Guest Post: Economic Fallacies And The Fight For Liberty

Submitted by James Miller of the Ludwig von Mises Institute of Canada

Economic Fallacies And The Fight For Liberty

It’s easy to be pessimistic over the future prospects of liberty when major industrialized nations around the world are becoming increasingly rife with market intervention, police aggression, and fallacious economic reasoning.  The laissez faire ideal of a society where people should be allowed to flourish without the coercive impositions of the state is all but missing from mainstream debate.  In editorial pages and televised roundtable discussions, a government policy of “hands off” is now an unspeakable option.  It is presumed that lawmakers must step up to “do something” for the good of the people.  Thankfully, this deliberate false choice will slowly but surely bring the death of itself.   Illogical theories can only go on for so long before the push-back becomes too much to handle.  For those who desire liberty, it’s a joy that the statist economic policies of the Keynesians become even more irrational as the Great Recession drags on. The two following examples will illustrate this point.

Former Labor Secretary, public policy professor at University of California, Berkley, and political commentator Robert Reich recently offered President Obama and Mitt Romney a proposal he thinks will help American workers.  In lieu of almost 40% of workers in the U.S. not receiving paid vacation for holidays and sick days, Reich proposes that the federal government mandate every worker receive three weeks of paid time off.  Reich calls the country’s lack of a national leave policy “absurd.”  Further, he claims that imposing an increase in mandatory paid vacation would be beneficial not just for employees but employers as well.  According to the union cheerleader, paying employees for taking time off is great for productivity because they come back with batteries recharged and higher morale.  This boost in output would more than pay for the leave and for the hiring of additional labor to offset the absence.

What Reich is arguing is that by increasing the cost of labor, somehow the unemployment rate will drop.  Or that by paying employees to take time off, the extra productivity that would take place would both pay for the hiring of more workers and make up for the loss of time devoted to labor.  And finally, Reich is assuming that employers have never taken such a policy into account and are blind to the low-hanging fruit of easy profits.

To even the most unlearned observer, Reich’s proposal comes off as pure nonsense in the sense that it would not just be damaging to an economy already strangled by regulatory mandates but it would actually be beneficial on the whole.  Government intervention into the free choices of people always amounts to the picking and choosing of winners.  Left to itself, the unhampered social system of production that is a free market economy is the best state of affairs for participants to maximize their well-being.  Under interventionism, voluntary choices are replaced by dictation from the political elite.  Reich’s proposal for mandatory three weeks of paid vacation assumes that all workers, at all times, would have no issue with the requirement.  He presumes that the policy would have immediate effect so that the up-front cost of labor would automatically be offset by increased production which in reality takes time to occur and isn’t guaranteed.  Reich’s policy rests on the notion that economies can be finely tuned.  His view is that the human energy expended on production is not an extension of the individual sovereignty of men but something to control and guide.  This is general mindset of a central planner; especially one who has a high-profile academic position at a major university.

Reich is far from alone in this regard.  He is a respected commentator featured in the mainstream press.  His colleagues offer the same suggestions for policymakers in the government to follow.  In another example, recently on the Washington Post’s Wonkblog, editor Ezra Klein offered up a compelling case for how Federal Reserve Chairman Ben Bernanke could get the housing market out of its slump.  Cleverly titled “Uncle Ben’s Crazy Housing Sale,” Klein suggests that Bernanke go before the American people and announce that the Fed will begin buying mortgage-backed securities in an effort to bring 30 year mortgage rates down to 2.5% “for one year, and one year only.”  The goal is simple according to Klein:

“If you have any intention of ever buying a house, the next 12 months is the time to do it. This is Uncle Ben’s Crazy Housing Sale, and you’d be crazy to miss it.”

But as Rothbardian economist Bob Murphy aptly points out, Klein’s proposal amounts to nothing more than the deliberate creation of another bubble.  By taking potential demand that could conceivably be spread out over the next decade or so and concentrating it within the confines of one year, the intertemporal allocation of goods within the structure of production (housing in this case) becomes distorted and leads to unsustainable investment.  So once Uncle Ben’s crazy housing sale comes to an end, the demand for housing would in all likelihood plummet and the industry would be no better off.  Also of importance is Klein presupposing that 2.5% is the most desirable rate for 30 year mortgage rates by not giving an explanation as to why.  Further, he mentions that the housing market is appearing to have bottomed out and is on its way to genuine recovery.  Yet his policy proposal rejects allowing for a natural recovery and boils down to the exact same monetary policy of low interest rates that created the housing bubble of the 2000s which laid the foundation for the financial crisis.  It is the equivalent of injecting heroin into a junkie who is trying to go cold turkey.

Though these are just a few examples of flawed policy recommendation, they are largely representative of the establishment’s views.  Like Princeton economist Paul Krugman, former Treasury Secretary Lawrence Summers, and even the New York Times editorial staff, Klein and Reich believe in the sanctity of government intervention over the market process.

What passes for informed economic analysis is becoming more unhinged from reality by the day.  The very same solutions are being offered that had a hand in causing the crisis to begin with.  That is: interest rates suppressed beyond market levels, increased government spending, economic micro-management, housing market stimulus, and more accommodating monetary policy.  Getting out of the way and allowing the economy to reach sound footing is too radical of an option for the busybodies of the state.  Still, Keynesianism continues to fall short.  Intellectuals of the school keep failing to recognize the harm their theories cause.  Their policy recommendations are a rehashing of the same fundamentally pro-state theory: government needs to spend more and more money needs to be printed into circulation.

Meanwhile the average private sector or low-wage worker sees a system stacked against him.  Public sector workers receive better pay and benefits.  Politically connected banks and large financial companies are bailed out for poor business decisions.  Industries totally under government supervision such as health care and education have become terribly inefficient.  Countless lives are lost or ruined from wars based on lies.  The prices for necessities at the supermarket are always inching upward.  is trampled upon by overzealous law enforcement.  Wallets are treated like a grab bag by tax collectors.  And the solution put forth is always bigger, more intrusive government.  The false dichotomy of liberal versus conservative is played out in the West as if there is an actual difference between the two.  In short, it’s only a matter of time before the ideas ignored by the establishment are given more serious consideration by the greater public.

As the Austrian school of economics emphasizes, the bust which follows an inflationary boom is a needed cure for the built-up malinvestment.  Likewise, recessions should serve as a guide on the unintended consequences of public policy.  They challenge orthodox teachings to justify themselves as the damage of prolonged unemployment takes it toll.  Out of hardship can emerge new ideas for men to adopt and integrate.  Thought then becomes a weapon against the existing order which sees its position of authority under attack.  As Ludwig von Mises once wrote

Thoughts and ideas are not phantoms. They are real things. Although intangible and immaterial, they are factors in bringing about changes in the realm of tangible and material things.

In the course of human history ideas have been the catalyst for profound change.  The American Revolution was being fought on an intellectual battlefield before the first bullet was shot at Lexington and Concord.  Cato’s Letters, along with the writings of Thomas Paine and Adam Smith, gave the revolting colonists a vision of the natural rights of man and the prosperity free enterprise brings.  Radical pamphleteering was always a bigger threat to the British monarchy than any musket.

Today, the liberty-minded versed in sound economics face an uphill battle.  The corporatist establishment won’t let go of their government privilege easily.  Academics are too infatuated with their prestige to question the blatantly criminal syndicate that is the state.  Against such forces, the battle may be tough but it is winnable in the end.  Western governments are beyond bankrupt when it comes to unfunded liabilities.  Their existence is dependent on the unsustainable and fraudulent practice of fractional reserve banking.  Default is inevitable at this point.  The broken promises of politicians will discredit government as a virtuous institution.  The productive class, meaning those forced to fund the state and its beneficiaries, will stop sitting passively by.

To win the fight against statism and the poverty it inevitably brings, the right to one’s very humanity must be reasserted.  From the beginning, mankind has been plagued with the conflict of power versus liberty.  As libertarian author Rose Wilder Lane summarizes in her book The Discovery of Freedom:

They replace the priest by a king, the king by an oligarchy, the oligarchy by a despot, the despot by an aristocracy, the aristocrats by a majority, the majority by a tyrant, the tyrant by oligarchs, the oligarchs by aristocrats, the aristocrats by a king, the king by a parliament, the parliament by a dictator, the dictator by a king…six thousands years of it in every language.

Lane asks the most pertinent and direct questions that are never alluded to in contemporary political discourse:  “What is the nature of man?  The only political question is: What is the nature of the institution named “Government”?  To Lane, government, or the state, is an abstract concept which does not exist.  What exists “is a man, or a few men, in power over many men.”  By the same token, the prosperity brought forth through government-financed initiatives and inflation does not exist either.  The printing of money creates no new wealth; just lowered purchasing power.  All government spending comes from resources siphoned away from the private sector.  For every dollar spent by lawmakers or bureaucrats means one less dollar devoted toward productive efforts.  In short, free lunch economics is a fairytale.

These principles, while plainly evident, cannot be stressed enough.  State officials can’t live outside the laws of economics or the laws of decent behavior.  The sham is coming to a close before our eyes.  The collapse of the Soviet Union proved that socialist regimes are incapable of rational economic calculation.  The fiat money system that brought the world the slowly splintering Eurozone will eventually run its course.  Establishment economists have resorted to outright lies to maintain the superiority of government paper money over the market’s preference for gold.

They are getting desperate because their stock answer is no longer being looked to as right by the public.  In their quest for power, the political elite are looking more like the tyrants they really are.  It’s only a matter of time before enough people are fed up and declare their right to life, liberty, and property once again.  The battle will be won in the long run no matter how perilous it appears in the short.

Bankrupt Cyprus And The Russian Connection

Wolf Richter

The Republic of Cyprus, with its 840,000 people, has been in the Eurozone for less than five years. Yet it burned through mountains of euros faster than anyone could count. Now it needs a bailout whose magnitude balloons every time someone blinks.

The financial problems came to a head last year when the markets refused to go along with the country’s profligacy. So Cyprus went begging to Russia and got a €2.5 billion loan last November. Which quickly evaporated. In June, banks began to crater. Bailout time. €2.3 billion would be required for the two largest ones. The bailout Troika, the despised austerity gang from the EU, the ECB, and the IMF, took a gander at the stuff the banks called “assets.” Costs jumped to €6 billion, plus €4 billion for a government bailout. Then rumors seeped out that the banks alone would need €9 billion, for a total of €13 billion [read….. The Ballooning Cyprus Fiasco].

In early August, a hullaballoo arose when it was leaked that Central Bank Governor Panicos Demetriades had told lawmakers of an even greater fiasco. He’d been appointed only on May 2, and when he opened the closet doors of the banks, he discovered the real mess: €12 billion would be needed for the banks—70% of the country’s shrinking €17 billion economy! Plus whatever the government would need. A total of €16 trillion perhaps. 94% of GDP.

But plot twist: his predecessor, Athanasios Orphanides, lashed out at him. He’d been in office from January 1, 2008, when Cyprus acceded to the Eurozone, to May 2, 2012. During that time, he was also on the Governing Council of the ECB. He’d overseen the whole debacle, had let it happen, had encouraged it. So he accused his predecessor of an awful sin, namely shining some light on the banks, thus “creating the impression that our debt is unsustainable.”

Orphanides grew into that milieu in the cradle of financial shenanigans and bailouts. With his ivy-league education and a Ph.D. in economics from MIT, he worked as Senior Adviser at the Fed’s Board of Governors. And when the financial crisis erupted in the US, he left the Fed to become Governor of the Central Bank of Cyprus—to start all over again.

So now, with budget cuts taking their toll, the economy is shrinking faster than expected, warned Finance Minister Vassos Shiarly. But the ongoing bailout negotiations with the Troika “are in advanced stages,” he said. So perhaps by October, they might agree on a bailout memorandum that would require the usual medicine of painful structural reforms in return for bailout billions

But Cyprus needs the moolah now. It’s already raiding internal accounts and slowing disbursements to keep the lights on. And there’s hope. Apparently, the Russian government just approved a €5 billion loan—but not out of the goodness of its heart.

In October 2010, Russian President Dmitry Medvedev went to Cyprus to scratch the backs of Russian expats and the Cypriot elite. Cypriot President Dimitris Christofias, a communist, and educated in Russia, was there also. Turns out, the first half of that year, tiny Cyprus had been the largest foreign investor in Russia, ahead of the Netherlands, Luxembourg, and Germany.

It wasn’t Cypriot money flowing into Russia. It was Russian money flowing back. Russian companies have long established their headquarters in Cyprus to benefit from its status as a tax haven, a trend that picked up when Cyprus acceded to the EU and then the Eurozone. According to the Russian Embassy in Cyprus, via Kathimerini:

In the last five years alone, the Russian economy has seen Cypriot investments of over $52 billion, of which $41.7 billion was invested in the 2007-10 period, or 2.7 times more than German investments in Russia in the same period.

At the same time, Russians are investing in Cyprus, among them businessman Dmitry Rybolovlev who bought a 10% stake in Bank of Cyprus, which is getting bailed out. And the offshore natural gas resources have attracted a slew of Russian companies.

And all that chaos in Europe? Won’t it further demolish the US economy? Not quite. Read…. Europe Funds The Last Ponzi Game Standing, by Lee Adler.

Peter Schiff Discovers No Country For Corporate Profits

While the general economy continues to float along a depressionary bottom across all key verticals including housing (quadruple dip), jobs (the “new part-time normal” even as real unemployment has risen to 2012 highs), and manufacturing (contracting for 3rd month in a row and lowest since mid-2009): a bleak picture manifesting itself in a sub-stall speed GDP in the third year after the “recession ended” despite trillions of fiscal and monetary stimulus (not to mention that according to Gluskin Sheff 100% of the developed world is now contracting), one aspect that has not only kept the S&P buoyant, but shoved it to near all time highs, has been the general offset to atrocious labor conditions and low salaries: namely surging corporate profits.

Needless to say (because we have said it many times), corporate profits are no longer surging, and together with corporate revenues, have now peaked on a year over year basis and are declining, but sure enough over the past 3 years, the ability of companies to refinance at ZIRP-levels, and to fire tens of millions of full time workers (offsetting in rare cases by hiring hundreds of thousands of part-time workers) has allowed the build up of a massive cash buffer allowing companies to better prepare for the next systemic crisis, as well as handle the never-ending geopolitical uncertainty. Most importantly, it is this transient yet record profitability, together with now endless central planning intervention by the Fed, that saw the S&P close at the highest level since 2008, a fact which the president will undoubtedly mention and take credit for during the DNC speech in two hours.

So while on one hand corporate profits are something to rejoice over, at least when not blaming them on the previous president, on the other hand it is these same “evil” corporations, in various populist narratives, that are the root of all evil, and are the reason why America’s real unemployment rate continues to be sticky in the 15% range.

One such narrative was discovered by none other than Peter Schiff who pulled an OccupyWallStreet (remember that whole Occupy movement?) where but at the Democratic National Convention. What he did, was succeed in exposing some very disturbing prevailing beliefs about the government’s role in establishing the ‘utility’ value of the free market as manifested by corporations, namely that according to a broad cross-section of society, it is the government job to “explicitly outlaw profitability.”

We wish to remind readers that this has been done on numerous occasions in the past, but most “effectively” in the Soviet Union’s centrally planned regime. Until the USSR’s failure of course. The premise of eliminating profitability is also quite popular, and even has its own name: nationalization, and its result in a business “manager” who is perfectly ambivalent if the state owned enterprise makes or loses money. After all the wage is determined by a politburo, and is not a function of the profits, or losses, a business may engender.

Furthermore, it is probably worth reminding that the primary tenet behind capitalism is the production of goods and services for a profit.

Sadly, quite a few of these concepts appear to have not been made clear to not just one or two Americans as the following clip demonstrates.

The Zero Hedge Daily Round Up #121 – 06/09/2012

When the world around you is falling apart; when your ever-so-nice neighbours with tertiary degrees and happy faces turn into savages, bearing nothing more but hate and a confused sense of pity; when all the food dries up and you’re questioning the sanity within that stupid little head of yours; when you wake up and find your son bearing a knife to your neck… sit back and crack a tinny with your good mate “Julius Reade” over the inter-waves. Don’t forget to smile. This is the Zero Hedge Daily Round Up.

1. ECB announcement: Aftermath. 2. MBA mortgage applications fall: QE syndrome. 3. Greek unemployment up 1% in one mere month! 4. The U.S. markets are happy. 5. Job creation is a myth. 6. Greek: Police vs Police. 7. Gina Rinehart is fat. 8. Gold: $1700 😉

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