Natural Economic Law Can't Be Repealed

If the government restricts supply and subsidizes demand, out-of-control prices, resource shortages, and unpleasant ad hoc coping restrictions will follow. That is the natural (economic) law. The government cannot repeal it. But it can stop its attempt to plan.

TGIF: What Government Has Wrought

Imagine two candidates for president, and ask yourself who is more likely to win.

Candidate A observes that people are facing generally rising prices. Their total at the supermarket checkout is higher than last year. Filling up the car at the gas station takes a bigger bite out of the budget. Everything the kids need seems costlier. Besides all that, the prospect of buying a home or moving to a larger apartment looks grim—too expensive.

Responding to this situation, Candidate A launches a campaign promising to defend the middle class and other working people against "corporate greed." Specifically, he proposes an expanded child tax credit, a crackdown on "price gouging," and down-payment subsidies to first-time home buyers. Targeted tax credits to homebuilders and small businesses are among the promises. (These and other tax credits are called "refundable," which means qualifying people who pay little or no taxes have their nonexistent tax payments refunded to them—a logical impossibility.)

Candidate B, not your typical frontman for a mass-marketing campaign, sees the same hardships as Candidate A, but he has a different message. He pledges to move heaven and earth to repeal taxes on savings, investment, and business, including the capital-gains tax and the corporate income tax. He explains that taxes on savings, investments, and enterprises are dishonest because businesses don't pay taxes; they collect them—from workers, customers, and corporate shareholders. Such taxes constitute double and even triple taxation. (See Roy Cordato's "Corporations Should Pay Higher Taxes?" and "Taxing Investment." ) He also promises to work to abolish regulation on business, which raises production costs, hikes prices, and reduces the supply and variety of consumer products.

The candidate unabashedly promotes his plan in the name of economic growth and prosperity for everyone. He does so because he believes that the only way for everyone to get rich(er) is for production to expand, for labor to become more productive, and for real prices to fall through increased supplies. That requires saving and investment, that is, deferred consumption. Anything that discourages savings is bad, he says. He favors prosperity, he says, over income equality, which is a recipe for poverty.

The candidate proposes to accommodate the lost revenue by pushing Congress to cut spending all through the budget. He also calls on the governors, county executives, and mayors to eliminate the barriers to home and apartment construction, including zoning, because, he notes, high housing prices are caused by politically restricted supply. This is especially egregious where some of the most lucrative jobs are. However, since housing is artificially scarce, many people can't move to where the best jobs are because they're priced out of the housing market. He also promises to get rid of any federal regulations that keep the housing supply from meeting the demand.

In general, Candidate B explains to voters that increased consumption requires increased production (not vice versa) and that bureaucracy discourages savings and raises costs and prices. The government is not good at creating real wealth; it is a consumer and engine of transfer, not a producer.

Who's likely to win the election? The one who promises direct help to middle- and working-class consumers or the one who promises to help them indirectly by freeing up entrepreneurship and free enterprise?

Does anyone doubt who, other things equal, would prevail? Candidate A would be widely portrayed as a champion of the people, a hero bursting with compassion and courage to take on special interests. Candidate B would be portrayed as a shill for Big Business and Wall Street, who favors having all the wealth go to the top 20 or even 1 percent, while the rest of America gets poorer and poorer. (Although that is the opposite of what's been happening for many decades.)

In other words, the candidate who understands how the free-enterprise system tends to work when left unmolested by politicians and bureaucrats will be scorned as an enemy of progress. Meanwhile, the candidate who either is ignorant of economics or engages in demagoguery will be lifted on people's shoulders and carried into the White House.

That's what a representative democratic republic produces. The result is a total national debt—$35 trillion and change—larger than GDP—almost $29 trillion—not counting the unfunded liabilities of the so-called entitlement programs. Interest paid on the debt will be about $900 billion this fiscal year, which ends September 30. Annual budget deficits have hit $2 trillion, which the government covers by selling bonds, which in turn the Fed (short for Federal Inflation Generator) buys up, creating money out of thin electrons. Inflating the money supply then raises prices generally as more dollars chase the same amount of goods, imposing hardship on regular people. A fiscal crisis looms.

If this tale of two candidates does not make you question the utility of government, what would?

TGIF: Extend Tolerance to Commerce

Perhaps you've noticed that we live in intolerant times. Many people claim to be endangered by the mere spoken or written expression of views on a range of issues. This has led to direct action to disrupt speakers on college campuses and elsewhere and to indirect government efforts to censor users of social media, which so far the courts have frowned on.

Believe it or not, this has had a silver lining. It's elicited articulate renewed defenses of free speech and tolerance -- long taken for granted.

But the tolerance movement should go further to include what the late philosopher Harvard Robert Nozick called "capitalist acts between consenting adults." Those are also known in sum as the free market, an unfortunately unnoticed option these days. When it comes to human action, we find wide and increasing support for a host of government measures that interfere with the freedom of individuals to trade with one another on their own terms. Those who have become disillusioned with the intolerant so-called left seem to think the free-market alternative is unworthy of consideration. This may also be true of those who are disillusioned with the intolerant so-called right. They may embrace freedom of conscience, but they draw a line at freedom of exchange, as if conscience had no part in that.

This line seems arbitrary. A product innovator or builder of an enterprise is a creator who may well be as passionate about this chosen life purpose as a writer or an artist. (Ayn Rand stressed this.) The creator offers the product to consumers (or downstream producers), who are free to decide if what's offered on given terms will serve their purposes. They are of course also free to decide that they do not want the offering and to go their own ways. Freedom of conscience permeates life in the marketplace, make no mistake about that.

Why should the work of people who dedicate their lives to such creations rank lower in our estimation than the work of artists? Is it because their products improve "only" material well-being and not spiritual well-being? That's not a good reason. We are not ghosts.

More pertinent, why should the government interfere in consensual transactions deemed merely "economic"? You can see the discrimination in the matter of free speech. Generally, freedom of speech, at least until recently, has been sacrosanct. The First Amendment says it must be. But commercial speech can be and has been regulated and even banned in various ways. It gets no respect.

The courts have long distinguished between so-called fundamental liberties and non-fundamental liberties, a distinction for which no support exists anywhere. What we think of as economic liberties are in the second category and so are deemed less worthy of protection from the government. That means politicians and bureaucrats can put themselves between consenting parties and either forbid or regulate transactions without even the semblance of a compelling reason. They just need to tell the judge that a decree is aimed at some articulated objective. Those who are interfered with may not tell the meddlers, "Mind your own business. If you think you have a better way of doing things, start your own business." That would get them heavily fined at the least. The consequences could be more severe.

Let's look at some common examples, so common they are taken for granted. We have minimum product standards (outlawing less-expensive options), the minimum wage (creating unemployment), price controls such as rent control and so-called gouging bans (creating shortages), housing regulations and zoning (ditto), restrictions and taxes on trade with foreigners (creating higher prices), immigration control (preventing the free exchange of labor, etc.), occupational licensing (barring the choice of one's work), industrial policy (picking winners), and drug and other "vice" prohibition (including the drinking of raw milk!). More could be added. In each case peaceful individuals are prevented from peacefully dealing with each other on mutually agreeable terms. Their freedom of conscience is intruded on by politicians and bureaucrats. Contracts are acts of conscience.

I object to the widely accepted distinction between personal liberty and economic liberty. As Thomas Sowell has pointed out, people select means to achieve all kinds of ends. Economics is a method of understanding the means-ends framework, but it does not provide grounds for distinguishing among ends. All ends are important to those who pursue them or else they would do something else. There is no personal and economic liberty. There is only liberty, which each person has a right to exercise in the pursuit of happiness.

If you believe people should respect each other, then you logically must extend that respect to freedom of commerce.

Flunk the State!

Knowledgeable people (Bill Gates among them) had warned for years that governments were ill-prepared for serious pandemics. The US government was not just ill-prepared; it also maintained regulatory obstacles — in the name of public health — to others who were willing and able to act.

I’d say the case for statelessness looks better all the time.

The FDA's Continuing Assault on the Principles of Justice

Eddie Gray, the owner of the online pipe-smokers' boutique The Pipe Nook, reports in his latest YouTube video that the FDA has accused him of selling to a minor but refuses to provide the evidence. This is nothing less than a direct assault on a basic principle of Anglo-American justice: innocence until guilt is proved, which means that the government -- exclusively -- has the burden of proof and the accused has no burden whatever to provide evidence of his innocence. One obvious aspect of this principle is that the state has an obligation to present the evidence to the accused, who may then rebut it. This is how things should work because one cannot prove a negative, namely, that one is not guilty, especially when one is given no details about the alleged offense.

When will those in Washington who love to rail against regulation finally pull the plug on the FDA, which tramples individual rights wherever it treads?

See my other FDA posts here, here, here, and here.

My Latest

My latest articles for the American Institute for Economic Research are:
"Competition: Just What the Doctored Ordered"
"Why Obama's Overtime Rule Will Backfire"

National Regulation of Amusement Parks Is Not What's Missing

The potential danger of amusement parks is not that they face state rather than national regulation. It's that people have been lulled by government chimerical guarantees per se. A false sense of security is worse than no sense of security at all. The best assurance would be produced by market competition along the safety dimension.

TGIF: Libertarian Strategy and Incremental Change

My first job in the libertarian movement, beginning in 1979, was as research director for the long-gone Council for a Competitive Economy (CCE). It was an organization of business owners who opposed the sorts of government interventions that business owners typically favor: tariffs, import quotas, eminent domain on behalf of corporations (and anyone else, really), and bailouts. In other words, it was to be a principled -- pure -- pro-free-market presence in Washington, D.C, financed by business people. (In case you are wondering: yes, it was an early Koch-backed organization, and no, business people did not rush to join.)

Stop Those Who Would Stop Uber

The nerve of some people! Imagine coming to a city and doing business without first asking permission from local officials! 

That’s what Uber has done in cities all over the United States and Europe, and it’s created quite a storm among politicians and licensed taxi drivers, who have held up traffic in, among other places, Boston, London, and Paris just to stamp their feet at the high-tech competition. 

What is Uber? It’s an innovator, and you know what means. It disturbs the regulatory landscape where protected firms have long settled in safely and comfortably. Suddenly, the advantage of being an “in” flies out the window. No wonder the regulation-spawned monopolies are upset.

Read it here.

GM: More Evidence against the Regulatory State

I've long said that government regulation gives people a false sense of security, which is worse than no sense of security at all. Latest evidence: GM's ignition-switch failure.

Op-Ed: JPMorgan Lesson: End Government Bank Guarantees

It’s widely believed that JPMorgan Chase’s recent $2 billion–plus loss proves we need the comprehensive banking regulation called for by the 2010 Dodd-Frank law.

That belief is wrong.

Read the rest of the op-ed here.

TGIF: The Washington-Wall Street Kabuki Dance

There’s something eerily ritualistic about the current occupant of the White House berating Wall Street for its irresponsibility and proposing new regulations, while his targets send a swarm of lobbyists to Washington to keep the regulatory overhaul from getting out of hand. (History says they’ll be on good terms with the regulators in any case.)

I’m reminded of journalist and historian Walter Karp’s book Indispensable Enemies. These apparent adversaries need each other.

The rest of TGIF is here.

I'm happy to say that Counterpunch has reposted the article.

Missing the Point

Reporting on this year's Nobel Prize winners in economics, Elinor Ostrom and Oliver Williamson, the New York Times said:

Neither Ms. Ostrom nor Mr. Williamson has argued against regulation. Quite the contrary, their work found that people in business adopt for themselves numerous forms of regulation and rules of behavior — called “governance” in economic jargon — doing so independently of government or without being told to do so by corporate bosses.

Note the key equivocation over the word regulation. Most people use that word to mean government interference with private market activity. So the Times at first seems to be saying that Ostrom and Williamson do not oppose such government interference. Maybe they don't, but that's not what the Times goes on to say. Instead, it says that both have shown that people often generate their own efficient rules -- governance -- independent of the State (and corporate authority).

It's as though the reporter said, "Neither has argued against taxation. Quite the contrary, they found that people use market prices to pay producers for their efforts."

What the Times reporter misses is that spontaneously evolved bottom-up rules are to be distinguished from top-down government regulation, which statists believe is indispensable. The former results from voluntary interaction by people on the spot, the latter from coercion by a central elite. The reporter seems more interested in getting in a subtle dig at the free market, which is alleged to be "unregulated." Of course it isn't, as I point out here.

TGIF: Regulation Red Herring

Most people believe that government must regulate the marketplace. The only alternative to a regulated market, the thinking goes, is an unregulated market. On first glance that makes sense.

The rest of TGIF, "Regulation Red Herring," is here.

TGIF: Bad Regulation Drives Out Good

In 1969 economist Harold Demsetz identified an important flaw in much public policy analysis, the “Nirvana Fallacy.” We would do well to keep it in mind as we think about solutions to the current economic problems.

The rest of TGIF is here.

Syllogism

• Government takes over regulation of an economic activity from the market process.
• Government regulation fails to prevent the bad it was intended to prevent.
• Ergo, the market is incapable of regulating itself, requiring more government regulation

Addendum: This, of course, can be made more general:

• Government assumes responsibility for the economy as a whole (the Fed, fiscal controls, housing policy, etc.)
• The economy goes through bouts of inflation and recession, and sometimes both at once.
• Ergo, since the market process cannot be relied on for self-generated stability, full employment, etc., more comprehensive government control is required.

Cross-posted at Anything Peaceful.

More on the Madoff Case

The New York Times yesterday reported that stock-fraud prosecutions have gone down the last several years, implying that the Bush administration's lax attitude toward regulation of Wall Street let the Madoff scam go on for so long. Whether FBI and SEC fraud investigations are really down, I can't say, but let's accept that they are. This hardly makes the case for regulation. Why? Laws against fraud are not the same thing as regulation. Fraud is theft of property by deception. Thus a law against it is a law protecting property. In contrast, regulation is an imposition by government unrelated to any specific wrongdoing; it violates property. Repealing laws against fraud (or the refusal to investigate and prosecute it) is not deregulation. If it were, so would repeal of the law against armed robbery be deregulation. No one talks that way -- for a good reason. There is a big difference between regulation and prohibitions on depriving people of their property. Anti-market people like to conflate the two categories to score points for the regulatory state.

By the way, if the government were to vigorously investigate fraud, it might indict everyone who keeps Social Security going.

Cross-posted at Anything Peaceful.

Madoff Scandal Exposes Government Failure

The common reaction to the Bernard Madoff $50 billion financial scam was wholly expected. As Los Angeles Times columnist Tim Rutten wrote, “The lesson is one that becomes clearer with each excruciating turn of the Wall Street screw. The long, bipartisan experiment with financial deregulation has failed utterly. The argument that a return to rigorous oversight will somehow stifle Wall Street’s ‘creativity’ is no longer convincing. Whatever its theoretical costs, regulation is dramatically cheaper than intervention. And absolutist insistence on the superiority of ‘individual choice’ and ‘free markets’ now is exposed as so much vacant rhetoric. Any system that permits a scam artist like Madoff to deceive not just widows and orphans but also sophisticated investors, like Fairfield Greenwich Group’s Walter Noel and Hollywood’s Jeffrey Katzenberg, isn’t a market at all; it’s a shooting gallery.”

The last sentence is a tipoff that something is wrong with this outlook. Financial regulation is usually proposed to protect the unsophisticated. People knowledgeable about finance and securities presumably can take care of themselves. But what makes the Madoff scandal so noteworthy is that the most sophisticated types were taken in, even though several experts sounded alarms. Why?

The rest of my op-ed, "Madoff Scandal Exposes Government Failure," is at The Future of Freedom Foundation website.

Heads They Win, Tails We Lost

Why is it that when the regulatory regime fails–see the Madoff fraud case–many people call for more regulation, but when markets (allegedly) fail, these same people don’t call for more markets but rather more regulation?

Cross-posted at Anything Peaceful.

The Pretense of Regulatory Knowledge

Advocates of the free market are sometimes parodied for their seemingly all-purpose answer to any problem: Let the market handle it. What may sound like a simplistic answer, however, is actually the most complex prescription imaginable. In the modern world, the workings of any particular market are so complicated, they are beyond the grasp of mere mortals. Moment by moment, day by day, so many subtly interrelated decisions are made by so many people worldwide that no individual or group could possibly understand the big picture in any detailed way. So there is nothing simplistic about proposing the market as a solution to an economic problem. It’s short way of saying: let the multitude of knowledgeable people seeking profit, risking their own money, and responding to incentives find a solution based on persuasion not force. Translated that way, it sounds like a promising approach.

Ironically, those who don’t appreciate markets are in fact the ones who offer a simplistic, even empty alleged solution to economic problems: government regulation.

The rest of this week's TGIF, "The Pretense of Regulatory Knowledge," is at the Foundation for Economic Education website.

Cross-posted at Free Association.