Eric Mack on Libertarianism

Eric Mack on Libertarianism

04/22/2019David Gordon

Libertarianism. By Eric Mack. Polity Press, 2018.  Vi + 167 pages. + online bonus chapter http://politybooks.com/wp-content/uploads/2018/07/Mack-Libertarian-FINAL-Online-Chapter-pdf.pdf

Eric Mack, for many years a philosophy professor at Tulane University, has a well-deserved reputation as a critic of philosophical arguments, and that talent is on abundant display in Libertarianism. In what follows, I shall comment on only a very few of Mack’s penetrating discussions.

The book is intended as an introductory guide to libertarianism, which Mack characterizes as “advocacy of individual liberty as the fundamental political norm. An individual’s liberty is understood as that individual not being subject to interference by other agents in her doing as she deems fit with her own person and legitimate holdings.” (p.1) The position may be defended with varying degrees of strictness, ranging from hardcore libertarians, who confine coercion to the protection of individual liberty, to soft-core libertarians, who allow coercion for a few additional reasons, such as aid when people are in “dire straits.” As the extent of permissible coercion grows, libertarianism shades into classical liberalism.

What is the justification for libertarianism? Mack distinguishes three principal answers, though noting that libertarianism can be defended in other ways as well. “There is the natural rights theme, according to which certain deep truths about human beings and their prospective interaction allow us to infer that each person has certain basic (‘natural’) moral rights that must be respected by all other persons, groups, and institutions.” (p.40)

Here I wonder whether one should make a distinction. Sometimes people use the term “natural rights” to mean basic rights, but sometimes people have in mind a narrower usage. In this understanding, it follows from human nature that human beings have certain rights. For example, in the Objectivist philosophy, because you need freedom in order to survive as a rational being, you have a right to freedom. There is no “is-ought” gap.  Philosophers like Nozick, who accept the is-ought gap, would in this usage count as supporters of basic rights but not of natural rights.

The second justification for libertarianism “is the cooperation to mutual advantage theme, according to which general compliance with certain principles of justice engenders a cooperative social and economic order that is advantageous to all its members.”(pp.4-5) These two justifications vie in popularity among libertarians, but there is a third justification as well, though this has been less influential. “A third possible approach. . .is a form of utilitarianism that maintains that the greatest happiness must be pursued indirectly through steadfast compliance with certain constraining moral norms—as it turns out, pretty much the same constraining norms that are celebrated by the natural rights and mutual advantage approaches.” (p.5)

Mack takes Locke to be an example of the first approach, Hume of the second, and John Stuart Mill and Herbert Spencer of the third. Among twentieth-century figures, he concentrates on Robert Nozick as a representative of the natural rights approach and Friedrich Hayek as a representative of the mutual advantage approach. Mack devotes most of the book to a close analysis of these two great thinkers. He mentions Murray Rothbard, who exerted a profound influence on Nozick, several times, but I wish he had devoted more space to him. Mack in the bonus online chapter subjects to critical scrutiny a number of contemporary libertarians: Hillel Steiner, Doug Rasmussen and Doug Den Uyl, Loren Lomasky, and David Schmidtz.

In what follows, I shall comment on only a few points. These concern Robert Nozick though some of the issues are relevant to others as well. This makes for an idiosyncratic review, but Nozick’s thought has fascinated me since I first encountered it some forty-five years ago, and that is why I have chosen this path.  Despite the narrow scope of my review, I hope that readers will gain some idea of Mack’s concerns and his style of argument.

Mack gives an excellent account of the argument, given by both John Rawls and Nozick, that utilitarianism does not take seriously the separateness of persons. The greatest happiness principle may require that you sacrifice yourself for the benefit of society. But, so the objection goes, this wrongly assimilates an individual’s sacrifice of part of himself for his overall good to the sacrifice of a person for the good of society. You may need to have your leg amputated to save your life, but there is no social entity having persons as its parts.

Mack considers a utilitarian response to the point raised by Rawls and Nozick, which does not rely “on the conflation of persons into a social entity.” (p.45) This response is that “what makes it rational for an individual to incur a lesser cost within her own life in order to attain a greater benefit within her own life is simply that the benefit is greater than the cost. The fact that the cost and the benefits are hers---that they both occur with her life---plays no role in making rational the production of the greater benefit at the lesser cost. Therefore, no contentious inference is needed to get from the so-called principle of individual choice to the principle of social choice.” (p.45, emphasis in original)

Mack responds on behalf of Rawls and Nozick to this rejoinder. They might reply that the rationality of prudential sacrifices within the life of one individual is “far less contentious” than the utilitarian’s balancing of costs and benefits across lives. (p.46) Can one show that utilitarian balancing is rational, without assuming the existence of a social entity with persons as parts? It seems doubtful that one can.

Mack’s response is excellent, but another answer is also worth considering. James Buchanan maintains that if one takes adequate account of the subjectivity of costs and benefits, a cost or benefit exists only relative to a single person. Your cost or benefit may be a cost or benefit to me, but only if I view it as one. I do not say that this view is correct, but it is at least worth considering. (Amartya Sen, like Buchanan a Nobel laureate in economics, thought there was a great deal to be said in favor of Buchanan’s view) If it is correct, benefits and costs cannot be added up across persons.

After a careful discussion of Nozick’s condemnation of using others as means, Mack says, “Nozick is concerned that his unqualified condemnation of using others as means will support anti-libertarian prohibitions, , for example, taking pleasure in another person’s appearance or trading with another person to one’s advantage. He then rules out such implications by declaring that, for the purposes of political philosophy, we need only be concerned ‘with certain ways that persons may not use others: primarily, physically aggressing against them. [quoting Nozick, Anarchy, State, and Utopia]However, this restriction is ad hoc because no reason is given for why political philosophy should only be concerned with this subset of usings.” (p.49, emphasis in original)

I do not think this objection altogether fair to Nozick, though it would be no doubt desirable to show how this view of political philosophy can be deduced from moral theory, as Nozick acknowledges. Confining political philosophy to the topic of when force is permissible (or obligatory) is not idiosyncratic to Nozick but a commonly used approach, especially among libertarians. He might respond to Mack, applying a strategy he often used on critics, ---much to their frustration, I might add---- that the problem of why political philosophy is thus confined is no more a problem for him than for anyone else. As such, it should not be taken as a decisive criticism of him.

Mack makes an excellent criticism of Nozick’s argument that if one starts with a network of competing protective agencies, as free market anarchists like Rothbard wish, “one of the protective agencies or the cooperative network as a whole seems to attain a natural ( non-coerced) monopoly in the provision of protective services.” (p.117), Nozick contends that if an agency or group of agencies attracts more clients than its rival agencies, there will be a cascade of new clients to it, because people will find it less costly to settle disputes if they are in the same agency. This will enable the largest agency to become a de facto monopoly. Mack is skeptical: “The fact that it may be less complicated and costly to resolve automobile collision claims when both parties are customers of the same insurance company has not led to one company having a virtual monopoly within the automobile insurance business. In addition, Nozick’s argument seems to overestimate the homogeneity of the services that competing protective agencies would offer.” (p.117)

There is an additional point here that seems worth making. Suppose that the process Nozick describes results in everyone’s joining the same agency. In that case, we would not have a state as Nozick characterizes it, because one of his requirements for a state is that it offers free or low-cost protective services to disadvantaged independents who are not its clients.  Thus, Nozick requires for his argument to the minimal state to succeed that the very process by which the derivation starts will come to an end before it completes itself, but he offers no reason for this.

Mack raises against Nozick the specter of public goods. “For our purposes here, we can think of a public good as a good which, if it is produced and enjoyed by some members of a given public, cannot readily be withheld from other members of that public. . .The standard and useful example of a public good is national-scale defense. . . The conventional economic wisdom. . .is that the total value of the orders that the state or firm [ that offers defense services]will receive will be markedly less than it naively expects.”(p.122) People will prefer to free ride, hoping that others will pay for the good; but if everyone reasons this way, the good will not be purchased.

Mack is certainly right that if anarchist protective agencies or a Nozickian minimal state, lacking the power of taxation, proved unable to supply effective defense, that would be a serious objection indeed. But I think his argument has moved too fast. According to the customary neoclassical analysis, public goods will not be supplied efficiently. It does not follow from that, though, that the good will not be supplied at all, or in a quantity insufficient to “do the job.” The extent of the supply is an empirical matter. It is not a requirement for a theory of libertarian rights that it never requires efficiency losses, as neoclassical theory defines these.[1] (The same difficulty also applies to Mack’s argument for a “dire straits fund” on pp.39-40 of the online bonus chapter.)

Suppose, though, that the free market turns out to be unable to supply defense. Would Mack then be correct when he says that a taxation minimal state may be justifiable on Nozickian grounds? He says, “Persons’ rights indicate what must not be done to them---or more specifically, what must not be done to them without their consent. But what about cases in which consent is not feasible?. . .A person’s right over her own body entails that she has a right not to be cut open without her consent even by an expert surgeon seeking to save her life. However, what if the person who needs that surgery to save her life is already unconscious and, hence, unable to give consent? If it is permissible for the surgeon to proceed with the needed surgery on the already unconscious individual, this seems to be true  because the requirement that the subject consent to the physical intervention is really a requirement that she consent if and only if consent is feasible.” (pp.123-124)

If this is right, then, “the libertarian advocate of the TMS may argue that, precisely because of the non-feasibility of attaining consent from individuals to make payments in exchange for the public good of rights-protection, it is permissible to impose those payments without actual consent.” (p.124, emphasis in original)

I do not think this argument succeeds. In the first case, it is permissible to proceed with the life-saving operation because there is reason to believe that is what the patient would want. Most people would. Had she given instructions beforehand not to operate, then the operation would not be permissible. In the taxation case, the reason consent is not feasible is that people refuse to consent. It is hardly plausible to say that I may force you to pay me for my services, because, owing to your refusal of my services, getting your consent is not feasible.

Mack himself raises an important problem for the argument for the taxation minimal state. ”Recall. . . . .that this defense of the TMS turns on a striking assumption about information. It assumes that the state’s tax assessors would know, for each assessed party, what magnitude of taxation would leave that party net better off in light of the value for that party of her receipt of the tax-funded public good of protective services.” (p.124)

In Libertarianism, Mack does not, for the most part, discuss his own views but confines himself to the exposition and criticism of others. An exception is his brilliant presentation of Mises’s calculation argument against socialism (pp.58 ff.), one of the best known to me, where it is clear that he endorses the argument. Readers should be aware though, that Mack has written a large number of papers setting forward his own views in great depth and detail. Readers of Mack’s work will encounter a very fine philosophical intelligence. Few can approach his power of critical analysis. Libertarianism is must reading for anyone interested in libertarian theory.


[1] For challenges to the neoclassical analysis of public goods, see Ludwig von Mises, Human Action, Chapter 23, pp.650 ff; and Anthony de Jasay, Social Contract, Free Ride. See also the discussion in David Schmidtz, The Limits of Government.

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The Economic Theory of Costs Now in Paperback

I’m happy to announce that the 2018 collection The Economic Theory of Costs: Foundations and New Directions, is now available in paperback at a substantially reduced price (see the post announcing its original publication here). This collection includes contributions from both leading and up-and-coming scholars working in the Austrian tradition. The contributors include many of the senior faculty members of the Mises Institute, as well as many of the younger fellows. It focuses especially on price theory, the unique feature of Austrian economics.

At the moment, the cheapest copies are available here and here.

The table of contents is as follows:

Introduction: “The Economic Theory of Costs in Perspective” Matthew McCaffrey

Cost and Choice

Chapter 1: “Contemporary Debates on Opportunity Cost Theory and Pedagogy” Jonathan Newman

Chapter 2: “The ‘Income Effect’ in Causal-Realist Price Theory” Joseph T. Salerno

The Evolution of Causal-Realist Production Theory

Chapter 3: “From Marshallian Partial Equilibrium to Austrian General Equilibrium: The Evolution of Rothbard’s Production Theory” Patrick Newman

Chapter 4: “Man, Economy and State, Original Chapter 5: Producer’s Activity” Murray N. Rothbard

Risk, Uncertainty, and Cost

Chapter 5: “The Myth of the Risk Premium” Jörg Guido Hülsmann

Chapter 6: “Time and the Theory of Cost” Jeffrey M. Herbener

Causal-Realist Price Theory: Debate and Synthesis

Chapter 7: “Monopsony Theory Revisited” Xavier Méra

Chapter 8: “Costs and Pricing: An Austro-Post-Keynesian Synthesis?” Mateusz Machaj

Economic Organization, Entrepreneurship, and the Firm

Chapter 9: “Austrian Economics and Transaction Cost Economics: Notes on a Doubtful Compatibility” Mihai-Vladimir Topan

Chapter 10: “The Management Problem of Socialism: Cost at the Expense of Value” Per L. Bylund

Chapter 11: “Economic Calculation and the Limits of Social Entrepreneurship” Matthew McCaffrey

__________

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The National Debt Is Now More than Ten Times Annual Tax Receipts

09/06/2019Ryan McMaken

Politicians from Alexandria Ocasio-Cortez to Dick Cheney are united in their agreement that deficits don't matter. Of course, that's exactly what a politician would say. Politicians score points by spending other people's money, so naturally, they don't want to hear anything about how prudence suggests it might be a good idea to not spend that extra 800 billion dollars they don't have.

But there is apparently little concern in Washington, DC as the annual deficit — for a single year, mind you — approaches one trillion dollars for the first time since the hit-the-panic-button days of the Great Recession. Except that now huge deficits are coming during "good" economic times.

Moreover, as the Congressional Budget Office has forecast, the debt load is expected to rise to 125 percent of GDP over the 20 years. That's higher than the US debt-to-GDP ratio during World War II.

This, of course, assumes no major geopolitical or economic disruptions, whicih would make things far worse.

For those who believe huge debts are no big deal, however, there's still no need to worry. After all, they say, actual debt payments are still only a minor issue. In fact, they're still lower than where they were during the early 1990s.

Consider the first graph, for example. If we take the federal government's interest payments, and calculate them as a percentage of federal tax revenue, we find 12 percent of what the feds take in has to paid out as interest. Back during the early nineties, on the other hand, the feds were paying more than twenty percent of their tax revenue toward debt service.

debtpayment.PNG

Source Office of Management and Budget and US Bureau of Economic Analysis.1

Of course, that's not all due to debt load. A lot of it depends on the interest rate. Back in late 1990, for example, the target federal funds rate was over 7 percent. The 10-year note rate was around seven percent also — compared to around two percent today. Not surprisingly, the feds were paying more on the debt they owed than under current conditions with a note rate of two percent.

But, the CBO estimates the 10-year note rate to double between now and 2020. I'm skeptical it will rise that fast from its current low levels, but when it does go up, so will the amount of money the federal government has to devote to servicing the debt. And that means cuts to things like defense, social security, and medicare.

Moreover, as the debt gets bigger and bigger, the need to keep the interest rate low via central bank "quantitative easing" will become more important, meaning middle class savers will take more of a hit to savings accounts and pension plans.

But perhaps the most striking aspect of the growing debt is the fact there really is no end in sight, and the US has no chance of ever paying off the debt.

We can see this when we compare the total size of the debt with government revenue.

Comparing Debt to Tax Revenue

Part of the reason people have a hard time comprehending the sheer size of the debt is because it is often compared to total GDP size. For example, it's easy to find online that the US debt-to-GDP ratio right now is around 105 percent. But what does that mean? One problem we encounter here is the fact when it comes to personal debt, people don't think of making debt payments as a percentage of their household "GDP." That wouldn't make much sense since the ability to pay off debt usually depends on income.

So what is the national debt as a percentage of the federal governments income? Income, in this case is the federal government's tax revenue. And it turns out by this measure, we're in uncharted waters.

In fact, the national debt is now eleven times annual federal revenue. And as far as I can tell, that's the highest it's ever been. (In 1945, the national debt was $251 billion, and tax receipts were $45 billion, meaning the national debt was 5.6 times tax revenue that year.)

debtgraph.PNG

Specifically, in 2018, the national debt ($21.4 trillion) was 10.9 times the size of annual tax receipts ($1.9 trillion). That's even higher than what it was during the dark days of the "stimulus" following the great recession. In 1981, on the other hand, the total debt load was only two-and-a-half times annual tax receipts.

From the perspective of household management, this is easier to comprehend. For example, if a household has an income-to-debt ratio like the federal government, that would mean an annual income of $100,000 and a debt load of a million dollars.

Now, at ultra low interest rates, if payments are interest-only, and non-debt-related daily expenses are fairly low, one could certainly manage this. But there are risks here. Interest rates could go up. Other expenses could rise. And in the end, the great-grandchildren are still paying off the debt for vacations and fancy trinkets their ancestors bought decades earlier. Even worse, if interest rates go up significantly, one's great grandchildren have a lower standard of living because they have to devote more and more of their possible savings and consumption to unproductive debt service.

None, of this, however, is likely to convince those who think debt doesn't matter. Some may still cling to the idea that the government can just print more money and purchase bonds to drive down interest and make payments.There are at least two problems that emerge here. The constant forcing down of interest rates is a problem for those who rely on pension funds and other investments that need relatively lower-risk yield to grow. Meanwhile, households that are on fixed incomes will be harmed by growing inflation, if it takes the form of consumer price inflation. If, on the other hand, the money-supply growth leads to asset -price inflation (which is what we have now) then this will make housing more unaffordable, while locking out lower-income and lower-net-worth people from a variety of assets, such as homes.

Now, none of this is an apocalyptic scenario, but it is a scenario in which people with low and moderate incomes must pay more, and are able to save less and invest less. It's a scenario of a standard of living that in decline. It's a scenario in which much of the population faces more roadblocks to wealth accumulation and must devote increasing levels of income and resources to paying off the debts of past generations. Government amenities such as welfare payments and transportation facilities must also shrink as more tax revenue must be spent on debt service. And, of course, the tax burden on ordinary people certainly won't be going down.

  • 1. For interest payment information, see Table 3.2 from OMB's historical tables. https://www.whitehouse.gov/omb/historical-tables/
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Why Property Rights Are Indispensable

In today’s political discussion, one of the fundamental principles our society is built on has been on the defense: private property rights and the protection of such rights. Just take the current debate about the housing shortage in Germany as a prime example. A very prominent policy proposal is flat-out expropriation of housing. Another one is the limitation of ownership of residential apartments.

Ideas such as these are not only supported by extremists. An activist group in Berlin collected over 77,000 signatures for the expropriation of private real estate corporations in Berlin. No worries, the appropriate vehicle for something like this already exists by the way: the German capital city already has an expropriation authority (Enteignungsbehörde).

Some proposals are less obvious, though they have the same basis. Rent control or the prohibition of “luxury renovations” seem harmless – but they are still major intrusions in one’s property. After all, these policies would result in the owner, in the legal sense, without real power or control over his own property.

Opponents of those policies correctly emphasize that housing in public ownership will lead to a state of disrepair, as it happened back in East Germany and as it still does to this day in socialist countries. The reason is that if the government has its hands in the housing sector to such a large extent, an imbalance of supply and demand will occur. And, as Mises and Hayek have shown, if too much tinkering with market prices fails, the price system will ultimately fail as well, leading to chaos, or that state of despair. At this point, socialists will point to a central planning board as a solution, but that would be no more than a “pretense of knowledge.”

However, the fundamental problem, of course, is the attack on private property itself. Property rights have not been created – they are a result of human action. Property rights developed over time through the interaction of people. Through a bottom-up process, this institution came into being organically, as Carl Menger, the founder of the Austrian School of Economcis, put it. It was not someone deciding top-down that we shall have property rights now. It came into being because people who accepted and protected property rights had an advantage over others, and so those others adopted the same approach.

The reason property rights have to be in place is scarcity. If the world was a utopia without any scarcity, private property would not be necessary. In such a world there would be no conflict between people over goods and services. There would be no necessity of an economy at all, as there would be no reason to trade. You could just have whatever you want. But the real world is characterized by scarcity. In the real world, not all dreams come true and human wishes stay unfulfilled. Some people have certain desirable goods, while others don’t.

At this point, there are two options: a Hobbesian anarchy, where everyone fights it out with hands and fists (or worse) who “owns” what – owning it only until someone else, someone stronger, comes along again. Or, you safeguard ownership, so that property is protected and the owner can be assured that he or she will own whatever he or she owns for longer, ultimately having the option to cultivate, to further develop the property – or to trade it for something else. Thus, property rights are at the basis of a genuine rule of law.

Without property rights, distrust and violence gain the upper hand. But with property rights, a peaceful order can emerge. It is this that Berlin’s expropriators seemingly have not realized yet.

Originally published by the Austrian Economics Center.

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Democrats and Republicans Team Up to Send Federal Spending to New All-Time Highs

09/06/2019Ryan McMaken

This summer's budget deal, negotiated by Nancy Pelosi and Donald Trump made few headlines. And that's exactly how these power brokers wanted it.

According to The Hill:

The new law suspends the debt ceiling through July 2021, removing the threat of a default during the 2020 elections, and raises domestic and military spending by more than $320 billion compared to existing law over the next two fiscal years.

Anxious to avoid a budget debate which Trump obviously thought he couldn't win, the President quickly signed a new agreement to keep federal spending growing quickly into the future.

Democrats crowed:

Importantly, Democrats have achieved an agreement that permanently ends the threat of the sequester ... With this agreement, we strive to avoid another government shutdown, which is so harmful to meeting the needs of the American people and honoring the work of our public employees.

Trump, in his usual unwarranted hyperbole, called the deal "phenomenal."

In nominal terms, spending has gone up relentlessly since Republicans gained control of both the White House in Congress in 2016. The Democratic takeover of the House has, not surprisingly, done nothing to stop the spending juggernaut.1

nominal.PNG

The budget deal ensures defense spending will go up for the sixth year in a row.2 Spending will hit a new all-time high in 2019, and will surpass a trillion dollars in 2020.

Growth is less impressive when adjusted ot the CPI. In 2018 dollars, defense spending will be just about back to the previous all-time high reached in 2011, hitting 989 billion in 2020. Welfare programs such as Medicare and Social Security all continue to reach new all-time highs nearly every year, with the exception of non-Medicaid poverty programs, such as TANF. Those programs have seen cuts in recent years.

adjusted.PNG

From 2017 to 2020, the OMB estimates (in 2018 dollars) growth rates in each area as:

  • Defense: 16 percent
  • Soc Sec: 10.4 percent
  • Medicare: 8.1 percent
  • Healthcare such as Medicaid: 8.9 percent
  • Other Poverty-Related Programs: -3.7 percent

Not surprisingly, the Trump administration has shown little inclination toward cutting or even moderating federal spending. Republicans had total control of Congress and White House during 2017 through early 2019, but total federal spending increased at sizable rates.

fedoutlays.PNG

In fact, the sort of spending we saw in the 2019 fiscal year (which ends this month) and which is expected in 2020, is the type of spending we haven't seen since the wake of the 2008 financial crisis when the federal government greatly expanded spending in the name of "stimulus."

But, as I noted here, the Trump administration's budgets are huge — with growing deficits — during a period of economic expansion. That is, even orthodox Keynesians might counsel slowing spending growth under current conditions, because stimulus is expected when recession hits. But the federal government is now going full bore into recession-type spending, even though there's no recession (yet.)

So, expect spending growth and deficits to become even more astronomical when the economy shows greater signs of slowing.

  • 1. See table 3.2 covering federal functions and subfunctions from the Office of Management and Budget. Functions included in this article include 050, 550, 570, 600, 650, 700, and 750.  https://www.whitehouse.gov/omb/historical-tables/.
  • 2. Defense spending here includes all "national defense" spending, plus veterans benefits, plus "Administration of Justice" funds, such as those going to the FBI which now describes itself as a national security organization. See Table 3.2 in OMB estimates.
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Forget the Russians: It’s the Federal Reserve Seeking to Meddle in Our Elections

09/05/2019Ron Paul

The US Constitution never granted the federal government authority to create a central bank. The Founders, having lived through hyperinflation themselves, understood that government should never have a printing press at its disposal. But from the very beginning of America’s founding, the desire for a crony central bank was strong.

In fact, two attempts were made at creating a permanent central bank in America prior to the creation of the Fed. Fortunately, the charter for The First Bank was allowed to expire in 1811, and President Andrew Jackson closed down the Second Bank in 1833.

But, unfortunately, a third attempt was successful and the Federal Reserve was unconstitutionally created by Congress in 1913. Americans have been living under a corrupt and immoral monetary system ever since. The Federal Reserve is the printing press that has financed the creation of the largest government to ever exist. Endless welfare and endless military spending are both made possible by the Federal Reserve. The Fed can just print the money for whatever the US establishment wants, so those of us who long for a Constitutional and limited government have few tools at our disposal.

Despite all the propaganda claiming “independence,” the Fed has always been a deeply political institution. Because the Fed is a government-created monopoly with key government-appointed employees, its so-called “independence” is a mere fiction. However, the US Congress created the Fed with legislation; it can also abolish the Fed with legislation.

Last week, the facade of Federal Reserve “independence” was dealt a severe blow. Ironically, the person who broadcast to the world that the Fed is anything but “independent” was ex-New York Fed President Bill Dudley. Dudley wrote that, “Trump’s re-election arguably presents a threat to the United States’ and global economy, and if the goal of monetary policy is to achieve the best long-term economic outcome, the Fed’s officials should consider how their decisions would affect the political outcome of 2020.”

The timing of Dudley’s threats to use Fed monetary policy to affect the outcome of a US election couldn’t come at a more striking time. After all, for more than two solid years Americans have been bombarded with fabricated stories about Russians rigging our elections. And yet here is a Federal Reserve official threatening to do the same exact thing - but this time for real!

Whether it’s the mainstream media, the CIA, the FBI, or now the Federal Reserve, more and more Americans are waking up to the fact that there is a Deep State in America and its interests have nothing to do with American liberty. In fact, our liberty is what the Deep State wants to abolish.

When it comes to the Federal Reserve, I stand firmly by my conviction that it needs to be audited and then ended as soon as possible.
 
America’s Founders were not perfect. They were human beings just as capable of error as we are. But they had a remarkable understanding of the ideas of liberty. They understood that liberty cannot exist with a government that has access to a printing press. Sound money and liberty go hand-in-hand. If we want to enjoy the blessings of Liberty, we must audit and then end the Federal Reserve!
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Tariffs Add to China's Banking Bust

09/04/2019Doug French

While Americans contemplated Jeffrey Epstein’s demise, Chinese authorities had more pressing matters as the country’s third bank was bailed out late last week. HengFeng Bank with $200 billion in assets fell into the hands of “Central Huijin Investment, a subsidiary of the China Investment Corporation that acts as the Chinese government’s shareholder in the country’s four biggest banks,” according to a brief report overnight by Shanghai Securities News, published by state news agency Xinhua and cited by Zero Hedge.

Prior to HengFeng, Bank of Jinzhou was propped up using “state-owned strategic investors,” according to Dai Zhifeng, analyst with Zhongtai Securities Co.

In plainer terms, Zero Hedge reports ,

“The latter approach is more market-oriented and showcased the determination of regulators to resolve problematic banks, while injecting confidence into the market,” Dai said, although when stripped of all the pig lipstick, what just happened in China is that another major bank, one with $100 billion in assets, just collapsed and received a government-backed rescue.

China’s banks hold $30 trillion in deposits according to Alexander Campbell, more or less double the amount of aggregated U.S. bank deposits. Campbell was pitching Alex Rosenberg on Real Vision on his thesis of buying gold in Yuan terms with the idea that bank bailouts take a flood of central bank created fiat money to paper over. So while the Chinese may want to keep the Yuan near the 7 to the dollar range, bank busts are just beginning in China and 7 may become a distant memory.

Campbell’s view is,

Bank of Jinzhou just went under, Baoshang went under. They're providing liquidity while trying to take out the small guys.

There's some big guys coming up. Industrial Bank looks fine. But by all of our metrics, it's the sketchiest big bank. Minsheng is not that far behind them. If you start to get those banks under question, the liquidity that they have to provide to offset the deleveraging, the negative liquidity from bank runs will be so big that I think the question of do you want to keep seven is obvious. And you say, no, who cares? Like, let's have it go down. And let's stimulate the economy. I think the cruxy thing, and the thing for the trade then is will do we print money as well?

China’s rural banks have classified loans totaling 4.1% which may not sound bad, but is the equivalent of circling the drain in the fractionalized banking world. ZH cited a JP Morgan report downgrading Chinese banks.

The J.P. Morgan economics team revised down its GDP growth forecast for 2020 by 0.1ppt due to the recent sharp turn in Sino-U.S. trade negotiations. But even prior to that, declining PPI and industrial profits growth, suggesting declining debt-servicing ability and weakening cash flow for Corporate China, increase the risks that banks will be asked to support macro growth at the potential expense of profitability. Recent official PBOC comments on an accelerating interest rate liberalization process are illustrative of such rising risks.

Meanwhile, Donald Trump is thrashing China with tariffs. In a piece for Bloomberg, Stephen Mihm compared Trump’s tariffs with the bad old days of Smoot-Hawley and the failure of Austrian bank, Credit-Anstalt, and the European liquidity crisis which followed.

While FDR finally backed off, Mihm, doesn’t believe Trump will. “Donald Trump is no FDR,” he writes. “Trump isn’t going to get religion and suddenly work for international cooperation on trade and currency before things go off the rails. He’s going to stay the course.”

China will have no choice but to let the Yuan sink versus the dollar as “Beijing has found itself paralyzed and with zero credibly options how to kickstart the economy,” writes ZH.

“The only thing that's left is for China to admit that this is indeed the case, so sit back, relax and watch as bank after bank on the list above fails and China's financial cancer spreads across the country with the $40 trillion in assets (which is certainly not bad news for either gold or Bitcoin).”

When Trump talked about winning, he must have been talking about holders of the yellow metal and its crypto cousin.

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McCaffrey in Harvard Business Review

09/03/2019Mises Institute

The Macro Problem of Microtransactions: The Self-regulatory Challenges of Video Game Loot Boxes by Matthew McCaffrey has been published as a case study for Harvard Business Review.

The video game industry has ignited a global controversy surrounding microtransactions in gaming, especially the use of loot boxes: randomized rewards with potential real-world value. Consumers and legislators are calling for the regulation of these revenue models on the grounds that they are unfair, predatory, or could be considered gambling. This article examines the controversy from a management perspective. First, I introduce current regulatory responses to the controversy and what they mean for business practices. Then, I explain ongoing industry-level and firm-level attempts to self-regulate as a way to placate consumers and governments. These tactics highlight a wide range of broader strategies that game developers and other stakeholders can pursue in order to improve customer relations and, more publicly, signal their commitment to self-regulation and avoiding consumer harm. These practices can be applied more broadly to firms that offer controversial products or services that do not yet fit within current regulatory frameworks.

Available for purchase here.

For more from McCaffrey on the topic on the Mises Wire:

Microtransactions and Loot Boxes: Can the Video Game Industry Regulate Itself? 

The Looming Threat of Video Game Regulation

 

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Happy Birthday Hans!

09/02/2019David Gordon

Today is  Hans Hoppe's birthday. He is an outstanding libertarian theorist, in the tradition of Murray Rothbard, and his strikingly original work ranges widely over philosophy, history, and economics. Among his many contributions are a defense of self-ownership and property rights through argumentation ethics and a trenchant criticism of democracy.  He is a scholar of the highest integrity and courage, and all lovers of liberty are in his debt.

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The F-35 Boondoggle

09/02/2019Elijah J. Henry

The U.S. government is infamously in debt. Since about 2012, the official national debt has equaled or exceeded the GDP. Shockingly, the real fiscal gap is much higher: with our $21.5T GDP and $22.5T official debt, we also have about $200T in unfunded liabilities over the next few decades. Most of that last number is due to programs such as Medicare and Social Security, but our regular debt comes from accumulated deficits: the U.S. government spends more each year than it steals in taxes. Since theft is its primary source of income, this situation is not sustainable.

The single largest item in the 2019 federal budget (contributing heavily to the aforementioned deficits and unfunded liabilities) is Social Security. The second-largest item is defense. The U.S. government spends more on defense than any other country in the world – by far. In fact, it spends about as much as the next eight countries combined. That is to say, the U.S. defense budget is approximately equal to the combined defense budgets of China, Saudi Arabia, India, France, Russia, the United Kingdom, Germany, and Japan.

Is spending of that magnitude necessary, or even remotely justifiable? Probably not. We’ve all heard infamous examples of gross waste and financial incompetence in the DoD – from $21T over a couple of decades that wasn’t correctly accounted for , to $1,280 cups , $999 pliers, and $640 toilet seats.

One of the biggest boondoggles in the U.S. DoD budget – and the focus of this article – is the F-35, AKA the most expensive weapons system in history. And of course, the costs continue to go up, according to a recent DoD report. The Pentagon first put out the project for bids in 1996 , and the first F-35s were manufactured and flown in 2006. However, it wasn’t until 2018 that they saw combat for the first time when Israel deployed them. Since then, the USMC , USAF , and RAF have used them in combat only rarely. For a plane that is supposed to be sufficiently versatile and modular to replace virtually all other combat aircraft , the F-35 has been used very little.

Perhaps you’re wondering if this is a typical timeframe for a high-tech military project. Well, in 2001, the DoD expected to have its first combat-capable F-35s in 2010. That did not happen, not by a long shot. At least as late as 2013, these 5th Generation fighter jets could not fly in bad weather or at night. Despite all this, the F-35 program will cost about $1.5T, or approximately what the U.S. government spent on the entire Iraq war.

Last year, Defense News identified thirteen significant deficiencies in one or more F-35 models: from the possibility of a blown tire destroying the entire aircraft, to inadequate vision and sensor systems , to not being to fly too high, too fast, or in certain maneuvers without either apparent or actual major problems. Other issues included logistical and security concerns. Many of these have solutions in progress, although several additional issues with the weapons systems have been identified since then.

How does a project like this happen, and continue, despite perpetual problems? There are 1,400 subcontractors for the F-35 program, spread out over 307 congressional districts in 45 States. For those of you unfamiliar with the U.S. political system, that means there are 307 Congressmen (out of 435) and 90 Senators (out of 100) who have constituents whose livelihoods depend in whole or in part on the F-35 program.

Even the extraordinarily liberal (and openly socialist) Senator Bernie Sanders claims to oppose the program but supports having it partly based in Vermont, so his constituents can benefit from the subcontracting jobs.

It’s not just U.S. politicians who are financially committed to this disaster: there are eight other countries involved in the development of the F-35.

I don’t have a solution to the issues presented here. Really, since I oppose U.S. involvement in all the wars I’m aware of, I don’t really want to see the F-35 used more than it has been. Probably the myriad problems will be solved eventually, and perhaps most of the money to be wasted in this program has already been spent.

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Hanke: Business Roundtable Suffers from Economic Illiteracy

08/29/2019Steve H. Hanke

Last week, the Business Roundtable launched a major attack on property rights, the bedrock of capitalism.

In a stunning new mission statement, the Roundtable, which represents nearly 200 of America’s blue-chip companies, downgraded shareholders. According to the Roundtable, the purpose of a corporation will no longer be to conduct business with the sole objective of generating profits for shareholders. Owners of corporations (read: shareholders) will now just be one of five “stakeholders”— alongside customers, workers, suppliers and communities — that will call the tune for corporations.

The Roundtable’s new anti-capitalist mission statement promises to dilute and muffle shareholders’ voices and further politicize corporate governance.

Read the full article at USA Today
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