U.S. Housing Prices Back to 2002 Levels

LvMIC:

Chalk up another failure for Federal Reserve Chairman Ben Bernanke.

More than three years after pumping an unprecedented amount of liquidity into the global financial system (read: print money), Bernanke’s wild experimentation in monetary policy has failed to bring the unemployment rate down as well as stop the crash course of U.S. housing prices.   Graphs via The Big Picture:

—————————————————————————————————————————————–

The past few years have brought a variety of speculation on whether a bottom in the housing market has been reached.  Even while the price of rent continues its upward trajectory, to quote a recent New York Times article, “the housing market remains a potent drag on the economy as home prices continue to slip, foreclosed homes fill some neighborhoods and millions of construction workers scramble for jobs.”  Those commentators and economists who see spending as the magical elixir for prosperity have been pining for a return to the home prices of the boom years.  “If only Americans could use their homes as ATMs again, then the glorious amount of spending which preceded the bust could finally resume,” sums up the prevailing wisdom.  Or as Mr. Union Sympathizer himself Robert Reich writes in the Financial Times today:

Has the American recovery finally entered the sweet, virtuous cycle in which more spending generates more jobs, more jobs make consumers more confident and the confidence creates more spending?
Yet the biggest continuing problem for most Americans is their homes. Purchases of new homes are down 77 per cent from their 2005 peak. They dropped another 0.9 per cent in January. Home sales overall are still dropping and prices are still falling – despite already being down by a third from their 2006 peak. January’s average sale price was $154,700, down from $162,210 in December.
The plunge in home values has changed all this. Young couples are no longer buying homes; they are renting because they are not confident they can get, or hold, jobs that will reliably allow them to pay a mortgage. Middle-aged couples are underwater or unable to sell their homes at prices that allow them to recover their initial investments. They cannot relocate to find employment. They cannot retire.

Virtuous?  Since when was a clear and unmistakable bubble referred to as virtuous?  In the Keynesian dreamland that is!  As long as those animal spirits are in full swing, the good times can roll regardless of the unsustainability of the binge!

As many should know, following the crash of 2008 the Fed took unprecedented steps to stop a much needed market correction:


Despite Bernanke’s best efforts of juicing inflation in housing, Mr. helicopter has only succeed in waging a war on savers and those on fixed income with anorexic interest rates and rising food and energy prices.  With housing prices back to pre-2003 levels, such speaks to the failure of central bank-driven monetary policy that is directed to a specific cause.  Like the now-in-vogue notion that central banks should concentrate on inflation or NGDP targeting, the money printers can’t guide where their newly created currency is funneled into.

It can’t be mentioned enough how puzzled this author is when those who deny the plausibility of the Austrian business cycle theory are usually the first ones to call for suppressed interest rates to fight recessions and create and economic boom.  In his infamous 1998 Slate article, Paul Krugman labels the Austrian theory, which he disparages by calling it “the hangover theory, as incoherent for its stipulations that artificially low interest rates cause malinvestment and lead to a bust after inflationary concerns lead to a ceasing of monetary expansion.  If the Austrians were wrong, then curtailing low interest rates wouldn’t result in a bust as the investments made during the boom would forever be sustainable and not a product of discoordination between savers, the amount of available capital, and the exuberance displayed by spenders and investors.

While there will undoubtedly be calls for more aggressive action by the Fed or federal government to get home prices riled up again, those “more spending” advocates will inadvertently be recognizing the credibility of the Austrian theory.  If the Fed is capable of boosting home prices, in turn setting off a spending binge based on the perceived wealth viability of a home, then a contraction in the money supply must have the same effect but in the opposite direction.

Meanwhile, with home prices still falling, it’s not evident if the clearing state for the housing market has been reached.  The past three years of monetary prime pumping has only slowed down the inevitable.  In lieu of the Fed’s unprecedented action, the housing market low could have conceivably been reached by now and prices may have even started rising.  Instead, the bust has been prolonged which in turn prolongs the suffering of all.

In the immortal words of Mises:

There is no means of avoiding the final collapse of a boom brought about by credit expansion.  The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Germany Ready to Send Tax Collectors To Greece

LvMIC:

It’s been two years since Greece started tilting off the deep end and, despite a deal being reached for a second bailout, problems of social unrest still persist as further austerity is pursued since the first round failed to yield the desired results.  That shouldn’t come as a surprise though as the government has only sought tax increases and public expenditure decreases without liberalizing much of its regulated economy.  While the private sector still suffers under a needlessly complex regulatory regime, more money was squandered in return for spending cuts.  Basically, the government ends up the only benefactor in the agreement.

To make matters worse, it looks like Germany is willing to lend a  helpful hand in this process, via The Local:

The German government is prepared to send 160 financial experts to Greece to help the country overhaul its tax collection, the business weekly WirtschaftsWoche reported Saturday.
Hans Bernhard Beus, deputy finance minister, told the magazine that the tax officials are ready to jump in to help the ailing country. They would need to at least speak English, but about a dozen of the volunteers speak Greek, he said.

This maneuver is a blatant attempt for German Chancellor Angela Merkel to save face and her coalition in Parliament as Germans want Greece out of the Eurozone.  Instead of representing her constituency, (since when has what “we the people” want ever mattered to public officials anyway?) Merkel is going to do her best to ensure the Greece government actually succeeds in abiding by the terms set in the new bailout package.  This means sending a few more highway men over to soak the already suffering people of Greece.

Though fairly well known, the history of tax evasion pervasive in Greece has recently become a hot button issue for obvious reasons.  While the government desperately attempts to shore up its own finances, last year’s tax evasion amounted to $11 billion or 4% of GDP.  Tax evasion is typically listed as a “problem” for Greece- economist Martin Sullivan calls it “disrespectful”- but evasion is only a problem if one considers the person who flees from a mugger a problem for the mugger himself.  Like tax breaks which see their fare share of demonization, tax evasion is simply a means to keep less earned income out of the greasy palms of politicians.  Since private individuals who produce and earn their income through voluntary measures are necessarily more prudent in their spending than public officials, tax evasion results in a more efficient allocation of goods.  As Rothbard pointed out,

If a tax is onerous and unjust, evasion might be highly beneficial to the economy, and moral to boot.

In actuality, it isn’t hard to imagine that Greece’s economy has stayed afloat not in spite of tax evasion but because of tax evasion itself.  That $11 billion not subject to thievery last year was left to those in the private sector to spend and invest as they saw fit.  It didn’t go toward funding political causes, crony capitalists, or public workers.  In the end, those funds weren’t wasted.

This attempt at further pilfering to mop up the excesses of Greece government shows the lengths bureaucrats are willing to go to to preserve their own unproductive hides.  Much like the rest of the circus acts constituting the “saving of the Eurozone,” this attempt by Germany is yet another step in the wrong direction.  If Greece really wants to come out of this storm in tact, the key isn’t increasing tax revenues but of leaving more money out of the public sector to actually be used in wealth creation.

Germany’s desire to aid in further robbery is reflective of the same reactionary measures all states use when pressed with financial difficulties.  Excessive taxation rates and business stifling red tape causing too many citizens to avoid paying into wasteful government coffers?  Send in more jack booted thugs armed with clipboards and the threat of imprisonment as their weapon of choice!

And the cycle of impoverishment continues.

The Lorax and Private Property

LvMIC (and also a first draft for a Mises Daily piece):

With Dr. Seuss’ classic book The Lorax making its way to U.S. theaters March 2, 2012, now is a good time to address some of the positions the children’s tale takes in regard to environmentalism and industrial production.

The Lorax follows the typical structure of any Dr. Seuss classic as it contains a simple plot structure, a fantasy world, and is laced with imaginative but continually rhyming words.  At the time of its publication, The Lorax was seen as a social commentary on the damage ravaged on the environment by corporations.  The plot involves a young boy who pays a creature known as the Once-ler to hear its retelling of why the Lorax left a once thriving forest it was supposed to protect.

When the Once-ler first arrived at the land of the Lorax, he was astounded at the beauty of the “Truffula Trees.”

But those trees! Those trees! Those Truffula Trees! All my life I’d been searching for trees such as these.  The touch of their tufts was much softer than silk.  And they had the sweet smell of fresh butterfly milk.

The Once-ler proceeds to set up shop and begin chopping down Truffula Trees.  With the “tufts,” he produces a kind of body suit called a “Thneed.”  Immediately, the Lorax appears and declares that it “speaks for the trees” and pleads for the Once-ler to reconsider harvesting Truffula Trees.  But the Once-ler finds customers for his Thneeds and expands production while cutting down increasing amounts of trees.  Eventually, the Once-ler chops down all the Truffula Trees and ceases production of Thneeds while leaving only pollution behind.  It’s easy to see how this fictive can ignite the passions of environmental movement who see capitalism as exploitive over nature.

Though environmentalists have made a habit of petitioning the government for economic intervention to halt environmental decay, the solution to preserving nature is much simpler.  The conception of private property serves as a means to both establish ownership over a given area and incentivize sustainable practices.
But in the Lorax’s world, it’s not clear whether or not there exists the institution known as the state.  If the state does exist and the Lorax, who displays human-like qualities and acts as a caretaker,  has clearly defined rights over the Truffula forest, then it is a failure of the state to enforce private property.  In a stateless society, the Lorax could file a grievance for legal arbitration between itself and the Once-ler within a system of competing, independent judges.  Whatever the situation, the Lorax would have a case to make against the Once-ler’s use of the forest if it properly acquired the use of the land beforehand.  Under a libertarian system, or system built upon the non aggression principle, of laws, the only legitimate way one acquires property of an unowned piece of land is homesteading.

Writing in Economic Thought Before Adam Smith, Murray Rothbard writes on this process which finds its origins in the theorizing of John Locke and St. Thomas Aquinas:

…cultivation and use of previously unused land establishes a just property title in the land in one man rather than in others. St. Thomas’ theory of acquisition was further clarified and developed by his close student and disciple John of Paris… Quidort declared that lay property ‘”is acquired by individual people through their own skill, labour and diligence, and individuals, as individuals, have right and power over it and valid lordship; each person may order his own and dispose, administer, hold or alienate it as he wishes, so long as he causes no injury to anyone else; since he is lord.”
The Aquinas–John of Paris–Locke view is the “labor theory” (defining “labor” as the expenditure of human energy rather than working for a wage) of the origin of property…

The theory of homesteading rests on natural law which holds that man has the absolute right to his body.  As Hans Herman-Hoppe puts it in reference to the all-important thought construct of an isolated Robinson Crusoe, “every person is the private (exclusive) owner of his own physical body. Indeed, who else, if not Crusoe, should be the owner of Crusoe’s body?”

The same logical deduction can be applied to homesteading as well for if unoccupied or unused land is to be ascertained and claimed by an individual, how else could it be done outside of mixing one’s labor with it?  The state is only made up of self-interested individuals; if those government officials sought to declare a portion of unused land forever more within its jurisdiction, then this constitutes an act of homesteading as well since adequate measures of securing the land would need to be taken.  However, considering the state obtains it resources to operate through theft, homesteading can’t ultimately be seen as legitimate when performed by public officials.

Because the Once-Ler set about chopping down Truffula Trees without any regard for previous ownership, there were no defined private property rights as to ensure the Lorax and his fellow animal companions maintained ownership over the forest.  This lack of definitive ownership resulted in the Lorax forest essentially becoming public property.  Like the overgrazing of land in the American West or the failed experiment of communism in early colonial Virginia, the inadequate enforcement or nonestablishment of private property rights resulted in a wasting of natural resources.

As Mises pronounces,

If history could teach us anything, it would be that private property is inextricably linked with civilization.

Though not a man per say, the Once-ler behaved purposefully by using natural resources to produce consumer goods.  In a world of strictly defined property rights, it would have to reach an agreement with the Lorax to make use of the Truffula Trees.  Otherwise, the Once-ler would be violently aggressing over the property of the Lorax.  The Lorax would then be justified in defending its property.

A common criticism launched against libertarian legal philosophy is that it assumes men act as angels.  This is blatantly false as libertarians would be the first to agree that the violent tendencies of man would exist in a free society.  The process of rectification and when force is really justified is where libertarians disagree with their statist opponents.  The truth is that while private property serves as the best means for man to produce and maintain wealth, its existence alone does not guarantee the owner any safety against the scheming of unscrupulous individuals.  If the Lorax had legitimately obtained the rights to the Truffula forest, it would have to act in order to repel the Once-ler’s attempt at using the property instead of merely trying to convince it through words alone.

While Dr. Seuss’ The Lorax serves as intellectual fodder for the environmental movement, it’s overly simplistic plotline is demonstrative of the author’s confused thinking on the issue.  Businessmen only destroy the environment if they have little desire to maintain the value of their land or seek to violate the property rights of others and take advantage of undistinguished public property.  The Lorax’s failure to establish its ownership over the Truffula forest was its fundamental error.  The victims were the Humming-Fish, Brown Bar-ba-loots, and Swomee-Swans which saw their habit destroyed.

On a more interesting and economic note, the Once-ler charges $3.98 for one Thneed which he describes as “It’s a shirt. It’s a sock.  It’s a glove. It’s a hat.  But it has other use.  Yes far beyond that.  You can use it for carpets. For pillows! For sheets!”  According to the Bureau of Labor Statistics’ CPI inflation calculator, what cost $3.98 in 1971 (the year of publication for The Lorax) costs $22.27 today.  It wouldn’t be a stretch to say that Dr. Seuss foresaw the advent of the television infomercial which typically charge $19.99 for a good that promises to solve various ailments!

Carney Once Again Warns on Debt

LvMIC:

If you want a good analogy on the various admonishments of Bank of Canada head Mark Carney, think of the bartender who tells the local drunk he should really reconsider getting sloshed every night but is still ready and willing to serve him up another.  Today, The Globe and Mail highlighted some recent research done by the BoC which issues a warning on a potential housing bubble burst and decline in prices:

The Bank of Canada is warning again that growth in household debt supported by a decade-long increase in home prices means families and the economy as a whole are vulnerable to a correction in the housing market.

“Rising house prices can facilitate the accumulation of debt,” the central bank said Thursday in a collection of its recent research on the subject. “Households could therefore experience a significant shock if house prices were to reverse.”

Governor Mark Carney and his policy team at the central bank have long flagged record levels of household debt as the No. 1 domestic risk to Canada’s economy and financial system. Still, while the report contains little new information and does not include any policy prescriptions, it comes at a time of escalating concern among policy makers about how overstretched many households have become.

In my recent article entitled “Mark Carney and the Art of Deflecting Blame,” I wrote on the blatant hypocrisy emanating from Carney’s mouth asserting that the increase in private debt is not a rational reaction to his own central bank’s monetary policies:

Though Canada saw tremendous growth with public spending reforms adopted in the mid-1990s, the cyclical pattern of private overindebtedness has begun to rear its ugly head. This isn’t unexpected as the BoC, like central banks all over the world, took interest rates to anorexic levels following the financial crisis of late 2008. As I have noted, this orthodox reaction has set the stage for what looks like a housing bubble that will inevitably pop.

While Carney spends a great deal of time laying out the predicaments the global economy is facing, he spends zero time acknowledging the role central banks have in perpetuating these difficulties. The continual and desperate manipulation of interest rates to spur growth is ignored. Carney is a master of pointing the finger at profligate governments and individuals without addressing the core issue at hand. Without a central bank ready and willing to use the printing press to engineer credit expansion, a sustained period of leveraging cannot occur without interest rates spiking. Price signals serve as not only a means to direct investment to those sectors which demand it but also to put a limit on an overextension resources devoted to unsustainable lines of production. The increase in cheap debt can’t continue without further inflationary pressure manifesting itself over the whole economy.

As The Globe and Mail article points out, Carney’s move to keep interest rate at 1% beginning in 2010 has in turn coincided with a jump in debt accumulation with almost 50% of the total borrowing amount using home values as collateral.  In what amounts to a laughable degree of double talk, Carney comes off as rest assured of the stability of the housing market yet worried about its growth in prices:

The central bank said Canada’s housing market has not yet shown signs of “the excesses seen in other countries,” such as the United States and the United Kingdom in the years before the global financial crisis, which in no small part was triggered by the bursting of real-estate bubbles. However, other comments in the report reinforce the notion that the central bank – which is not expected to be able to counter a runup in debt through higher interest rates any time soon – is more and more worried about this issue.

Carney and co. want their cake and to eat it too.  Whenever the inevitable bust comes, they can point back to these reports and claim they gave adequate warning.  Meanwhile, the BoC holds interest rates low to support its banking sector and fuel the boom.  When interest rates eventually rise, the result will be the same:

These economists too must admit and do admit that the upswing is invariably conditioned by credit expansion, that it could not come into being and continue without credit expansion, and it turns into depression when the further progress of credit expansion stops. -pg 78 Human Action

This author always finds it peculiar that while mainstream economists are well aware of the damage wrought by rising interest rates after a period of ultra cheap credit, they are still dismissive of the Austrian Business Cycle Theory as if it doesn’t adequately explain this phenomena.  Like the collapsing of the housing bubble in the U.S., the prospects of more people coming to the Austrian school once the same happens in Canada are good.  Even the grayest of clouds can always have a silver lining.

Just don’t expect central bankers or do-gooder politicians to ever learn their lesson.

Could the U.S. Government Default? It Defaults Everyday!

LvMIC:

A few days ago, The Economist asks the big question on whether or not the U.S. government will eventually default on its debt.  In highlighting a series of papers out of the Mercatus Center at George Mason University, the popular magazine lists some opinions from economists who agree that the long term spending prospect for the U.S. is bleak but can be controlled.

Peter Wallison takes the (fairly widespread) view that a government with debt denominated in its own currency and with access to the printing press will not default on its debt. But he can still envisage a crisis in which repeated failure by politicians to tackle the debt burden means that investors eventually conclude that the debt will be inflated away. This will lead to a weaker dollar, higher prices for commodities and other real assets and a wage-price spiral.

This is the most plausible outcome of a system built upon theft and cronyism, aka the state.  Politicians act as drunks addicted to the slosh of pork barrel spending.  Though the political class scores electoral points by decrying pork spending, the truth is, to paraphrase Lew Rockwell, the entirety of the government’s budget is pork barrel spending.  Down to the very last penny.  Wallison’s view is similar to the Modern Monetary Theory school which holds that sovereign nations with their own printing press can never go bankrupt.  Sure a loaf of bread may cost $300 but as long as troops remain scattered across the globe and the Social Security checks keep being mailed, then the illusion of solvency can be maintained.  But going bankrupt or defaulting are not one in the same as I will get to soon.

Garett Jones thinks that neither outright default nor inflation is likely, in paper because the markets would see such an outcome coming and push interest rates up to prohibitive levels. Furthermore, Americans will be able to see the messy state of Europe and will resolve to avoid the same outcome. Thus a massive deficit-cutting deal will be achieved although Mr Jones thinks this is more likely under the Democrats than the Republicans, because of the latter’s anti-tax philosophy.

Lenders can ditch dollars all they want, the Fed will be there to resupply so it’s kind of hard to see interest rates ever reaching a point to force Congress into action less done purposefully like Volcker’s term as Chairman.  Jones acts like Congressmen ever do the right thing which is the equivalent of believing in Santa Claus.  Tax increases are unfortunately likely but I have a bridge to sell him if he thinks the increased revenue will be used to pay down the national debt.

In contrast, Arnold Kling argues that neither Democrats nor Republicans will be willing to compromise because of the effect on their electoral prospects. However, a negotiated default would bring in the IMF to broker a deal, which would inevitably involve both tax rises and spending cuts.

I have a lot of respect for Arnold Kling but seeing as how the United States provides a large amount of funding for the IMF and the dollar is still the reserve currency of the world, it would be very peculiar to see the U.S. being bailed out by the international community.  If the U.S. were to undergo a fiscal crisis, the potential issues posed to the global economy may override any effort by the IMF to shore up America’s finances.  One good outcome of IMF blackmailing (which is what it amounts to) could be the possibility of Congress cutting all funding from the institution; thus posing a serious blow to the banker class which uses it as mechanism to leverage bailouts in its favor.

Perhaps the most provocative paper comes from Jeffrey Rogers Hummel who reasons that default is virtually inevitable because a)federal tax revenue will never consistently rise much above 20% of GDP, b)politicians have little incentive to come up with the requisite expenditure cuts in time and c)monetary expansion and its accompanying inflation will no more be able to close the fiscal gap than would an excise tax on chewing gum. Most controversially, he argues that

The long-term consequences (of default), both economic and political, could be beneficial, and the more complete the repudiation, the greater the benefits.

Why does he take this view? Once allows for the Treasuries owned by the Fed, the trust funds and foreigners, total default could cost the US private sector about $4 trillion. In contrast, the fall in the stockmarket from 2007 to 2008 cost around $10 trillion. In compensation, however, the US taxpayer would no longer have to service the debt; their future liabilities would be lower.

Hummel nails it.  Default is ultimately in the best interest of the U.S. as it punishes creditors stupid enough to lend to the government in the first place.  An outright default would make borrowing costs much higher in the future absent further Fed intervention which would in turn place a limit on future deficit spending.  It would also serve as a much needed wake up call to those who still believe the entitlement programs will be there to pay for the good life come retirement.  As Hummel mentions:

Reliance upon these government promises constitutes a particularly egregious form of fiscal illusion….The best way to alleviate future suffering is to repeatedly and emphatically warn the American people that these programs will go under. The more accurately people anticipate this inevitable outcome, the better prepared they will be.

When current Presidential candidates speak on “saving Social Security” or “preserving Medicare,” they are doing a disservice to anyone who listens to them.  The future unfunded liabilities of the U.S. government amount to over $100 trillion.  There is no possible way to pay for them in full.

So there are your choices. Default on the debt in real terms via inflation, default in nominal terms or break the promises made to future benefit recipients. Not an appealing menu but an indication of the likely political battles over the next 10-20 years.

The truth is the U.S. government defaults everyday the Federal Reserve prints a new sheet of crisp dollar bills.  When creditors are being paid back a principle nominally but worth less in real terms, that constitutes default.  Social Security checks can stay the same amount nominally but will purchase less and less.  Eventually the medical industry will likely be nationalized completely as to ensure medical care is given while quality inevitably declines.  So yes, the U.S. will default ultimately by continuing to monetize its debt.  The grand promises of utopia made by politicians will never be fulfilled.  The sooner the overall public and private creditors realize this, the better.

A Dentist Calls Me Out

LvMIC:

Yesterday I had a piece published at the Ludwig von Mises Institute entitled “Monopoly Dentistry” which highlighted an ongoing trend by states in the U.S. to adopt occupational licensing for mid level dental practitioners as a means to expand the supply of care available.  In the piece, I documented the push by the American Medical Association to limit the supply of doctors and medical schools through state intervention during the turn of the 20th century; thus decreasing the competition and driving up the wages of the doctors it represents.

Though I received a number of complimentary emails on the piece, some readers were not so pleased.  One practicing dentist found it necessary to email and critique the argument made in favor of open, unobstructed competition in the dental industry.  I will address some of his disagreements below, but for the sake of humility and encouraging meaningful discussion, the dentist’s name will remain anonymous.  I will refer to him as Mr. Smith only.

Mr. Smith emails:

Mr. Miller,

You do us a disservice.  Selling lemonade and restoring teeth are night and day.  Yes, yes, it’s an analogy.  But the ADA would support  mid-level providers if mid-level licensing would be required to go to areas where there is a need (rural), but they are not.  So they move down the street and simply undercut pricing with “inferior dentistry”.  Now you say, see, you prove my point, but I don’t.  I say “inferior dentistry” because I believe four years of dental school after college is not enough time to learn all you really need to know to perform good dental surgery and you want to train people for two years out of high school?  Did you know that it is two years of training for a high school graduate for a mid-level license?  This would be a disservice to the health of the public.  Bring on mid-level and send them to the rural needs but give them the proper training.

What Mr. Smith is referring to when he writes “lemonade” is a brief example I give on the sort of process some businessman go through in order to impose occupational licensing via the state:

To get a good idea of how state occupational licensing works, consider the following example.  Imagine Bill runs a lemonade stand in the middle of a bustling city.  Instead of facing competition from other street vendors and surrounding eateries and grocery stores, Bill had the foresight to lobby the local city council to outlaw all sellers of lemonade who don’t at first obtain a license from the city.  Due to his influence and close ties to select city council members, Bill fast tracked through the application process and was able to secure a license to sell lemonade before anyone else.  Little competition stands in his way now. Bill is then able to keep his sale price above the established level of a real free market and reap in profits as consumers are still willing to take the extra hit on their wallet for his delicious lemonade.  Profits are up, times are good, and Mrs. Bill is happy.  But now the city council is beginning to change its tune on lemonade licensing and is considering an increase in licensing allotments.  The free ride is coming to an end so Bill, worried the good life will soon be over, launches a countering lobbying effort on the basis that product quality will decrease if more licenses are given out.

Mr. Smith, like many of his peers who are professionals in specific occupations, regards his practice as above the fray of the lemonade salesman.  But that is simply not true.  Sure, dentistry is a very specialized field and under a free market, its service would still cost more compared to the selling of basic foodstuffs.  But dentistry is a service like any other; nothing makes it unique or worthy of special treatment.  While dental work can be vital for overall health and well being, the same can be said for food, water, shelter, or clothing.  Yet the clothing industry or food industry, though stifled by overburdensome regulation, don’t experience the kind of degree of state intervention and privilege granting the medical industry does.

Now Mr. Smith asserts that I am an advocate for mid level dental practitioners when I clearly state in my piece that:

It must be stressed, however, that the advent of an increase in licensing for a type of mid-level dentist is by no means a comprehensive solution for the problems that plague the industry. Previous governmental intervention was the cause of a shortage in dentists and an increase in the price of dental care. Further micromanagement of an already overly managed problem will only bring about more unintended consequences.

I have no desire to “want to train people for two years out of high school” to be mid level dentists as Mr. Smith claims.  The idea that an arbitrary number of hours or years of training for a specific practice ignores the reality that individuals learn at different paces.  What may take George five years to learn may take Fred only three if he is naturally skilled and adaptable enough.  The division of labor, which is fundamental to technological development and the raising of living standards, is built upon the inequalities of man where some excel in occupations that others don’t.  Like “one size fits all” public schooling that has coerced generations of children into a raw deal of not providing a custom education focused on each child’s inner ability, prohibiting the market from achieving its full potential has disastrous results.

Mr. Smith invokes the term “proper training” without defining it.  Is that because what is considered good and proper is ultimately in the subjective views of the consumer?  Mr. Smith doesn’t say.

Answer this question honestly; who would you go to to have your teeth drilled by, someone two years out of high school or 5 years (that’s what I recommend) of training after 4 years of college.  Yea, I thought so.  I rest my case.

Apparently Mr. Smith is a mind reader as he seems to know my answers well in advance.  If I were to honestly answer the question, I would prefer the person drilling my teeth to have an adequate amount of training.  Whether that is two years  or nine years, as per Mr. Smith requests, is beyond the point.  I graduated college last May with a large number of people who attended school the same number of years as me.  Were we all on the same level intellectually?  Of course not.  People learn at different levels.  If I have the choice of two dentists, there are a number outlets that could develop outside the sphere of government regulation which would vet the merit of every practicing dentist.  Like Kelly Blue Book or Angie’s List, market-based rating agencies develop when the demand arises.  Unlike governmental licensing, the profit incentive exists for rating agencies to provide accurate information in order to gain market share.  There is no need to believe that such wouldn’t develop in absence of state occupational licensing.

You need to see all sides of an issue and not just the economics of it.  It’s called dental “care”, “service”, “vocation”, not just economics.
I will be unsubscribing if this is how you research your articles.  How can I trust your opinion on other topics when I know you didn’t understand my own?

Economics is a subset of praxeology; which is the science of human action.  As Mises wrote, “praxeology, like the historical sciences of human action, deals with purposeful human action.  If it mentions ends, what is has in view is the ends at which acting men aim.  If it speaks to meaning, it refers to the meaning which acting men attach to their actions.”  The purpose of my article was not to just take an economic view of state licensing but analyzing the overall purpose behind the push for government intervention.  It undoubtedly is in the best interest of Mr. Smith to restrict the amount of dental service providers as it means a higher-than-market wage for himself.  At the same time, intervention not only allows the state to grow in size and influence but also serves as a jobs program for bureaucrats who in turn provide electoral support for the status quo.

Economics ultimately deals with looking at allocation of scarce resources which includes “care” and “service.”  Applying praxeological and economic analysis to the dental industry does, in fact, allow an observer to see and consider all sides of the issue.

In the end, I don’t do a disservice to the dental industry; the dental industry and its tight connections with the state do a disservice to its customers.  By lobbying to establish occupational licensing, and hence a decrease in the overall supply of dentists, costs necessarily go up for industries with inelastic demand.  The narrative Mr. Smith espouses assumes his customers are too ignorant to safely choose amongst a variety of dental services providers.  If that isn’t a disservice, I don’t know what is.

I would encourage Mr. Smith to not unsubscribe to the literature of the Austrian school but actually attempt to study the material in depth.  By studying Mises, Mr. Smith stands to learn the proper way of analyzing market phenomena.  Through Hayek, he can learn how knowledge is widely dispersed throughout society.  And through Rothbard he can learn the exploitive nature of the state and how its co-opted by various special interests.  Only then will Mr. Smith realize the type of impoverishing system of state licensing he ultimately supports.

Monopoly Dentistry and a Brief History of the Austrian School

Had a piece published at the Mises Institute today entitled "Monopoly Dentistry."  Here is an excerpt:

And so began the downward trend in America's free market in medicine. With fewer medical schools — and thus fewer doctors — wages can be kept higher than would exist in a market dominated by free enterprise and the unobstructed entry into practice. Consumers, who ordinarily determine the success of producers, have lost out as they face higher costs on top of being deemed too ignorant to choose an adequate doctor without the aid of the state. Rent seeking becomes ingrained in an industry that must devote increasing amounts of financial resources to appease public officials.

The American Dental Association's opposition to expanded licensing has more to do with preserving the status quo than looking out for consumer safety. If freedom of entry were maintained in the dental industry, there is little doubt that mid-level dental practitioners, or some cost-efficient form of such, would have emerged as a viable occupation by now.

It must be stressed, however, that the advent of an increase in licensing for a type of mid-level dentist is by no means a comprehensive solution for the problems that plague the industry. Previous governmental intervention was the cause of a shortage in dentists and an increase in the price of dental care. Further micromanagement of an already overly managed problem will only bring about more unintended consequences. Such is the nature of the state: intervention begets intervention, and we forge ahead on the path to socialism.

I received a couple of angry emails from current dentists over this, so I take that as a great sign of my logic and rational.

The director of LvMIC asked me to do a brief piece on the history of Austrian economics and its founders.  Below is an initial draft, all suggestions are welcome, including those from current dental practitioners:

Austrian Economics 101

What is Austrian economics and who were its leading theorizers?  The following will attempt to answer that question as succinctly as possible. 

The Austrian school received its name from the fact that many of its early thinkers hailed from Vienna in the Austrian Empire.  This oft-neglected school of thought emphasizes a few key concepts vital to economic analysis including individual methodology, the heterogeneous nature of production and goods, and the incompatibility of applying precise mathematical constructs to unpredictable human action.

The birth of Austrian economics begins with Carl Menger and the publication of his Principles of Economics in 1871.  Menger was one of three founders of the “marginalist revolution” along with William Stanley Jevons and Leon Walras.  In correcting the Smithian paradox of the classical school, otherwise known as water vs. diamonds, the marginalist position was one of explaining how items are valued by market participants on the margin of their value scales.  As an individual trades for preferred goods, their value scales are fulfilled in steps in accordance with perceived marginal utility of each good.  The “marginal revolution,” which Menger helped spearhead, set the foundation for establishing individual subjective value as the basis for all economic observances of value.  In addition to his rigorous use of individual methodology and deductive reasoning, Menger outlined how commodities become mediums of exchange; which would become a full fledged theory come Ludwig von Mises’ “regression theory.”

Eugen Bohm von Bawerk, who was a devout follower of Menger, made significant contributions in the development of time in its relation to production.  In his devastating critique of Karl Marx, Bohm-Bawerk described the “roundabout” nature of production in that capitalists risk their own saved capital to invest and pay workers in the time it takes to yield a final product.  Time is ultimately the key determinant of interest rates which are not exploitive but a price paid for present satisfaction.

The leading economist of the Austrian school was Ludwig von Mises.  Mises, whose ambitious treatise Human Action is the leading work on the Austrian worldview, embraced economics as a “value-free” science and applied a number of universally true axioms to deduce that laissez faire capitalism was the best economic system for relieving man’s uneasiness within nature.  The fundamental Mises axiom begins as “human action is purposeful behavior” through which an entire body of economic thought developed.  In addition to his rigorous application of axiomatic truths to economics, Mises developed a number of groundbreaking theories in the sphere of monetary operations and theory.  Most famously, Mises applied marginal utility to the inflationary policies of central banking and concluded that abundant credit expansion not backed by an increase in savings on part of the general public leads to distortions in economic calculation and malinvestment.  In short, artificially low interest rates perpetuated by a central bank lead to the business cycle- usually called the Austrian Business Cycle theory.  Like Bohm-Bawerk before him, Mises dismantled any notion of socialism possibly working by showing that prices act as signals to producers in order to more efficiently allocate goods.  Without the pricing system, socialism is doomed to fail.  Mises also brought Menger’s theory on money evolvement full circle with his regression theorem which stated that any commodity being used as a unit of exchange obtains its value from its previous usage as a non-money.

Perhaps the most famous of the Austrian economists was Freidrich Hayek.  Hayek, being a student of Mises, made great strides in developing the Austrian Business Cycle Theory and the damage wrought by central banking.  Hayek’s lasting influence however comes from his theorizing on the disbursement of knowledge throughout society.  In arguably the most important economic essay ever written, The Use of Knowledge in Society, Hayek explains how marketable information can never possibly reside in the minds of few central planners and that markets must remain unobstructed in order to work efficiently. 

Economist Murray Rothbard took the Misean approach to another level by synthesizing it with a strict adherence to natural rights.  Rothbard’s Man, Economy, and State and Power and Market rank along with Human Action as the premier treatise on Austrian economic theory.  In addition to elaborating on the theories of Mises in his famously succinct prose, Rothbard made headway in further developing Austrian thought on such concepts as monopoly price and the limited size of private firms amidst dynamic competition.  Rothbard was also a rigorous historian and libertarian theorist who developed a substantial body of work in application of the fundamental “non aggression axiom.”  Rothbard famously coined the term “anarcho capitalism” to describe his preferred economic system as lacking in a state apparatus.

Though Austrian economics is not as popular or eminent as the Keynesian or Chicago school, it has seen yet another revival with the presidential campaign of Texas Congressman Ron Paul and worldwide economic slump.  As interest continues to grow as to the true cause of financial crisis, the Austrian school stands to gain much more attention from a broader audience.  This can be seen as the one true silver lining in the devastation brought about by the Federal Reserve.

-------------------------------------------------------

It needs some elaboration but it's a start.

Robert "If Only We Had More Unions" Reich

LvMIC:

At this point in his career, it’s a safe bet that former Labor Secretary and UC at Berkley public policy professor Robert Reich has never met a union he hasn’t liked.  Like Karl Marx and the muddled thinking which preceded him, Reich has spent his writing career playing the class warfare card while citing the 1950s as vindication for high union rates being responsible for a robust economy.  The solution to all problems economic, according to the former Clinton lackey, is businesses not paying their employees enough.  If only Walmart would pay their associates more than, say, $9.00 an hour, those employees would have more disposable income and will subsequently go on a spending spree; hence leading to a boom.  Basically, evil capitalist pigs paying their employees a mere pittance for their hard work is what prolongs deep recessions. Sounds simple enough, right?

In a recent Slate column, Reich once again attempts to rationalize this logic while explaining that low skill manufacturing isn’t making a triumphant return to the United States anytime soon.

Suddenly, manufacturing is back – at least on the election trail. But don’t be fooled. The real issue isn’t how to get manufacturing back. It’s how to get good jobs and good wages back. They aren’t at all the same thing.

But American manufacturing won’t be coming back. Although 404,000 manufacturing jobs have been added since January 2010, that still leaves us with 5.5 million fewer factory jobs today than in July 2000 – and 12 million fewer than in 1990. The long-term trend is fewer and fewer factory jobs.

Even if we didn’t have to compete with lower-wage workers overseas, we’d still have fewer factory jobs because the old assembly line has been replaced by numerically-controlled machine tools and robotics. Manufacturing is going high-tech.

Reich is correct about one thing: the underwear and t-shirt factories are not coming back to the U.S.  And for that we should all say good riddance.  Mechanization often means lower cost for inputs, increased productivity and supply, and leads to lower consumer prices.  Lower prices leave more money in the wallets of all consumers which can then be devoted to other ends.  Former manufacturing workers can find employment meeting the new demand structure that is a result of a jump in productivity.  Fretting over this process misunderstands the role machinery plays in increasing the marginal productivity of labor.  Mises explains:

The confusion starts with the misinterpretation of the statement that machinery is “substituted” for labor. What happens is that labor is rendered more efficient by the aid of machinery. The same input of labor leads to a greater quantity or a better quality of products. The employment of machinery itself does not directly result in a reduction of the number of hands employed in the production of the article A concerned. What brings about this secondary effect is the fact that — other things being equal — an increase in the available supply of A lowers the marginal utility of a unit of A as against that of the units of other articles and that therefore labor is withdrawn from the production of A and employed in the turning out of other articles.

Though Reich doesn’t explicitly condemn mechanization, he has the short sighted view of robotic operations being the direct cause of a decline in manufacturing employment.  It shouldn’t be a surprise then that Reich, along with many big labor proponents, mistakenly attributes high wages with material abundance.

Bringing back American manufacturing isn’t the real challenge, anyway. It’s creating good jobs for the majority of Americans who lack four-year college degrees.

Manufacturing used to supply lots of these kind of jobs, but that was only because factory workers were represented by unions powerful enough to get high wages.

Reich sees money as an end in itself rather than a means to acquire goods and services.  This is his first mistake.  Taking his rational to the extreme but logical conclusion, a declared minimum wage for all workers of $1,000 an hour should instantaneously lead to prosperity.  After all, “good jobs and “good wages” are the overall goal, correct?  But I doubt Reich would advocate for such a policy and recognizes the damage an incredibly high price floor would cause.  At least I hope he does given his prominent role in commentating.

Where Reich ultimately falls short is believing that unions are solely responsible for higher-than-market-determined wage rates and that no negative consequences permeate from such.  Wages in an uninhibited market are determined by the marginal productivity of labor of each worker.  In order to maintain higher than normal wage levels, be recognized by employers, and prevent potential workers from being employed at a lower wage, unions rely on the force of government and threat of judicial lawsuit.  Like all market intervention, unions are an inherently violent imposition into the peaceful transactions of individuals (the exception to this rule being trade unions which act as networking aides and are funded through the voluntary payments of their members.)  From the utilitarian perspective, implicit compulsion may seem worth it if your goal is promoting an increased standard of living.  Unionization would certainly seems beneficial for already employed workers.  But the fact is that the financial benefits obtained through unionization and binding collective bargaining go to the union members only.  Murray Rothbard shows how unions, rather than assisting the common man, are actually the enemy of all workers:

Consequently, at best, a union can achieve a higher, restrictionist wage rate for its members only at the expense of lowering the wage rates of all other workers in the economy. Production efforts in the economy are also distorted. But, in addition, the wider the scope of union activity and restrictionism in the economy, the more difficult it will be for workers to shift their locations and occupations to find nonunionized havens in which to work. And more and more the tendency will be for the displaced workers to remain permanently or quasi-permanently unemployed, eager to work but unable to find nonrestricted opportunities for employment. The greater the scope of unionism, the more a permanent mass of unemployment will tend to develop.

Higher-than-market wage levels are not the product of utopian fantasy but of government decree only.  In order to maintain such rates, resources and capital must be devoted to those industries; leaving less for the rest of the economy.  Forced collective bargaining is the anathema of rising living standards and only serves the interest of union members and its administration.  A return of the unionization rates of the 1950s wouldn’t bring back to the conditions of the post war boom but would have the opposite effect.  Reich either doesn’t understand this phenomena or ignores it all together.

Greece Default Has a Set Date?

LvMIC:

About two years ago when things started going downhill, the original bailout package for Greece totaled 110 billion euros.  The second bailout deal, which has been seemingly put off indefinitely as the troika busybodies try to reach agreeable terms, is set to cost around 170 billion euros.  If confirmed, Zerohedge estimates the total of the two packages will likely cost around 320 billion euros or 136% of the country’s GDP.

Meanwhile, the never ending meetings with private creditors over bond haircuts have yet to yield a result that satisfies both parties.  Headlines such as “Greece nears deal with private creditors” have become the laughing stock of the financial blogosphere.  At this point, the date for a deal to be reached has been pushed back till March where bondholders are being pressured to accept a 70% haircut which will more than likely not be large enough.

Two years of budget austerity and increasingly violent protests have done little to save the country from its fiscal problems.  From the beginning, many financial commentators, including this author, have argued the best thing for Greece is an outright and hard default.  The endless stream of summits with politicians doing nothing more than wasting taxpayer money on high end hotel rooms and catered food are a clear sign that progress in terms of actually reaching a viable fix to the crisis is not occurring.  And now, via The Slog, a rumored timetable appears to be in the works for the country to finally ditch the euro and tell creditors where to stick it (my emphasis added below).

Senior bankers on Wall Street have been given detailed documentation setting out a timetable to Greek default, including firm dates and technical ‘orders’ about last use of the euro as a currency there. The revelation arrived at Slogger’s Roost last Monday, since when I have been trying to obtain corroboration. This arrived in the early hours of today (Thursday). One of the banks is Barclays Capital (Barcap) run by controversial figure Bob Diamond. The other must remain anonymous for the time being, in order to protect sources.

The document asserts that Greece will officially be declared in default by all the ratings agencies after the close of business on Friday March 23rd . At the weekend all Greek bank accounts will be frozen, with emergency measures detailed to prevent the flight of capital. Included in the paperwork is a list of very limited exceptions to the ‘no withdrawals’ order. All major banks ‘are instructed  not to deal with euro exchange  as of open of business in Greece on Monday 26th march. All Greek markets will close for one day ‘at least’.

It should be pointed out immediately that this so called “document” has yet to be confirmed as real.  Still, it’s not a stretch to think that the heads of major banks exposed to Greece debt are preparing for the worst.  All along, the talks of “bailing out” Greece were in actuality a justification to bailout the banks who were shortsighted enough to purchase the country’s bonds in the first place.  Put simply, Greece wasn’t bailed out, the banks still left holding the country’s debt were.  What else would you expect when both the head of the European Central Bank and the appointed Prime Minister of Greece are Goldman Sach alum?

If an outright default is indeed in the works, it will be for the best.  The people of Greece could have avoided a great a deal of pain if this decision was correctly made two years ago.  Instead, the political class did what it does best and kicked the can of reckoning all the way to the abyss and has no room left to go.  When the yield on a 1 year Greece bond hit over 100% just a few months ago, the end was in sight.  Today, a one year bond yield is an astounding 629%!



The banker class sees the writing on the wall and, regardless if the supposedly leaked document is real, is likely preparing to finally rid itself of its toxic and debilitating debt holdings.  Of course such a consequence is not to be feared but embraced by all those who realize markets can only work if both success and failure are allowed to occur.  Like investor Kyle Bass says, “capitalism without failure is like Christianity without Hell.”  Preventing the market from ridding itself of unproductive assets not only sends mixed signals to investors but also serves to absorb limited capital.  With default looming, it’s become perfectly clear that the billions thrown at Greece over the past two years might as well have been dumped in a pile, doused in gasoline, and set ablaze.

Perhaps more worrisome about a hard default, and nationwide defaults in general, is the prospect of a declared banking holiday.  As the leaked document mentions, the planned default will result in “all Greek bank accounts” being frozen, “with emergency measures detailed to prevent the flight of capital.”  For well over a year now, there has been a slow but steady bank run occurring in Greece:

Combine this with impending default and capital controls are almost a given.  To paraphrase Murray Rothbard, the institution of fractional reserve banking is functionally insolvent and reliant on the public to not do as the citizens of Greece are doing and justifiably reclaim their private property before a potential currency debasement.  In Anatomy of the Bank Run, Rothbard describes this process:

It was a scene familiar to any nostalgia buff: all-night lines waiting for the banks (first in Ohio, then in Maryland) to open; pompous but mendacious assurances by the bankers that all is well and that the people should go home; a stubborn insistence by depositors to get their money out; and the consequent closing of the banks by government, while at the same time the banks were permitted to stay in existence and collect the debts due them by their borrowers.

In other words, instead of government protecting private property and enforcing voluntary contracts, it deliberately violated the property of the depositors by barring them from retrieving their own money from the banks.

The answer lies in the nature of our banking system, in the fact that both commercial banks and thrift banks (mutual-savings and savings-and-loan) have been systematically engaging in fractional-reserve banking: that is, they have far less cash on hand than there are demand claims to cash outstanding. For commercial banks, the reserve fraction is now about 10 percent; for the thrifts it is far less.

This means that the depositor who thinks he has $10,000 in a bank is misled; in a proportionate sense, there is only, say, $1,000 or less there. And yet, both the checking depositor and the savings depositor think that they can withdraw their money at any time on demand. Obviously, such a system, which is considered fraud when practiced by other businesses, rests on a confidence trick: that is, it can only work so long as the bulk of depositors do not catch on to the scare and try to get their money out. The confidence is essential, and also misguided. That is why once the public catches on, and bank runs begin, they are irresistible and cannot be stopped.

Given that large financial institutions serve as the middle man between a nation’s central bank and respective Treasury, the government has a keen interest in maintaining the solvency of the banking system at all costs.  This means shutting off the people’s access to their supposed property at a time when they need it the most.  The most likely outcome of a default in Greece will be the abandonment of the euro and readoption of the drachma.  Depending on the size of the haircut bondholders will ultimately face, massive currency debasement will be opted for in lieu of imposing further austerity.  The planned bank holiday will thus be used to transfer the deposited euros into drachmas; essentially robbing the people of their already slowly deteriorating store of wealth.  Again, the banking system’s interest is being put above the rest of the country’s.  Such is the nature of power centers occupied by easily corruptible men who greatest feat in life amounts to lying to more people than their opponent on election day.

Whether or not a hard default is being planned for on March 23rd, the inevitable will come in one form or another.  For Greece, the past two years have been nothing more than an exercise in political theater and obfuscation.  The heavily regulatory burden, generous welfare benefits, and pro-union policies have decimated the country’s private sector and diminished any hope of economic growth.  Wiping the slate completely clean is the only viable option for a country that has defaulted on its debt a total of five times in the past two centuries.  Ripping a band aid off in one fell swoop is never the end of the world and neither will be the bondholders suffering the consequences of their actions.  The sooner the market is allowed to function properly and allocate capital toward more efficient outlets, the better the whole of the Eurozone will be.  Now if only Portugal, Italy, Ireland, and Spain would take the same path.

-------------------------------------------------------------
On a personal note, I promised someone this today, though it's a tad bit late:

I really liked the card you gave me today!  To answer the question inside, which I apologize for not doing so in person, i would love to be! 

And to further add to the overall dorkiness, and since I occasionally point out these performances on here as demonstrative of the producer's talent (and this one is exceptionally good), I will stick with the V-Day theme:

And now that I have completely embarrassed myself, I hope you at least email or text me and let me know if you saw this!

San Francisco, Regime Uncertainty, and The Plight of Small Business

LvMIC:

Back in the 1990′s, economic historian Robert Higgs, author of the popular Crisis and Leviathan, famously developed the concept of “regime uncertainty” as a tool to describe the type of business atmosphere which pervaded during The Great Depression and prolonged the deep contraction in investment.  Higgs described “regime uncertainty” as:

To narrow the concept of business confidence, I adopt the interpretation that businesspeople may be more or less “uncertain about the regime,” by which I mean, distressed that investors’ private property rights in their capital and the income it yields will be attenuated further by government action. Such attenuations can arise from many sources, ranging from simple tax-rate increases to the imposition of new kinds of taxes to outright confiscation of private property. Many intermediate threats can arise from various sorts of regulation, for instance, of securities markets, labor markets, and product markets. In any event, the security of private property rights rests not so much on the letter of the law as on the character of the government that enforces, or threatens, presumptive rights.

Though considered groundbreaking at the time, the idea of regime uncertainty should be an innate consideration for any market observer.  Investment in the midst of a market economy is always a risky endeavor.  Consumers aren’t cogs in a machine and react to stimuli in unpredictable patterns.  The 40-something year old putting his life savings into opening a laundromat has a myriad of factors to worry about when attempting to get his business off the ground; least of which is obtaining the initial funding.  Competition, price of inputs, hiring competent workers, and finding a suitable location to set up shop are all factors entrepreneurs must take into consideration.  There is never a guarantee of success.

But as government, infused with do-gooder politicians and bureaucrats, intervene in this process by setting up a plethora of regulatory obstacles, such serves as a further impediment to any aspiring businessman.
Investment, in addition to being inherently risky, is also time sensitive and requires a great deal of future forecasting.  Knowing whether or not you are going to make the bottom line come the end of the month or year is an incredibly difficult thing to do when you are limited in knowledge capacity and rely on attracting consumers who aren’t force to patronize your newly established business.  Throw a government into the mix which is continually adding and deliberating further private intervention and tax increases and what inevitably springs forth is a hostile business climate where entrepreneurs are at the whim of a political class which doesn’t rely on voluntarily payment for operation but on violent confiscation.

Case in point, the Worker’s Republic of San Francisco.  In a recent New York Times article, the journey of entrepreneur Juliet Pries to open up a small ice cream shop in the famously left-leaning city was documented:

The Ice Cream Bar opened Jan. 21 in the Cole Valley neighborhood — an homage to the classic parlors of the 1930s, complete with vintage soda fountain and lunch counter seating. It has become an immediate sensation, packed with both families and the foodie crowd, savoring upscale house-made ice creams and exotic sodas (flavorings include pink peppercorn and tobacco). The shop also employs 14 full- and part-time workers.
But getting it opened wasn’t easy.

“Many times it almost didn’t happen,” said Juliet Pries, the owner, with a cheerful laugh.

Ms. Pries said it took two years to open the restaurant, due largely to the city’s morass of permits, procedures and approvals required to start a small business. While waiting for permission to operate, she still had to pay rent and other costs, going deeper into debt each passing month without knowing for sure if she would ever be allowed to open.

“It’s just a huge risk,” she said, noting that the financing came from family and friends, not a bank. “At several points you wonder if you should just walk away and take the loss.”

Ms. Pries said she had to endure months of runaround and pay a lawyer to determine whether her location (a former grocery, vacant for years) was eligible to become a restaurant. There were permit fees of $20,000; a demand that she create a detailed map of all existing area businesses (the city didn’t have one); and an $11,000 charge just to turn on the water.

New York Times columnist and resident Keynesian Paul Krugman has been dismissive on the effects of regime uncertainty in recent years.  In a column written in 2010, Krugman declared there is no truth to the claims that the Obama administration has created an anti-business climate and those who consider such a possibility are merely “peddling scare stories.”  Krugman puts the cart in front of the horse and blames the weak economy for low business investment when a weak economy is a byproduct of low business investment.  As Mises showed, “the ultimate goal of human action is always the satisfaction of the acting man’s desire.”  Since man does not act less all desires are fulfilled, human demand can be thought of as infinite since action never ceases on the part of fulfilling various ends.

As Robert Higgs recently pointed out, private investment has failed to recover from the downturn of 2007-2008 while consumer expenditures have returned to their pre-recession level.  With broad and encompassing legislation like Obamacare and the Dodd-Frank financial regulatory bill still not in full effect, it should not come as a surprise to any observer why entrepreneurs are thinking twice about investing scarce capital.  The Obama administration’s newly proposed budget alone contains increases of the capital gains tax, estate tax, dividends tax, and elimination of state and local bond interest deductions.  It even introduces new fees for airline travel and security.  Though the budget has little chance in making it through the U.S. Congress, such policies emanating from Washington certainly aren’t a welcome sign for investors.

Combined with the Federal Reserve’s unprecedented intervention and interest rate suppression, policymakers are attempting to throw the future to the wind in order to speed up consumer spending now.  Entrepreneurs are being told that long term investment is a dangerous game where your return, which wasn’t guaranteed to begin with, may be subject to further thievery if Washington feels so inclined.  Put together with needlessly complex regulatory stipulations at the state and local level and you have the makings of Ayn Rand’s anti-capitalist dystopia of Atlas Shrugged.

While there has been evidence of regime uncertainty holding back entrepreneurial capital, economic logic tells us that if more barriers are erected between a man attempting to fulfill an end, he may divert his energies elsewhere.  As long as the trend of creeping statist intervention continues at all capacities of private life, sustained recovery and technological innovation will continue to stagnate as market signals are prevented from operating efficiently.

Mises and Free Love

LvMIC:

Quite a Valentine’s Day-esque controversy has erupted over Mises’ stance toward birth control and feminism over the past week.  The affair began when Mike Konczal of the Roosevelt Institute, writing under the pseudonym rortybomb, took libertarians to task by pointing out that Mises was supposedly against the birth control contraceptive.  Thanks to Gene Callahan, we can see that Mr. bomb didn’t take the time to actually read and figure out that Mises was, in fact, in favor of birth control:

“It is not the practice of birth control that is new, but merely the fact that it is more frequently resorted to. Especially new is the fact that the practice is no longer limited to the upper strata of the population, but is common to the whole population. For it is one of the most important social effects of capitalism that it deproletarianizes all strata of society. It raises the standard of living of the masses of the manual workers to such a height that they too turn into ‘bourgeois’ and think and act like well-to-do burghers. Eager to preserve their standard of living for themselves and for their children, they embark upon birth control. With the spread and progress of capitalism, birth control becomes a universal practice. The transition to capitalism is thus accompanied by two phenomena: a decline both in fertility rates and in mortality rates. The average duration of life is prolonged.” — Human Action

From this cited passage however, it isn’t clear whether or not Mises is talking directly about the contraceptive of birth control or the practice of less sexual intercourse in order to prevent the chance of impregnation.  If Mises was actually referring to birth control as the contraceptive, it begs to be asked why he didn’t refer to it as such instead of invoking the word “practice.”  As he points out, a rise in the standard of living tends to lead to lower birth and fertility rates.  Given that people are living longer and experiencing more material comfort, there is less of a need to reproduce in order to have support once the body deteriorates to a point where its labor becomes less productive.

Whatever the case, it’s clear that Mises was not opposed to the practice of birth control whereas he saw it as a natural progression of capitalism and humanity’s purposeful behavior.

At this point, Brooklyn College political science professor Corey Robin jumped into the fray to denounce Mises, not for his position on birth control, but his opposition to the “free love” doctrine.  He writes:

The real reason Mises’s arguments about women are so relevant, it seems to me, is that in the course of making them he reveals something larger about the libertarian worldview: libertarianism is not about liberty at all, or at least not about liberty for everyone. In fact, it’s the opposite.

Here’s Mises describing the socialist program of “free love”:

Free love is the socialists’ radical solution for sexual problems. The socialistic society abolishes the economic dependence of woman which results from the fact that woman is dependent on the income of her husband. Man and woman have the same economic rights and the same duties, as far as motherhood does not demand special consideration for the women. Public funds provide for the maintenance and education of the children, which are no longer the affairs of the parents but of society. Thus the relations between the sexes are no longer influenced by social and economic conditions….The family disappears and society is confronted with separate individuals only. Choice in love becomes completely free.

Sounds like a libertarian paradise, right? Society is dissolved into atomistic individuals, obstacles to our free choices are removed, everyone has the same rights and duties. But Mises is not celebrating this ideal; he’s criticizing it.  Not because it makes people unfree but because it makes people—specifically, women—free. The problem with liberating women from the constraints of “social and economic conditions” is that…women are liberated from the constraints of social and economic conditions.

I am going to go out on a limb here and assume Robin has not read the full breadth of theory contained in Socialism.  When Mises writes on socialism presenting the possibility of “freedom” from the duties of parenthood or motherhood, it is within the context of what socialism itself encompasses.  Specifically, free love through socialism doesn’t bring freedom but rather imposes different duties on other individuals through the force of the state.  The worker’s paradise envisioned by socialism is not a free utopia but a top down, forcefully planned vision of those who make up whatever grand council appoints itself to carry out the task.  Like Mises said, “Socialism means full government control of every sphere of the individuals life and the unrestricted supremacy of the government in its capacity as central board of production management.”

In a sense, the parenting dynamic present in market economies characterized by private property does present a burden on the mother and father who procreate.  Such is human nature as newborns and children are unable to provide for themselves till a certain point in their respective lives.  Stripping away the parenting aspect within socialism would indeed lead to a state of free, and most likely, promiscuous love.  But invoking the word “free” to describe this new societal relationship is misleading; nothing about socialism is “free.”  The burden of childcare must fall on someone or someones.

Robin does not understand this truth as he goes on to write:

But the underlying logic of Mises’s argument—in which the redistributive state is criticized not for making men and women slaves or equals but for making them free—cannot be so easily contained. It can easily be applied to other realms of social policy—labor unions, universal health care, robust public schools, unemployment benefits, and the like, which the left has always seen as the vital prerequisites of universal freedom—suggesting that the real target of the libertarian critique may be the proposition that Mises articulates here so well: that all men—not just the rich or the well born—and all women will in fact be liberated from the constraints of their “social and economic conditions.”

The disconnect between libertarians and other political ideologies comes down a definition of what freedom really entails.  Though not an anarchist or proponent of natural rights, Mises recognized “Government is beating into submission, imprisoning, and killing.”  Government owns no resources and must siphon all it has from the private sector through taxation.  Given that taxation is not voluntary or else it would fail to then be taxation, the state’s role as the monopolizer of violence and conflict arbitration is based purely off the force it yields over a given citizenry.  Therefore, the wealth redistributive functions of government are not some corollaries of “freedom” but a process through which one taxpayer is denied his freedom to keep a portion of his own income for another to receive the confiscated money.  In Power and Market, Murray Rothbard cites an important passage from John C. Calhoun on the myth that taxation is not a winners and losers game:

Such being the case, it must necessarily follow that some one portion of the community must pay in taxes more than it receives back in disbursements, while another receives in disbursements more than it pays in taxes.  It is, then, manifest, taking the whole process together, that taxes must be, in effect, bounties to that portion of the community which receives more in disbursements than it pays in taxes, while to the other which pays in taxes more than it receives in disbursements they are taxes in reality–burdens instead of bounties.

All of the examples of social policy Robin cites, such as universal health insurance, unemployment benefits, and public schools, are not prerequisites for freedom as their existence as tax funded endeavors necessarily means the economic freedom of some was violated for their provision.  Curiously, Robin mentions labor unions as vital for some type of freedom when the ability of any union to be recognized by an employer relies on the guns and courts of government to back them up.

As much as it breaks the hearts of egalitarians, the human condition is one of inherent inequality.  Market economies defined by the division of labor demand specialization in certain industries and production.  Put simply, the ability for man to excel in certain fields above his fellow man is not something to abhor but celebrate.  Knowledge is dispersed across a wide range of occupations.  Specialization allows for greater resources of labor and capital to be devoted toward specific lines of work to both improve production and develop technological advances.

Why anyone would want to promote egalitarianism in face of the fact that diversity in physical and mental attributes allows each of us to devote our energies toward specific professions is beyond this writer.  The loss of an opportunity to be server at Hooters or a coal miner is not a tragedy of capitalism but one of its enriching and endearing aspects.

How Robin comes to the conclusion that “libertarianism is not about liberty at all, or at least not about liberty for everyone” shows a complete and total lack of understanding for what liberty truly is.  Freedom is not the ability to loot your fellow man from his earned income via the state’s confiscation apparatus otherwise known as taxation.  It is merely the ability to obtain property by peaceful means, live, and establish working relationships with those whom you ultimately choose to.  The interference of such activities, whether it be through forcing the recognition of certain individuals on private property or the violent confiscation of wealth, negate freedom.

Mises long understood this (though to some Rothbardians didn’t take it far enough!) and actually attributed one of the hallmarks of liberty, the right to contract, to a woman truly seeking to liberate herself:

The woman may deny herself to anyone, she may demand fidelity and constancy from the man to whom she gives herself.  Only in this way is the foundation laid for the development of woman’s individuality.

So much for Mises being a closeted woman oppressor.

*Also of note, Brian Doherty does a fantastic job of refuting rortybomb’s initial post.