Sending Money Home: Technology or Bureaucracy? by Iain Murray

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Remittances are helping poor people globally, but regulators loom.

Some of the world’s poorest people depend on the money they receive from relatives working in developed countries. In fact, this money dwarfs the world’s official foreign aid budget, and the gap is increasing.

In 2011, total private flows of aid totaled $680 billion—almost five times the $138 billion official figure. As I noted in 2005, “the future of aid to developing countries is private.”

This increase in private aid is great news for all concerned. Except, perhaps, for bureaucrats, who are loath to let good deeds go unpunished. World Bank and United Nations bean counters are denouncing remittance transfer fees as exploitative. The U.S. Consumer Financial Protection Bureau (CFPB) has issued a rule to crack down on supposed fraud and exploitation affecting the existing remittance-transfer infrastructure. Its most important provision is the right to cancel a money transfer within 30 minutes of its being initiated. Proposals to cap the fee charged by remittance firms have also been agreed to internationally.

Critics claim that high transfer fees are the result of a so-called market failure. Yet, markets in remittances are frequently overregulated. Many African governments have exclusive deals with money transfer companies, which operate as national monopolies, free from competitive discipline. And there are other regulatory pitfalls that drive up prices. A Western Union spokesman told The Guardian: 

Our pricing varies between countries depending on a number of factors, such as consumer protection costs, local remittance taxes, market distribution, regulatory structure, volume, currency volatility and other market efficiencies. These factors can impact the fees and foreign exchange rates offered by corridor and service type.

All this suggests the remittance market needs less regulation. Proper competition, lower taxes, less restrictive “consumer protection” measures (which quickly become outdated), and less red tape in general would all likely increase the flow of funds between individuals.

Such a solution would be inconceivable for global bureaucrats. Indeed, their house organ, The New York Times, last week recommended that the industry should be not only nationalized, but internationalized, with the World Bank taking on the role of remittance service provider, a role the Times actually described as “critical”:

The World Bank could pool deposits from banks and nonbank money transfer agents and parcel them to recipient banks, using its formidable certification protocols to verify that the money is coming from and going to legitimate parties. Such pooling could also reduce exchange fees, a big cost to migrants. Equally important, the World Bank could use its relationships with regulators around the world to enhance the remittance system’s integrity.

Technology is already solving many of the problems faced by the money transfer industry, making the industry obsolete in the process. For example, in the central Asian republic Kyrgyzstan, which relies heavily on remittances—accounting for 31 percent of its GDP, mostly from within the former Soviet Union—an Italian entrepreneur named Emanuele Costa is able to promote bitcoin as an alternative to the expensive, heavily regulated money transfer firms. 

Costa can do this because Kyrgyzstan is notably less oppressive and more free-market-oriented than its neighbors, and it has much less regulation than is typical in the area. He regularly hosts meetups to explain the currency to potential recipients and has installed a bitcoin ATM at a pizzeria (which, as Eurasianet notes, has been “bombarded with calls” since it publicized its existence).

In Kenya, meanwhile, a bitcoin startup called BitPesa offers money transfers “twice as fast and 75% cheaper” than traditional competitors. Kenya is an especially interesting place for this innovation to happen, as it was the scene of a “cell phone revolution” that allowed its telecommunications market to work around a serious case of government failure. As a result, most Kenyans now use a form of mobile wallet on their cell phones.

The potential for bitcoin to revolutionize the global remittance industry is hard to overstate. It largely cuts out the middleman, reducing the fees and charges some view as exploitative. Converting to local currency would be the most significant charge for most users. Bitcoin facilitates the establishment of trust through its “blockchain” public ledger, potentially reducing fraudulent transfers to near zero (although there is always the chance of someone stealing a wallet key). Taxes, at the moment, are minimal. 

For these reasons, bitcoin represents the best hope to ensure that all of the $680 billion in remittances goes to the people who need it. That might be why in America, bitcoin is most popular among Hispanics, who send more money abroad than any other group.

Yet, roadblocks remain. If Kyrgyzstan joins Moscow’s customs union as expected, bitcoin’s days may be numbered there, as Russian officials have taken a dim view of anonymous payment vehicles. Meanwhile, in the UK, where many Kenyan remittance senders live and work, banks are wary of taking bitcoin businesses on as clients. As BitPesa’s founder told The Guardian:

Most UK banks won’t let Bitcoin businesses open bank accounts. These businesses want to be licensed, but UK banks shy away, just like Barclays cut Somalia off the map. 

British banks are highly regulated and probably fearful of what regulators might do to them if they did business with companies that present “reputational risk”—as defined by regulators, of course.

In the United States, the CFPB rule mentioned above could threaten to make bitcoin illegal for remittance purposes. The average time for a Bitcoin transaction to go through is around eight minutes, and reversing a transaction is impossible unless an escrow service is used. It is possible that the rule may not apply to a decentralized network like bitcoin, but in its short existence, the CFPB has not become known for reading its powers narrowly.

Regulators could wind up killing off the solution to problems created by, well, regulators. If they are serious about reducing costs and decreasing the potential for fraud in remittances, they will stand aside and let bitcoin develop in this role. If the choice is between a distributed, autonomous cryptocurrency network approved by the people who need the remittances most, or a combination of policies approved by The New York Times, the World Bank, and international regulators, Public Choice economics suggests that the technological option faces a long struggle ahead.

ABOUT IAIN MURRAY

Iain Murray is vice president at the Competitive Enterprise Institute.

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.

CLICHES OF PROGRESSIVISM #20 – Government Can Be a Compassionate Alternative to the Harshness of the Marketplace

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In every election campaign, we hear the word “compassion” at least a thousand times. One political party supposedly has it, the other one doesn’t. Big government programs are evidence of compassion; cutting back government is a sign of cold-hearted meanness. By their misuse of the term for partisan advantage, partisans and ideologues have thoroughly muddied up the real meaning of the word.

The fact is that some of what is labeled “compassionate” is just that, and it does a world of good; but a whole lot of what is labeled “compassionate” is nothing of the sort, and it does a world of harm. The former tends to be very personal in nature, while the latter puts an involuntary burden on someone else.

As Marvin Olasky pointed out in his 1994 book, The Tragedy of American Compassion, the original definition of compassion as noted in The Oxford English Dictionary is “suffering together with another, participation in suffering.” The emphasis, as the word itself shows—“com,” which means with, and “passion,” from the Latin term “pati,” meaning to suffer—is on personal involvement with the needy, suffering with them, not just giving to them. Noah Webster, in the 1834 edition of his American Dictionary of the English Language, similarly defined compassion as “a suffering with another.”

But the way most people use the term today is a corruption of the original. It has come to mean little more than, as Olasky put it, “the feeling, or emotion, when a person is moved by the suffering or distress of another, and by the desire to relieve it.” There is a world of difference between those two definitions: One demands personal action, the other simply a “feeling” that usually is accompanied by a call for someone else—namely, government—to deal with the problem. One describes a Red Cross volunteer, the other describes the typical Progressive demagogue who gives away little or nothing of his own resources but lots of yours.

The plain fact is that government compassion is not the same as personal and private compassion. When we expect the government to substitute for what we ourselves ought to do, we expect the impossible and we end up with the intolerable. We don’t really solve problems, we just manage them expensively into perpetuity and create a bunch of new ones along the way.

From 1965, the beginning of the so-called War on Poverty, to 1994, total welfare spending in the United States was $5.4 trillion in constant 1993 dollars. In 1965, total government welfare spending was just over 1 percent of gross domestic product, but by 1993 it had risen to 5.1 percent of GDP annually—higher than the record set during the Great Depression. The poverty rate in 1994 was almost exactly where it was in 1965 and now, 20 years later, it’s even higher. It was apparent when “welfare reform” was enacted in 1996 that millions on welfare were living lives of demoralizing dependency; families were rewarded for breaking up; and the number of children born out of wedlock was in the stratosphere—terrible facts brought about, in large part, by “compassionate” government programs.

A person’s willingness to spend government funds on aid programs is not evidence that the person is himself compassionate. Professor William B. Irvine of Wright State University in Dayton, Ohio, once explained, “It would be absurd to take a person’s willingness to increase defense spending as evidence that the person is himself brave, or to take a person’s willingness to spend government money on athletic programs as evidence that the person is himself physically fit.” In the same way as it is possible for a “couch potato” to favor government funding of athletic teams, it is possible for a person who lacks compassion to favor various government aid programs; and conversely, it is possible for a compassionate person to oppose these programs.

It is a mistake to use a person’s political beliefs as the litmus test of his compassion. Professor Irvine said that if you want to determine how compassionate an individual is, you are wasting your time if you ask for whom he voted; instead, you should ask what charitable contributions he has made and whether he has done any volunteer work lately. You might also inquire into how he responds to the needs of his relatives, friends, and neighbors.

Many of the political world’s most boisterous welfare statists are also among the most duplicitous and selfish (in the bad sense of the term) hypocrites. While small-government conservatives and libertarians generally give generously from their own pockets, charitable organizations are often lucky to get a little more than token donations from the “progressives” of the world. For a mountain of evidence in that regard, see the 2006 book, Who Really Cares? by Arthur Brooks, then at Syracuse University and now president of the American Enterprise Institute.

It’s worth noting that not even progressives donate to supposedly “compassionate” government agencies a penny more than the law requires them to. There’s nothing illegal about writing out a check to the “Department of Health and Human Services,” but progressives, when they seek to personally help others, tend to write their checks out to private agencies.

True compassion is a bulwark of strong families and communities, of liberty and self-reliance, while the false compassion of the second usage is fraught with great danger and dubious results. True compassion is people helping people out of a genuine sense of caring and brotherhood. It is not asking your legislator or congressman to do it for you. True compassion comes from your heart, not from the state or federal treasury. True compassion is a deeply personal thing, not a check from a distant bureaucracy.

In a television interview in Nassau, Bahamas, in November 2012, I was asked by host Wendall Jones, “Mr. Reed, what about the Good Samaritan in the New Testament? Doesn’t that story show that government should help people?” My reply: “Wendall, what made the Good Samaritan good was the fact that he personally helped the stricken man along the road. If he had simply told the helpless chap to ring up his congressman, no one to this day would have the gall to call him anything but a good-for-nothing.”

“But what about Christianity itself?” Jones then asked me. “Isn’t it in favor of redistribution as a compassionate way to help the poor?” Fortunately, I know a few things about the Bible and Christianity. My reply: “Wendall, the Eighth Commandment says ‘Thou shalt not steal.’ It doesn’t say, ‘Thou shalt not steal unless the other guy has more than you do or unless you’re convinced that you can spend it better or unless you can find a politician to take it on your behalf.’ And even more to the point, a new book on the subject, For the Least of These: A Biblical Answer to Poverty (link provided below) answers this question in both a detailed and scholarly fashion.

Progressives are often so convinced of their moral superiority that they tend to be very intolerant of a good, opposing argument. Mr. Jones edited out the above exchange before airing the show, but you can see the rest of it here.

The marketplace is often dismissed as a cold, impersonal, and selfish place where compassion takes a back seat to self-interest. But that view ignores some important facts: 1) The marketplace is what produces the wealth that compassion allows you to share or give away; 2) Historically, the freest of societies are the most compassionate in the truest sense of the term; 3) Nothing about being a government employee spending other people’s money makes you more compassionate or effective than the rest of society; 4) Government “compassion” usually gets diverted toward vote-buying and programs that perpetuate the very problems it was supposed to remedy. The news brings daily reminders that there’s no shortage of “harshness” in government—as well as greed, waste, fraud, and inefficiency.

The next time you hear the word “compassion,” probe the person invoking it to find out if he really knows what he’s talking about—or at least to determine if he is compassionate with his own resources.

Lawrence W. Reed
President
Foundation for Economic Education

Summary

  • “Compassion” isn’t simply giving something away, especially if what you’re giving wasn’t yours in the first place.
  • True compassion means getting personally involved.
  • Instinctively, when we want to help others with our own time and resources, we overwhelmingly tend to do so through donations of time and money to private agencies, not to public ones.
  • The marketplace, where self-interest is a powerful motivator for the creation of wealth, is therefore the primary source for whatever wealth anybody has to give away.

For further information, see:

“The Politics of Compassion” by William B. Irvine

“Presidents and Precedents” by Lawrence W. Reed

For the Least of These: A Biblical Answer to Poverty, edited by Anne Bradley and Art Lindsley

“Book Review: The Tragedy of American Compassion by Marvin Olasky” as reviewed by Daniel Bazikian

larry reed new thumbABOUT 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. Prior to becoming FEE’s president, he served for 20 years as president of the Mackinac Center for Public Policy in Midland, Michigan. He also taught economics full-time from 1977 to 1984 at Northwood University in Michigan and chaired its department of economics from 1982 to 1984.

EDITORS NOTE: Earlier versions of this essay have appeared in FEE publications under the title, “What Is Real Compassion?” The featured image is courtesy of FEE and Shutterstock.

Two Blockbuster IRS Annoucements

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Yesterday, in a blockbuster announcement, Thomas Kane, Deputy Assistant Chief Counsel for the IRS, wrote in a sworn lawsuit declaration that former IRS senior manager Lois Lerner’s now infamous BlackBerry was “removed or wiped clean of any sensitive or proprietary information and removed as scrap for disposal in June 2012.”

The magnitude of lies, deceit and corruption is incredible isn’t it? But that’s how it is when an out-of-control bureaucracy does the political bidding of Congress.

Thankfully, the FairTax® will eliminate the IRS and replace the income tax code with a simple and fair national sales tax. For the first time in 200 years, the American people will have independence from oppressive income taxation.

Much like when Gandhi sought independence for India and Pakistan and when asked about his non-violent protest in support of that goal he said, “First they ignore you, then they laugh at you, then they fight you, then you win.”

For years, Washington’s elites have ignored, laughed and even fought the FairTax Plan. But as the IRS targeting investigation has unfolded, the laughing has all but stopped and the FairTax is being talked about more and more as a viable alternative to the current tax code.

More importantly, “experts” are openly discussing it as the only tax reform plan that can eliminate a completely corrupt and out-of-control IRS. 

Meanwhile, during this election year, most members of Congress continue to operate with their usual level of arrogance; acting like they own their elected office. Yet, make no mistake; they secretly fear being ousted in any primary election when their electorate finally gets smart. Just ask former Majority Leader Eric Cantor.

The ouster numbers, however, are not currently in favor of We the People.

As the Washington Post stated in June, “Overall, voter turnout among the 25 states that have held primaries is down 18 percent from the 2010 election, according a study by the Center for the Study of the American Electorate. There were almost 123 million age-eligible voters in these primary states, but only about 18 million of them voted.” With an average of 15% of the eligible voters turning out in primary elections, an average of 40,000 voters decided the primary election.

A new initiative in the FairTax campaign aims to change that dynamic. 

We know that Members are most influenced by groups that have large numbers of paying members in their districts. Imagine the influence on just one Congressional district if AFFT had 3,000 paying members who could influence 1, 5, or 10 voters. Now we have their attention!

As a 501(c)(4), AFFT cannot directly participate in political campaigns, but we can let our supporters know if a candidate supports the FairTax Plan. And, those supporters can take that knowledge to the election booth.

Today, AFFT is announcing a new AFFT membership drive designed to increase our sphere of influence in Washington and accelerate passage of the FairTax. 

Each of you is being asked to become a paying member of AFFT. Annual membership plans begin at $5.00 and best of all, your membership payment will be divided equally between AFFT and your state FairTax organization!

Your membership will help fund greater efforts at both the local and national levels. And, in exchange for your paid membership, you will receive a credit in the FairTax.org store equal to 10% of your paid membership.

And here’s how you can multiply your membership impact and AFFT’s ability to make Congress listen. Think of 5 or 10 family members, employees or friends and sponsor them for AFFT membership! Please make sure you let these individuals know in advance that you would like to sponsor their membership so they do not hit “unsubscribe” or “spam” when we begin providing them with information on the FairTax Plan.

You will get store credit, your state will still receive their share of your membership and you will have magnified your impact!

Napoleon Hill said, “You must get involved to have an impact.”

Don’t delay – go to FairTax.org and click on “Become a Member” today.

RELATED ARTICLE: Campaigning Against Tax Inequality

Not Just the VA: Another example of government failure in healthcare by Terree P. Summer

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Jay Littlewolf, a 54-year-old man, said inadequate healthcare at the government clinic compounded his problems with a diabetic ulcer on his right foot. He said that at one point he was told the remedy was to cut off his toes. Instead, he sought private medical treatment in Billings, Montana. “I don’t like those comments when the podiatrist says he just wants to cut your toes off,” Littlewolf said. “I know there are alternatives. Common sense says that.” To date, Jay has spent $3,000 out of pocket and expects his total bill to exceed $20,000. He wants to be reimbursed—and pay the balance of the bill—but the government agency has refused.

“We are trained and born not to challenge the system,” he said. “I’m not trying to challenge the system. I just want my bills paid. I wanted to save my toes, my foot, my leg, my life. All I want to do is mow my darn lawn.”

Littlewolf’s story is reminiscent of the stories of neglect and incompetency at the U.S. Department of Veterans Affairs (VA), the agency charged with caring for American veterans. Last April, news broke that the VA had serious problems. They came to light in its Phoenix  facility, where more than 40 veterans died while waiting for care. An internal audit released June 9, 2014, revealed that more than 120,000 veterans nationwide were left waiting or never got care and that pressures were placed on schedulers to use unofficial lists or engage in inappropriate practices to make waiting times appear more favorable. On June 11, 2014, the Federal Bureau of Investigation opened a criminal investigation of the VA.

Littlewolf, however, isn’t a veteran, and he was not dealing with the VA. Jay is a Native American and a member of the Northern Cheyenne reservation in Montana. He’s talking about the Indian Health Service (IHS), another federal government-operated healthcare system. When the scandal broke about the VA, the media, pundits, and politicians quickly concluded that the remedy for the VA’s ills was reform: more funding, regulation, and accountability. But the occurrence of the same problems at the IHS suggests that these sorts of problems may be endemic to government-run systems. Unfortunately, few are stepping up to recommend a more permanent fix than to enact reforms to the existing systems. What is needed is the privatization of healthcare services for those who suffer under government-controlled programs.

The IHS is familiar to me, as my grandfather was an IHS physician in Arizona. There are 22 tribes in my home state, and growing up there, I saw the issues facing Native Americans up close. The IHS has problems with long waits, inferior care, rationing, and lack of access—just as with the VA and with nationalized healthcare systems abroad. And, like the VA, when healthcare is under government control, it becomes inefficient and ineffective. Just ask Littlewolf.

In 2004, a report of the U.S. Commission on Civil Rights unsurprisingly blamed the substandard care in the IHS on the usual culprits: lack of funding, hiring the wrong people, retention and recruiting of qualified healthcare providers, and maintenance of aging facilities. As usual, the report didn’t point to the real problem: the program itself.

As with all government programs, inevitably most of the funding goes to pay bureaucrats and administrators, leaving little money for medical staff salaries and treatment. Low salaries contribute to unfilled vacancies, poor retention, and low morale among staff, causing waiting lists and inferior treatment for patients. The IHS has job vacancy rates for healthcare professionals ranging from 12 percent to 32 percent.

Bureaucrats cover up their mistakes with phony documents, like those found in the VA scandal, showing that patients are being promptly treated. Ultimately, supporters of government control lament that if only the right people could be found to run the program, everything would be fine.

In order to justify their salaries, government administrators promulgate endless regulations, bogging down the treatment process with red tape. Additionally, the IHS has a bloated bureaucracy, with over 14,000 employees, including eight assistant surgeon generals, 439 “Director Grade” bureaucrats, and 601 “Senior Grade” bureaucrats. Yet, in 2005, per capita federal spending on patients by the IHS was only $2,130—half the amount spent on federal prisoners’ care.

In a move in the right direction, in 2008, U.S. Senator Tom Coburn (R-OK), introduced an amendment to the Indian Health Care Improvement Act that would allow tribal members to choose from various healthcare coverage options, including the ability to purchase private health insurance. According to Senator Coburn, the IHS currently rations services on the basis of whether a particular service will save a “life or limb.” Unfortunately, but not surprisingly, Coburn’s amendment was voted down, 28 to 67.

While Coburn’s attempt at reform was laudable—and would have, at a minimum, provided an option for Native Americans seeking better health care—it didn’t really address the root of the problem. The only lasting solution that would ensure improvements in care and health outcomes would be the privatization of services to Native American tribes. I’m not confident that such a change is likely in the near future—for the IHS or for the VA. And, unfortunately, the problems that have plagued the VA and the IHS are harbingers of a future under our increasingly socialized healthcare system.

ABOUT TERREE P. SUMMER

Terree P. Summer is an economist and author specializing in healthcare and the federal budget. She is the author of What Has Government Done to Our Health Care? published by the Cato Institute (1992).

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.

What Gave Bitcoin Its Value? by Jeffrey A. Tucker

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Those who use the work of Mises to challenge bitcoin should think again.

Many people who have never used bitcoin look at it with confusion. Why does this magic Internet money have any value at all? It’s just some computer thing that someone made up.

Consider the criticism of goldbugs, who have, for decades, pushed the idea that sound money must be backed by something real, hard, and independently valuable.

Bitcoin doesn’t qualify, right?

Maybe it does. Let’s take a closer look.

Bitcoin first emerged as a possible competitor to national, government-managed money nearly six years ago. Satoshi Nakamoto’s white paper was released October 31, 2008. The structure and language of this paper sent the message: this currency is for computer technicians, not economists nor political pundits. The paper’s circulation was limited; novices who read it were mystified.

But the lack of interest didn’t stop history from moving forward. Two months later, those who were paying attention saw the emergence of the “Genesis Block,” the first group of bitcoins generated through Nakamoto’s concept of a distributed ledger that lived on any computer node in the world that wanted to host it.

Here we are six years later and a single bitcoin trades at $500 and has been as high as $1,200 per coin.The currency is accepted by many thousands of institutions, both online and offline. Its payment system is very popular in poor countries without vast banking infrastructures but also in developed countries. And major institutions—including the Federal Reserve, the OECD, the World Bank, and major investment houses—are paying respectful attention.

Enthusiasts, who are found in every country, say that its exchange value will soar in the future because its supply is strictly limited and it provides a vastly superior system to government money. Bitcoin is transferred between individuals without a third party. It is nearly costless to exchange. It has a predictable supply. It is durable, fungible, and divisible: all crucial features of money. It creates a monetary system that doesn’t depend on trust and identity, much less on central banks and government. It is a new system for the digital age.

Hard lessons for hard money

To those educated in the “hard money” tradition, the whole idea has been a serious challenge. Speaking for myself, I had been reading about bitcoin for two years before I came anywhere close to understanding it. There was just something about the whole idea that bugged me. You can’t make money out of nothing, much less out of computer code. Why does it have value then? There must be something amiss. This is not how we expected money to be reformed.

There’s the problem: our expectations. We should have been paying closer attention to Ludwig von Mises’s theory of money’s origins—not to what we think he wrote, but to what he actually did write.

In 1912, Mises released The Theory of Money and Credit. It was a huge hit in Europe when it came out in German, and it was translated into English. While covering every aspect of money, his core contribution was in tracing the value and price of money—and not just money itself—to its origins. That is, he explained how money gets its price in terms of the goods and services it obtains. He later called this process the “regression theorem,” and as it turns out, bitcoin satisfies every condition of the theorem.

Mises’s teacher, Carl Menger, demonstrated that money itself originates from the market—not from the State and not from social contract. It emerges gradually as monetary entrepreneurs seek out an ideal form of commodity for indirect exchange. Instead of merely bartering with each other, people acquire a good not to consume, but to trade. That good becomes money, the most marketable commodity.

But Mises added that the value of money traces backward in time to its value as a bartered commodity. Mises said that this is the only way money can have value.

The theory of the value of money as such can trace back the objective exchange value of money only to that point where it ceases to be the value of money and becomes merely the value of a commodity…. If in this way we continually go farther and farther back we must eventually arrive at a point where we no longer find any component in the objective exchange value of money that arises from valuations based on the function of money as a common medium of exchange; where the value of money is nothing other than the value of an object that is useful in some other way than as money…. Before it was usual to acquire goods in the market, not for personal consumption, but simply in order to exchange them again for the goods that were really wanted, each individual commodity was only accredited with that value given by the subjective valuations based on its direct utility.

Mises’s explanation solved a major problem that had long mystified economists. It is a narrative of conjectural history, and yet it makes perfect sense. Would salt have become money had it otherwise been completely useless? Would beaver pelts have obtained monetary value had they not been useful for clothing? Would silver or gold have had money value if they had no value as commodities first? The answer in all cases of monetary history is clearly no. The initial value of money, before it becomes widely traded as money, originates in its direct utility. It’s an explanation that is demonstrated through historical reconstruction. That’s Mises’s regression theorem.

Bitcoin’s use value

At first glance, bitcoin would seem to be an exception. You can’t use a bitcoin for anything other than money. It can’t be worn as jewelry. You can’t make a machine out of it. You can’t wear it, eat it, or even decorate with it. Its value is only realized as a unit that facilitates indirect exchange. And yet, bitcoin already is money. It’s used every day. You can see the exchanges in real time. It’s not a myth. It’s the real deal.

It might seem like we have to choose. Is Mises wrong? Maybe we have to toss out his whole theory. Or maybe his point was purely historical and doesn’t apply in the future of a digital age. Or maybe his regression theorem is proof that bitcoin is just an empty mania with no staying power, because it can’t be reduced to its value as a useful commodity.

And yet, you don’t have to resort to complicated monetary theory in order to understand the sense of alarm surrounding bitcoin. Many people, as I did, just have a feeling of uneasiness about a money that has no basis in anything physical. Sure, you can print out a bitcoin on a piece of paper, but having a paper with a QR code or a public key is not enough to relieve that sense of unease.

How can we resolve this problem? In my own mind, I toyed with the issue for more than a year. It puzzled me. I wondered if Mises’s insight applied only in a predigital age. I followed the speculations online that the value of bitcoin would be zero but for the national currencies into which is converted. Perhaps the demand for bitcoin overcame the demands of Mises’s scenario because of a desperate need for something other than the dollar.

As time has passed—and I read the work of Konrad Graf, Peter Surda, and Daniel Krawisz—finally the resolution came. I will cut to the chase and reveal it: Bitcoin is both a payment system and a money. The payment system is the source of value, while the accounting unit merely expresses that value in terms of price. The unity of money and payment is its most unusual feature, and the one that most commentators have had trouble wrapping their heads around.

We are all used to thinking of currency as separate from payment systems. This thinking is a reflection of the technological limitations of history. There is the dollar and there are credit cards. There is the euro and there is PayPal. There is the yen and there are wire services. In each case, money transfer relies on third-party service providers. In order to use them, you need to establish what is called a “trust relationship” with them, which is to say that the institution arranging the deal has to believe that you are going to pay.

This wedge between money and payment has always been with us, except for the case of physical proximity. If I give you a dollar for your pizza slice, there is no third party. But payment systems, third parties, and trust relationships become necessary once you leave geographic proximity. That’s when companies like Visa and institutions like banks become indispensable. They are the application that makes the monetary software do what you want it to do.

The hitch is that payment systems we have today are not available to just anyone. In fact, a vast majority of humanity does not have access to such tools, which is a major reason for poverty in the world. The financially disenfranchised are confined to only local trade and cannot extend their trading relationships with the world.

A major, if not a primary, purpose of developing Bitcoin was to solve this problem. The protocol set out to weave together the currency feature with a payment system. The two are utterly interlinked in the structure of the code itself. This connection is what makes bitcoin different from any existing national currency, and, really, any currency in history.

Let Nakomoto speak from the introductory abstract to his white paper. Observe how central the payment system is to the monetary system he created:

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they’ll generate the longest chain and outpace attackers. The network itself requires minimal structure. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone.

What’s very striking about this paragraph is that there is not even one mention of the currency unit itself. There is only the mention of the problem of double-spending (which is to say, the problem of inflationary money creation). The innovation here, even according to the words of its inventor, is the payment network, not the coin. The coin or digital unit only expresses the value of the network. It is an accounting tool that absorbs and carries the value of the network through time and space.

This network is called the blockchain. It’s a ledger that lives in the digital cloud, a distributed network, and it can be observed in operation by anyone at any time. It is carefully monitored by all users. It allows the transference of secure and non-repeatable bits of information from one person to any other person anywhere in the world, and these information bits are secured by a digital form of property title. This is what Satoshi called “digital signatures.” His invention of the cloud-based ledger allows property rights to be verified without having to depend on some third-party trust agency.

The blockchain solved what has come to be known as the Byzantine generals’ problem. This is the problem of coordinating action over a large geographic range in the presence of potentially malicious actors. Because generals separated by space have to rely on messengers and this reliance takes time and trust, no general can be absolutely sure that the other general has received and confirmed the message, much less its accuracy.

Putting a ledger, to which everyone has access, on the Internet overcomes this problem. The ledger records the amounts, the times, and the public addresses of every transaction. The information is shared across the globe and always gets updated. The ledger guarantees the integrity of the system and allows the currency unit to become a digital form of property with a title.

Once you understand this, you can see that the value proposition of bitcoin is bound up with its attached payment network. Here is where you find the use value to which Mises refers. It is not embedded in the currency unit but rather in the brilliant and innovative payment system on which bitcoin lives. If it were possible for the blockchain to be somehow separated from bitcoin (and, really, this is not possible), the value of the currency would instantly fall to zero.

Proof of concept

Now, to further understand how Mises’s theory fits with bitcoin, you have to understand one other point concerning the history of the cryptocurrency. On the day of its release (January 9, 2009), the value of bitcoin was exactly zero. And so it remained for 10 months after its release. All the while, transactions were taking place, but it had no posted value above zero for this entire time.

The first posted price of bitcoin appeared on October 5, 2009. On this exchange, $1 equaled 1,309.03 Bitcoin (which many considered overpriced at the time). In other words, the first valuation of bitcoin was little more than one-tenth of a penny. Yes, if you had bought $100 worth of bitcoin in those days, and not sold them in some panic, you would be a half-billionaire today.

So here is the question: What happened between January 9 and October 5, 2009, to cause bitcoin to obtain a market value? The answer is that traders, enthusiasts, entrepreneurs, and others were trying out the blockchain. They wanted to know if it worked. Did it transfer the units without double-spending? Did a system that depended on voluntary CPU power actually suffice to verify and confirm transactions? Do the rewarded bitcoins land in the right spot as payment for verification services? Most of all, did this new system actually work to do the seemingly impossible—that is, to move secure bits of title-based information through geographic space, not by using on some third party but rather peer-to-peer?

It took 10 months to build confidence. It took another 18 months before bitcoin reached parity with the U.S. dollar. This history is essential to understand, especially if you are relying on a theory of money’s origins that speculates about the pre-history of money, as Mises’s regression theorem does. Bitcoin was not always a money with value. It was once a pure accounting unit attached to a ledger. This ledger is what obtained what Mises called “use value.” All conditions of the theorem are thereby satisfied.

Final accounting

To review, if anyone says that bitcoin is based on nothing but thin air, that it cannot be a money because it has no real history as a genuine commodity, and whether the person saying this is a novice or a highly trained economist, you need to bring up two central points. One, bitcoin is not a stand-alone currency but a unit of accounting attached to an innovative payment network. Two, this network and therefore bitcoin only obtained its market value through real-time testing in a market environment.

In other words, once you account for the razzle-dazzle technical features, bitcoin emerged exactly like every other currency, from salt to gold, did. People found the payment system useful, and the attached accounting was portable, divisible, fungible, durable, and scarce.

Money was born. This money has all the best features of money from history but adds a weightless and spaceless payment network that enables the entire world to trade without having to rely on third parties.

But notice something extremely important here. The blockchain is not only about money. It is about any information transfers that require security, confirmations, and total assurance of authenticity. This pertains to contracts and transactions of all sorts, all performed peer-to-peer. Think of a world without third parties, including the most dangerous third party ever conceived of by man: the State itself. Imagine that future and you begin to grasp the fullness of the implications of our future.

Mises would be amazed and surprised at bitcoin. But he might also feel a sense of pride that his monetary theory of more than 100 years ago has been confirmed and given new life in the 21st century.

20121129_JeffreyTuckeravatarABOUT JEFFREY A. TUCKER

Jeffrey Tucker is a distinguished fellow at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. He speaks at FEE summer seminars and other events.

‘The Chinafication of America’

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New York Times: ‘U.S. seeking climate deal that would skirt Senate’: ‘Under the Constitution, a president may enter into a legally binding treaty only if it is approved by a two-thirds majority of the Senate. To sidestep that requirement, President Obama’s climate negotiators are devising what they call a “politically binding” deal that would “name and shame” countries into cutting their emissions…American negotiators are instead homing in on a hybrid agreement — a proposal to blend legally binding conditions from an existing 1992 treaty with new voluntary pledges. The mix would create a deal that would update the treaty, and thus, negotiators say, not require a new vote of ratification.’

Morano: ‘Obama is taking a page from China’s government and is seeking to bypass democracy’s ‘very detrimental’ hurdles and just impose a new UN treaty on Americans’ By:  – Climate Depot

August 27, 2014 12:19 PM

Marc Morano statement on Obama bypassing Senate ratification of UN climate ‘deal’. Morano is publisher of Climate Depot, former staff of U.S. Senate Environment  & Public Works Committee and producing and writing the new global warming documentary ‘Climate Hustle.’

Morano: “This is the Chinafication of America. Many global warming activists and the UN have previously praised China’s ability to impose climate and energy regulations without the messiness of democracy.

See: < href=”http://climatedepot.us1.list-manage.com/track/click?u=87b74a936c723115dfa298cf3&id=d8f230ce9e&e=d3a947e3d3″ target=”_blank”>NYT’s Friedman lauds China’s eco-policies: ‘One party can just impose politically difficult but critically important policies needed to move a society forward’

UN Climate Chief Christiana Figueres laments U.S. democracy is ‘very detrimental’ in war on global warming — Lauds one-party ruled China for ‘doing it right’ on climate change

President Obama is taking a page from China’s government and is seeking to bypass democracy’s ‘very detrimental’ hurdles and just impose a new UN treaty on Americans. The Administration with both its EPA climate regulations (no climate impact)and the UN treaty has essentially declared ‘We don’t need no stinkin legislature.’

Sec. of State John Kerry is pushing the hardest for a UN agreement. See: Flashback NYT: John Kerry ‘hopes to use his position as secretary of state to achieve a legacy on global warming that has long eluded him’

We have known for years that the Obama administration was seeking no Senate ratification. See: Flashback 2009: Chris Horner: Kyoto II as Congressional-Executive Agreement: The Emerging Strategy?

The American people will now face an increasingly EPA centrally planned domestic energy economy and one now dictated from the United Nations without the Senate’s consent. The U.S. is currently heading to an energy deprived future. See: Winter blackouts could hit Midwest, Mid-Atlantic, regional grid operator warns

And we may end up like our European counterparts: See: Flashback 2011: We’re All North Koreans Now: ‘Era of Constant Electricity at Home is Ending, says UK power chief’ — ‘Families would have to get used to only using power when it was available’

Of course, eliminating plentiful energy is what the Obama administration officials have stated is their goal. See: Flashback 1975: John Holdren Says Real Threat to USA Is Cheap Energy: ‘The U.S.is threatened far more by the hazards of too much energy, too soon, than by the hazards of too little energy, too late.’

All of this comes at a time when the evidence continues to show that man-made global warming claims are failing. Global temperatures have flat-lined for nearly 18 years (with at least 38 excuses offered).

Sea level rise has decelerated. Arctic summer sea ice may hit a decade high in 2014. (Sorry John Holdren, looks like your Arctic warnings about missing winter sea ice is still far off): Antarctica sea ice is at record expansion. Extreme weather is at or near historic lows, declining trends or no trends in tornadoes, wild fires, droughts and floods.

But despite all of this, the UN IPCC’s new report will claim its worse than we thought – by continuing to make scarier and scarier predictions of 50 to 100 years from now. See: Geologist Rebuts Media-Hyped Draft Of New UN IPCC Report As ‘Nonsense Totally Contrary To Real Evidence’

When current reality fails to alarm, just make scarier and scarier predictions and claim its worse than we thought because our predictions are now more alarming.”

End Morano statement.

Climatologist Dr. Pat Michaels of Cato Institute: The President simply doesn’t care about the legislative branch when it comes to climate regulations.  He feels that the Supreme Court empowered him in Mass. v. EPA.  He lost the House over cap and trade in 2010 so what does it matter if the voters take it out on the Senate in 2014?  Besides, the electoral demographics in the Senate look as bad for the Repos in 2016 as they do for the Demos this year.  So they will just be out for two years anyway.

If that’s all cold and calculating, it is.  Welcome to Washington, where, with regard to climate change, we have a King, unless (fat chance) someone with standing can convince the courts to reign him in.” Flashback 2009: Chris Horner: Kyoto II as Congressional-Executive Agreement: The Emerging Strategy?Flashback: CEI’s Myron Ebell: ‘In the past, rulers who act as if the law does not apply to them were called tyrants’ – Obama’s UN climate agreement doesn’t need congressional approvalFlashback Feb. 2014: Obama’s UN climate agreement doesn’t need congressional approval

Related Links:

Flashback: ‘John Kerry is steering the Obama administration’s international focus to embarrassingly bad man-made climate fears’

Flashback NYT: John Kerry ‘hopes to use his position as secretary of state to achieve a legacy on global warming that has long eluded him’

Study: Global climate deal won’t stop dangerous warming: ‘Climate negotiators may need to reframe their work the 2 degree goal just doesn’t appear to be achievable, no matter how strong the progress made in Paris next year,’ said fellow Point Carbon analyst Ashley Lawson.

Kyoto II climate treaty coming in 2015 — And taxpayers are paying environmental groups to design it!

Coral Davenport and Christiana Figueres assure us ‘there’s no such thing as the U.N. imposing any regulation’ ; UN officials are just ‘working toward forging a historic, legally binding global-warming treaty’

U.S. Commits to New UN Climate Treaty! U.S. signs onto Brussels G-7 Summit Declaration: ‘We affirm our strong determination to adopt in 2015 a global agreement – a new protocol’

Developing Nations Demand $$$ to support new UN climate treaty: ‘We will want more than the $100bn to agree to a new Paris protocol’

Sec. Kerry challenges climate skeptics at House hearing: If skeptics are wrong and nothing is done, ‘life on the Earth can literally end’

Climate Treaties Like Kyoto Aren’t Coming Back: Ex-UN Climate Chief – ‘Pacts like the Kyoto Protocol, which the U.S. Senate blocked by a 95-0 vote in 1997, are probably a thing of the past’

Follow  on Twitter at @ClimateDepot

America, Our Debt-Ridden Nation

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Let’s look at just some of the latest news about the U.S. economy:

  1. According to the Treasury Department’s Bureau of Fiscal Services, the federal government paid $2,007,358,200,000—over $2 trillion—in benefits and entitlements in the 2013 fiscal year, October 1, 2012 to September 30, 2013. Most of the benefits, 69.7% came from non-means tested government programs that provide them to recipients who qualify regardless of income. That would include Medicare, Social Security, unemployment compensation, veteran’s compensation, and railroad retirement, to name a few.
  2. The total federal government spending in 2013 totaled $3,454,253,000,000—over $3.4 trillion—encompassing defense, highway and transportation costs, public education, immigration services, and government worker salaries, to name a few.
  3. An astonishing amount of that spending constitutes wasted taxpayer money. In July the Government Accountability Office (CAO) testified before Congress that federal agencies made more than $100 billion in improper payments in 2013. That is an amount comparable to the combined total budgets of the Coast Guard, U.S. Immigration and Customs Enforcement agency, Border Patrol, Secret Service, and the Federal Emergency Agency, et cetera. Improper payments result when people collect money from government programs for which they are ineligible.
  4. By August, the total U.S. federal debt had increased to more than $7 trillion during the five and a half years since Barack Obama has been President. That is more than the debt increased under all U.S. Presidents from George Washington through Bill Clinton—combined! More debt than was accumulated in the first 227 years from 1776 through 2003.
  5. During the time President Obama has been in office the number of unemployed reached 37.2%, a 36-year high for those 16 or older who do not have a job and are not actively seeking one. From December 2013 through May of this year, the labor participation rate had been at 62.8%. The last time the labor participation rate was that low was February 1978 when Jimmy Carter was President.
  6. As the nation sank deeper into debt by the end of 2012 there were 109,631,000 Americans living in households that were receiving one or more federally funded “means-tested programs”, more generally referred to as welfare. Combined with those receiving non-means-tested benefits and it added up to 49.5% of the population.

Money BombIt is always tempting to blame everything on the President and, despite the usual rebound from a recession that has occurred in the past, it has not occurred during his first term, nor into his second at this point. In fact, the latest data reveals that the U.S. economy shrank at a 2.9% annual rate during the first quarter of 2014. Its long-run average rate of growth has been 3.3%, but the highest since Obama took office was 2.8%.

According to the World Bank, in 2013 the U.S. Gross Domestic Product, the value of its goods and services, was $16,800,000,000,000. The federal, state and governments took their share via taxation on income and/or property. The rest was saved or spent by those either holding a job or receiving government benefits; very nearly half of the population old enough to be employed if there were jobs for them.

The problem that affects all of us is the imbalance of the U.S. budget where more money is going out than coming in. The difference is deemed the “deficit.” In order to pay bills, Congress has to agree to raise the limit on how much the nation can borrow.

Nick Dranias, the constitutional policy director for the Goldwater Institute, has come up with a proposal, “The Compact for a Balanced Budget”, and it was been published by The Heartland Institute, a free market think tank, in July.

As Dranias points out, “The U.S. gross federal debt is approaching $18 trillion. That figure is more than twice what was owed ($8.6 trillion) in 2006, when Barack Obama was a junior U.S. Senator from Illinois and opposed lifting the federal debt limit.” It represents more than $150,000 per taxpayer.

“What if states could advance and ratify a powerful federal balanced budget amendment in only twelve months, asks Dranias. His proposal is “a new approach to state-originated amendments under Article V of the U.S. Constitution.

Two states, Georgia and Alaska, are expected to establish a Balanced Budget Commission, an interstate agency dedicated to organizing a convention—before 2014 ends—to propose an amendment to achieve a balanced budget. The amendment would put “an initially fixed limit on the amount of federal debt.” It would ensure Washington cannot spend more than tax revenue brought in at any point in time, with the sole exception of borrowing under the fixed debt limit. It would force Washington to reduce spending long before borrowing reaches its debt limit, preventing any default on obligations; something threatening many other nations as well.

Suffice to say, the proposed amendment involves some complex elements and, if the Compact does not receive sufficient support from many more states than just the two that have signed on, it won’t see the light of day.

What the rest of us understand, however, is that federal spending is out of control at the same time as the amount of money it takes in is more than what it “redistributes.” Add in a sluggish economy, not growing at its usual rate, and you have a recipe for a lot of trouble ahead.

Republicans are usually credited with being more financially prudent. If true, we need to elect a Congress controlled by the GOP in November and a Republican President in 2016. If we don’t, all bets are off.

© Alan Caruba, 2014

CLICHES OF PROGRESSIVISM #19 – “Big Government Is a Check on Big Business”

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A myth runs through most of America today, and it goes like this: Big business hates government and yearns for an unregulated market. But the reality is the opposite: Big government can be highly profitable for big business.

Many regulations restrict competition that would otherwise challenge existing firms. At the same time, government institutions—many created during the New Deal—funnel money to the largest corporations.

When government regulates X industry, it imposes high costs that hurt smaller firms and reduce competition. Imagine that the Department of Energy imposes a new rule that dishwashers must be more energy efficient. Coming up with designs, retrofitting factories to produce these energy-efficient models, and navigating the forms and licenses around this rule might cost a dishwasher-producing firm thousands of dollars. An industry giant, with more revenue and sizeable profit margins, can absorb this cost. A small dishwasher factory that’s only a year or two old, with little revenue and less profit, cannot. The latter would have to shut down. That means less competition for the industry giant, enabling it to grow even bigger and seize even more market share.

Barriers to entry, such as expensive licenses, also cripple start-ups and reduce competition. The Progressive New Republic speaks favorably of how Dwolla, an Iowa-based start-up that processes payments and competes with credit card agencies, had to pay $200,000 for a license to operate. Rather than hire employees or build a better product to compete with its entrenched competition, Dwolla was forced to spend its first $200,000 on a permission slip. Dwolla could afford it; but how many less-well-funded competitors were forced from the market? How many were deterred from even starting a payment-processing business by this six-figure barrier to entry?

For big businesses, which often sacrifice agility for size, smaller competitors are a major threat. By limiting smaller competition, government helps the industry giants at the expense of everyone else. Barriers to entry can kill the next innovative firm before it can become a threat to its giant competition. When this happens, we don’t even know it: The killed-before-it-can-live company is a classic example of the “unseen” costs of regulation.

While regulations minimize competition, government entities subsidize big business. The Export-Import Bank, established in 1934 as part of the New Deal, exists to subsidize exports by U.S.-based firms. The primary beneficiaries? Large corporations. From 2009 to 2014, for instance, the Ex-Im Bank financed over one-quarter of Boeing’s planes. Farm bills, a key element of the New Deal that still exists today, subsidize huge farms at the expense of smaller ones. The program uses a variety of methods, from crop insurance to direct payments, to subsidize farmers. The program is ostensibly designed to protect small farmers. But 75 percent of total subsidies—$126 billion from 2004 to 2013—go to the biggest 10 percent of farming companies. The program taxes consumers to funnel money to large farms.

Nor are these programs unique. National Journalism Center graduate Tim Carney argues, “The history of big business is one of cooperation with big government.” In the time of Teddy Roosevelt, big meat packers lobbied for federal meat inspection, knowing that the costs around compliance would crush their smaller competitors. New Deal legislation was only passed with help from the national Chamber of Commerce and the American Bankers Association. The Marshall Plan, which subsidized the sale of billions of dollars of goods to Europe, was implemented by a committee of businessmen. President Johnson created the Transportation Department in 1966, overcoming resistance from shipping interests by agreeing to exempt them from the new rules. Costly regulations for thee, but not for me.

If Progressives want to see what free enterprise looks like, they need only look at the Internet. For the past 20 years, it’s been largely unregulated. The result? Start-ups erupt and die every year. New competitors like Facebook bring down existing giants like MySpace and are in turn challenged by a wealth of social media competitors. Yahoo was the Internet search king until two college kids founded Google. Google has been recently accused of monopoly status, but competitors like DuckDuckGo spring up every day.

Let’s imagine if the Internet—a playground of creative destruction—had been as subject to big government as brick and mortar businesses have been. Yahoo would have been subsidized. Facebook would have had to pay six figures to get a licensing fee, crushing college-kid Zuckerberg before he got started and preserving MySpace’s market dominance. Businesses that learned to play the lobbying game would have been allowed to write regulations to crush their competitors.

For those who doubt, the proof of business’s collusion with big government is in the pudding. In 2014, a surprising number of libertarian-leaning men and women are in Congress. How has big business responded? K Street has spent millions of dollars working to replace laissez-faire advocates with those who are establishment-friendly. Sadly, cronyist businesses are fighting to keep free market advocates out of power.

A final note: I have criticized Progressives here, but the institution of big government, which enables businesses to hire lobbyists to write regulations or give themselves a subsidy, is the primary problem. The bigger government grows, the more powerful a tool it becomes for businesses prone to use it for private advantage. That’s not capitalism; it’s what one economist properly labeled “crapitalism.”

Julian Adorney
Economic Historian, Entrepreneur, Fiction Writer

Summary

  • Big Government and Big Business often play well together, at the expense of start-ups, little guys, and consumers.
  • Artificial, politically instigated barriers to entry make markets less competitive and dynamic, and make established firms more monopolistic.
  • A free market (true capitalism, not its adulterated “crapitalism” version) maximizes competition and, therefore, service to the consumer.

For further information, see:

“Of Meat and Myth” by Lawrence W. Reed
“Atlas Shrugged and the Corporate State” by Sheldon Richman
“Ending Corporate Welfare As We Know It” by Lawrence W. Reed
“The Rise of Big Business and the Growth of Government” by Robert Higgs
“Theodore Roosevelt: Big Government Man” by Jim Powell

ABOUT JULIAN ADORNEY

Julian Adorney is an economic historian, entrepreneur, and fiction writer. He writes for the Ludwig von Mises Institute and other websites. You can find his collected work at adorney.liberty.me.

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.

The Best Debt in the World by Emma Elliot Freire

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Hard to believe, but Britain’s student loan problem is worse than the Yanks’.

In late 2010, tens of thousands of British students took to the streets of London. They protested government plans to cut direct funding of higher education and raise the cap on tuition from £3,290 ($5,500) to £9,000 ($15,000). Some of them occupied government buildings and clashed violently with police. Hundreds were arrested.

Maybe they shouldn’t have gotten so worked up. It’s now becoming clear that most of them won’t repay their loans in full. Some of them will even be getting their education for free.

The UK government’s student loan scheme is more generous than its American counterpart. Any British student who is accepted to a university is automatically entitled to a government loan for the entirety of their tuition. Most universities are charging £9,000 per year. British students can also get loans for their living costs, which range from £4,418 to £7,751 per year. The average student will graduate £44,000 ($74,000) in debt.

The core difference between the British and American systems lies in the terms of repayment. American students typically have to start repaying 6 months after they graduate. Opportunities for loan forgiveness are extremely limited, and loans cannot be discharged via bankruptcy. By contrast, British students don’t have to start repaying until they are earning £21,000 ($36,000) per year. They must then pay 9 percent of their gross income as long as they stay above the threshold. Their outstanding balance is automatically forgiven 30 years after it became eligible for repayment. Also, the loans do not appear on their credit report. 

“The thing people worry about with debt is that they won’t be able to pay it back. The way this is structured means that is not a worry ever, and it doesn’t follow you around until your old age,” says Sam Bowman, Research Director at the Adam Smith Institute, a free-market think tank. 

Bowman finds it helpful to understand loan repayment as a tax. “You can either think of it as a graduate tax or it’s the best debt in the world,” he says. “It makes sense to think of it as a graduate tax, a specific kind of tax on a specific action that is designed to offset the cost of that action.”

Uncharted waters for repayment

The first students to take on the new, larger type of loans have yet to graduate, so it is hard to estimate what repayment rates are likely to be. However, the Institute for Fiscal Studies (IFS), an independent research center, is already projecting that 73 percent of students will not repay their loans in full. They believe the average amount written off will be around £30,000 ($50,500).

A report released in July by a committee of the British parliament reached similar conclusions. “By providing favourable terms and conditions on student loans, the Government loses around 45p [cents] on every £1 it loans out.” When the new policies were first announced in 2010, the government projected it would only lose 28p per £1 loaned out. The report notes that government loans to students are expected to total £330 billion by 2044. “We are concerned that Government is rapidly approaching a tipping point for the financial viability of the student loans system,” says the report.

By and large, students still think of themselves as having “real debt” for their education. “One valid criticism of the loan system is that students don’t realize how generous it is,” says Nick Hillman, director of the Higher Education Policy Institute. “Students think they’re paying for the entirety of their education when actually they’re not. Taxpayers are covering quite a lot of the cost.”

The IFS report notes that the lowest-earning 10 percent of graduates will only repay £3,879 (in 2014 prices). A survey earlier this year showed that 40 percent of graduates are still looking for a job 6 months after leaving university. If this trend continues, some graduates may never start earning £21,000.

A few savvy individuals are learning to work the system. British financial advisors encourage parents who could contribute to their child’s education to have their kid take out government loans instead. Martin Lewis, who runs the popular website moneysavingexpert.com, writes, “If a parent pays the £27,000 tuition fees upfront, and their child becomes a poet and never earns above £21,000, the whole £27,000 would have been wasted.”

The only people who can expect to repay their loans plus interest in full are the small group who take high-paying jobs soon after graduating and get regular pay increases for the next 30 years. These individuals are thinking hard about whether they need a degree. “The only income group that has gone to university less are the richest. That might be surprising, but what the debt does is it imposes some cost on people for going to university,” says Bowman. “So if they have other options, they take them. Maybe they could skip college and join their parent’s business or their parents can find them jobs.”

This is one immediate impact of the new loan scheme. There will undoubtedly be unintended consequences that may only become evident years or decades from now. For example, Britain may see an increase in the number of stay-at-home parents. Loan repayment is tied to an individual’s income. Spouse’s earnings are irrelevant. Child care is already very expensive. For some families, the extra 9 percent they would lose in loan repayments will be enough to push one parent out of paid employment.

Loans without borders

Loan repayments are collected by Her Majesty’s Revenue and Customs, the British equivalent of the IRS, via withholding from a person’s paycheck. This makes it fairly simple to collect money from anyone working for a British employer. Things become harder when a graduate leaves the country. 

“There is no way that the government can collect money from people who go abroad,” says Bowman. “There is a big incentive for them to stay away. Say you’re an English graduate and you go to America for a couple of years to work. If you have this debt waiting for you when you get home, there’s a big reason for you to stay abroad for as long as possible.”

The number of students who would actually permanently leave is probably very small. “It would be a much bigger problem than the student loan book if we were seeing Irish levels of emigration,” says Bowman. However, a determined few will be able to dodge repayment.

And then there’s the question of students who come to Britain from other European Union countries. Since 2006, EU law has required Britain to offer these students the same loan deals for tuition, though not for living costs. It is a tradition in British politics to blame problems that are largely homegrown on the widely-hated EU. As the issues with loan repayment have come to light, stories about EU students borrowing money and then “going to ground” have also been hitting the headlines.

This problem is still fairly small, since EU students have only been receiving loans since 2006. Hillman says that about half of EU students who study in Britain choose not to borrow or repay their loan in full before they leave the country. Many EU students enroll at British universities because they want to work in Britain later. Thus, they have a strong incentive to repay. However, data is now emerging that shows unpaid loans in the low millions. “The issue is less about what has happened to date but what might happen in the future because there aren’t many people yet who are liable to repay, but it’s growing all the time,” says Hillman. 

“If a French or Dutch person studies at a British university then goes home and gets a job, we can certainly chase them through the French or Dutch courts because they’ve signed a legal contract and they should repay,” Hillman says. “But the trouble is that it’s an incredibly expensive business. The person may owe £27,000, which is a lot of money, but chasing someone through the courts can easily cost that much.”

One way to address this problem would be an EU-wide agreement. “But there’s no real incentive for other European countries to do this because other European countries don’t use loans in the same way we do,” says Hillman. 

Relative improvement

Despite the problems, both Hillman and Bowman say the new system is an improvement over the way British higher education used to be funded. Tony Blair’s government only introduced tuition in 2004. “Before loans and fees came in, British taxpayers paid 100 percent of the cost of going to university. Now they don’t. But they still fund part of the loan cost,” says Hillman.

Bowman says it is important to remember the overall British context. “The alternative is not a kind of free market where you have everybody paying their own way and banks privately making loans to people. The alternative is going back to a situation where the government pays for everything, and that’s a disaster,” he says. “The political climate in the UK is very hostile to any kind of marketization of anything. That’s not going to change for a couple of years, at least until we’re growing rapidly, and we all feel rich and safe again.” 

Potential Solution

One interesting idea put forward by David Willetts, a Member of Parliament and former Minister of State for Universities, is to sell government student loans to universities, making them responsible for collecting repayment. This approach would address a problem that afflicts both American and British higher education: Universities collect tuition upfront and then have little incentive to ensure loans are repaid. 

Bowman supports the proposal. “Making universities responsible for whether people repay might make them more willing to turn people away if they’re not a great bet in terms of their future earning, and that might counteract some of the qualification inflation. Right now, you need a university degree for any job that isn’t blue collar manual labor.”

He believes Willetts’ idea is politically viable. “Britain has lots of middle-class people who think of themselves as being working-class. They feel like they’re fighting against the man when in reality they are the man. You could say to them that we don’t want people who haven’t gone to university picking up the bill in any way for people who have gone to university.” 

The only question is whether universities would go along with it. Right now, they have a very beneficial arrangement. 

Much will depend on how loan repayment rates develop in the next few years. Graduates will probably soon grasp that they have the best debt in the world. Maybe taxpayers will start to realize this debt isn’t such a good deal for them. 

ABOUT EMMA ELLIOTT FREIRE

Emma Elliott Freire is a freelance writer living in England. She has previously worked at the Mercatus Center, a multinational bank, and the European Parliament.

RELATED ARTICLE: Can You Pay Student Loans With a Credit Card?

EDITORS NOTE: This column with images is republished with permission. The featured image is courtesy of FEE and Shutterstock.

New York Federal Reserve: Higher Health Costs, More Part-Time Workers from Obamacare

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Obamacare puts employers in a bind, two New York Federal Reserve surveys show. Employers’ health care costs continue to rise, and the health care law is driving them to hire more part-time labor, CNBC reports:

The median respondent to the N.Y. Fed surveys expects health coverage costs to jump by 10 percent next year, after seeing a similar percentage increase last year.

Not all firms surveyed said the Affordable Care Act (ACA) is to blame for those cost increases to date. But a majority did, and the percentage of businesses that predicted the ACA will hike such costs next year is even higher than those that said it did this year.

Obamacare’s higher costs will cascade down to consumers. The surveys found that “36 percent of manufacturers and 25 percent of service firms said they were hiking prices in response” to Obamacare’s effects.

The Empire State Manufacturing Survey polls New York State manufacturers, and the Business Leaders Survey polls service firms in the New York Federal Reserve District.

A June Gallup poll found that four in ten Americans are spending more on health care in 2014 than in 2013.

Let’s dig into the numbers.

When asked, “How would you say the ACA has affected the amount your firm is paying in health benefit costs per worker this year?” More than 73% of manufacturers and 58% of service firms said the health care law has increased costs this year.

Companies are also more pessimistic about Obamacare next year. Over 80% of manufacturers and 74% of service firms expect health plan costs to increase in 2015.

New York Federal Reserve Empire State Manufacturing and Business Leaders Surveys

Source: New York Federal Reserve. For a larger view click on the image.

Employers were also asked what effects Obamacare is having on their labor forces. Over 21% of manufacturers and nearly 17% of service firms say they reduced the number of employees because of the law, while only about 2% of each have hired more workers. What’s more, nearly 20% of both manufacturers and service firms say that Obamacare has pushed them to increase their proportion of part-time workers, but just under 5% of each type of firm said they have lowered them. Presumably this is due to the perverse incentives from Obamacare’s employer mandate.

This data fits with research from the Atlanta Federal Reserve that found that since the recession, 25% of firms have a greater share of part-time workers, while only 8% have a lower share. This data also fits with anecdotes from around the country of employers saying that they’re hiring more part-time workers because of Obamacare.

New York Federal Reserve Empire State Manufacturing and Business Leaders Surveys

Source: New York Federal Reserve. For a larger view click on the image.

The sad truth is the health care law is pushing higher health costs onto employers and incentivizing them to hire more part-time workers. Despite passing a law in 2010 loaded with rules, regulations, mandates, and taxes, health care reform is needed more than ever. For solutions that that will control health care costs, improve quality, and expand access, check out the U.S. Chamber’s Health Care Solutions Council report.

Follow Sean Hackbarth on Twitter at @seanhackbarth and the U.S. Chamber at @uschamber.

Deputizing America: Sooner or later, we’ll all work for the State—unless we do something about it by Iain Murray

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It’s an old Western movie trope. The harassed sheriff needs help against Desperado D. Blackhat and his gang of gunslingers. He goes into the saloon, finds the gambler who was once the most feared crack shot this side of the Pecos, and makes him his deputy. Together, they run Blackhat and his gang out of town. If you thought that type of quick-and-dirty deputizing died with the Wild West, think again. Government is deputizing people all over the country to do its law-enforcement work. But unlike that gambler, they don’t get the chance to say no.

Take, for instance, FedEx. The delivery company has been indicted by federal prosecutors for not doing the Drug Enforcement Agency’s (DEA) job for it. The DEA alleges that FedEx knowingly shipped pharmaceuticals for online pharmacies that were based on invalid prescriptions, because it should have known “the principals, company names, shipping addresses and billing addresses that were initially connected to” a network of pharmacies closed down by the DEA in 2003. As a recent Wall Street Journal editorial summarized:

Translation: FedEx employees should have connected the dots. But if it’s so easy, why didn’t the DEA do it? The truth is that unmasking the bad guys would have required an extensive metadata analysis of customer data that is not FedEx’s job.

The DEA also alleges that FedEx should have known its orders were based on fraudulent prescriptions from visiting the pharmacies’ facilities for inspection. That’s not something a shipping company is set up to do. It is something a law enforcement agency is set up to do, but the DEA didn’t do it. So by its indictment of FedEx, the feds are telling all other delivery firms that they are now forcibly deputized to do the DEA’s job in the War on Drugs. If they don’t play along, they need to show up in court.

Banking regulators have been playing a similar game. Under a campaign known as Operation Choke Point, they have been telling banks that if they don’t investigate their customers for “high-risk” activity, they will be subject to subpoenas and everything that implies. As a result, banks have simply been cutting off links to potentially risky customers on the simple basis of what business they are in. As Department of Justice documents show (which I document extensively in my recent report on the operation), the motivation for Choke Point was the feds’ lack of manpower to investigate the risky businesses themselves. So they deputized the banks to do their job for them.

If New York’s Department of Financial Services (NYDFS) has its way, bitcoin businesses operating in the state will be deputized, too. The NYDFS, supposedly concerned about fraud risk, is demanding that businesses that use bitcoin keep a public record of every transaction. This would destroy the currency’s appeal by undermining one of its most potent selling points: users’ expectations of privacy. As Jim Harper, global policy counsel for the Bitcoin Foundation, told Coinbase,

Surveillance of transactions is at odds with both bitcoin users’ and consumers’ privacy demands, and the level of privacy they could expect is similar to that dictated by deals between corporations and governments in the fiat currency realm.

There are many more examples, from gambling regulators forcing credit processing companies to stopping unlawful online gambling transactions—without a clear definition of “unlawful” in this context—to immigration authorities deputizing employers to confirm potential employees’ immigration status.

In each of these cases, the executive is essentially requiring businesses to deploy employees to work for the government, rather than the company. The justification, supposedly to protect consumers from fraud or other abuse by a third party, traditionally has been reserved to the government as part of its law enforcement powers. That’s why the term “deputizing” is so appropriate—the government is making businesses into its policemen. The only difference is it will charge them with a crime if they don’t agree. No wonder the easy way out is just to stop doing business with the third party at all.

This is a disturbing and unprecedented tendency. It’s time that we put a stop to it, before we all end up working for the government whether we like it or not. Next time, it won’t just be dodgy online pharmacies or payday lenders that are in the crosshairs, but anyone or anything the government of the day doesn’t like or understand. In a world where you can’t do business because the government has its nose in everything, innovation will grind to a halt much like the Western movie genre.

ABOUT IAIN MURRAY

Iain Murray is vice president at the Competitive Enterprise Institute.

CLICHES OF PROGRESSIVISM #18 – “Humanity Can Be Best Understood in a Collective Context” by Lawrence W. Reed

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There are two basic prisms through which we can see, study, and prescribe for human society: individualism and collectivism. These worldviews are as different as night and day, and they create a great divide in the social sciences. That’s because the perspective from which you see the world will set your thinking down one intellectual path or another.

Advocates of personal and economic freedom are usually in the individualism camp, whereas those who think of themselves these days as “progressives” are firmly in the camp of collectivism.

I think of it as the difference between snowstorms and snowflakes. A collectivist sees humanity as a snowstorm, and that’s as up-close as he gets if he’s consistent. An individualist sees the storm, too, but is immediately drawn to the uniqueness of each snowflake that composes it. The distinction is fraught with profound implications.

No two snowstorms are alike, but a far more amazing fact is that no two snowflakes are identical either—at least as far as painstaking research has indicated. Wilson Alwyn Bentley of Jericho, Vermont, one of the first known snowflake photographers, developed a process in 1885 for capturing them on black velvet before they melted. He snapped pictures of about 5,000 of them and never found two that were the same—nor has anyone else ever since. Scientists believe that changes in humidity, temperature, and other conditions prevalent as flakes form and fall make it highly unlikely that any one flake has ever been precisely duplicated. (Ironically, Bentley died of pneumonia in 1931 after walking six miles in a blizzard. Lesson: One flake may be harmless, but a lot of them can be deadly).

Contemplate this long enough and you may never see a snowstorm (or humanity) the same way again.

Anne Bradley is vice president of economic initiatives at the Institute for Faith, Work and Economics. At a recent FEE seminar in Naples, Florida, she explained matters this way:

When we look at a snowstorm from a distance, it looks like indistinguishable white dots peppering the sky, one blending into the next. When we get an up-close glimpse, we see how intricate, beautiful, and dissimilar each and every snowflake is. This is helpful when thinking about humans. From a distance, a large crowd of people might look the same, and it’s true that we possess many similar characteristics. But we know that a more focused inspection brings us nearer to the true nature of what we’re looking at. It reveals that each of us bears a unique set of skills, talents, ambitions, traits, and propensities unmatched anywhere on the planet.

This uniqueness is critical when we make policy decisions and offer prescriptions for society as a whole; for even though we each look the same in certain respects, we are actually so different, one to the next, that our sameness can only be a secondary consideration.

The late Roger J. Williams, author of You Are Extra-Ordinary and Free and Unequal: The Biological Basis of Individual Liberty (as well as several articles in The Freeman), was a noted biochemistry professor at the University of Texas in Austin. He argued that fingerprints are but one of endless biological characteristics unique to each of us, including the contours and operation of our brains, nerve receptors, and circulatory systems.

These facts offer biological bases for the many other differences between one person and the next. Einstein, he noted, was an extremely precocious student of mathematics, but he learned language so slowly that his parents were concerned about his learning to talk. Williams summed it well more than 40 years ago when he observed, “Our individuality is as inescapable as our humanity. If we are to plan for people, we must plan for individuals, because that’s the only kind of people there are.”

Proceeding one step further, we must recognize that only individuals plan. When collectives are said to “plan” (e.g., “The nation plans to go to war”), it always reduces to certain, specific, identifiable individuals making plans for other individuals. The only good answer to the collectivist question, “What does America eat for breakfast?” is this: “Nothing. However, about 315 million individual Americans often eat breakfast. Many of them sometimes skip it, and on any given day, there are 315 million distinct answers to this question.”

Collectivist thinking is simply not very deep or thorough. Collectivists see the world the way Mr. Magoo did—as one big blur. But unlike Mr. Magoo, they’re not funny. They homogenize people in a communal blender, sacrificing the discrete features that make us who we are. The collectivist “it takes a village” mentality assigns thoughts and opinions to amorphous groups, when, in fact, only particular people hold thoughts and opinions.

Collectivists devise one-size-fits-all schemes and care little for how those schemes may affect the varied plans of real people. Any one flake means little or nothing to the collectivist because he rarely looks at them; and in any event, he implicitly dismisses the flakes because there are so many to play with. Collectivists are usually reluctant to celebrate the achievements of individuals per se because they really believe that, to quote President Obama, “you didn’t build that.”

Take individuals out of the equation and you take the humanity out of whatever you’re promoting. What you’d never personally inflict on your neighbor, one on one, you might happily sanction if you think it’ll be carried out by some faceless, collective entity to some amorphous blob on behalf of some nebulous “common good.” The inescapable fact is that we are not interchangeable. Cogs in a machine are, but people most emphatically are not.

If this point is lost on you, then watch the 1998 DreamWorks animated film Antz. The setting is an ant colony in which all ants are expected to behave as an obedient blob. This is very convenient for the tyrant ants in charge, each of which possesses a very unique personality indeed. The debilitating collectivist mindset is shaken by a single ant who marches to a different drummer—namely, his own self—and ultimately saves the colony through his individual initiative.

Karl Marx was a collectivist. Mother Theresa was an individualist. One dealt with people in lumps. The other one treated them as individuals. The lessons in that clear-cut dichotomy are legion. They are ignored only at great peril.

So what does humanity look like to you: a snowstorm or snowflakes?

If your answer is the latter, then you understand what the philosopher and historian Isaiah Berlin meant when he wrote in 1958, “But to manipulate men, to propel them toward goals which you—the social reformers—see, but they may not, is to deny their human essence, to treat them as objects without wills of their own, and therefore to degrade them.”

Lawrence W. Reed
President of FEE

Summary

  • If you see the world as a collective lump of humanity, you’ll likely come to very different conclusions about life and economics than if you see it as composed of billions of unique individuals.
  • A snowstorm is only as big as its individual snowflakes are numerous.
  • Abstractions are just that, while individuals are real.
  • Take individuals out of the equation and you remove humans from humanity.

For further information, see:

“Individualism, Collectivism and Other Murky Labels” by Sheldon Richman
“Maverick Mark Twain’s Exhilarating American Individualism” by Jim Powell
“Methodological Individualism” by Warren Gibson
“Hayek on Individualism” by Sheldon Richman

20130918_larryreedauthorLAWRENCE 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. Prior to becoming FEE’s president, he served for 20 years as president of the Mackinac Center for Public Policy in Midland, Michigan. He also taught economics full-time from 1977 to 1984 at Northwood University in Michigan and chaired its department of economics from 1982 to 1984.

EDITORS NOTE: The features image is courtesy of FEE and Shutterstock.

Unicorn Governance by MICHAEL MUNGER

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Ever argued public policy with people whose State is in fantasy land?

Our problem is that we have to fight unicorns.

Unicorns, of course, are fabulous horse-like creatures with a large spiraling horn on their forehead. They eat rainbows, but can go without eating for years if necessary. They can carry enormous amounts of cargo without tiring. And their flatulence smells like pure, fresh strawberries, which makes riding behind them in a wagon a pleasure.

For all these reasons, unicorns are essentially the ideal pack animal, the key to improving human society and sharing prosperity.

Now, you want to object that there is a flaw in the above argument, because unicorns do not actually exist. This would clearly be a fatal flaw for the claim that unicorns are useful, if it were true. Is it?

Of course not. The existence of unicorns is easily proven. Close your eyes. Now envision a unicorn. The one I see is white, with an orange-colored horn. The unicorn is surrounded by rainbows (perhaps it’s time for lunch). Your vision may look slightly different, but there is no question that when I say “unicorn,” the picture in your mind corresponds fairly closely to the picture in my mind. So, unicorns do exist and we have a shared conception of what they are.

Problem: “the State” is a unicorn

When I am discussing the state with my colleagues at Duke, it’s not long before I realize that, for them, almost without exception, the State is a unicorn. I come from the Public Choice tradition, which tends to emphasize consequentialist arguments more than natural rights, and so the distinction is particularly important for me. My friends generally dislike politicians, find democracy messy and distasteful, and object to the brutality and coercive excesses of foreign wars, the war on drugs, and the spying of the NSA.

But their solution is, without exception, to expand the power of “the State.” That seems literally insane to me—a non sequitur of such monstrous proportions that I had trouble taking it seriously.

Then I realized that they want a kind of unicorn, a State that has the properties, motivations, knowledge, and abilities that they can imagine for it. When I finally realized that we were talking past each other, I felt kind of dumb. Because essentially this very realization—that people who favor expansion of government imagine a State different from the one possible in the physical world—has been a core part of the argument made by classical liberals for at least three hundred years.

Some examples help illustrate the point.

Edmund Burke  highlights the unicorn fallacy neatly. The problem is not bad people, or systems that need reform. Come the next election, we’ll have a Messiah! The next reform will lead to Utopia! No. No, we won’t, and no, it won’t.

In vain you tell me that [government] is good, but that I fall out only with the Abuse. The Thing! The Thing itself is the abuse! Observe, my Lord, I pray you, that grand Error upon which all artificial legislative Power is founded. It was observed, that Men had ungovernable Passions, which made it necessary to guard against the Violence they might offer to each other. They appointed Governors over them for this Reason; but a worse and more perplexing Difficulty arises, how to be defended against the Governors?

Adam Smith put it this way in The Wealth of Nations:

It is the system of government, the situation in which [people] are placed, that I mean to censure, not the character of those who have acted in it. They acted as their situation naturally directed, and they who have clamoured the loudest against them would probably not have acted better themselves.

Smith was talking about the employees of the East India Company in this passage. But the insight is a general one: the failure of a system of organization often arises from the incentives, the logic of action, or the inconsistencies, inherent in that system. The people who work in that system probably act in much the same way that other people would act if they found themselves in that system. So, while it’s true that one can imagine a State that works differently, there are no actual human beings who can work in that system and deliver what statists can imagine.

More recently, Ludwig von Mises and F. A. Hayek recognized the problem of unicorns rather deftly. In Epistemological Problems of Economics, Mises said:

Scarcely anyone interests himself in social problems without being led to do so by the desire to see reforms enacted. In almost all cases, before anyone begins to study the science, he has already decided on definite reforms that he wants to put through. Only a few have the strength to accept the knowledge that these reforms are impracticable and to draw all the inferences from it. Most men endure the sacrifice of the intellect more easily than the sacrifice of their daydreams. They cannot bear that their utopias should run aground on the unalterable necessities of human existence. What they yearn for is another reality different from the one given in this world … They wish to be free of a universe of whose order they do not approve.

Perhaps the most famous, and devastating, version of “skewer the unicorn” is Hayek’s, when he said in The Fatal Conceit that “the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

The Munger test

In debates, I have found that it is useful to describe this problem as the “unicorn problem,” precisely because it exposes a fatal weakness in the argument for statism. If you want to advocate the use of unicorns as motors for public transit, it is important that unicorns actually exist, rather than only existing in your imagination. People immediately understand why relying on imaginary creatures would be a problem in practical mass transit.
But they may not immediately see why “the State” that they can imagine is a unicorn. So, to help them, I propose what I (immodestly) call “the Munger test.”

  1. Go ahead, make your argument for what you want the State to do, and what you want the State to be in charge of.
  2. Then, go back and look at your statement. Everywhere you said “the State” delete that phrase and replace it with “politicians I actually know, running in electoral systems with voters and interest groups that actually exist.”
  3. If you still believe your statement, then we have something to talk about.

This leads to loads of fun, believe me. When someone says, “The State should be in charge of hundreds of thousands of heavily armed troops, with the authority to use that coercive power,” ask them to take out the unicorn (“The State”) and replace it with George W. Bush. How do you like it now?

If someone says, “The State should be able to choose subsidies and taxes to change the incentives people face in deciding what energy sources to use,” ask them to remove “The State” and replace it with “senators from states that rely on coal, oil, or corn ethanol for income.” Still sound like a good idea?

How about, “The State should make rules for regulating sales of high performance electric cars.” Now, the switch: “Representatives from Michigan and other states that produce parts for internal combustion engines should be in charge of regulating Tesla Motors.”  Gosh, maybe not … In my experience, we spend too much time fighting with our opponents about their unicorns. That is, we claim that the unicorn/State itself is evil, and cannot be tamed in a way that’s consistent with liberty. The very mental existence of the unicorn is the target of our arguments.

The problem, of course, is that the unicorn they imagine is wise, benevolent, and omnipotent. To tell them that their imaginations are wrong is useless. So long as we insist that our opponents are mistaken about the properties of “the State”— which doesn’t exist in the first place, at least not in the way that statists imagine—then we will lose the attention of many sympathetic people who are primarily interested in consequences.

To paraphrase Hayek, then, the curious task of the liberty movement is to persuade citizens that our opponents are the idealistic ones, because they believe in unicorns. They understand very little about the State that they imagine they can design.

ABOUT MICHAEL MUNGER

Michael Munger is the director of the philosophy, politics, and economics program at Duke University. He is a past president of the Public Choice Society.

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.

INFOGRAPHIC: How Unions Are Chewing Through Taxpayer Dollars

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Nicole Rusenko and Kelsey Harris write and graphically display on The Daily Signal:

Did you know your tax dollars are financing unions?

Thanks to what the federal government calls “official time,” government workers spent 2.4 million hours on union work in 2010. In fact, the Internal Revenue Service alone has 286 full-time employees who work exclusively for the National Treasury Employees Union.

Check out the infographic below for more details on whose special interests (and pockets) your money is going.

WARNING: This infographic may upset your stomach and shrink your wallet.

OfficialTime_Infographic_Rusenko-011

COMMENTARY BY

Portrait of Nicole Rusenko Nicole Rusenko@ncrusen20

Nicole Rusenko is a senior designer at The Heritage Foundation.

 

Portrait of Kelsey Harris

Kelsey Harris
Kelsey Harris is the visual editor at The Daily Signal and digital media associate at The Heritage Foundation.

Why You Should Brush Off That New Keystone XL Study

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A new study claims that the State Department underestimated the amount of greenhouse emissions from the Keystone XL pipeline. The Los Angeles Times reports:

Building the Keystone XL pipeline could lead to as much as four times more greenhouse gas emissions than the State Department has estimated for the controversial project, according to a new study published in Nature Climate Change that relies on different calculations about oil consumption.

…

The study’s authors based their calculation on the premise that increased supplies of petroleum through the pipeline would push down global oil prices marginally, and that would lead to an increase in consumption and thus pollution.

But wait, the State Department concluded in its final environmental impact statement that Canada’s oil sands crude will be developed and affect global consumption no matter how it’s transported:

[A]pproval or denial of any one crude oil transport project, including the proposed Project, is unlikely to significantly impact the rate of extraction in the oil sands, or the continued demand for heavy crude oil at refineries in the United States.

Based upon that analysis, the State Department determined that the pipeline would have minimal impact on the environment.

The oil is already coming to market by rail, and more pipelines are either in the planning stages or are working their way through the approval process. It will get to market, one way or another.

What’s more, the AP reports that some economists are skeptical of the study’s findings:

An increase of 121 million tons of carbon dioxide is dwarfed by the 36 billion tons of carbon dioxide the world pumped into the air in 2013. That’s why University of Sussex economist Richard Tol dismissed the calculated Keystone effect as merely a drop in the bucket. If somebody is concerned about climate change, he wrote in an email, the pipeline “should be the furthest from your mind.”

…

Independent energy economist Judith Dwarkin in Calgary, Alberta, Canada, dismissed the study, faulting the idea that added oil production will lower the price and boost demand. Usually, she said, it’s consumption that spurs price and then oil production.

Since we know this oil will be developed, the Keystone XL pipeline should be a part of the transport mix. It will create jobs, boost local economies, improve America’s energy security, and do it with minimal impact on the environment.

This study didn’t offer any reason to not approve it.

UPDATE: Oil Sands Fact Check points out that State Department considered and cited a draft of this study in its final environmental impact statement.

Follow Sean Hackbarth on Twitter at @seanhackbarth and the U.S. Chamber at @uschamber.

EDITORS NOTE: In its August 18, 2014 edition Forbes reports, “Warren Buffett and Carl Ican, two of the nation’s richest investors have benefited from insufficient pipeline capacity. Millions of barrels of oil are being moved around America by train, and and Buffett’s Berkshire Hathaway owned railroad company Burlington/Northern and railcarmaker Union Tank Car. Ican owns railcar producers American Railcar Industries and ACF Industries, together with a huge fleet of oil-carrying railcars.

The featured image is a mining truck carrying oil sands in Fort McMurray, Alberta, Canada. Photographer: Jimmy Jeong/Bloomberg.