Economy Archives - Page 151 of 170

Study: Canadian Oil Sands Aren’t Increasing U.S. Carbon Emissions

June 4, 2014/in Economy, Environment, News, Policy, Science/by Sean Hackbarth

A mining truck carries oil sands in Fort McMurray, Alberta, Canada. Photographer: Jimmy Jeong/Bloomberg.

Keystone XL opponents say they’re fighting the project because they fear the carbon emissions that would be produced by developing Canada’s oil sands, but a new report undercuts that argument by finding that the oil sands development has resulted in only a fractional increase in them.

Bill McKibben, head of 350.org and the main face behind the anti-pipeline campaign declared in 2011 that Canada’s oil sands are “the earth’s second-largest pool of carbon, and hence the second-largest potential source of global warming gases after the oil fields of Saudi Arabia.”

However, a report by IHS finds that increased development of Canadian oil sands have not had an impact on U.S. carbon emissions. Canada’s National Post reports:

The report, based in part on a focus group meeting held last October in Washington, D.C., with Alberta’s Department of Energy and major oil sands producers, found that between 2005 and 2012, the carbon intensity of the average crude oil consumed in the U.S. “did not materially change,” decreasing by about 0.6%.

That is despite a 75% increase in U.S. imports of oil sands and other Canadian heavy crudes over the same period — to about 2.1 million barrels a day from 1.2 million barrels.

At the same time, U.S. imports of Mexican and Venezuelan heavy crude fell, while production of U.S. tight oil from North Dakota’s Bakken and the Eagle Ford shale in Texas climbed to 1.8 million barrels a day, up from virtually zero in 2005. That helped displace imports of similar crudes from Africa and elsewhere with relatively higher carbon footprints, the report says. U.S. imports from Nigeria fell 64% over the period, it said.

“A lot has changed since 2005,” said Kevin Birn, a director of IHS Energy and leader of the consultancy’s oil sands dialogue in Calgary.

“We’ve had heavy crudes push out heavy crudes that happen to be within the same GHG intensity range, and the same thing’s happened on the light oil side.”

Since we’re on the topic of the Keystone XL pipeline and greenhouse gas emissions, I’ll remind you that the State Department’s economic analysis of the pipeline found that alternative methods of moving oil sands crude—no serious observer thinks they won’t be developed–would result in higher greenhouse gas emissions than from the Keystone XL pipeline.

Remember these facts the next time pipeline protesters get arrested in the name of reducing carbon emissions.

A Slogan Worth Your Bumper? by Lawrence W. Reed

June 2, 2014/in Economy, Policy, Politics/by Foundation for Economic Education (FEE)

Statism can be summed up and slapped on the back of a car. Can the freedom philosophy?

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups. — Henry Hazlitt, Economics in One Lesson

Statists—those who prefer force-based political action over spontaneous, peaceful, and voluntary initiatives—excel at distilling their views into slogans. It’s shallow stuff, but their pithy expressions have nonetheless taken a toll on individual liberty and free markets.

“I’m for people, not for profits!” is a case in point. Never mind the fact that an economy without profit is an economy that’s headed nowhere (and taking its people with it). If you suggest that one must choose between people and profit—that you can have one only at the expense of the other—it’s not hard to fathom which one the uninformed will pick.

A student leader in the Czech Republic recently asked me, “Can you think of a few words that so effectively summarize the case for liberty that they will draw people to our side?” His name is Jan Škapa and his question revealed an understandable frustration. On a mere bumper sticker, statists glibly express fallacies that require far more time, space, and patience to rebut than it ever took to cook them up in the first place.

I’m no fan of slogans. By their very nature and brevity, they can oversimplify. But is there one, rooted in truth not deception, that would advance liberty and put its opponents on the defensive?

Long Run, All People

I submit there may be many strong candidates for such a slogan, but the moment Škapa raised the question, my nominee was this one: “Long Run, All People.” The more I’ve thought about it since, the more I like it. Škapa informed me that since he started using it at exhibits and in promotions for his organization, Students for Liberty, “the reception has been very positive—people generally agree right up front and are interested in learning more.” You can see reference to it on the group’s Web site under “Why Liberty?” (in Czech, “Proc Svoboda?”).

(Please note: In my view, the moral argument for liberty still trumps all others, including this rather utilitarian one. Liberty is a birthright of all individuals. You forfeit it in whole or in part only when you initiate force against another. But in the battle for liberty, we need many arrows in our quiver. Choose the one you think may best hit the mark depending on the circumstances.)

Statism in all its various forms reduces to this: It’s a short-sighted scheme that benefits some at the expense of others. Its time horizon is usually no further ahead than the next election or, at best, maybe one generation. It profits those who wield power and those who receive more advantages from the state than they pay for, but statism in practice is not aimed at improving the lot of all people in the long run. It’s a short-term theory of redistribution and consumption, not a long-term theory of wealth creation. A more cynical but not inaccurate way to look at it is this: It’s just glorified vote-buying with other people’s money.

Statists like to “stimulate” the economy today by giving money to some (often the politically well-connected) and strapping future generations with debt and inflation to pay for it. They also claim to want to help old people (via Social Security and Medicare) or young people (via student loans). They do it, however, with programs that shift power and responsibility—but not the expense—away from individuals and families and to politicians. Their programs resemble Ponzi schemes that must inevitably go bust, even as they feed bureaucracies and breed debt and dependency for many along the way.

Paved with Good Intentions

Writing in the November 13, 2013, edition of The New York Times (p. A-19), John Harwood noted how the assistance programs created by the nanny state naturally mushroomed:

Congress enacted Social Security in 1935 to provide benefits to retired workers. In 1939, benefits were extended to their dependents and survivors. Later the program grew to provide disability coverage, cover self-employed farmers and raise benefit levels.

President Lyndon B. Johnson’s Great Society created Medicare and Medicaid in the 1960s to provide health coverage for the elderly and the poor. They followed the same pattern.

In 1972, Congress extended Medicare eligibility to those under 65 on disability and with end-stage renal disease. In 2003, Congress passed President George W. Bush’s plan to offer coverage under Medicare for prescription drugs.

Lawmakers initially linked Medicaid coverage to those receiving welfare benefits, but over time expanded eligibility to other “poverty-related groups” such as pregnant women. In 1997, President Bill Clinton signed into law the Children’s Health Insurance Program, which now covers eight million children whose families’ incomes are too high to qualify for Medicaid.

All of these expensive, bureaucratic, and ultimately unsustainable programs sounded wonderful to many when they were enacted. Rarely were they judged on what they likely would yield down the road for us all. Supporters embraced them mostly because of what they would do for some in the near term. None of the advocates ever said, “In the not-too-distant future, these programs will grow like topsy and saddle the nation with trillions in debt, thereby jeopardizing those who depend upon them and the nation as a whole as well.”

Short Run, Some People

This is the essence of the statists’ welfare state: Rob Peter to pay Paul. Always promise more, and send a lot of the bills to generations yet unborn. Après moi, le déluge. And they have the nerve to sell it by claiming they are the compassionate ones. If their rhetoric matched their handiwork, their motto would be “Short Run, Some People.”

“Long Run, All People” should be a battle cry of those who embrace liberty. It seizes the moral high ground because it’s farsighted and inclusive—and it’s accurate, too. It challenges others to be thorough in their thinking, to consider the whole picture and not just the corners of it that capture their ephemeral attentions. Isn’t that what responsible adults are supposed to do? Today is the tomorrow that yesterday’s shortsighted statists didn’t bother to think about. The victims of their handiwork number in the millions, though the statists never saw them coming.

Half a century ago, W. Allen Wallis addressed this issue in this very magazine in his insightful article, “The Public Versus the Private Sector.” I urge you to give it a look. It’s “dated” only in a few examples and in a word choice here and there, which only underscores the timelessness of the core message.

I wish I could get a T-shirt and bumper sticker that say in large print, “Long Run, All People” and in small print, “Shrink Big Government.” Wouldn’t they spark some interesting conversations?

How might “Long Run, All People” be deployed with good effect in today’s context? I could produce some hypothetical examples, but I’d prefer to stimulate YOUR thoughts. So let me invite you, the reader, to put the comment section below to good use. Where, when, and how do you think this line of reasoning could change some minds in the right direction? Or is my case here overstated? All comments, suggestions, and examples welcome.

ABOUT 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: The features image is courtesy of FEE and Shutterstock.

Former CIA Officer — Its the National Debt Stupid! Beware of the Bail-in!

June 2, 2014/in Budget and Finance, Economy, Featured, National Security, News, Policy, Politics, Waste, Fraud and Abuse/by Dr. Rich Swier

“It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world.” – Thomas Jefferson, 3rd U.S. President

Gary Berntsen

Decorated former Central Intelligence Agency (CIA) career officer who served in the Directorate of Operations between October 1982 and June 2005, Gary Berntsen was in Sarasota, Florida to talk about the greatest threat to the national security of the United States of America. Speaking at an event hosted by the Concerned Veterans for America, Berntsen said that the greatest national security threat to the U.S. is not the Russian incursion into Ukraine, the Chinese expansion into SE Asia, the threats from Middle Eastern terrorists, its the growing national debt.

Berntsen went on to say that the debt bubble is about to burst. It is when, not if, ordinary Americans will feel the impact of a weakened dollar and the failure of Congress to deal with the national debt and spending.

Berntsen quoted a number of recent books warning about the coming fiscal crisis, including The Death of Money: The Coming Collapse of the International Monetary System by James Rickards. Berntsen said that after reading Rickards book he understood how vulnerable Americans are to two fiscal bubbles – the dollar bubble and national debt bubble. Berntsen said that the pins that will burst these bubbles are: inflation and China stopping to buy U.S. Treasury Bonds.

Berntsen raised the specter of a new financial global paradigm called the “bail-in“. The Financial Times defines “bail-in” as, “[A] desire to make bondholders – who after all helped lend the money that allowed banks to lend imprudently – share the burden in future by making them forfeit part of their investment to “bail in” a bank before taxpayers are called up on to bail it out. In theory, this will force them to be more careful with their investments and protect the taxpayer from a re-run of the recent crisis.”

Berntsen noted that the bail-in paradigm was used in Cypress. In his article Bail-in vs. Bailout, David Kotok writes:

In the aftermath of the bungled Cyprus affair, we are now observing a major transition underway with regard to bank-deposit safety.

In the Eurozone and in Europe generally, the sacredness of an insured deposit was bludgeoned by the finance ministers in their botched attempt to impose a cost on insured deposits in Cyprus. The finance ministers were taken to task decisively by their political constituents. Imagine: it was the parliament of Cyprus that stood between the insured depositors in Eurozone banks and the outrageous attempt to breech the sacred promise that insurance entails.

One has to be thankful for the democratic political process that elects parliaments, even in Cyprus.

Now we are seeing a different form of attack on depositors. We are transitioning from a system of bank bailouts to “bail-ins.”

Read more.

Berntsen said that Alan Greenspan in his book The Map and the Territory: Risk, Human Nature and the Future of Forecasting alluded to the new paradigm of the bail-in. The bail-in is available to President Obama and Congress as it was included in H.R. 4173: Dodd-Frank Wall Street Reform and Consumer Protection Act. The Financial Times in the definition of bail-in uses the Example of Dodd-Frank stating, “The US has already put in place bail-in-like powers as part of the Dodd-Frank financial reform act passed last year [2010]. The law includes a resolution scheme that gives regulators the ability to impose losses on bondholders while ensuring the critical parts of the bank can keep running. Employees would be paid, the lights would stay on and derivatives contracts would not have to be instantly unwound, one of the areas that caused market confusion when Lehman Brothers collapsed in September 2008.” [Emphasis added]

The danger is clear and present. The media is not covering this existential threat. Rather the news outlets are more interested in any issue other than the one most important to Main Street America.

Time will tell and time is running short according to Berntsen.

RELATED VIDEO:

[youtube]http://youtu.be/QTSvz__if2s[/youtube]

Maybe You Can Get Blood from a Stone by Lawrence W. Reed

May 30, 2014/in Economy, News, Taxes/by Foundation for Economic Education (FEE)

How a beautiful old hill in Britain is bleeding one man dry.

With these words two centuries ago, the poet Samuel Taylor Coleridge immortalized a beloved mountain in Britain’s stunningly beautiful Lake District:

On stern Blencathra’s perilous height
The winds are tyrannous and strong;
And flashing forth unsteady light
From stern Blencathra’s skiey height,
As loud the torrents throng!

The famed and prolific fellwalker (hill climber) and guide book author Alfred Wainwright (1907–1991) wrote more about Blencathra than any other hill or mountain in the country. Untold hundreds of thousands of hillwalkers have left their footprints on its trails. The goat herds of a dozen graziers eat of its grass every day. It’s quiet, panoramic, idyllic—and private.

Now the peak is in the news again, as I learned during a visit to Britain earlier this month. Blencathra is up for sale.

For 400 years, the nearly 3,000-foot Blencathra has belonged to the same family, the Lowthers. Ownership includes an ancient manorial title, the Lordship of the Manor of Threlkeld, and the man who holds it now is Hugh Lowther, Lord Lonsdale. Since his father died eight years ago, Lord Lonsdale has been saddled with a massive inheritance tax bill he can’t pay without selling the mountain. The British government wants £9 million—equivalent to more than $15 million.

A worldwide study by accountants UHY Hacker Young showed that Ireland and Britain (in that order) have the highest death duties of any of the world’s major economies—more than three times higher than the global average. Australia, Israel, and New Zealand are among the more enlightened developed countries that have scrapped the tax on death altogether. Even the average continental European tax on a large estate is less than half what it is in Britain.

“Big inheritance tax bills,” UHY Hacker Young’s Ladislav Hornan told The Telegraph, “can reduce the incentive to keep creating wealth in order to pass it on to your family. They can also deprive the next generation of capital that traditionally has been key to funding the establishment of new businesses. As more and more UK families are caught in the inheritance tax trap, pressure for major reform is growing.”

Prime Minister David Cameron promises to raise the threshold of estate value at which the high death rates kick in—hardly revolutionary and certainly a step that doesn’t challenge the inherent injustices of the inheritance tax: It taxes a second time what was already taxed heavily once (as income); it assaults the right of a property owner to bequeath his already-taxed wealth to his family; it makes it difficult if not impossible to pass on land that generates little income because its owners seek to preserve its pristine nature; and it siphons money from productive people to politicians to squander and buy votes.) See “Grave Robbers: The Moral Case Against the Death Tax” by Edward J. McCaffery (1999).

Lowther is asking 1.75 million pounds for Blencathra but at that price, any buyer will have to pay over 300,000 pounds more (half a million dollars) in VAT, or value-added tax. There’s no such thing as a free lunch or a cheap mountain in the British welfare state.

“Nobody climbs mountains for scientific reasons,” said Sir Edmund Hillary, who scaled the summit of Mt. Everest in Nepal. “Science is used to raise money for the expeditions, but you really climb for the hell of it.” Sometimes I think that’s the best explanation for why governments tax inheritances—just for the hell of it.

ABOUT 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.

Libertarians As Seen from the “Other Side” by Sandy Ikeda

May 30, 2014/in Budget and Finance, Courts & Law, Economy, News, Regulation/by Foundation for Economic Education (FEE)

I think it’s good to try to see an issue from the side of one’s ideological opponent, but it’s very hard to do. Sometimes, though, I see or read something that hits me in a way that really gets through.

This time it was a clever cartoon from a left-leaning blogger.

In it the following thought bubbles float above an increasingly a beleaguered character:

“A corporation laid me off…

… a corporation took my house …

… a corporation is corrupting democracy …

… a corporation denied my [insurance] claim …

… corporations track my every move …

I hate the GOVERNMENT!”

Unlike a lot of blasts from the left aimed at libertarians, I found this one clever and thoughtful. I didn’t feel exasperation; it was more like getting jabbed in the ribs. Ah, I thought, here’s one reason the left finds libertarianism silly! I had to work through to get my bearings back, but I think the entire experience was worthwhile.

There are two possibilities

Despite the American law that gives a corporation the legal status of a person that can make and enforce contracts, the first thing to note is that it’s a flesh-and-blood person who lays someone off, repossesses a house, bribes government officials, etc. The question then is, “For whom is that person acting?”

It’s natural in such circumstances to try to find someone other than oneself to blame. If you’re laid off, it’s hard to blame that on the fact that your boss, if she’s doing her job right, is only conveying the wishes of consumers. The final consumer may be very far away from you in the production process, while your boss and the corporation are right there.

If the layoffs and the rest occur in a free market, then ultimately it’s the consumer who is doing the laying off. To use William H. Hutt’s famous phrase, “The consumer is sovereign,” or as Ludwig von Mises (quoted by Robert Murphy) put it, “The real boss is the consumer.” So General Motors hires or fires you, MetLife grants or denies your application, or Amazon.com tracks your spending habits because they are doing the bidding of those who ultimately pay their salaries and are the source of losses and profits: consumers.

A free market works because the rivalry among entrepreneurial competitors keeps them from charging prices that are too high, producing goods that are shoddy, or selling on terms that are unfair from the viewpoint of the consumer. If a seller charges a higher price for hiking boots that in the eyes of the consumer are of no better quality than what another seller offers, competition (on the part of profit-seeking rivals and bargain-seeking buyers) pressures her to lower the price, raise quality, or both. That could mean someone getting fired or getting hired at that company. So while it’s true that a specific person makes the immediate decision, she is only doing the bidding of consumers as a whole, who are the ultimate decision-makers.

But if you live in a system in which government habitually regulates people and redistributes wealth and income, then your woes may indeed be the fault of a specific and identifiable agent: namely, the government. Recessionary layoffs, housing crises, crony capitalism, the healthcare mess, and especially the surveillance state can more and more these days be traced to specific government interventions. (For examples and analyses you need look no further than the archives of The Freeman.) So if these unpleasant things happen to people in a mixed economy, we shouldn’t simply assume that they had it coming to them or that they have only themselves to blame. (We ought not to assume that in a free market, either, because businesses and consumers and everyone else do make mistakes.)

The naive view of the free market

There are thus two false starting points in that cartoon. The first is to assume that the nasty experiences depicted are taking place in a free market. In a free market operating under the rule of law, people and businesses should receive no special privileges from the government. Of course, the United States economy is no pure free market.

To take but one example, General Motors has issued its 30th recall so far this year. So far it’s recalled something like 14 million vehicles for manufacturing defects, some of them quite serious. That’s more cars and trucks than it manufactured in all of 2013.

The irony of course is that GM had been initially touted as a bailout poster child. President Obama went so far as to declare, “In exchange for rescuing and retooling GM and Chrysler with taxpayer dollars, we demanded responsibility and results. In 2011, we marked the end of an important chapter as Chrysler repaid every dime and more of what it owed the American taxpayers from the investment we made under my Administration’s watch.” Then of course we learned taxpayers actually lost over $11 billion on the deal.

The other false premise ignores the concept of consumer sovereignty altogether. It is that a private company can use its wealth to trample on the rights of both consumers and its employees. Big government is necessary then to offset the “power” of big business, so big government is good.

Whenever I hear people compare the power of private wealth with the power of government coercion, I think of a line from the Netflix series House of Cards that I’ve used before. It’s in the scene where a rich businessman threatens to use his influence with the President of the United States to topple the vice president. The VP cooly responds, “You may have all the money, but I have all the men with all the guns.”

That’s ultimately what separates a big business in a free market from the government. In the free market you get wealthy by serving consumers well; under interventionism you get wealthy by accessing coercion. I often tell my students that if you put a greedy Bill Gates and all his billions in a room with some greedy guy with a 22-caliber pistol, who do you think is going leave richer?

Out of our comfort zones and back—sort of

My overall point here, however, is that each side of an issue begins with certain premises that need to be checked, both our own and those of our opponents. There are things seen and unseen by all and it’s important to try to see as much as we can. That can sometimes be uncomfortable. But find something you’re not comfortable with, then see if you can work you way logically, step by step, back to your comfort zone. If you do it right and you do make it back, it probably won’t be the same comfort zone that you left. At least, I hope it isn’t.

ABOUT SANDY IKEDA

Sandy Ikeda is an associate professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism. He will be speaking at the FEE summer seminars “People Aren’t Pawns” and “Are Markets Just?“

CLICHES OF PROGRESSIVISM #7 – The Free Market Ignores the Poor

May 30, 2014/in Budget and Finance, Culture War, Economy, Education, News, Policy, Politics, Regulation, Waste, Fraud and Abuse/by Foundation for Economic Education (FEE)

Editor’s Note: This week’s cliché was authored decades ago by FEE’s founder, Leonard E. Read, and originally appeared in the first edition of Clichés of Socialism. Barely a word has been changed and though a few numbers are dated, the essay’s wisdom is as timely and relevant today as it ever was.)

The Foundation for Economic Education (FEE) is proud to partner with Young America’s Foundation (YAF) to produce “Clichés of Progressivism,” a series of insightful commentaries covering topics of free enterprise, income inequality, and limited government.

Our society is inundated with half-truths and misconceptions about the economy in general and free enterprise in particular. The “Clichés of Progressivism” series is meant to equip students with the arguments necessary to inform debate and correct the record where bias and errors abound.

The antecedents to this collection are two classic FEE publications that YAF helped distribute in the past: Clichés of Politics, published in 1994, and the more influential Clichés of Socialism, which made its first appearance in 1962. Indeed, this new collection will contain a number of essays from those two earlier works, updated for the present day where necessary. Other entries first appeared in some version in FEE’s journal, The Freeman. Still others are brand new, never having appeared in print anywhere. They will be published weekly on the websites of both YAF and FEE: www.yaf.org and www.FEE.org until the series runs its course. A book will then be released in 2015 featuring the best of the essays, and will be widely distributed in schools and on college campuses.

See the index of the published chapters here.

#7 – The Free Market Ignores the Poor

Once an activity has been socialized for a spell, nearly everyone will concede that that’s the way it should be.

Without socialized education, how would the poor get their schooling? Without the socialized post office, how would farmers receive their mail except at great expense? Without Social Security, the aged would end their years in poverty! If power and light were not socialized, consider the plight of the poor families in the Tennessee Valley!

Agreement with the idea of state absolutism follows socialization, appallingly. Why? One does not have to dig very deep for the answer.

Once an activity has been socialized, it is impossible to point out, by concrete example, how men in a free market could better conduct it. How, for instance, can one compare a socialized post office with private postal delivery when the latter has been outlawed? It’s something like trying to explain to a people accustomed only to darkness how things would appear were there light. One can only resort to imaginative construction.

To illustrate the dilemma: During recent years, men and women in free and willing exchange (the free market) have discovered how to deliver the human voice around the earth in one twenty-seventh of a second; how to deliver an event, like a ball game, into everyone’s living room, in color and in motion, at the time it is going on; how to deliver 115 people from Los Angeles to Baltimore in three hours and 19 minutes; how to deliver gas from a hole in Texas to a range in New York at low cost and without subsidy; how to deliver 64 ounces of oil from the Persian Gulf to our Eastern Seaboard—more than half-way around the earth—for less money than government will deliver a one-ounce letter across the street in one’s home town. Yet, such commonplace free market phenomena as these, in the field of delivery, fail to convince most people that “the post” could be left to free market delivery without causing people to suffer.

Now, then, resort to imagination: Imagine that our federal government, at its very inception, had issued an edict to the effect that all boys and girls, from birth to adulthood, were to receive shoes and socks from the federal government “for free.” Next, imagine that this practice of “free shoes and socks” had been going on for lo, these 173 years! Lastly, imagine one of our contemporaries—one with a faith in the wonders of what can be wrought when people are free—saying, “I do not believe that shoes and socks for kids should be a government responsibility. Properly, that is a responsibility of the family. This activity should never have been socialized. It is appropriately a free market activity.”

What, under these circumstances, would be the response to such a stated belief? Based on what we hear on every hand, once an activity has been socialized for even a short time, the common chant would go like this, “Ah, but you would let the poor children go unshod!”

However, in this instance, where the activity has not yet been socialized, we are able to point out that the poor children are better shod in countries where shoes and socks are a family responsibility than in countries where they are a government responsibility. We’re able to demonstrate that the poor children are better shod in countries that are more free than in countries that are less free.

True, the free market ignores the poor precisely as it does not recognize the wealthy—it is “no respecter of persons.” It is an organizational way of doing things featuring openness, which enables millions of people to cooperate and compete without demanding a preliminary clearance of pedigree, nationality, color, race, religion, or wealth. It demands only that each person abide by voluntary principles, that is, by fair play. The free market means willing exchange; it is impersonal justice in the economic sphere and excludes coercion, plunder, theft, protectionism, subsidies, special favors from those wielding power, and other anti-free market methods by which goods and services change hands. It opens the way for mortals to act morally because they are free to act morally.

Admittedly, human nature is defective, and its imperfections will be reflected in the market (though arguably, no more so than in government). But the free market opens the way for men to operate at their moral best, and all observation confirms that the poor fare better under these circumstances than when the way is closed, as it is under socialism.

Leonard E. Read

Founder and President

Foundation for Economic Education, 1946–1983

Summary

Explaining how a socialized activity could actually be done better by private, voluntary means in a free market is a little like telling a blind man what it would be like to see. But that doesn’t mean we just give up and remain blind.
Examples of the wonders of free and willing exchange are all around us. We take them for granted. Just imagine what it would be like if shoes and socks had been a government monopoly for a couple hundred years, versus the variety and low cost of shoes as now provided in free countries by entrepreneurs.
Free markets open the way for people to act morally, but that doesn’t mean they always will; nor should we assume that when armed with power, our behavior will suddenly become more moral.
For more information, see http://tinyurl.com/mkkrcpu, http://tinyurl.com/m8vjqvp,http://tinyurl.com/pfrmbux, and http://tinyurl.com/ocva6hu.

ABOUT LEONARD E. READ

Leonard E. Read (1898-1983) was the founder of FEE, and the author of 29 works, including the classic parable “I, Pencil.”

That Cold-Hearted Discipline by David J. Hebert

May 27, 2014/in Culture War, Economy, Must Read, Policy/by Foundation for Economic Education (FEE)

Good economics teaches cooperation and the limits of politics, not greed.

But of all the duties of beneficence, those which gratitude recommends to us approach nearest to what is called a perfect and complete obligation. What friendship, what generosity, what charity, would prompt us to do with universal approbation, is still more free, and can still less be extorted by force than the duties of gratitude. — Adam Smith, The Theory of Moral Sentiments

A recent article by Wharton Professor Adam Grant has been popping up here and there, most recently in Psychology Today. Grant suggests that studying economics breeds greed, and he cites several studies to support his claim. The studies conclude economics professors give less money to charity than other professions, economics students are more likely to deceive others for personal gain, and people who study economics have less of a concern for fairness and tend to think that “greed” is okay.

To his credit, Grant does consider the alternative: that maybe economics actually attracts greedy people or that greedy people tend to thrive by studying economics. He dismisses these possibilities by noting that “there is evidence for selection…but this doesn’t rule out the possibility that studying economics pushes people further toward the selfish extreme.” He goes on to chide practitioners of the discipline for teaching self-interest in the classroom.

Finally, he concludes with four points that are meant to provide evidence of the social harm in studying economics, which can be summarized in two overarching points:

1) Economics justifies greedy behavior, and

2) Studying economics makes people less altruistic.

Economics Justifies Greedy Behavior?

Studying economics, and specifically the role of incentives, teaches us that relying on altruism is a brave assumption that has but limited applicability. For example, among people we know, we can rely on a certain degree of altruism or benevolence. I know, for example, that my family and friends will be there for me not because I pay them to do so, but because they care about me. Similarly, they know I will be there for them. However, I don’t know the same thing about random people I encounter on the street.

And yet in order to enjoy the immense wealth that the division of labor affords us, society demands that we have interactions both with people we know well and people we do not know at all. These two distinct spheres of activity require two distinct forms of cooperation, which one might get from reading Adam Smith’s twin pillars of economics: The Theory of Moral Sentiments and The Wealth of Nations.

More tidily, perhaps, F. A. Hayek describes this situation in The Fatal Conceit by noting the difference between the macro-economy and the micro-economy. Macro, in this context, refers to society as a whole, while micro refers to just the people to whom we are close. Hayek says that if we were to apply the same rules of the family unit to the macro, as would be the case if we were to allocate resources altruistically, we would destroy the macro. This is because there would be a complete lack of economic calculation, resources would be misallocated, and plans would fail to be coordinated (see these articles for more on economic calculation).

Hayek also notes that the reverse is true: If we were to apply the rules of the market to the family, we would destroy it as well. We don’t need prices and incomes at the dinner table to allocate the food. Even the most ardent defender of markets would agree that having prices and such as the means of allocating food at the dinner table would be wrong, just like paying your friends to help you move across town would be strange. (Beer and pizza don’t count.)

Instead, students of economics recognize not that greed is good, as the saying goes, but that greed can be transformed into the service of others given the proper institutional setting. That institutional setting, which has been thoroughly discussed elsewhere, is one that celebrates the role of property rights, prices, and profits (and losses) and recognizes their role in creating the incentives to properly husband resources, generates the information about the relative scarcities of various goods and transmits this information to consumers and producers in a quick and efficient manner, all of which provides a feedback mechanism to drive continued innovation.

Economics Makes People Less Altruistic?

Grant cites a 2005 article by Neil Gandal et. al. as concluding that “students who planned to study economics rated helpfulness, honesty, loyalty, and responsibility as just as important as students who were studying communications, political science, and sociology,” but that by the third year, economics students rated these values “significantly less important than first-year economics students.”

While the Gandal study does include such conclusions, it also includes much more. For example, economics students attribute less importance to fairness. Evidencing this, Gandal points out that, when questioned about the allocation of radio frequencies to different mobile-phone service providers, students who study economics are more likely to advocate selling the rights to the highest bidder while students of other disciplines are more likely to advocate for allocating the rights to “anybody who meets some minimal eligibility criteria.”

Students of economics do not advocate for property rights because we are greedy; we advocate for property rights because we understand and take seriously potential incentive problems in politics. The notion of minimal eligibility requirements may sound nice, for example, but problems may lie in who gets to draw that line, by what process that line gets drawn, and the incentives faced by the line-drawers. As Madison points out in Federalist 51, “If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary.”

Economics students know men are no angels. And as Nobel laureate James Buchanan points out, government officials are human beings, too, with their own hopes, dreams, and aspirations—and yes, forms of avarice. Supporting the allocation of resources to the highest bidder sidesteps the issues raised by these potential incentive problems. This means that the choice of how to allocate resources fundamentally comes down to a choice of institutions.

We can have a central authority establish guidelines by which anyone who wants can use the radio frequencies, or we can let the market decide. The former leads to a standard tragedy of the commons problem, whereby the radio frequency gets overused. In the case of cell phones, this means that the frequency would be crowded with multiple conversations simultaneously; imagine trying to shout to your friend across a crowded bar. The latter leads to the frequencies being allocated to the person who is best able to utilize them to serve the general population. So AT&T, for example, gets exclusive rights to a certain bandwidth and then tries to figure out how to best serve its customers. In this case, the customer gets to enjoy a clear phone call without the distraction of several other conversations in their ear simultaneously.

In any case, these are not examples of quelling altruism, but of keeping it in its place.

Less Greed, More Cooperation

Viewed in this light, economics does not so much teach greed but rather the beauty of cooperation. How else could we explain how a woolen coat gets made, how Paris gets fed, or how a pencil gets made? And if allocating, say, radio frequencies based on highest valued use makes people learn to discard fairness, well, how exactly is that a bad thing?

ABOUT DAVID J. HEBERT

David Hebert is a Ph.D. student in economics at George Mason University. His research interests include public finance and property rights.

EDITORS NOTE: The featured image is from FEE and Shutterstock.

Compulsion Is Not Cooperation by Gary M. Galles

May 27, 2014/in Economy, News, Policy, Regulation/by Foundation for Economic Education (FEE)

Market competition expands cooperative arrangements among people.

If you ask people whether competition or cooperation is better, almost everybody picks cooperation. It just “feels” better. However, when it comes to economic relationships, the question is not “either/or,” despite long-standing confusion.

FDR’s often-echoed statement was that “cooperation, which is the thing we must strive for today, begins where competition leaves off.” Market competition is actually the process that leads to better cooperative results than are otherwise achievable. Market competition actually expands cooperation.

A competitive market economy is characterized by more extensive and effective cooperation than a “cooperative” economy controlled by the State. That is because market competition embodies a discovery process that reveals who will best cooperate with us, and how. So far this system has no equal. That is why commerce has reduced conflict throughout history, with greater beneficial effects, the less it has been hamstrung by governments. Even in an age of open source and peer-to-peer, market arrangements—exchanges of value between parties—still give rise to the greatest level of prosperity.

A market economy, based on a legal framework of people’s rights to life, liberty, and property, outclasses a command economy because it is permeated by voluntary cooperation across the almost uncountable margins where individual choices interact. Consider the “cooperation” imposed on some by others against their will: Such a system of technocracy discards massive potential gains realized through exchange.

Competition exists within firms. But success in the marketplace requires extensive cooperative skills among many individuals in widely varied activities. Just as sports teams and orchestras illustrate how fierce competition can produce outstanding cooperation, the employees of firms must cooperate to produce high-quality, low-cost results, or risk being of being outperformed by rival cooperative teams.

Market competition is the process of rivalry in which the best cooperators—those who cooperate more effectively with more people—earn greater rewards. Further, the stronger the competition for consumer patronage and employees, the more such cooperation develops.

Each interaction in the vast web of market relationships (which Friedrich Hayek called the “extended order” of the marketplace) involves voluntary cooperation, which is the origin of the market’s mutual benefits. No arrangement is imposed by someone else’s decree. Rather, each develops as participants advance their mutual self-interests, among participants who often live in vastly disparate places, speak and write in a multitude of languages, and often believe many different things—even mutually inconsistent ones. And competition improves outcomes because the requirement to get the consent of all whose rights are impacted (absent in other systems) forces competition into positive channels, generating beneficial results.

People compete for jobs to cooperate with others to produce goods and services. That “competitive” cooperation also extends to owners and creditors, suppliers and customers. A worker that cooperates more effectively earns more income. A firm that better cooperates with customers and suppliers raises its market value.

Market competition leads to improved cooperation because everyone is free to offer to cooperate at whatever terms they find acceptable. The process rewards those most able to meet consumer desires, whoever they may be. Competition replaces restrictions imposed to benefit the politically powerful by denying others opportunities to cooperate on better terms. The result is improved results for them as well as those who would prefer to deal with them, if given the chance. Based in secure property rights, it does not allow the strong to abuse the weak; rather, it favors those better able to serve others, however weak they may be in politics or other aspects of society, with a special premium for benefiting the masses (where really large rewards can be reaped). In that way, competition is the primary uplifting force for the poor, not the means of making them victims.

Nothing prevents individuals who are sovereign over themselves from voluntarily cooperating whenever all involved expect to benefit. We do it countless times, without even noticing it. But when those with political power can impose limits on how we are allowed to cooperate with others, competition is transformed into a political war to control what we must cooperate in pursuit of, as well as how and for whom. There is nothing harmonious, benevolent, caring, or community-minded about such conflict. It focuses on reducing the options of others.

Scarcity means competition cannot be avoided, no matter how society is organized. In capitalism—voluntary cooperation based on private property (in turn based on the principle of self-ownership)—it creates wealth out of otherwise-latent abilities in others. The key to its success is its limitation to voluntary activities, barricaded against political compulsion, because under “cooperative” decision-making, competition for political power destroys wealth and hamstrings society from vast areas of true cooperation.

Contrary to those who assert cooperation’s superiority to competition, capitalism is the only system that strips force away from all relationships, allowing true voluntary cooperation. The issue is not competition versus cooperation, but channeling people’s scarcity-induced competition exclusively into mutually agreed forms. Markets do that. As Ludwig von Mises put it, competitive markets comprise “a system of mutual cooperation,” where “the function of competition is to assign to every member of the social system that position in which he can best serve the whole of society and all of its members.” In contrast, government enforced “cooperation” actually crowds out or destroys real cooperation.

ABOUT GARY M. GALLES

Gary M. Galles is a professor of economics at Pepperdine University.

CLICHES OF PROGRESSIVISM #6 – Capitalism Fosters Greed and Government Policy Must Temper It

May 26, 2014/in Budget and Finance, Economy, Government Transparency, Policy, Politics, Regulation/by Foundation for Economic Education (FEE)

The Foundation for Economic Education (FEE) is proud to partner with Young America’s Foundation (YAF) to produce “Clichés of Progressivism,” a series of insightful commentaries covering topics of free enterprise, income inequality, and limited government.

Our society is inundated with half-truths and misconceptions about the economy in general and free enterprise in particular. The “Clichés of Progressivism” series is meant to equip students with the arguments necessary to inform debate and correct the record where bias and errors abound.

The antecedents to this collection are two classic FEE publications that YAF helped distribute in the past: Clichés of Politics, published in 1994, and the more influential Clichés of Socialism, which made its first appearance in 1962. Indeed, this new collection will contain a number of essays from those two earlier works, updated for the present day where necessary. Other entries first appeared in some version in FEE’s journal, The Freeman. Still others are brand new, never having appeared in print anywhere. They will be published weekly on the websites of both YAF and FEE: www.yaf.org and www.FEE.org until the series runs its course. A book will then be released in 2015 featuring the best of the essays, and will be widely distributed in schools and on college campuses.

See the index of the published chapters here.

#6 – Capitalism Fosters Greed and Government Policy Must Temper It

On April 19, 2014, the Colonial Bread store in my town of Newnan, Georgia, closed its doors after a decade in business. The parent company explained, “In order to focus more sharply on our core competencies, the decision was made to close some of our retail stores.” A longtime patron responded in the local newspaper this way: “It’s just sad. It’s simply greed and we’re on the receiving end. It’s frustrating to know there isn’t anything you can do about it either.”

Now there’s a rather expansive view of “greed” if there ever was one! Trying to make more efficient the business in which you’ve invested your time and money is somehow a greedy thing to do? And what is it that the disgruntled patron wishes should be done about it? Perhaps pass a law to effectively enslave the business owner and compel him to keep the store open? Who is really the greedy one here?

“Greed” is a word that flows off Progressive tongues with the ease of lard on a hot griddle. It’s a loaded, pejorative term that consigns whoever gets hit with it to the moral gutter. Whoever hurls it can posture self-righteously as somehow above it all, concerned only about others while the greedy wallow in evil selfishness. Thinking people should realize this is a sleazy tactic, not a thoughtful moral commentary.

Economist Thomas Sowell famously pointed out in Barbarians Inside the Gates and Other Controversial Essays that the “greed” accusation doesn’t meet the dictionary definition of the term any more. He wrote, “I have never understood why it is ‘greed’ to want to keep the money you have earned but not greed to want to take somebody else’s money.”

Once upon a time, and for a very long time, “greed” meant more than just the desire for something. It meant the inordinate, obsessive worship of it that often crossed the line into actions that harmed other people. Really, really wanting a million bucks was not in and of itself a bad thing if you honestly worked for it, freely traded with others for it, or took risks and actually created jobs and wealth to secure it. If you worshiped the million bucks to the point of a willingness to steal for it or hire a public official to raid the Treasury on your behalf, then you were definitely a greedy person. Shame on you. If you’re one of those many people today who are willing to stoop to stealing or politicking your way to wealth, you’ve got a lot to answer for.

“Greed” also means, to some people, an unwillingness to share what’s yours with others. I suppose a father who buys a personal yacht instead of feeding his family would qualify. But that’s because he is evading a personal responsibility. He owes it to the family he brought into being to properly care for them. Does the bakery owner who closes his store thereby violate some responsibility to forever serve a certain clientele? Was that ever part of some contract all parties agreed to?

Let’s not forget the fundamental and critical importance of healthy self-interest in human nature. We’re born with it, and thank goodness for that! I don’t lament it for a second. Taking care of yourself and those you love and have responsibility for is what makes the world work. When your self-interest motivates you to do that, it means on net balance you’re good for the world. You’re relieving its burdens, not adding to them.

A common but misleading claim is that the Great Recession of 2008 resulted from the “greed” of the financial community. But did the desire to make money suddenly appear or intensify in the years before 2008? George Mason University economist Lawrence White pointedly explained that blaming greed for recessions doesn’t get us very far. He says, “It’s like blaming gravity for an epidemic of plane crashes.” The gravity was always there. Other factors must have interceded to create a serious anomaly. In the case of the Great Recession, those factors prominently included years of cheap money and artificially low interest rates from the Federal Reserve, acts of Congress and the bureaucracy to jawbone banks into making dubious loans for home purchases, and government entities like Fannie Mae and Freddie Mac skewing the housing market—all policies that enjoyed broad support from Progressives but never from genuinely “free market” people.

The Progressive perspective on “greed” is that it’s a constant problem in the private sector but somehow recedes when government takes over. I wonder exactly when a politician’s self-interest evaporates and his altruistic compassion kicks in? Does that happen on election night, on the day he takes office, or after he’s had a chance to really get to know the folks who grease the wheels of government? When he realizes the power he has, does that make him more or less likely to want to serve himself?

The charlatan cries, “That guy over there is greedy! I will be happy to take your money to protect you from him!” Before you rush into his arms, ask some pointed questions about how the greedy suspect is doing his work and how the would-be protector proposes to do his.

The fact is, there’s nothing about government that makes it less “greedy” than the average guy or the average institution. Indeed, there’s every reason to believe that adding political power to natural self-interest is a surefire recipe for magnifying the harm that greed can do. Have you ever heard of corruption in government? Buying votes with promises of other people’s money? Feathering one’s nest by claiming “it’s for the children”? Burdening generations yet unborn with the debt to pay for today’s National Cowboy Poetry Gathering in Nevada (a favorite pork project of Senator Harry Reid)?

If you are an honest, self-interested person in a free market, you quickly realize that to satisfy the self-interest that some critics are quick to dismiss as “greed,” you can’t put a crown on your head, wrap a robe around yourself and demand that the peasants cough up their shekels. You have to produce, create, trade, invest, and employ. You have to provide goods or services that willing customers (not taxpaying captives) will choose to buy and hopefully more than just once. Your “greed” gets translated into life-enhancing things for other people. In the top-down, socialized utopia the Progressives dream of, greed doesn’t disappear at all; it just gets channeled in destructive directions. To satisfy it, you’ve got to use the political process to grab something from other people.

The “greed” charge turns out to be little more than a rhetorical device, a superficial smear intended to serve political ends. Whether or not you worship a material thing like money is largely a matter between you and your Maker, not something that can be scientifically measured and proscribed by lawmakers who are just as prone to it as you are. Don’t be a sucker for it.

Lawrence W. Reed
President
Foundation for Economic Education

Summary

Greed has become a slippery term that cries out for some objective meaning; it’s used these days to describe lots of behaviors that somebody doesn’t like for other, sometimes hidden reasons.
Self-interest is healthy and natural. How you put it into action in your relationships with others is what keeps it healthy or gets it off track.
Lawmakers and government are not immune to greed and, if anything, they magnify it into harmful outcomes.
For more information, see http://tinyurl.com/lxdrfac, http://tinyurl.com/pyvvx73, and http://tinyurl.com/lj7s2ab.

ABOUT 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.

CLICHES OF PROGRESSIVISM #5 – Warren Buffett’s Federal Tax Rate Is Less than His Secretary’s

May 25, 2014/in Budget and Finance, Economy, Taxes/by Foundation for Economic Education (FEE)

The Foundation for Economic Education (FEE) is proud to partner with Young America’s Foundation (YAF) to produce “Clichés of Progressivism,” a series of insightful commentaries covering topics of free enterprise, income inequality, and limited government.

Our society is inundated with half-truths and misconceptions about the economy in general and free enterprise in particular. The “Clichés of Progressivism” series is meant to equip students with the arguments necessary to inform debate and correct the record where bias and errors abound.

The antecedents to this collection are two classic FEE publications that YAF helped distribute in the past: Clichés of Politics, published in 1994, and the more influential Clichés of Socialism, which made its first appearance in 1962. Indeed, this new collection will contain a number of essays from those two earlier works, updated for the present day where necessary. Other entries first appeared in some version in FEE’s journal, The Freeman. Still others are brand new, never having appeared in print anywhere. They will be published weekly on the websites of both YAF and FEE: www.yaf.org and www.FEE.org until the series runs its course. A book will then be released in 2015 featuring the best of the essays, and will be widely distributed in schools and on college campuses.

See the index of the published chapters here.

#5 – Warren Buffett’s Federal Tax Rate Is Less than His Secretary’s

In August 2011, Warren Buffett wrote an opinion piece in the New York Times in which he made the assertion that his 2010 “federal tax rate” of 17.4 percent was 18.6 percentage points less than the 36.0 percent average rate paid by the 20 other workers in his office.

Buffett’s piece garnered substantial media attention and, in the months since its publication, his “federal tax rate” assertion has been woven into the fabric of American politics. His analysis was the basis for the “Buffett Rule,” a tax plan proposed by President Obama that would implement measures under which everyone making more than $1 million in income per year would pay a minimum effective tax rate of 30 percent.

Clearly, given Buffett’s status as a legendary businessman and investor (the “Oracle of Omaha”), his tax analysis carried a great deal of credibility and, as such, it was never challenged. Adding to the unchallenged acceptance of Buffett’s assertion was the fact that Buffett never released (a) his 2010 federal tax return, (b) the federal tax returns of his office workers, or (c) the analysis underlying his “federal tax rate” assertion.

In truth, Buffett’s assertion is completely inaccurate and is based on a fundamentally flawed analysis of basic federal taxation principles. In reality, he pays a much higher relevant “federal tax rate” than any of his office workers.

First of all, payroll taxes (Social Security and Medicare) are totally irrelevant for this type of analysis. Because these taxes were not assessed on non-wage income (prior to 2013), and because Social Security taxes were only assessed on the first $106,800 of wage income in 2010, the amount Buffett paid into these programs was very close, in dollar terms, to the amounts paid into them by each of his office workers. But because Buffett had total taxable income of almost $40 million, the amount of Social Security and Medicare taxes he paid in 2010 represented only a tiny fraction of his total taxable income. For most of his office workers, these taxes represented 7.65 percent of their taxable income (even though they paid roughly the same amount as Buffett did in dollar terms). This 7.65 percent payroll tax differential is part of the 18.6 percent differential cited by Buffett in his op-ed piece.

But what Buffett failed to mention is that Social Security and Medicare benefits are capped as well. Upon retirement, Buffett will receive almost exactly the same Social Security and Medicare benefits (in dollar terms) that his office workers will receive. There is very little differential between Buffett and his office workers in terms of what they pay into the Social Security and Medicare programs and what they will receive in benefits. As such, the 7.65 percentage point “federal tax rate” differential between Buffett and his co-workers arising from the existing Social Security and Medicare taxing mechanism is simply not relevant and is a mirage.

A second flaw in Buffett’s analysis has to do with the fact that he included employer-paid payroll taxes in coming up with his and his office workers’ “federal tax rates.” The obvious problem here is that Buffett’s coworkers do not pay these taxes. Rather, Buffett does as a partial owner of their employer, Berkshire Hathaway. Buffett’s inclusion of these taxes in his analysis was clearly incorrect, and it distorts the rates he cited. Of course, he included employer-paid payroll taxes to double the 7.65 percent “federal tax rate” differential mirage identified in the previous paragraph.

Buffett himself owns 33.9 percent of Berkshire Hathaway, a publicly traded corporation with taxable income of $19.1 billion in 2010. Assuming a very conservative corporate federal tax rate of 25 percent, Berkshire will ultimately pay $4.76 billion in federal corporate income taxes on this taxable income. Corporate taxes are borne by shareholders of the corporation, in that these taxes reduce the amount of cash available for (a) dividend payments (Berkshire has not historically paid dividends to its shareholders), or (b) reinvestment into the corporation in order to increase shareholder value.

Given his ownership stake in Berkshire, Buffett bore 33.9 percent of the $4.77 billion in federal corporate taxes, or $1.61 billion. Buffett ignored this tax amount in compiling his “federal tax rate” analysis. If Buffett’s share of corporate taxable income and corporate taxes paid are factored into his analysis, his overall 2010 “federal tax rate” increases by 7.56 percentage points, from 17.4 percent to 24.96 percent.

As an employer, Berkshire matches the Social Security and Medicare taxes paid by its employees. These taxes are borne by the shareholders of Berkshire for the same reasons corporate income taxes are. Using reasonable assumptions and data gleaned from the company’s 2010 SEC filings, Buffett’s share of these taxes was approximately $400 million in 2010. If these taxes are included (and they certainly should be), his 2010 “federal tax rate” increases by 6.16 percentage points to 31.12 percent.

Let’s do the math. Buffett, in his analysis, overstated his office workers’ “federal tax rate” by including irrelevant payroll taxes (7.65 percent) and employer-paid payroll taxes (7.65 percent). In actuality, his office workers’ relevant 2010 “federal tax rate” was 20.7 percent, not 36.0 percent, while Buffett’s was actually 31.12 percent, not 17.4 percent.

Bottom line: Buffett’s 2010 relevant “federal tax rate” was actually at least 10.4 percentage points higher than the average rate paid by his office workers.

Who knew?

It is quite troubling that Buffett’s original Times op-ed piece, based upon such a flawed and incomplete analysis, has gained such unchallenged visibility and credibility within the landscape of American politics. While Buffett should be chastised for putting out such an inaccurate and misleading analysis, political commentators on the right should be faulted for not doing their research and for not effectively raising a challenge against the flawed thinking underlying Buffett’s op-ed.

George P. Harbison

Executive Vice President and Chief Financial Officer

Trident University International, LLC

Cypress, California

Summary

Warren Buffett created a new tax metric by combining individual income taxes and payroll taxes into one “federal tax rate.” He then asserted that his 2010 “federal tax rate” of 17.4 percent was 18.6 percentage points lower than the 36.0 percent average “federal tax rate” paid by his office workers.
The Social Security and Medicare taxing mechanisms in place in 2010 were inherently fair. Ascribing a “federal tax rate” differential to employee-paid payroll taxes, as Buffett did, is analytically incorrect. This 7.65 percentage point “federal tax rate” differential is a mirage.
Incredibly, Buffett included employer-paid (matching) payroll taxes in his calculations as well, thus doubling the 7.65 percentage point differential.
Buffett ignored, in his calculations, the roughly $1.6 billion in corporate income taxes he bore in 2010 as a one-third owner of Berkshire Hathaway. He also ignored his share (roughly $400 million) of Social Security and Medicare matching taxes that Berkshire Hathaway paid to employees.
The analytically correct comparison, excluding individual payroll taxes and including corporate income and payroll taxes, shows that Buffett’s “federal tax rate” was actually over 10 percentage points higher than the average rate of his office workers in 2010.
For further information, see http://tinyurl.com/mn4z9rr, http://tinyurl.com/kt8kcds,http://tinyurl.com/lzdg7ym, and http://tinyurl.com/lxdrfac.

Editor’s Note: This essay originally appeared on Forbes.com in October 2013.

ABOUT GEORGE P. HARBISON

George P. Harbison is the Executive Vice President and Chief Financial Officer of Trident University International, LLC.

Slogans or Science? Regression toward the meme in the minimum wage debate by Sandy Ikeda

May 25, 2014/in Budget and Finance, Economy, Policy, Politics/by Foundation for Economic Education (FEE)

The debate over raising the legal minimum wage (LMW) to $10 an hour has people on both sides saying things they should know better than to say. For example, a friend recently posted the following meme (which isn’t the worst I’ve seen) on Facebook:

One year ago this week, San Jose decided to raise its minimum wage to $10/hour.

Any jobs disappear?

The number of minimum wage jobs has grown.

Any businesses collapse?

The number of businesses has grown.

Any questions?

Yes, several, but I’ll get to those in a bit.

Memes like these are just as silly and misleading as the simplistic arguments they’re probably attacking. In fact, the economic analysis of significantly raising the minimum wage says that, other things equal, it will reduce employment below the level where it would otherwise have been. It doesn’t say that that employment will fall absolutely or businesses will collapse.

A little thinking can go a long way

Have a look at this chart published in the Wall Street Journal. At first, it seems to support the simplistic slogans. But it’s important to compare similar periods, such as March–November 2012 (before the increase was passed) versus March–November 2013, (just after it went into effect). The LMW increase wasn’t a surprise, so in the months before it was passed, businesses would have been preparing for it, shaking things up. Comparing those two periods, which makes the strongest case for the meme’s assertions, the total percentage increase in employment (the area under the red line) looks pretty close, going just by my eyeballs and a calculator. In fact, the post-hike increase might actually be smaller, but you’d need more data to be sure. So if you compare similar periods, the rate of employment growth seems not to have been affected very much by the hike. So is the meme right?

According to that same chart and other sources, hiring in the rest of California and the country, where for the most part there was no dramatic increase in the LMW, was also on the rise at pretty much the same time. Why? Apparently, the growth rate of the U.S. economy jumped in 2012, especially in California. So the demand for inputs, including labor, probably also increased. I’m certainly not saying this correlation is conclusive, but you could infer that while hiring in San Jose was rising, it wasn’t rising as fast as it might have otherwise, given the generally improving economy.

That’s a more ambiguous result, and of course harder to flit into a meme.

You are stupid and evil and a liar!

Those strongly in favor of raising the LMW cast opponents as Republican apologists for big business. Take this post from DailyKos, which apparently is the source of the above meme. The author writes, “Empirically, there’s no clear negative effect that can be discerned. The concerns of Teahadists like Paul Ryan and Marco Rubio is [sic] rather unfounded in academic literature and in international assessments of natural experiments.”

Now, the overwhelming conclusion of years of economic research on the effects of a minimum wage on employment is that it tends to increase, not lower, unemployment. As this article from Forbes summarizes, “In a comprehensive, 182-page summary of the research on this subject from the last two decades, economists David Neumark (UC-Irvine) and William Wascher (Federal Reserve Board) determined that 85 percent of the best research points to a loss of jobs following a minimum wage increase.”

So, saying there is “no clear negative effect” is an outrageously ignorant claim. And there’s not one mention of the economic evidence that significantly raising the LMW will hurt the very people you wish to help: the relatively poor. But why address solid scientific research when there’s sloppy sloganeering by politicos to shoot down?

Attacking easy targets is understandable if you want to vilify your opponents or win an easy one for the cause. In that case, you take the dumbest statement by your rival as the basis of your attack. Such is the way of politics. In intellectual discourse, however, you may win the battle but you’ll lose the war. That is, if your goal is to learn from fruitful intellectual discussion, you must engage your opponent’s best arguments, not her weakest ones.

Let me use a counterexample. The sloganeering approach to attacking those who oppose raising the LMW is the equivalent of someone saying: “Well, this past winter was one of the coldest on record in the Midwest. So much then for global warming!” That may be “evidence” in a mud-slinging contest, but it’s not science.

What’s the theory?

While weather is complex and unpredictable, economic systems are even more so. Does that mean there are no principles of economics? Of course not. In fact, it’s because of such complexity that we need whatever help economic theory can offer to organize our thinking. And it doesn’t get any more basic than this: The demand curve for goods slopes downward.

That is, other things equal, the costlier something is, the less of it you’ll want to buy.

Note that the caveat—other things equal—is as important as the inverse relation between price and quantity demanded. That’s why my earlier back-of-the-envelope analysis had to be conditional on more data. Unfortunately, those data are often very hard to get. Does that mean we abandon the theory? Well, that would be like letting go of the rope you’re hanging on to for dear life because you’re afraid it might break.

So what exactly is the theory behind the idea that raising the LMW will increase hiring low-wage workers and boost business? If raising wages will actually increase employment and output, then why not also mandate a rise in interest rates, rents, electricity rates, oil prices, or the price of any of the other myriad factors of production that businesses ordinarily have to pay for? I would hope that this idea would give even the meme promoters pause.

As far as I know, the only situation in which forcing people to pay a higher wage rate will increase employment is when there is a dominant employer and there are barriers to competition. Economists term this “monopsony,” a situation that might occur in a so-called “factory town.” There, the dominant employer (of labor, capital, land, or whatever) can lower what she pays for inputs below the revenue that an additional unit of input earns the company. I would love to hear that argument and challenge it, because it’s the strongest one that standard economics can offer in favor of coercing businesses to raise wages. But so far I’ve not come across it, let alone any discussion of the economic literature on monopsony in the labor market, most of which questions its relevance. Some almost random examples are here and here.

Margins of analysis

Finally, economics teaches us that we can adjust to a particular change in different ways. In a thoughtful article on the effect of the LMW increase in San Jose that all sides of the debate should read, we get the following anecdote:

For his San Jose stores to make the same profit as before the wage increase, the same combo meal would be $6.75. “That would chase off a large percentage of my customers,” Mr. DeMayo said. He hasn’t laid off San Jose workers but has reduced their hours, along with some maintenance such as the drive-through lane’s daily hosing, and may close two unprofitable stores.

Employers can adjust to higher costs in one area by cutting back on spending in others. That might mean less unemployment than otherwise, but it doesn’t mean that raising the LMW has no negative employment effect at all. It means that the effects are harder to see. There’s that darn “other things being equal” again!

Slogans and memes are no substitute for science, or even clear thinking.

ABOUT SANDY IKEDA

Sandy Ikeda is an associate professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism. He will be speaking at the FEE summer seminars “People Aren’t Pawns” and “Are Markets Just?“

CLICHES OF PROGRESSIVISM #4 – The More Complex the Society, the More Government Control We Need

May 25, 2014/in Budget and Finance, Economy, Government Transparency, News, Policy, Regulation/by Foundation for Economic Education (FEE)

The Foundation for Economic Education (FEE) is proud to partner with Young America’s Foundation (YAF) to produce “Clichés of Progressivism,” a series of insightful commentaries covering topics of free enterprise, income inequality, and limited government.

Our society is inundated with half-truths and misconceptions about the economy in general and free enterprise in particular. The “Clichés of Progressivism” series is meant to equip students with the arguments necessary to inform debate and correct the record where bias and errors abound.

The antecedents to this collection are two classic FEE publications that YAF helped distribute in the past: Clichés of Politics, published in 1994, and the more influential Clichés of Socialism, which made its first appearance in 1962. Indeed, this new collection will contain a number of essays from those two earlier works, updated for the present day where necessary. Other entries first appeared in some version in FEE’s journal, The Freeman. Still others are brand new, never having appeared in print anywhere. They will be published weekly on the websites of both YAF and FEE: www.yaf.org and www.FEE.org until the series runs its course. A book will then be released in 2015 featuring the best of the essays, and will be widely distributed in schools and on college campuses.

See the index of the published chapters here.

#4 – The More Complex the Society, the More Government Control We Need

Argued a college president at a recent seminar: “Your free market, private property, limited government theories were all right under the simple conditions of a century or more ago, but surely they are unworkable in today’s complex economy. The more complex the society, the greater is the need for governmental control; that seems axiomatic.”

It is important to expose this oft-heard, plausible, and influential fallacy because it leads directly and logically to socialistic planning. This is how a member of the seminar team answered the college president:

“Let us take the simplest possible situation—just you and I. Next, let us assume that I am as wise as any President of the United States who has held office during your lifetime. With these qualifications in mind, do you honestly think I would be competent to coercively control what you shall invent, discover, or create, what the hours of your labor shall be, what wage you shall receive, what and with whom you shall associate and exchange? Is not my incompetence demonstrably apparent in this simplest of all societies?

“Now, let us shift from the simple situation to a more complex society—to all the people in this room. What would you think of my competence to coercively control their creative actions? Or, let us contemplate a really complex situation—the 188,000,000 people of this nation [Editor’s note: now, in 2014, about 318 million]. If I were to suggest that I should take over the management of their lives and their billions of exchanges, you would think me the victim of hallucinations. Is it not obvious that the more complex an economy, the more certainly will governmental control of productive effort exert a retarding influence? Obviously, the more complex our economy, the more we should rely on the miraculous, self-adapting processes of men acting freely. No mind of man nor any combination of minds can even envision, let alone intelligently control, the countless human energy exchanges in a simple society, to say nothing of a complex one.”

It is unlikely that the college president will raise that question again.

While exposing fallacies can be likened to beating out brush fires endlessly, the exercise is nonetheless self-improving as well as useful, in the sense that rearguard actions are useful. Further, one’s ability to expose fallacies—a negative tactic—appears to be a necessary preface to influentially accenting the positive. Unless a person can demonstrate competence at exploding socialistic error, he is not likely to gain wide audiences for his views about the wonders wrought by men who are free.

Of all the errors heard in classrooms or elsewhere, there is not one that cannot be simply explained away. We only need to put our minds to it. The Foundation for Economic Education seeks to help those who would expose fallacies and accent the merits of freedom. The more who outdo us in rendering this kind of help, the better.

Leonard E. Read

Founder and President of FEE, 1946–1983

Summary

Complexity does not automatically suggest centralization of power.
You and I have full-time jobs managing our own respective lives; our task increases exponentially if we try to control the lives of a handful of others, and it explodes beyond reason if we try to control the lives of millions.
For further information, see http://tinyurl.com/p7kauf5, http://tinyurl.com/l7wbfa8,http://tinyurl.com/om9kybb, and http://tinyurl.com/ozxu23l

Editor’s Note

This was the first chapter in the first edition of FEE’s Clichés of Socialism when it appeared in 1962. Though the “complexity requires control” fallacy is not publicly expressed so boldly today, it is still implicit in the core assumptions of modern Progressivism. Almost every new innovation gives rise to some call from some Progressive somewhere to regulate it, monitor it, sometimes even ban it. Rarely will a Progressive reject new assignments for government, even though it has already assumed so many that it manages so poorly (and at a financial loss). It behooves us to point out that the more government attempts to control, the less well it will perform all of its duties, including the essential ones. Leonard Read passed away in 1983, but his wisdom as expressed here still resonates.

ABOUT LEONARD E. READ

Leonard E. Read (1898-1983) was the founder of FEE, and the author of 29 works, including the classic parable “I, Pencil.”

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

Poker and the Free Market by Robert Stewart

May 25, 2014/in Budget and Finance, Economy, News/by Foundation for Economic Education (FEE)

Good Poker Players Have More in Common with Entrepreneurs than with Gamblers.

Until recently I was a director and the chairman of the audit committee of one of Bermuda’s banks, but I lived with a guilty secret, almost the equivalent of being an alcoholic or, even worse, a smoker. I played poker regularly and had done so since I was about 20 years old. A public poker game was held in a bar in Bermuda called Flannagan’s, and I played there a few times until about five years ago. A friend suggested that I should not participate in a public game since customers and shareholders of the bank would get the wrong impression I was gambling. Poker, of course, is not gambling, although the authorities took a different stance and closed the game down on the grounds that people like me need protection from ourselves. Poker appears to be about gambling, but it is a game of immense skill—skill that is based on betting and reading the bets of other players.

However, the more I thought about it the more I began, belatedly, to realize that poker has as much in common with the free market as banking—indeed more, in light of some of the recent bailouts in the United States. There is no lender of last resort like the Fed, and no friendly Uncle Sam saying that you are too big to fail.

But I get ahead of myself.

The origins of poker are obscure (they go back to Persia in the fourteenth century to a card game called “as nas”), but most historians give the honour of developing the modern game to the French residents of New Orleans, the home of jazz and enjoyable living. It spread up the Mississippi through paddle steamers (showbiz historians will remember that in Showboat the main character was Gaylord Ravenal, a huge romantic but a rotten poker player). It was played by soldiers of both sides during the Civil War and then made its way to the Wild West and became a staple of cowboy movies. Violence has always been associated with the game, wrongly in my view, and many westerns feature poker disputes. Wild Bill Hickok was shot by Crooked Nose McCall in Deadwood in 1876 during a poker game when he held a hand of two aces, two eights and a queen, immortalized as the dead-man’s hand. Benny Binion, owner of Binion’s Horseshoe Casino in Las Vegas, who hosted the First World Series of Poker tournament in 1970, was a convicted murderer.

Spontaneous Order

The game is a good example of spontaneous order, not unlike the development of language, dancing, or the free market, where cooperation and coordination among people arise without conscious government or other deliberate direction. It is a classic product that arises not because of human design, but because of human action.

Poker is normally played by five to eight players, usually but not exclusively males who enjoy the raucous company of one another plus the thrill and skill of being able to make a few dollars at the expense of their friends. The rules are pretty simple—to avoid boring everyone, they can be found in many reference books—and are enforced by all participants in an unequivocal way in much the same manner as golf rules are enforced by the U.S. Golf Association.

There are no extenuating circumstances, and genuine mistakes are regarded as acts of remarkable stupidity and penalized accordingly. No friendly banking window, no Ben Bernanke, just a fleeting look of sympathy (or contempt) as the other participants pocket your dough. This is capitalism at its rawest. You keep the benefits, but you pay the full price if you get it wrong. Best of all, you are not taxed on your winnings—unless you are good enough to win the World Series of Poker. There is no moral hazard because the participant bears the losses of his actions (or bets), and he will be constrained in his actions because of the burden of potential losses.

Arguments about the rules of poker are rare. They have been established for years now, and although there can be local variations, the players generally all know the rules. There is no nonsense about living rules that need to be interpreted as social or economic circumstances change. However, nothing is perfect. Daniel Seligman, a writer for Fortune, in a delightful essay titled “Poker Memories” cites taking an arcane dispute to a professor of jurisprudence and public policy at Fordham Law School because his writings evidenced a lifetime of dealing at a high level with questions of justice and ethics. In my experience, it is rare for there to be an unresolved question about the rules. Anyway, people are too impatient to get on with the game rather than haggle about some obscure point of procedure.

A Zero-Sum Game

In one vital aspect poker is unlike a free-market economy. It is a zero-sum game. Participants who win are exactly matched dollar for dollar by those who lose. Indeed, playing in a casino setting it is even worse than a zero-sum game as the “house” takes its cut for organizing the game. By contrast, in a free market, both buyer and seller gain something—otherwise, no exchanges would take place.

That being said, most of the people with whom I play put the five or six hours of entertainment ahead of dining at the best restaurants, and even a bad night with the cards is less expensive than paying for an expensive dinner.

Over the past five years poker has enjoyed a renaissance thanks to television and the Internet. Online players are estimated to wager more than $250 million per day. On most evenings a viewer may watch a game and get a sense of the excitement that arises, notwithstanding that the game most frequently telecast is Texas Hold ’Em, probably the most boring of all poker games and scorned as “poker for dummies.”

Indeed, so popular has the game become that it is the central theme in movies such as Lucky You, about a professional poker player, played by Eric Bana, who gets a lesson in life from a struggling singer played by Drew Barrymore; a few poker personalities make cameo appearances. Even James Bond in Casino Royalehas given up baccarat in favor of Texas Hold ’Em.

Risk and Uncertainty

Competing against seven hardened veterans of poker means that the risk of failure is pretty high—at least 6 to 1 against—but less risky than the business world, where the failure rate is higher. Unlike a job in the civil service, the monetary rewards from playing poker are not predictable, and like most business ventures it does not provide a guaranteed income. There is always and everywhere uncertainty. In the free market, unless you serve the consumer at least as well as your competitor, you will end up broke—this is known as creative destruction. In poker, unless you are consistently better than your rivals over a five-hour period, you will end up the same way. It is you versus the rest, and in the poker world, there are only two types: winners and losers, with the latter being the more numerous. It is a game of immense skill, not luck, although in the short term luck can temporarily overcome skill just as it can in economic life. But as most people know, luck comes in two packages—good and bad—and no one knows in advance which will apply.

In short, success at poker has much in common with success as an entrepreneur. Ludwig von Mises says it best in Planning for Freedom: “The entrepreneurs are neither perfect nor good in any metaphysical sense. They owe their position exclusively to the fact that they are better fit for the performance of the functions incumbent upon them than other people are. They earn profit not because they are clever in performing their tasks, but because they are more clever or less clumsy than other people are.”

Few people play poker for “Monopoly” (or play) money because it does not mean anything; any incentive to win would evaporate if the participants knew that no one was going to win or lose. If there is nothing at stake the game is meaningless, just like the communist economies before 1989. In a socialist or communist country, as Henry Hazlitt pointed out in The Foundations of Morality, “If I am a government commissar selling something I don’t really own, and you are another government commissar buying it with money that isn’t really yours, then neither of us really cares what the price is.” Prices and real money depend on the possibility of personal profit or loss.

You would be sneered at in disbelief if you alleged after a year of playing poker that the distribution of income was unfair and, because you find yourself with less cash than you think you should have, someone should bail you out in the name of social justice. There are no affirmative-action policies and no redundancy payments for bad poker players, no unemployment insurance, no subsidies, no tax write-offs, no pension after 40 years for having played the game sportingly. There are no alibis in poker.

Many poker games use chips instead of cash. They are easier to use than notes, can be given different values based on color, can be stacked with ease, and can easily be counted when the game ends. Each player, for example, can put $200 (or $2,000) in the kitty and at the end of the night cash in his chips against notes in the kitty. Should the host for the evening borrow extra chips without a corresponding donation to the kitty, there will be a cash shortage at the end of the evening when the players cash in. With seven players there could be chips valued at $1,500 but only $1,400 in cash. Any host who tried this stunt would suddenly find that no one would play with him. But is that not what central banks do? They create money (chips) out of thin air by using the printing press and when the public comes to spend it on goods and services they find that prices have gone up—which is the same thing as saying that the value of money has gone down.

The Fed and the Bank of England are really like crooked hosts. They create money without a corresponding payment to the kitty. In poker you would be banned—or shot, if you played in Deadwood. In central banking, the chairman of the Fed is listened to with respect and awe, and collects accolades when he retires.

Just as people can trade freely with everyone irrespective of age, sex, race, national origin, income, or any other irrelevance, poker players have no objection to anyone participating in the game provided he plays by the rules and does not complain if he loses. Indeed, any televised poker game provides a representative sample of society, although your grandmother might think that there are more than a fair number of shady characters wearing dark glasses and baseball caps with odd nicknames like Amarillo Slim. Poker is a great social equalizer: So long as you have the cash you are welcome to pull up a chair. It is rare for someone, even a stranger, who wants to borrow to be denied a loan from another player; and it is equally rare, in my experience, for a debt not to be repaid in full. Financial responsibility is an unexpected characteristic of most players.

The essayist Leonard Kriegel, in an article titled “Poker’s Promise” in the New York Times Magazine, stated, “No game commanded greater loyalty and no game promised more. Along with the intricacies of baseball, poker was a cultural bridge that helped you cross over into a wider world. No game better embodied the enormous sense of possibility we felt was ours by right of having been born in this America. A man could shed the past in poker. What could be more American than that?”

Imperfect Knowledge

Poker, like capitalism, is a game of incomplete information. In the free market there is always imperfect knowledge and uncertainty. In poker, it is possible to calculate the odds of drawing a king to make a full house, or whether the amount in the pot is sufficient to risk calling a bet, but these are mere fragments of the information required.

Donald Boudreaux, in his May 2000 column in this magazine, wrote:

In The Future and Its Enemies, Virginia Postrel notes the astonishing fact that if you thoroughly shuffle an ordinary deck of 52 playing cards, chances are practically 100 percent that the resulting arrangement of cards has never before existed. Never. Every time you shuffle a deck, you produce an arrangement of cards that exists for the first time in history. The arithmetic works out that way. For a very small number of items, the number of possible arrangements is small. Three items, for example, can be arranged only six different ways. But the number of possible arrangements grows very large very quickly. The number of different ways to arrange five items is 120 . . . for ten items it’s 3,628,800 . . . for fifteen items it’s 1,307,674,368,000.

The number of different ways to arrange 52 items is 8.06667. This is a big number. No human can comprehend its enormousness. By way of comparison, the number of possible ways to arrange a mere 20 items is 2,432,902,008,176,640,000—a number larger than the total number of seconds that have elapsed since the beginning of time ten billion years ago—and this number is Lilliputian compared to 8.06667.

This means that everyone playing poker is pretty much in the dark about what is going happen. To be a consistent winner means paying attention to minute detail, but it also means that the unexpected is always likely to happen. Like a participant in the economy, nothing is forever and nothing is certain. There is always the ever-present risk of being bested by the unforeseen. Is this not the problem of knowledge to which Hayek drew our attention? As he explains in “The Use of Knowledge in Society,” “The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. Or put briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.”

A good poker player does not play just the odds; he also plays the people. Is a bet of $100 a bluff or a warning that your opponent holds four aces? Is the sweat on the hands of your opponent a result of the air conditioner not working or does it arise from the fact that the guy across the table is playing you for a sucker? Not all the information that you need to make a correct decision is available and it never will be.

The late John von Neumann, a mathematician involved in the development of the computer and the atomic bomb, sought to apply the principles of mathematics to poker, but he soon discovered that bluffing, deception, human fallibility, and human ingenuity were not promising subjects for the application of mathematical principles. Others have tried to apply what is known as game theory, but without any notable success. The geeks have failed to best the uneducated cowboys. That lack of success is similar to the failure of computer-generated studies to forecast with any degree of accuracy (or usefulness) the track of free-market economies. Time will tell if the same types of studies will be able to forecast accurately the climate of the world in 50 years time. But it must be remembered that poker (like economics) is not a hard science like physics, where predictions can be made in laboratory-like conditions. For a computer program to work, poker would have to be a game in which nothing unexpected happens. People would have to be predictable. Anyone who knows anything knows that people are totally unpredictable, and this is especially true of those who play poker.

In a free economy information is not free and is difficult to acquire. Government regulators, for example, always like to speak about uniform standards and processes, as do security personnel at airports. I wonder if these people play poker, because if they do, using uniform standards would mean that they are guaranteed losers. If you always fold when you have a mediocre hand or shake with excitement when you have a certain winner, your opponent will know exactly what you are up to and the chances are you will be a consistent loser. What is needed is not uniform or standardized behavior but unpredictable behavior. You want your opponent always to be guessing at what you have in your hand. Predictable security standards at airports assure that some criminal will do the unexpected. So will those who are regulated, as the 2008 subprime financial crisis indicated. I’ll bet my house that it was a poker player who came up with structured investment vehicles, which were developed to get around regulators.

Good poker players are like entrepreneurs: You need greater skill than average to anticipate the future. As Mises so cogently puts it in Human Action, “What distinguishes the successful entrepreneur and promoter from other people is precisely the fact that he does not let himself be guided by what was and is, but arranges his affairs on the ground of his opinion about the future. He sees the past and the present as other people do; but he judges the future in a different way.”

Incentives Matter

Most of all, poker is a game of incentives. It has been said of economics that it is only a question of incentives; the rest is merely detail. No one in his right mind would play if, at the end of the evening, the money won and lost had to be redistributed to ensure fair shares. Any poker game run on that basis would be a complete flop. In real life an economy that seeks to ensure that losers are compensated from the earnings of the winners (those who cater to the wishes of the consumer) would not be a place that winners would like to frequent. One of the central lessons of poker, and the free market, is that when incentives change, individual behavior also changes.

In the current world of high oil prices, futures markets, structured investment vehicles, and hedge funds, speculators are often blamed for creating mayhem and dismissed as mere gamblers or poker players. What difference is there between betting on two pairs in poker and taking a position on oil or corn? Are not speculators merely well-dressed poker players with Ivy League names?

There is a big difference. Poker is an artificially contrived uncertainty devised for entertainment or thrills, while the speculator clearly discerns unnoticed opportunities for profits and alertly exploits them. “Whereas the gambler is attentive to the world of artificial indeterminacy, the speculator keeps an economic vigil over the real, uncontrived future” (John A. Sparks, “The Fellows with Black Hats: The Speculators,” The Freeman, August 1974).

There is certainly a close affiliation between playing poker and commercial speculation, but that simply makes my point that poker is but a surrogate for the free market.

ABOUT ROBERT STEWART

It All Depends on Who You Know

May 24, 2014/in Budget and Finance, Economy, News, Politics, Waste, Fraud and Abuse/by Paul R. Hollrah

A May 20, 2014 report by the Reuters news agency tells us that Credit Suisse, Switzerland’s second largest bank, has been fined $2.5 billion by U.S. regulators. The bank was charged with helping wealthy Americans conceal major cash assets, making it possible for them to evade U.S. federal and state income taxes.

In a related story, the Associated Press reports that, “The case is part of an Obama administration crackdown on offshore banks believed to be helping U.S. clients hide assets. Justice Department officials said their investigations into secret bank accounts held by Americans in Switzerland and other countries likely will bring forth additional resolutions.”

The prosecution of Credit Suisse came after prolonged criticism that the Obama administration has not been aggressive enough in its pursuit of wrongdoing in the banking industry. According to the AP, “A report from the Senate subcommittee that investigated Credit Suisse accused (Eric Holder’s) Justice Department of (surprise, surprise) lax enforcement and faulted the government for gleaning only 238 names of U.S. citizens with secret accounts at Credit Suisse, or just 1 percent of the estimated total.” The Senate subcommittee was able to find more than 22,000 U.S. clients with Credit Suisse accounts totaling some $10-12 billion.

The subcommittee report charged that Credit Suisse had sent bankers to recruit American clients at golf tournaments and other events. They encouraged potential clients to travel to Switzerland where they were assisted in hiding assets. The report disclosed that, in one instance, a Credit Suisse banker passed bank statements to a U.S. client hidden in the pages of a Sports Illustrated magazine during a breakfast meeting. In some instances, Credit Suisse bankers helped wealthy U.S. depositors withdraw funds from their Swiss accounts by either providing hand-delivered cash in the United States, or through Credit Suisse bank accounts in the U.S.

The $2.5 billion fine will be divided between the U.S. Department of Justice, the Internal Revenue Service, the Federal Reserve, and the New York State Department of Financial Services. Just under $200 million has already been paid to the Securities and Exchange Commission. In order to appease investors, the bank will begin paying out roughly half its profits to shareholders until its profitability reaches a pre-established price/earnings ratio.

However, the Credit Suisse settlement calls into question a 2009 “deferred prosecution agreement” between the U.S. Department of Justice and Switzerland’s largest bank, the Union Bank of Switzerland (UBS). In 2009, following a lengthy investigation by the Senate Permanent Subcommittee on Investigations, UBS agreed to pay just $780 million in fines and to turn over the names of thousands of customers suspected of evading U.S. taxes.

So why the disparity in fines between the two largest Swiss banks, UBS and Credit Suisse?

In July 2008, Barack Obama boasted of a contributor base totaling some 1.5 million people, with one-fourth of his $265 million coming from those contributing $2,000, or more. However, by October 2008, just five months later and just days before the General Election, the campaign reported that their contributor base has grown from 1.5 million to 2.5 million, and that the total amount raised approached $600 million. So who were all those people, and where did all that money come from?

In a July 25, 2008, column we pointed out that UBS Americas, headed by Robert Wolf… along with George Soros, one of Obama’s top two money men… had been accused of highly unethical and illegal banking practices in six months of hearings by the Senate subcommittee. According to an article in The Nation, UBS Americas had advised wealthy Americans, including many of our worst villains, how to shelter funds from the IRS, as well as from prosecutors, creditors, disgruntled business associates, family members, and each other.

In a Statement of Fact in the criminal trial of former UBS executive Bradley Birkenfeld, it was learned that UBS took extraordinary steps to help American clients manage their Swiss accounts without alerting federal authorities. For example, UBS advised American clients to avoid detection by using Swiss credit cards to withdraw funds, to destroy all existing off-shore banking records, and to misrepresent the receipt of funds from their Swiss accounts as loans from the Swiss bank. According to The Nation, UBS established an elaborate training program which taught bank employees how to avoid surveillance by U.S. authorities, how to falsify visas, how to encrypt communications, and how to secretly move money into and out of the country… ”

It was the perfect instrument for funneling illegal campaign contributions into the coffers of an unscrupulous American politician. Putting two and two together, I suggested that a very wealthy individual, such as George Soros, wishing to influence the outcome of an American presidential election, could transfer unlimited sums of money through this device. A U.S. recipient, such as the Obama campaign, could receive tens of thousands of individual contributions via Swiss credit card transfers, with the identities of bogus contributors “borrowed” from their extensive list of $10 and $20 U.S. contributors and entered onto FEC reports by teams of paid staffers working in a “boiler room” setting. The owners of the Swiss accounts would receive periodic statements indicating debits of varying amounts, up to $2,300 each, and offsetting credits funded by the wealthy, but unnamed, “international financier.”

For most of the super wealthy, especially those attempting to hide income and assets from U.S. authorities, an unexplained debit and credit of $2,300, or less, would not even raise an eyebrow. It would look to the depositor as if the bank had made a debit error which had been immediately corrected with a credit of like amount. However, in this instance, the Swiss bank account would actually have been debited, money transferred to the U.S. recipient, and funds replaced by person or persons unknown. The scheme would represent money-laundering of the first order. So who would ever know the source of such contributions? No one.

In response to my July 25 column, and at my suggestion, Newsmax sent a team of researchers to the Federal Election Commission to take a closer look at Obama’s FEC reports. In a follow-up October 20 article by Kenneth Timmerman, Newsmax provided details from FEC records that gave substantial weight to my theory. In studying Obama’s FEC filings, Newsmax found more than 2,000 donors who had given substantially more than their $4,600 limit ($2,300 in the primaries and $2,300 in the General Election).

But these were relatively minor infractions compared to 66,383 highly suspicious contributions that were, oddly enough, not rounded to even dollar amounts. For example, Newsmax reported that John Atkinson, an insurance agent in Burr Ridge, Illinois, gave a total of $8,724.26, more than double his legal limit. He gave in odd amounts such as $188.67, $1,542.06, $876.09, $388.67, $282.20, $195.66, $118.15, and one of $2,300. A self-employed caregiver from Los Angeles made 36 separate contributions totaling $7,051.12, of which thirteen were later refunded. However, in an odd coincidence, those 13 refunds, in amounts such as $233.88 and $201.44, came to an even $2,300, the maximum amount allowable in any one election.

One contributor interviewed by Newsmax, Ronald J. Sharpe, Jr., a retired schoolteacher from Rockledge, Florida, was reported to have given $13,800… $9,200 over his limit. However, when interviewed by Newsmax, Mr. Sharpe did not remember giving that much money to Obama, nor had anyone from the Obama campaign ever contacted him about a refund.

Lest anyone suggest that those 66,383 donors either emptied their piggy banks or emptied their pockets and purses periodically and just sent it all to Obama, pennies and all, I think it is far more reasonable to assume that those contributions were the proceeds of foreign currency conversions, smuggled into the country in foreign credit card transactions, converted to U.S. dollars, and deposited in Obama’s campaign coffers. Of course, when your money is coming in large chunks from illegal offshore accounts and laundered though a Swiss bank in Zurich, it takes a bit of creativity to put authentic-sounding names on all of it for the quarterly FEC reports. But the Obama campaign had a huge source of such data: the names, addresses, and occupations of tens of thousands of $10 and $20 U.S. Kool-Ade drinkers.

According to Newsmax, the Obama campaign finance reports contained some 370,500 unique names… a far cry from the 2.5 million contributors claimed by the campaign. Of course, a great many of those 2.5 million contributors were illegal Muslim “conduits” who were given money by their local imams with the understanding that they would use it to help elect Obama… a crime for which Eric Holder is now prosecuting a major Obama critic, author Dinesh D’Souza. The principal difference being that, instead of creating tens of thousands of illegal conduits, as the Muslim clerics clearly did, D’Souza reimbursed only three people in a New York senate race.

So what happened to Robert Wolf, Obama’s most important friend in the international banking industry? Was he fired, tried and imprisoned? No, Wolf was named to UBS’s Group Executive Board and promoted to President and COO of the UBS Investment Bank. From 2009-11, Wolf served on Obama’s Homeland Security Advisory Council, in 2011 he became a member of Obama’s Council on Jobs & Competitiveness, and in 2012 he was appointed to the President’s Export Council.

In response to the Credit Suisse prosecution, Attorney General Eric Holder has said that no bank is immune from criminal prosecution. But it’s clear that in his world, and in Obama’s world, the severity of punishment depends very much on who you are and who you know.

EDITORS NOTE: The featured photo is courtesy of Reuters/Ruben Sprich.

The Market Is Rigged: High-frequency trading vs. the culture of inflation by Douglas French

May 23, 2014/in Budget and Finance, Economy, News, Waste, Fraud and Abuse/by Foundation for Economic Education (FEE)

When Michael Lewis’s new book Flash Boys came out, the author caused a stir while making the media rounds to promote it. “The market is rigged,” he told 60 Minutes flatly. His comments set off a firestorm of debate as to whether sharp techies and their fast computers are screwing small investors.

As titillating as that soundbite was, those who take aim at high-frequency trading (HFT) need to reconsider their targets. The computers of HFT firms jump ahead of investors buying stock, purchasing shares from the seller and in turn selling to the buyer, making a few pennies of profit in between. Technology makes this all possible with computers making decisions in nanoseconds.

This trading system has created an opportunity for enterprising entrepreneurs to make a buck and, some would say, make the market more efficient. Others see it differently. “If you can see trades a little before someone else,” Floyd Norris writes for The New York Times, “then it may be possible to profit from that knowledge. To Mr. Lewis, and to some of the heroes in his book, the technology should be used to help bring real investors together to trade with one another.”

Matthew Phillips at Bloomberg Businessweek takes the opposite view. Speed traders and retail investors are not playing the same game, he writes. High-frequency traders are competing against each other to fill retail investors’ orders.

“The majority of retail orders never see the light of a public exchange,” writes Phillips. Large wholesale firms compete to fill these orders. “These firms’ algorithms compete with each other to capture those orders and match them internally. That way, they don’t have to pay fees for sending them to one of the public exchanges, which in turn saves money for the retail investor.”

HFT has created an arms race of sorts. One story Lewis’s book revolves around is a $300 million construction project to lay a more direct cable between the futures exchanges in Chicago and the stock market computers in New Jersey. The line shaved critical milliseconds off the time it takes to send information.

Ex-Wall Street economist Robert J. Barbera believes, “Economically, that has to be a deadweight loss.” He’d rather they built another lane on the George Washington Bridge.

Norris is also skeptical of the investment. “It is hard to see the benefit to society as a whole of enabling such trades.”

However, Gus Sauter, who was the CIO at low-fee Vanguard for many years, said speed traders helped him save his mutual fund clients (retail investors) more than a $1 billion a year. By that comparison, the Chicago–New Jersey cable looks downright cheap.

The culture of inflation

The cultural effects of inflation create this HFT debate in the first place, because it is financially fatal to leave one’s money in cash as government continually erodes its purchasing power. As Jörg Guido Hülsmann writes in The Ethics of Money Production, inflation deprives people “of the possibility of holding their savings in cash.” Professor Hülsmann explains that the elderly, widows, and orphans “must invest their money into the financial markets, lest its purchasing power evaporate under their noses.”

With a sound currency a person could put a few bucks away in a savings account each month, confident its purchasing power would keep pace and the interest earned provide an adequate nest egg, all the time being blissfully unaware of what was happening on Wall Street. But in the modern world, Hülsmann writes, people “become dependent on intermediaries and on the vagaries of stock and bond pricing.”

This is great for Wall Street players and bad for everyone else.

The Fed’s inflation provides near-term arbitrageurs opportunities to make money while share prices fall on a real basis. Hans Sennholz explained in his 1979 book Age of Inflation, “But alert traders can profit from the many chills and fevers that attack the market.”

Sennholz foresaw this new investing class of one-percenters all those years ago, when he wrote, “A small new middle class of traders and speculators replaces the old middle class of investors, and huge new fortunes are created from the losses suffered by investors and capitalists.”

Everyday middle-class investors look with envy at the wealth they see generated on Wall Street and seek to emulate it. Instead of spending time on more important things, “Inflation forces them to spend much more time thinking about their money than they otherwise would,” writes Hülsmann.

Think of all the time spent perusing financial publications and watching TV networks devoted solely to investments. People must invest right in hopes of accumulating wealth for emergencies and retirement. Inflation “compels them to be ever watchful and concerned about their money for the rest of their lives,” explains Hülsmann. “They need to follow the financial news and monitor the price quotations on the financial markets.”

In the end, the controversy surrounding high-frequency trading is likely much ado about nothing. For one thing, the industry peaked five years ago, pulling in $5 billion in profits. In 2012, it pulled in $1 billion. That might sound like a lot, but JPMorgan Chase made $5 billion just last quarter. As far as influencing markets and costing the average person money, HFT doesn’t compare to the Fed’s quantitative easing and zero interest rate policy. But in this age of inflation, “Money and financial questions come to play an exaggerated role in the life of man,” Hülsmann warns.

A more sound currency, whether metallic or digital, would spread a healthier culture: one not so obsessed with speculation, wealth, material goods, and nanoseconds.

ABOUT DOUGLAS FRENCH

Douglas E. French is senior editor of the Laissez Faire Club and the author of Early Speculative Bubbles and Increases in the Supply of Money, written under the direction of Murray Rothbard at UNLV, and The Failure of Common Knowledge, which takes on many common economic fallacies.

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