And we must consider the present value of that entire stream, not a given year’s results, to evaluate managers’ productivity versus pay.

No manager is always right, but not every mistake is proof that they’re overpaid. They are paid for superior, not flawless, judgment — fewer mistakes, but not no mistakes.

That is another reason top managers of large enterprises will be very highly compensated. A 1% higher probability of being right on a $1 billion bet is very valuable, and even more so for a $10 billion bet. But even the best will err sometimes, so mistakes don’t prove shareholders are overpaying for managerial judgment.

This is part of a series of micro-blogs by Professor Galles responding to frequently asked questions on economic issues. If you have a question, emailAnythingPeaceful@FEE.org. 

World’s Poor: “We Want Capitalism” by Iain Murray

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In the forests of India, something exciting is going on. Villagers are regaining property taken from them when the British colonial authorities nationalized their forests. Just as exciting, in urban Kenya and elsewhere, people are doing away with the need for banks by exchanging and saving their money digitally. All over the world, poor people are discovering the blessings of bottom-up capitalism.

Sadly, though, developed country governments and anti-poverty activists ignore this fact and insist that developing nations need a paternalistic hand up. Both are missing an opportunity, because there are billions of capitalists in waiting at the bottom of the pyramid.

Next month, the United Nations will formally announce the successors to its Millennium Development Goals, the global body’s approach to poverty alleviation since the year 2000. These new goals will be touted as “sustainable.” The event will coincide with a visit by the pope, at which he is expected to concentrate on climate change and materialism as the greatest threats to the welfare of the people of the developing world.

Don’t expect to hear much on the way people in the Western world lifted themselves out of poverty: free-market capitalism.

The phrase “the fortune at the bottom of the pyramid” was coined by the late C.K. Prahalad, building on the work of Nobel laureate Amartya Sen. In his groundbreaking 1999 work, Development as Freedom, Sen pointed out that one of the most important aspects of development is freedom of opportunity, a vital part of which is access to capital and credit. Capital and credit, however, appear nowhere in the draft UN goals.

When capital is sufficiently available, would-be entrepreneurs at the bottom of the pyramid have demonstrated a willingness to launch new ventures and invest in their futures — that is, to embrace free-market capitalism to the benefit of all concerned.

There are several ways to ensure access to capital in the developing world, but the most important approach is to unlock the productive potential of the capital already available there.

Land Titling

In many countries, people could possess access to capital by virtue of the real estate they already occupy, but they are unable to prove ownership of the land due to inadequate land-titling systems or because of traditional forms of property ownership where everything belongs to the village chief. As Hernando de Soto explained in his book, The Mystery of Capital, land-titling reforms significantly benefit the poor, enabling

such opportunities as access to credit, the establishment of systems of identification, the creation of systems for credit and insurance information, the provision for housing and infrastructure, the issue of shares, the mortgage of property and a host of other economic activities that drive a modern market economy.

De Soto estimates that up to $10 trillion of capital worldwide is locked away unused because of inadequate titling systems. A recent study by the Peru-based Institute for Liberal Democracy (ILD), which De Soto heads, estimated Egyptian workers’ real estate holdings to be worth around $360 billion, “eight times more than all the foreign direct investment in Egypt since Napoleon’s invasion.”

Similarly, many local assets around the world remain in common ownership — in reality, owned by no one. Initiatives such as India’s privatization of forest resources seek to address this problem by enabling the titling of assets by indigenous peoples, who can then tap into those resources for access to credit to open up new opportunities. Estimates suggest that similar initiatives could be extended to 900 million plots of land across the developing world.

There are also exciting opportunities that could arise for the public recording and utilization of such capital through the distributed public-ledger system known as the blockchain, best known for its role in the development of bitcoin. Development of the blockchain for property recording and titling would significantly reduce both the transaction costs and the widespread corruption  associated with government-controlled titling systems. Significantly, De Soto’s ILD is promoting these initiatives.

Microfinance

Recent innovations have enabled the development of microfinance — access to small amounts of credit for specific purposes. Today, microfinance institutions all over the developing world provide small loans, access to savings, and microinsurance to families or small businesses.

By giving them access to proper investment capital and affordable financial institutions, microfinance providers help small- and medium-sized enterprises in developing countries to grow. Often, these businesses are so small that they can neither afford the interest rates on bank loans nor come up with the capital they need on the their own. When implemented correctly, microfinance loans empower their customers to invest, grow, and be productive, all of which contribute to diminishing poverty within communities.

One of the most prominent examples of microfinance is Muhammad Yunus’s Grameen Bank, first established in Bangladesh. According to a RAND Corporation study, areas where Grameen Bank offers programs saw unemployment rates drop from 31 percent to 11 percent in their first year. Occupational mobility improved, with many people moving up from low-wage positions to more entrepreneurial ones. There is evidence of increased wage rates for local farmers. Women’s participation in income-generating activities also rose significantly.

The Consumers at the Bottom of the Pyramid

Access to capital and credit enable new markets to spring up where none existed before. Entrepreneurial activity is unleashed. Consider one of Prahalad’s case studies of Nirmal, a small Indian firm that sold detergent products designed for rural village uses, such as in rivers. The products came in small packages at low prices suitable for Indian villagers’ daily cash flow. The company soon found itself with a market share equal to that of consumer-goods giant Unilever’s Indian subsidiary. Unilever responded by introducing similar products, thereby growing this new market. In the process, more environmentally friendly products were invented and sold, too.

As Prahalad points out, over four billion people in the world lived on an annual income of $1,500 or less (in 2002 dollars), with one billion living on less than a dollar a day. Nevertheless, based on purchasing power parity, this market represents an economy of $13 trillion or more, not that far off from the entire developed world.

The underdeveloped world is ripe for capitalism. The “unemployed” protestors of the Arab Spring were, in fact, small businessmen who were pushed to the breaking point by continually having their capital and profits expropriated by corrupt government officials, as De Soto points out. So, while the Western media portrayed the protests as being mostly about politics and freedom of expression, they were as much — if not more — about the freedom to do business.

Kenya: Mobile Phones and Payments

Despite corruption and bureaucracy, strong markets have grown up in developing countries. Kenya is a case in point. It leapfrogged the Western world’s development process for mobile communications technology. Kenyans went from having few telephones to virtually everyone having a mobile phone without needing the stage of landline infrastructure in between. A similar process is now taking place in personal finance.

Vodafone, along with its Kenyan subsidiary, Safaricom, developed m-pesa, a mobile payment and value storage system to be used on its phones. Transactions are capped at about $500, but crucially can be person-to-person, acting as digitized cash. Introduced in 2007, it had 9 million users — 40 percent of Kenya’s population — just two years later. By 2013, 17 million Kenyans were using it, with transactions valued at over $24 billion — over half of Kenya’s GDP.

M-pesa has in turn improved access to capital even more, and technology businesses are thriving all over Kenya as a result.

Kenya is not alone. The phenomenon is spreading to other African countries and to some South American countries such as Paraguay.

Environment, education, and health all benefit from wealth creation. Perhaps the real mystery of capitalism is that neither the United Nations nor the pope recognize the benefits it can bring to four billion of the world’s poor. Free enterprise and human welfare boom where governments allow new markets with access to capital and credit. That is all it takes to meet the UN’s development goals.

Iain Murray
Iain Murray

Iain Murray is vice president at the Competitive Enterprise Institute.

Market Corrections Inspire Dangerous Political Panic by Jeffrey A. Tucker

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Some kinds of inflation people really hate, like when it affects food and gas. But now, with the whole of the American middle class heavily invested in stocks, there is another kind inflation people love and demand: share prices that increased forever.

Just as with real estate before 2008, people seem addicted to the idea that they should never go anywhere but up.

This is the reason that stock market corrections are so dangerous. The biggest danger is not economic. It is political. Such corrections push politicians and central bankers to undertake ever-more nutty political in do order to fix them.

To make the point, Donald Trump immediately blamed China, which has the temerity to sell Americans excellent products at low prices. Bernie Sanders blamed “free trade,” even though the United States is among the most protectionist in the world.

Nothing in this world is more guaranteed to worsen a correction that a trade war. But so far, that’s what’s been proposed.

Tolerance for Downturns

It was not always so. In the 1982 recession, the Reagan administration argued that it was best to let the market clear and grow calm. Once the recession cleaned up misallocations of resources, the economy would be well prepared for a growth path. Incredibly, the idea was sold to the American people, and it proved wise.

That was the last time in American history we’ve seen anything like a laissez-faire attitude prevail. After the 1990s dot com boom and bust, the Fed intervened in an effort to repeal gravity. After 9/11, the Fed intervened again, using floods of paper money to rebuild national pride. That created a gigantic housing bubble that exploded 7 years later.

By 2008, the idea of allowing markets to clear became intolerable, and so Congress spent hundreds of billions of dollars and the Fed created trillions in phony money, all to forestall what desperately needed to happen.

Now, with dramatic declines in stock markets around the world, we are seeing what happens when governments and central banks attempt to counter market forces.

Markets win. Every time. But somehow it doesn’t matter anymore. There’s no more science, no more rationality, no more concern for the long term, so far as the Fed is concerned. The Fed is maniacally focused on its member banks’ balance sheets. They must live and thrive no matter what. And the Fed is in the perfect position now to use public sentiment to bolster its policies.

The Right and Wrong Question 

In the event of a large crash, the public discussion going forward will be: What can be done to re-boost stock prices? This is the wrong question. The right question should be: What were the conditions that led to the unsustainable boom in the first place? This is the intelligent way to address a global meltdown. Sadly, intelligence is in short supply when people are panicked about losing their retirement funds they believed were secure.

Back when people thought about such things, the great economic Gottfried von Haberler was tapped by the League of Nations to write a book that covered the whole field of business cycle theory as it then existed. Prosperity and Depressioncame out in 1936 and was republished in 1941. It is a beautiful book, rooted in rationality and the desire to know.

The book covers six core theories: purely monetary (now called Chicago), overinvestment (now called Austrian), sudden changes in cost (related to what is now called Real Business Cycle), underconsumption (now called Keynesian), psychological (popular in the financial press), and agricultural theories (very old fashioned).

Each one is described. The author then turns to solutions and their viability, assessing each. The treatise leans toward the view that permitting the recession (or downturn or depression) run its course is a better alternative than any large policy prescription applied with the goal of countering the cycle.

Haberler is careful to say that there is not likely one explanation that applies to all cycles in all times and in all places. There are too many factors at work in the real world to provide such an explanation, and no author has ever attempted to provide one. All we can really do is look for the primary causes and the factors that are mostly likely to induce recurring depressions and recoveries.

He likened the business cycle a rocking chair. It can be still. It can rock slowly. Or an outside force can come along to cause it to rock more violently and at greater speed. Detangling the structural factors from the external factors is a major challenge for any economist. But it must be done lest policy authorities make matters worse rather than better.

The monetary theory posits that the quantity of money is the key factoring in generating booms and busts. The more money that flows into an economy via the credit system, the more production increases alongside consumption. This policy leads to inflation. The pullback of the credit machine induces the recession.

The “overinvestment” theory of the cycle focuses on the misallocation of resources that upsets the careful balance between production and consumer. Within the production structure in normal times, there is a focus on viability in light of consumer decisions. But when more credit is made available, the flow of resources is toward the capital sector, which is characterized by a multiplicity of purposes. The entire production sector mixes various time commitments and purposes. Each of them corresponds with an expectation of consumer behavior.

Haberler calls this an overinvestment theory because the main result is an inflation of capital over consumption. The misallocation is both horizontal and vertical. When the consumer resources are insufficient to realize the plans of the capitalists, the result is a series of bankruptcies and an ensuing recession.

Price Control by Central Banks

A feature of this theory is to distinguish between the real rate of interest and the money rate of interest. When monetary authorities push down rates, they are engaged in a form of price control, inducing a boom in one sector of the production structure. This theory today is most often identified with the Austrian school, but in Haberler’s times, it was probably the dominant theory among serious specialists throughout the world.

In describing the underconsumption theory of the cycle, Haberler can hardly hide his disdain. In this view, all cycles result from too much hoarding and insufficient debt. If consumer were spend to their maximum extent, without regard to issues of viability, producers would feel inspired to produce, and the entire economy could run off a feeling of good will.

Habeler finds this view ridiculous, based in part on the implied policy prescription: endlessly inflate the money supply, keep running up debts, and lower interest rates to zero. The irony is that this is the precisely the prescription of John Maynard Keynes, and his whole theory was rooted in a 200-year old fallacy that economic growth is based on consumption and not production. Little did Haberler know, writing in the early 1930s, that this theory would become the dominant one in the world, and the one most promoted by governments and for obvious reasons.

The psychological theory of the cycle observes the people are overly optimistic in a boom and overly pessimistic in the bust. More than that, the people who push this view regard these states of mind as causative of economic trends. They both begin and end the boom.

Haberler does not deny that such states of mind are important and contributing elements to making the the cycle more exaggerated, but it is foolish to believe that thinking alone can bring about systematic changes in the macroeconomic structure. This school of thought seizes on a grain of truth, and pushes that grain too far to the exclusion of real factory. Interestingly, Haberler identifies Keynes by name in his critique of this view.

Haberler’s treatise is the soul of fairness but the reader is left with no question about where his investigation led him. There are many and varied causes of business cycles, and the best explanations trace the problem to credit interventions and monetary expansions that upset the delicate balance of production and consumption in the international market economy.

Large-scale attempts by government to correct for these cycles can result in making matters worse, because it has no control over the secondary factors that brought about the crisis in the first place. The best possible policy is to eliminate barriers to market clearing — that is to say, let the market work.

The Fed is the Elephant in the Room

And so it should be in our time. For seven years, the Fed, which controls the world reserve currency, has held down interest rates to zero in an effort to forestall a real recession and recreate the boom. The results have been unimpressive. In the midst of the greatest technological revolution in history, economic growth has been pathetic.

There is a reason for this, and it is not only about foolish monetary policy. It is about regulation that inhibits business creation and economic adaptability. It’s about taxation that pillages the rewards of success and pours the bounty into public waste. It is about a huge debt overhang that results from the declaration that all governments are too big to fail.

Whether a correction is needed now or later or never is not for policymakers to decide. The existence of the business cycle is the market’s way of humbling those who claim to have the power and intelligence to outwit its awesome and immutable forces.

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.

The Oldest Fallacy in Economics by Donald J. Boudreaux

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The quote of the day comes from pages 476-477 of the 5th edition (2015) of Thomas Sowell’s Basic Economics:

At one time, it was believed that importing more than was exported impoverished a nation because the difference between import and exports had to be paid in gold, and the loss of gold was seen as a loss of national wealth. However, as early as 1776, Adam Smith’s classic The Wealth of Nations argued that the real wealth of a nation consists of its goods and services, not its gold supply.

Too many people have yet to grasp the full implications of that, even in the twenty-first century. If the goods and services available to the American people are greater as a result of international trade, then Americans are wealthier, not poorer, regardless of whether there is a “deficit” or a “surplus” in the international balance of trade.

Yes. And it matters not how Americans (or, more generally, how denizens of whatever country is considered to be the “domestic” one) gain greater access to goods and services produced globally.

If the Chinese become zealous devotees of a religion whose doctrine requires that they serve Americans by shipping to Americans goods and services free of charge, then Americans are made better off.

If the Chinese innovate in ways that lower their costs of production — and distribution and, thus, enable them to sell goods and services to Americans at lower prices — then Americans are made better off.

If the Chinese invent new products and offer to sell these new products to Americans at prices that Americans find attractive, Americans are made better off.

If the forces of international competition oblige Chinese producers to lower their export prices to levels closer to their costs of production, then Americans are made better off.

If the Chinese government forces Chinese citizens to subsidize the production of goods and services sold to Americans so that Americans can purchase these goods and services at artificially low prices, then Americans are made better off (although Chinese citizens, other than those involved in the export trade, are made unjustifiably worse off).

If the Chinese monetary authority buys US dollars with newly created yuan in order to (of necessity temporarily) make Chinese exports artificially inexpensive for Americans to buy, then Americans are made better off (although Chinese citizens, other than those involved in the export trade, are made unjustifiably worse off).

The above reality is missed by people, such as Donald Trump (but hardly limited to him) who judge trade to be “successful” only if the jobs and businesses that it visibly — that is, directly — creates in the domestic economy are perceived as being greater than the number of jobs and businesses that it visibly destroys.

This error is among the oldest and most difficult to kill in economics — not only because this error is serviceable to domestic producers who greedily seek protection from competition, but also because it appeals to people who refuse to think beyond what is immediately and blindingly obvious.

A version of this post appeared at Café Hayek.

Donald J. Boudreaux

Donald J. Boudreaux

Donald Boudreaux is a professor of economics at George Mason University, a former FEE president, and the author of Hypocrites and Half-Wits.

Breaking News: High Tax States STILL Hemorrhaging Income

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Tax high income earners at high rates, and they leave…at high rates. Are progressives blind to this seemingly obvious point? I was recently alerted to the pending release of the IRS Statistics of Income Division, state and county migration data for the calendar year 2012 through 2013, by my friend and former campaign spokesman, Jim Pettit who has written previously about the disappearing tax base in high tax blue states.

So, who are the losers? The deep blue, high tax states – New York, California, Illinois, and Connecticut – on net, lost a staggering 15 billion dollars in taxpayer income.

The stories of businesses and people exiting high tax, deep blue states for the friendlier economic confines of low-tax, largely red states are readily available using a simple Internet search but the recently released IRS data is damning. The data shows that the mass income exodus from high tax states is continuing.

So, who are the losers? The deep blue, high tax states – New York, California, Illinois, and Connecticut – on net, lost a staggering 15 billion dollars in taxpayer income.

And, who are the winners? My home state of Florida gained an incredible 8.3 billion dollars and the top four states, low-tax Florida, Texas, South Carolina and North Carolina gained an enormous 17.5 billion in income.

Despite all the nonsense from the Left about how taxing away people’s hard-earned income magically makes them wealthier, people vote with their feet, while their wallets are voting for states with low taxes, right-to-work, sensible regulation, and smaller government burdens. And, although the standard progressive response which states “taxes aren’t the only reason people leave” is true, it ignores the obvious point that it is a reason, and a significant one. This is a silly, delusional point to make. Is the Left’s question that people leave the states they govern for all kinds of reasons – so let’s ensure that we make that decision easier for them by taxing them to death?

With the collapse in global equities markets today, there is no better time to sound the alarm about the dangers of high tax rates. The Obama administration and their, “Never let a crisis go to waste” opportunism are already using today’s economic trouble to call for MORE government spending despite the trillions they have already thrown down the drain.

Today’s data is additional evidence that this is economic poison, not an elixir.

EDITORS NOTE: This column originally appeared in the Conservative Review.

Europe Must Confront Its Financial Problems, Not Subdue Them

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Permanent instability appears to be the order of the day in Europe. The announcement by the Greek Prime Minister Alex Tsipras that he is stepping down and calling new elections comes as a surprise to no one. The Tsipras era has been no less volatile than that of his recent predecessors.

The immediate cause of his resignation is the loss of confidence in him by members of his own party, specifically over the agreement Tsipras made on the latest bailout with Greece’s European creditors. A new party has already been formed by the former energy minister, Panagiotis Lafazanis. When they stand before the electorate they are likely to be offering the Greek people almost exactly what Syriza offered the people before the party came across the realities that Greece is facing and that any party in government there must recognise.

But the truth is that the Greek people – and the people of the EU in general – deserve better than this. Specifically they deserve better leadership. It is not enough that the Greek government continues to revert to the people every few months in order to request that they suggest new ways to reorganise the deck chairs. The Greek governing class continues to behave as though there is a way of averting the inevitable – which is that the country face up to its creditors. Instead of that, a substantial portion of the Greek political class prefers to pretend that they will one day succeed in facing those creditors down.

In some ways the stasis exemplified in this Greek political groundhog day finds expression in other parts of the continent’s politics as well. In Sweden new polls show that the Sweden Democrats – a party with historical far-right leanings – is polling above any other party in the country. The cause is not complex: immigration. All the other Swedish political parties keep putting off the growing problems of their current asylum, immigration and integration strategies. Only the Sweden Democrats have been addressing them and as they have addressed them the other parties have stepped away from the issue rather than into it. And so a matter of the utmost concern to the Swedish people becomes addressed only by people who should have remained on the margins.

These are testing times across the continent, from north to south. There are no simple solutions to any of the problems the continent faces, but unless the mainstream political class in each of our countries is honest with the people and addresses their concerns rather than trying to subdue them, permanent instability will be the least of our worries.

mendozahjsFROM THE DIRECTOR’S DESK 

This week’s revelation that over $1 billion in US military equipment has now flowed to the Lebanese Army in one sense counts as no surprise.

Lebanon has been seriously affected by the conflict in Syria and has been rocked by instability caused by massive refugee flows that have swollen the country’s population by 25% of its pre-war total. Sectarian tensions have simmered and occasionally flared into violence. With ISIS claiming sovereignty over the country and Iran’s Lebanese catspaw Hezbollah having been drafted in to defend President Assad’s faltering rule, Lebanon runs the constant risk of once again being torn apart by conflict within its region. It stands to reason that its army therefore needs bolstering.

Except that in Lebanon, nothing is ever straightforward. The careful internal balance within the country has meant that the army cannot enforce the state evenhandedly. Hezbollah has long acted with impunity for example, acting as an armed militia which cannot be controlled. Worse, the army’s links with Hezbollah have been scrutinised in the past, with the US Congress stopping military aid several times on account of fears that Hezbollah would get hold of US equipment and use it against US strategic interests.

Given this, what explains the US move? The answer, as with part of the rationale for the Iran nuclear deal, seems clear: President Obama has decided to gamble on Iran and its allies becoming a fully fledged part of the coalition against ISIS, and that this bet is worth the potential consequences of a strengthened Iran in the region

This is a strange decision to make. Hezbollah is no friend of the US. Commencing with its murder of US marines in Beirut in 1983, it has consistently targeted US interests in the country. It poses a direct threat to the US’s Israeli ally, and has engaged in terrorism overseas in other US allied countries. Its military support for the Assad regime keeps the murderous dictator in power, helping ISIS radicalise foreign Muslims to come and wage jihad against him.

This US decision once again therefore marks the triumph of blind optimism over experience as the guiding principle of US foreign policy today. We must hope it is not one that will return to haunt the US in years to come.

Dr Alan Mendoza is Executive Director of The Henry Jackson Society
Follow Alan on Twitter: @AlanMendoza

Is the Car a Menace or a Miracle? Vindication for the Vilified Vehicle by Steven Horwitz

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The “automobile” moves itself, but it also moves us. Our cars carry us along the road of human progress not just by making us freer but by making us cleaner, healthier, and better fed.

Does such a claim strike you as strange?

In our own time, cars are seen as causing pollution, as well as making us lazy and fat. Consider how many of us drive our cars to the gym, where we exercise by walking or running, two activities often replaced by driving. But if you think about what the car replaced, it’s easy to see how the car is another example of what Don Boudreaux calls being “cleaned by capitalism.”

Cleaner

How has the car, which is so vilified as a producer of pollution today, made our lives cleaner?

Before the car, transportation required animals, mostly horses. Horses, of course, produce pollutants. What we in the modern, car-centric world easily lose track of is how dirty and smelly a world of horse-driven transportation is. Cities, in particular, were full of horse urine and manure, the stench of which could be overwhelming. Those by-products of transportation were no less polluting than what comes out of the exhaust pipe of a car or truck.

To understand the scale of the problem of horse-related pollution, consider historian David Kyvig’s observation:

The idea of self-propelled carriages had long fascinated American inventors, not to mention the carriage-using wealthy classes. Given the problems of highly-polluting horse-drawn vehicles, especially in congested urban areas, a cleaner-running automobile had great appeal. In 1900 in New York City alone, 15,000 horses dropped dead on the streets, while those that lived deposited 2.5 million pounds of manure and 60,000 gallons of urine on the streets every day.

Note that those numbers are for daily waste.

The omnipresence of horses meant that 19th-century houses were built with “boot scrapers” outside so that people could get the manure off their boots before entering a home. The waste was also a source of disease, as were the dead horses in the streets. Disposing of the horses and their by-products was costly, and as historian Stephen Davies observed in an earlier Freeman column, there were many debates about how society would deal with the even larger amount of manure the future held if the then-current growth rate in the use of horses continued.

Healthier

The car eliminated that worry by dramatically reducing the use of horses and replacing them and their waste products with the much cleaner automobile. The car produced by-products of its own, but none of them posed the direct and severe health risks that came from rotting horse carcasses and millions of pounds of manure in the streets. And whatever the smell that came from car exhaust, it was much less offensive than the odor produced by the horses. Plus, traveling in the relative discomfort of early cars was still more pleasant than sitting immediately behind the rear end of a horse.

The car also made us healthier in another, more subtle, way. One of the first people in many small towns to acquire a car was the local doctor. Having a car made it easier to make house calls, increasing the probability that he could save a life or reduce the danger from injury or illness. The car also extend the geographic range of his service, making isolated rural locations accessible in ways they might not have been before. And somewhat later, when car ownership spread to more of the population, people were able to get themselves to a doctor or hospital more quickly and easily. Cars save lives.

Better Fed

In addition to making us cleaner and healthier, the car has made us better nourished. The most obvious way it has done so is that the internal combustion engine also made possible the truck and the tractor, which revolutionized agriculture. Having tractor power rather than just animal or human power made humans much more productive. Any given farmer could produce more output per person by using tractors and trucks. Rather than hiring an army of temporary workers and putting the whole family to work at harvest time, farmers could employ machines, freeing that labor to satisfy other, more valuable human wants elsewhere.

As farmers got more productive, they could produce food more cheaply, making more and better food more accessible to more people. The car made us better fed by increasing agricultural productivity.

Wealthier

The car, the tractor, and the truck had another related effect. In a world of horse-powered transportation, the demand for horses was high, which meant land had to be devoted to producing crops to feed them. Farmers who relied on horsepower could not earn income from the portion of their harvest that fed the horses. With tractors and trucks replacing those horses, crops that previously went to horses could be sold on the market, which also helped reduce the prices of those crops.

Check Your History

The way the car is vilified in our modern world is the result of two human biases. The first is simply forgetting our history — or imagining it through a very rosy rearview mirror. Looking at historical photos, or reading historical books, or watching historical movies often only gives us a sanitized (figuratively and, in a sense, literally) version of the past. None of those depictions can allow us to smell the stench of the preautomobile world. If we don’t know what the past was really like, we can’t appreciate the present.

The second kind of bias is that we tend to get increasingly upset about a problem when only a little bit of it remains. Cigarette smoking has largely died out, but we have little toleration for the small bit of it that remains. As we solve more of the big issues of death and disease, we get increasingly frustrated with the smaller ones that remain.

But that should not allow us to overlook our real accomplishments. The car is a major reason that human life is cleaner and that we are healthier and better fed than were our horse-powered ancestors.

Steven Horwitz
Steven Horwitz

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Microfoundations and Macroeconomics: An Austrian Perspective, now in paperback.

Capitalists Have a Better Plan: Why Decentralized Planning Is Superior to Bureaucracy and Socialism by Robert P. Murphy

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To early 20th-century intellectuals, capitalism looked like anarchy. Why, they wondered, would we trust deliberative, conscious guidance when building a house but not when building an economy?

It was fashionable among these socialist intellectuals to espouse “planning” as a much more rational way to organize economic activity. (F.A. Hayek wrote a famous essay on the phenomenon.) But this emphasis on central planning was utterly confused both conceptually and empirically.

Ludwig von Mises made the most obvious rejoinder, pointing out that there is “planning” in the market economy, too. The difference is that the planning isdecentralized in a market, spread out among millions of entrepreneurs and resource owners, including workers. Thus, in the debate between socialism and capitalism, the question isn’t, “Should there be economic planning?” Rather, the question is, “Should we restrict the plan design to a few supposed experts put in place through the political process, or should we throw open the floodgates and receive input from millions of people who may know something vital?”

This second question came to be known as the “knowledge problem.” Hayek pointed out that in the real world, information is dispersed among myriad individuals. For example, a factory manager in Boise might know very particular facts about the machines on his assembly line, which socialist planners in DC could not possibly take into account when directing the nation’s productive resources. Hayek argued that the price system in a market economy could be viewed as a giant “system of telecommunications,” rapidly transmitting just the essential bits of knowledge from one localized node to the others. Such a “web” arrangement (my term) avoided a bureaucratic hierarchy in which every bit of information had to flow up through the chain of command, be processed by the expert leaders, and then flow back down to the subordinates.

Complementary to Hayek’s now-better-known problem of dispersed knowledge, Mises stressed the calculation problem of socialist planning. Even if we conceded for the sake of argument that the socialist planners had access to all of the latest technical information regarding the resources and engineering know-how at their disposal, they still couldn’t rationally “plan” their society’s economic activities. They would be “groping in the dark.”

By definition, under socialism, one group (the people running the state, if we are talking about a political manifestation) owns all of the important productive resources — the factories, forests, farmland, oil deposits, cargo ships, railroads, warehouses, utilities, and so on. Thus, there can be no truly competitive markets in the “means of production” (to use Karl Marx’s term), meaning that there are no genuine prices for these items.

Because of these unavoidable facts, Mises argued, no socialist ruler could evaluate the efficiency of his economic plan, even after the fact. He would have a list of the inputs into a certain process — so many tons of steel, rubber, wood, and man-hours of various types of labor. He could contrast the inputs with the outputs they produced — so many houses or cars or bottles of soda. But how would the socialist planner know if this transformation made sense? How would the socialist planner know if he should continue with this operation in the future, rather than expanding it or shrinking it? Would a different use of those same resources produce a better result? The simple answer is that he would have no idea. Without market prices, there is no nonarbitrary way of comparing the resources used up in a particular process with the goods or services produced.

In contrast, the profit-and-loss test provides critical feedback in the market economy. The entrepreneur can ask accountants to attach money prices to the resources used up, and the goods and services produced, by a particular process. Although not perfect, such a method at least provides guidance. Loosely speaking, a profitable enterprise is one that directs scarce resources into the channel that the consumers value the most, as demonstrated through their spending decisions.

In contrast, what does it mean if a particular business operation isunprofitable? It means that its customers are not willing to spend enough money on the output to recoup the monetary expenses (including interest) necessary to buy the inputs. But the reason those inputs had certain market prices attached to them is that other operations were bidding on them, too. Thus, in Mises’s interpretation, an unprofitable business enterprise is siphoning away resources from channels where consumers would prefer (indirectly and implicitly) that the resources be deployed.

We must never forget that the economic problem is not to ask, “Will devoting these scarce resources to project X make at least some people better off, compared to doing nothing with these resources?” Rather, the true economic problem is to ask, “Will devoting these scarce resources to project X make people better off compared to using the resources in some other project Y?”

To answer this question, we need a way of reducing heterogeneous inputs and outputs into a common denominator: money prices. This is why Mises stressed the primacy of private property and the use of sound money as pillars of rational resource allocation.

Robert P. Murphy
Robert P. Murphy

Robert P. Murphy has a PhD in economics from NYU. He is the author of The Politically Incorrect Guide to Capitalism and The Politically Incorrect Guide to The Great Depression and the New Deal.

The Slow-Motion Financial Suicide of the Roman Empire by Lawrence W. Reed & Marc Hyden

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More than 2,000 years before America’s bailouts and entitlement programs, the ancient Romans experimented with similar schemes. The Roman government rescued failing institutions, canceled personal debts, and spent huge sums on welfare programs. The result wasn’t pretty.

Roman politicians picked winners and losers, generally favoring the politically well connected — a practice that’s central to the welfare state of modern times, too. As numerous writers have noted, these expensive rob-Peter-to-pay-Paul efforts were major factors in bankrupting Roman society. They inevitably led to even more destructive interventions. Rome wasn’t built in a day, as the old saying goes — and it took a while to tear it down as well. Eventually, when the republic faded into an imperial autocracy, the emperors attempted to control the entire economy.

Debt forgiveness in ancient Rome was a contentious issue that was enacted multiple times. One of the earliest Roman populist reformers, the tribune Licinius Stolo, passed a bill that was essentially a moratorium on debt around 367 BC, a time of economic uncertainty. The legislation enabled debtors to subtract the interest paid from the principal owed if the remainder was paid off within a three-year window. By 352 BC, the financial situation in Rome was still bleak, and the state treasury paid many defaulted private debts owed to the unfortunate lenders. It was assumed that the debtors would eventually repay the state, but if you think they did, then you probably think Greece is a good credit risk today.

In 357 BC, the maximum permissible interest rate on loans was roughly 8 percent. Ten years later, this was considered insufficient, so Roman administrators lowered the cap to 4 percent. By 342, the successive reductions apparently failed to mollify the debtors or satisfactorily ease economic tensions, so interest on loans was abolished altogether. To no one’s surprise, creditors began to refuse to loan money. The law banning interest became completely ignored in time.

By 133 BC, the up-and-coming politician Tiberius Gracchus decided that Licinius’s measures were not enough. Tiberius passed a bill granting free tracts of state-owned farmland to the poor. Additionally, the government funded the erection of their new homes and the purchase of their faming tools. It’s been estimated that 75,000 families received free land because of this legislation. This was a government program that provided complimentary land, housing, and even a small business, all likely charged to the taxpayers or plundered from newly conquered nations. However, as soon as it was permissible, many settlers thanklessly sold their farms and returned to the city. Tiberius didn’t live to see these beneficiaries reject Roman generosity, because a group of senators murdered him in 133 BC, but his younger brother Gaius Gracchus took up his populist mantle and furthered his reforms.

Tiberius, incidentally, also passed Rome’s first subsidized food program, which provided discounted grain to many citizens. Initially, Romans dedicated to the ideal of self-reliance were shocked at the concept of mandated welfare, but before long, tens of thousands were receiving subsidized food, and not just the needy. Any Roman citizen who stood in the grain lines was entitled to assistance. One rich consul named Piso, who opposed the grain dole, was spotted waiting for the discounted food. He stated that if his wealth was going to be redistributed, then he intended on getting his share of grain.

By the third century AD, the food program had been amended multiple times. Discounted grain was replaced with entirely free grain, and at its peak, a third of Rome took advantage of the program. It became a hereditary privilege, passed down from parent to child. Other foodstuffs, including olive oil, pork, and salt, were regularly incorporated into the dole. The program ballooned until it was the second-largest expenditure in the imperial budget, behind the military.It failed to serve as a temporary safety net; like many government programs, it became perpetual assistance for a permanent constituency who felt entitled to its benefits.

In 88 BC, Rome was reeling from the Social War, a debilitating conflict with its former allies in the Italian peninsula. One victorious commander was a man named Sulla, who that year became consul (the top political position in the days of the republic) and later ruled as a dictator. To ease the economic catastrophe,Sulla canceled portions of citizens’ private debt, perhaps up to 10 percent,leaving lenders in a difficult position. He also revived and enforced a maximum interest rate on loans, likely similar to the law of 357 BC. The crisis continually worsened, and to address the situation in 86 BC, a measure was passed that reduced private debts by another 75 percent under the consulships of Cinna and Marius.

Less than two decades after Sulla, Catiline, the infamous populist radical and foe of Cicero, campaigned for the consulship on a platform of total debt forgiveness. Somehow, he was defeated, likely with bankers and Romans who actually repaid their debts opposing his candidacy. His life ended shortly thereafter in a failed coup attempt.

In 60 BC, the rising patrician Julius Caesar was elected consul, and he continued the policies of many of his populist predecessors with a few innovations of his own. Once again, Rome was in the midst of a crisis. In this period, private contractors called tax farmers collected taxes owed to the state. These tax collectors would bid on tax-farming contracts and were permitted to keep any surplus over the contract price as payment. In 59 BC, the tax-farmer industry was on the brink of collapse. Caesar forgave as much as one-third of their debt to the state. The bailout of the tax-farming market must have greatly affected Roman budgets and perhaps even taxpayers, but the catalyst for the relief measure was that Caesar and his crony Crassus had heavily invested in the struggling sector.

In 33 AD, half a century after the collapse of the republic, Emperor Tiberius faced a panic in the banking industry. He responded by providing a massive bailout of interest-free loans to bankers in an attempt to stabilize the market. Over 80 years later, Emperor Hadrian unilaterally forgave 225 million denarii in back taxes for many Romans, fostering resentment among others who had painstakingly paid their tax burdens in full.

Emperor Trajan conquered Dacia (modern Romania) early in the second century AD, flooding state coffers with booty. With this treasure trove, he funded a social program, the alimenta, which competed with private banking institutions by providing low-interest loans to landowners while the interest benefited underprivileged children. Trajan’s successors continued this program until the devaluation of the denarius, the Roman currency, rendered the alimenta defunct.

By 301 AD, while Emperor Diocletian was restructuring the government, the military, and the economy, he issued the famous Edict of Maximum Prices. Rome had become a totalitarian state that blamed many of its economic woes on supposed greedy profiteers. The edict defined the maximum prices and wages for goods and services. Failure to obey was punishable by death. Again, to no one’s surprise, many vendors refused to sell their goods at the set prices, and within a few years, Romans were ignoring the edict.

Enormous entitlement programs also became the norm in old Rome. At its height, the largest state expenditure was an army of 300,000–600,000 legionaries. The soldiers realized their role and necessity in Roman politics, and consequently their demands increased. They required exorbitant retirement packages in the form of free tracts of farmland or large bonuses of gold equal to more than a decade’s worth of their salary. They also expected enormous and periodic bonuses in order to prevent uprisings.

The Roman experience teaches important lessons. As the 20th-century economist Howard Kershner put it, “When a self-governing people confer upon their government the power to take from some and give to others, the process will not stop until the last bone of the last taxpayer is picked bare.” Putting one’s livelihood in the hands of vote-buying politicians compromises not just one’s personal independence, but the financial integrity of society as well. The welfare state, once begun, is difficult to reverse and never ends well.

Rome fell to invaders in 476 AD, but who the real barbarians were is an open question. The Roman people who supported the welfare state and the politicians who administered it so weakened society that the Western Roman Empire fell like a ripe plum that year. Maybe the real barbarians were those Romans who had effectively committed a slow-motion financial suicide.

Lawrence W. Reed

Lawrence W. Reed

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s.

The Most Impossible Thing in “MI: Rogue Nation” by Jeffrey A. Tucker

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There’s a scene in “Mission Impossible: Rogue Nation” that seems entirely plausible. The bad guy is transferring a huge amount of money, something like $1 billion. He has a hand-held device and clicks the button. We see a progress bar. The operation takes only a few seconds and then there is a ding. Done! Wow, impressive.

Surely, this is the way rich, powerful, well-connected people do it.

Actually, this is the most impossible thing that happens in the movie. It is more impossible than holding one’s breath for 3 minutes, more impossible than hanging onto the side of an airplane as it takes off and lands, and more impossible than riding a motorcycle at 120 miles an hour around curvy Moroccan roads and not crashing.

It can’t be done — not with any existing service. Viewers hardly question that it should be possible to move money that quickly. Sadly, it is not. Our money transmission technologies in real life are like the 1950s.

The only way to do what they did would be the use of a technology invented in 2009 but is still in extremely limited use, for now: cryptocurrency like Bitcoin operating on a distributed ledger. Otherwise, you are going to have to wait several weekdays, pay high fees, or have a trusted (credit-based) relationship with some third-party provider.

There is currently no way, using national money, to move a billion dollars from one person to another instantly. You can’t do it with a million dollars. There are better and worse ways to move thousands of dollars, but they all cost money, all require a trust relationship, and all take time. And there is no way to do this peer to peer using even $1 (except, of course, physically handing you a piece of paper in person).

National Currencies Limit Transfer Choice

Consider the most common way of moving money from me to you. It is ACH, which stands for Automated Clearing House. It moves a total of $40 trillion per year in 25 billion transactions, and is increasingly preferred over credit cards. It seems clean and, once you have verified accounts, works without a credit relationship.

However, it is slow. It takes at least one day and as much as four days, not including weekends. If you push on Thursday, the funds might not be there until Tuesday. It’s also expensive: 1-3%, which doesn’t sound like much until you realize you can get a nice car for how much it costs to move $1 million.

ACH is the most advanced, most common, most direct, most reliable method. And it is still terrible. It’s closely related to wiring money — an ancient method that uses Western Union (founded 1851!) or Moneygram (the new name for Travelers Express founded in 1940). These are very expensive services, though they are very fast.

PayPal is a mixed bag. If you have a balance or have it directly linked to your bank account, there are no fees, though there is a transaction limit of $10,000. If you are using a credit or debit card, the fees can be 3%. And the clearing time can be 3-4 business days, though if you have a balance in your account, the transfer is instant. This doesn’t really mean anything, though, because it takes 3-4 days to make the PayPal balance achieve liquidity outside of PayPal. If you are using it internationally, the fees go through the roof, regardless.

Other services improve on this record. Google Wallet is one of the best. It’s been known to be fast when it is linked up to your bank account. But you can’t know for sure. It could take several days. And there are strict limits to the amount to you can move. If you have more than $50,000 to send in a week, you are completely out of luck.

It is the same with Square Cash, except that this service absolutely requires a debit card hook up. It is mercifully free of fees, but you have to wait 30 days before your account is verified, and, until that time, you are limited to moving $1,000.

There is a fancy new application on Facebook that allows you to move limited amounts of money, and it is wonderful and exciting.

Except: it can take three to four days before your money movies via instant messaging. And Facebook doesn’t permit credit cards, debit cards, or other third-party payment systems.

SnapChat is experimenting with something similar.

There are many other services that are desperately trying to resolve the problem. Think of companies like Dwolla, which started in 2008 with such promise. But this company, just like PayPal and everyone else, bumped into a crazy system of regulations that forced compliance with every form of “know your customer” rules and navigating a highly regulated banking system with a money that is ultimately controlled by government and, therefore, moves digitally only according to its diktat.

Risks of Anachronistic Systems

Another big flaw is that any one of these trusted third parties can reverse, freeze, or seize the transaction funds and there’s nothing anyone can do to avoid this risk. For a billion dollar transfer, the risk of seizure, freezing, or reversal would be enormous and would last for months.

It’s not a surprise that innovation is difficult under these conditions. We can get ever fancier interfaces, ever more accessibility, ever friendlier ways of going about things. All of this is great.

But, in the end, transferring money from one person to the next bumps into the same problems: trust, fees, waiting times, dollar limits, and grave problems with international transfers. Each problem has a slightly different source. But they all add up to the weird reality that doing what would seem completely normal in 2015 — moving money instantly from here to there — is still exceedingly difficult.

How much further are we going to get into the digital age before our monetary and payment systems catch up? There is a crying need. Everyone knows it. This is why so many people are excited about Bitcoin.

Bitcoin blows up the current system through several critically new innovations. It combines a money and payment system into one single process, bypassing national monies altogether. It also bypasses the banking system completely through a ledger system that is open source and monitored through software. It also requires no trust, credit, or identity verification. If you have an Internet connection, and you hold some amounts of the currency, you can move that property from you to anyone else in the world without asking anyone’s permission.

The time for transaction processing is almost instant; the transaction clearing time can be several minutes. Compare that clearing time to 1-3 days for equity markets, 3-5 business days for a check or wire transfer, and 60-90 days for a credit card transaction.

The costs associated with moving cryptocurrency are negligible. For example, in December 2014, there was an $81 million transaction that cost just $0.40 to conduct. That compares to the $2.4 million or so this same transaction would cost using conventional payments systems and national monies.

This is a huge benefit of Bitcoin but only one feature of a larger innovation. Cryptocurrency completely rethinks the way we bundle, title, move, and verify all kinds of information. The potential applications for this technology are awesome to consider. It’s not just about money, though that would be significant enough. The spillovers affected titling, securities, and all forms of contracts.

The headlines over Bitcoin today are all about the fallout from the failure of one firm, Mt. Gox, an early mover in the space that mishandled its business. It’s just another in a long series of blows Bitcoin has endured in the 6 years of its existence. And yet, when you look at it today, you see an innovation that has been tested, survived, and thrived.

Bitcoin is Mission Impossible — an innovation that finally moves money into the 21st century — coming true.


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.