The Foldvarium

No Association. No Talking. No Confederation. No Peace.

2012-01-12T14:37:00.000-08:00

The committee for an Israeli-Palestinian Confederation attempted to hold meetings in Israel and Palestine in December 2011. The purpose of these meetings was to prepare for elections for an Israeli-Palestinian Confederation to be voted on by the people, even if not recognized by the Israeli and Palestinian governments. The Confederation would be an independent third government representing the peoples of both Israel and Palestine.

The committee had been promoting the concept of a confederation for several years, as a path to the solution of the conflict. But in Palestine, mobs forced their way into the meetings and shut them down. The Jerusalem Post on 13 December 2011 reported this under the headline, “Anti-‘normalization’ Palestinians protest peace meeting.”

Daoud Kuttab, columnist, former professor of journalism at Princeton University, and director general of Pen Media, in an article first published in the Jordan Times on Dec. 22, 2011, reports that previous meetings that included Israeli Jews and Palestinian Arab Muslims had also been disrupted. In 2000, a Palestinian-Israeli human rights film festival was held in several cities in Israel and Palestine. The winning film was to be announced at the final meeting in Ramallah, but protesters who opposed Israeli-Palestinian peace came in and forced the cancellation of the ceremony.

The Palestinian Israeli Journal was going to hold a conference in East Jerusalem to promote its issue on“The impact of the Arab Spring on the Palestinian-Israeli conflict.” Palestinians opposed to “normalisation” called for a boycott of the hotel, and the event was cancelled.

The government of Israel has also been guilty of violating the freedom of association. The government has prevented the Jerusalemites of the eastern part of the city from creating their own organizations. For example, The Orient House and the East Jerusalem chamber of commerce remain closed. Daoud Kuttab reports that cultural and sports activities have been stifled when they are regarded as being tied to the Palestinian Authority.

In a message to the candidates for the Confederation on 25 December 2011, Josef Avesar, founder of the committee, stated that while demonstrators stopped the confederation conventions at east Jerusalem and Palestine, they were not able to shut down the convention in Haifa, Israel. Opponents had also contacted candidates to intimidate them from running. But “not a single candidate took his name of the IPC official website. Collectively, we remain stronger by adding 150 candidates in the last month. We now have a total of 625 candidates.”

Those gangs that shut down the meetings are opposed to peace between Israelis and Palestinians. The plain two-state solution has been much discussed, but not acted on due to inherent problems. A confederation is necessary in order for both states to co-exist. That is why those oppose to peace oppose the confederation idea. The vote for the Confederate legislature is scheduled to take place on December 12, 2012.

A Jerusalem Post headline on 17 December 2001, exclaimed, “Fatah declares 'war' on normalization with Israel.” In reaction to the meetings of the Israeli Palestinian Confederation, Palestinian Authority President Mahmoud Abbas’s Fatah faction has banned informal meetings between Israelis and Palestinians.

Although the Palestinian Arabs may believe that these meetings would not change the Israeli government’s policies, the Confederation offers a method of resolving the problem peacefully, and so banning the meetings blocks off one avenue towards a solution to the problem of the Israelis settlements in the West Bank and the recognition of the 1967 boundary. This war on meetings also blocks off discussions on possible solutions, such as the payment of rent to the Palestinians by the Israeli settlers.

The ban by the Palestinian Authority violates the freedom of association and speech, and shows that this government does not respect liberty and natural rights. It is very deeply an opposition to peace and the resolution of the problem. They claim that they are blocking meetings because of Israeli policy even while shutting off an avenue to change the policy.

Enough said. The actions of the PA speak for themselves. There shall be no associations that include Palestinians and Israelis. There will be no mutual discussions. They will attempt to prevent the Confederate elections of December 2012 in Palestine. And with no dialog and no mutual governance, there will be no peace in Palestine and Israel. The main victims will be the Palestinian Arabs, and the whole world will continue to suffer from the global shock waves generated by turmoil in the Middle East. That is the tragic message by the supremacists on Christmas Day in 2011.

Fetishism in Economics

2011-12-09T08:27:00.001-08:00

The thought of Karl Marx continues to resonate throughout the world and is never more prominent than in the use of the propaganda term “capitalism” by both advocates and opponents of economic freedom. The opposition to “capitalism” by the Occupy movements show that Marxist thought has penetrated deeply into global economic culture. Therefore it behooves us to understand Marxism in order to understand the global culture of economics, especially to know how Marxist culture blocks reforms to enhance prosperity and economic justice.

If you talk to Marxists, they will tell you that the concept of “fetish” is fundamental to the economic ideas of Marx and his followers. Fetishism is described in Das Kapital or Capital, Volume 1, Part I “Commodities and Money,” Chapter 1 on Commodities, Section 4 on “The Fetishism of Commodities and the Secret Thereof.”

Marx states that a commodity abounds in “metaphysical subtleties and theological niceties.” An object such as a kitchen table does not merely serve some want to use, but can get transformed by the human mind into “something transcendent.” It can acquire a mystical character.

This commodity meaning of “fetish” is a different application of the concept from the meaning as a sexual attraction to things, such as feet and leather, that are not usually regarded as being sexual.

We can clearly see fetishism in religious objects, which to the believers, are not just physical statues or candle holders but have a metaphysical significance and even life. But there is a fetish also to non-religious things. Marx says, “the productions of the human brain appear as independent beings endowed with life... So it is in the world of commodities with the products of men’s hands. This I call the Fetishism which attaches to the products of labor.”

Objects with sentimental value acquire such a “life.” But to Marx, fetishism applies generally, and in private enterprise, fetishism reduces labor to a disrespected commodity. The whole economic system of private enterprise becomes a fetish - something people think is holy and not to be disturbed.

The injustice and low wages of labor are rationalized away by this fetishism in economic thought. To Marx, the exchange value of commodities comes only from “the amount of labor bestowed” on objects. “Nature has no more to do with it, than it has in fixing the course of exchange.” Thus to Marxists, value comes from labor, and if the Worker is not paid that full value, he is exploited, and the Capitalist wrongly takes the surplus that should belong to Labor.

The concept of economic fetishism is a valuable addition to economic thought, but this has to be applied generally, including also to Marxist doctrine. It is understood in modern economics that labor is generally paid the contribution to output of the marginal worker, conceptually the last one to be hired, what economists call the “marginal product of labor.” Because of diminishing returns, the average product of labor is higher than the marginal product, and that is a surplus that by superficial appearance goes to the owner of the firm, the Capitalist. But Marx made a fetish out of “capital,” applying it even to the title of his major works. By denigrating nature, Marx also made a negative fetish out of nature.

In the analysis of the American economist and social philosopher Henry George, the surplus from production is ground rent. Suppose in some geographic region, the average product of labor is greater than the wage paid to workers. The existence of that surplus at that location makes the location valuable, and so entrepreneurs will bid up what they pay to be located there. They will keep bidding up the rent until the rent has soaked up all the surplus. Generally, what economists call the “producer surplus” is really land rent, and since landowners produce nothing, they are non-producers, and the surplus is better called the “non-producer surplus.”

Hence Marx is right that economists have fetishes. Most economists have made a fetish out of the producer surplus, imagining that it goes to the better producers rather than to non-productive landowners. This is what Mason Gaffney has called the “corruption of economics.” But Marxist economics falls to the same fetish in saying that nature is not involved in the course of exchange. In a market economy, each factor - land, labor, and capital goods - is paid its marginal contribution to output. There is no injustice in being paid what you contribute.

Karl Marx recognized that land rents grow not just out of soil but also from society. But rather than conclude logically that this rent should belong to society, Marx made a fetish out of labor and thought that the surplus is part of the economic wage. Marx did not understand that this surplus should be paid by the land title holder for the use of land, in order to have efficient economic calculation. The rent is an implicit reality apart from any explicit payments by tenants to landlords or no explicit payments by owner-occupants. If that rent is not explicitly paid, not only does the landowner take what comes from society and nature, but the rent generates land value that becomes an object of speculation that creates the boom and bust sequence.

Some followers of Henry George also have fetishes. When they treat George’s thought as religion, then Saint George becomes a fetish. The concepts that all taxation comes from rent, that services have a different function than tangible goods, and that “interest” is the yield of capital goods, all fetishize George. Of course it is difficult to not have any fetishes.

The prime achievement of Marxism is the adoption of the fetish term “capitalism” even by those who defend private enterprise. By applying “capitalism” both to the mixed economy and to private enterprise, Marxists have turned a nonsense word into a brilliant fetish term used to blame economic freedom for the social problems that come from government intervention. Those opposed to economic freedom also make a fetish out of the state, endowing it with god-like qualities of omniscience, omnipotence, and benevolence.

It is in human nature to create fetishes, but it is also in human nature to apply logic. There is nothing wrong with treating objects such as a photograph of a loved one or a special gift into a fetish, i.e. qualities that come from the mind, but we need to learn to apply unhampered logic when it comes to science, including the science of economics.

The Occupy Movement: A Failure of Democracy

2011-11-22T07:55:00.000-08:00

Mass protests imply that democracy has failed. In a genuine democracy, if one seeks a change in policy, one contacts one's representative, and if that agent is not responsive and does not represent the consent of the people, then the voters replace the bum in the next election.

Mass protests arose in the Arab world because they had dictatorships which refused to respond favorably to grievances. The regimes responded with force, because the chiefs sought to preserve their privileged power. But in a democracy, the government is supposed to represent the people and respond to popular desires.

The most powerful weapon of protest is civil disobedience, the refusal to obey unjust laws. During the civil rights movement of the 1960s, the protestors went beyond calling attention to their demand for equal rights. With the refusal to obey segregationist laws, the movement put pressure on the authorities. Mass arrests placed a cost on the authorities and generated sympathy for the cause.

The occupy movements have practiced civil disobedience by putting up tents for a continuous presence in the occupied territory. The police have responded by taking down tents, destroying property, and arresting the demonstrators. This brute-force police reaction will not succeed, because the protestors have a passion for justice on their side, and the political machines have not been responsive. For the most part, the occupy movement has been ignored, dismissed, or disparaged by the political establishment. When democracy fails, the alternative is mass protest.

Mass protests seek to educate the public in addition to putting pressure on authorities. During the War in Vietnam, for example, the protestors made speeches and published literature on why the war was wrong. The majority at first did support the war, and later, both due to the protests and due to the continuing cost in lives and treasure, the public turned against the war.

The problem today is that those seeking change have to convince the majority of the mass of voters, and this persuasion is difficult and costly. But the core of the problem lies in democracy itself. We are used to democracy being our system of mass voting and representation, but there is an alternative democracy, a radical decentralization of power and voting.

Suppose that the political body is divided into tiny cells of a few hundred people. People would only vote for a local neighborhood council. Those councils would vote for the level-2 council, and so on to the top level of Congress or Parliament. If the country was engaged in a war you wanted to stop, the first place to engage in would be your local level-one council. If you could convince your neighbors that the war is unnecessary and unjust, then that council would send representatives to level-two to oppose the war.

The anti-war movement would take place in many neighborhoods, all seeking anti-war majorities in the level-one councils. Thus level-two would also be opposed to the war, and send anti-war representatives to level 3, and so on up to the Congress, which would end the war.

Thus with a cellular democracy, protests might take place to call attention to a cause and to help educate the people, but the push to change the policy would take place within the multi-level system of voting. With just a few hundred people in the level-one neighborhood, one could hold meetings, distribute literature, and just talk to people about the issues. The council would have to be responsive to the majority, otherwise it gets replaced.

If one could not persuade the majority, then so be it. One could just keep trying. If truth is on your side, eventually logic may well prevail. Prejudices may be difficult to dislodge, but most people think they believe in justice and liberty, so pointing out the contradictions in their thinking could well eventually erode their bias. For example, racism was deeply entrenched in western civilization for centuries, yet there was a quick turn in the culture, so that today it would be shocking to hear anyone exclaim racist ideas in American civil discourse.

The failure of democracy illuminated by the occupy movement is not a failure of the concept of democracy but of the misapplication into mass voting. The problems of mass voting are well known in the theories of political science and the branch of economics called "public choice." Everybody knows the perverse influence of the moneyed special interests, and that is one of the themes of the Occupy Movement.

Members of that movement have created an alternative democracy of general assemblies within the protest neighborhoods. If the local assemblies would then send representatives to regional assemblies, which then send members to a national assembly, they would create a parallel democracy. They might then realize that this bottom-up structure should replace some or all the structures of mass democracy. For example, one of the two legislative houses in the states could be elected by cellular democracy.

Mass democracy has failed to sustain prosperity, justice, and liberty. The Occupy Movement is a symptom of mass-democracy failure. Small-group bottom-up cellular democracy would provide a great enough voice to people so that they would no longer feel the need to live in tents and march down the street.

Nobel Prize in Economics for 2011

2011-11-17T20:25:00.001-08:00

The 2011 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was awarded jointly to Thomas J. Sargent and Christopher A. Sims "for their empirical research on cause and effect in the macroeconomy."

Thomas Sargent is a professor at New York University in New York City and a senior fellow at the Hoover Institution at Stanford, California. Christopher Sims is a professor at Princeton University, New Jersey. Their research on the economy has investigated questions such as the effects of changes in interest rates, tax rates, and government borrowing. They create models that apply econometrics, the application of statistical analysis and quantitative techniques, to discover trends and to make forecasts.

Thomas Sargent uses structural macroeconometrics to analyze changes in economic policy. This involves an equation which discovers how the dependent variable is affected by the independent variables. The coefficients of the variables tell their economic significance, and the statistical significance tells how well that variable affects the dependent one. If there is much variation in an independent variable, then it will not predict the action of the independent variable. For example, if we examine the effect of education on income, the coefficient would be something like income going up by twice the amount of education expense, and this would have statistical significance only if most of the time, higher education would raise income, rather than often less education being correlated with more income.

Sargent also helped develop and apply the theory of rational expectations, by which people form expectations not just from recent events but also by analyzing the likely future changes in the economy and expected government policy. So for example, if people anticipate the expansion of money by government, that policy will not increase output, as prices and nominal interest rates will rise at that time, to prevent the erosion of income and wealth that would happen if the inflation were unexpected.

Christopher Sims developed vector autoregression techniques to analyze how the economy is affected by changes in economic policy and by shocks to the economy. A “regression” is a line trend that best fits some relationship such as between income and education. “Auto” means “self,” and an autoregression includes the results of previous dependent variables as new independent variables. For example, the value of a dollar today depends to a great extent on the value of a dollar yesterday. A “vector” is a set of numbers such as “1, 2, 3.” Vector autoregression (VAR) measures the interdependencies among several regressions. Each variable has an equation explaining its changes based on its own lags and the lags of all the other variables in the model.

The models developed by these two prize winners are used by the Federal Reserve and other central banks and other policy makers to analyze the effects of changes in tax and interest rates and other variables. Earlier simpler models failed to take into account the complicated relationships that are included in the models by Sargent and Sims.

A major principle of science is that correlation is not causation. When variable A is correlated with variable B, the data will not tell you which is cause and which is effect. It requires theory to determine this, and the techniques of Sims and Sargent apply theory to arrive at a cause-effect conclusion.

Sargent and Sims have done excellent work in generating conclusions from a mass of data. But basic economics can be understood with three very simple concepts. First, people respond to incentives, doing more when the cost is lower, less if the cost is higher. Second, the knowledge of how to produce is so spread out throughout the economy, much of it not written down, and often changing, that a government planner cannot possibly do better than the decentralized decisions of the local actors. Third, prices and quantities move towards equilibrium, meaning that profits induce more output, losses less output; a surplus reduces prices, while a shortage increases prices; all moving production and consumption towards harmony.

Thus the best policy is to let producers and consumers choose their action without interference from government. Get government revenue without increasing the cost of production and consumption, by tapping a resource that is not produced but already here, land, whose rent is a surplus beyond costs, and a free gift to humanity to use to pay for community services.

The work of Sargent and Sims is useful in determining the result when there are shocks to the economy, but really, it does not require statistical analysis to understand that taxation imposes an unnecessary shock. Tapping the rent for public revenue will have a transitional, temporary shock, which we can minimize by compensating for net losses, but forever after, it will allow people to invest, produce, and consume according to their own subjective desires.

My dream is that Sargent and Sims will apply their powerful techniques to analyze the effects of switching from today’s punitive tax system to an efficient system of public revenue from land rent, pollution charges, and voluntary user fees. History would then award these two economists with a prize much greater than that of the Sveriges Riksbank, the honor of having helped to achieve a lasting universal prosperity for humanity.

The Decline of American Civilization

2011-10-09T08:07:00.000-07:00

Since the first stamps issued by the United States Post Office in 1847, the rule had been that no living person may appear on a U.S. stamp. The first U.S. issue was a set of two stamps, one showing George Washington, and the other, Benjamin Franklin, the first postmaster general.

U.S. stamps since then depicted deceased presidents and other historical people, but never any living person. There was a good reason for this. In countries with kings, the monarch’s portrait appears on its coins and stamps. The king or queen is the sovereign. Today, Queen Elizabeth appears on the stamps and coins of the United Kingdom and the members of the British Commonwealth for which she is the head of state. However limited her powers, the Queen is the living personification of the state.

But the USA was a republic that rejected royalty. In the USA, all the citizens are individually sovereign. To put the president of the United States of America on an official stamp or coin would treat the elected servant of the people as a royal master. To put any person on a stamp or coin would treat them as exalted. It would confer a governmental privilege, in effect, royal treatment, contrary to the spirit of the Constitution of the USA, which declares, “No Title of Nobility shall be granted by the United States.”

Now the United States Postal Service has announced that henceforth it will issue stamps showing living persons. Stamps showing popular people would be big sellers. They could put sports and movie stars and musicians on stamps. Even worse, they could put the US president on the stamp, and then members of Congress and the Supreme Court.

The USPS has allowed people to issue their own stamps showing living persons. On a web site, one could upload a picture and provide the text, and then pay for special stamps that would be delivered to the buyer, valid for postage. But these were not national stamps officially issued by the USPS.

Now the USPS is exploiting its prestige for money. The coins and stamps of the US government represent the grandeur of the nation. When money means more to the USPS than the dignity of official philatelic images, it amounts to postal prostitution.

The breakdown of long established rules indicates an abandonment of discipline. Of course bad rules should be gotten rid of, but the rule that no living person appear on a US stamp had good reasons behind it.

The USPS is now inviting people to suggest people to be put on stamps. If it goes by popularity, we could see a set of stamps showing top stars and celebrities, such as Lady Gaga or Mick Jagger. Maybe the high value of the set will sell for $5, with others denominated at $2, $1, and a forever stamp for 44 cents. Collectors will want the whole set. And then the USPS will offer a souvenir package with a booklet, photos, and a chip with songs. It will be enough to make old-school collectors gag.

The USPS would like to promote the old hobby of stamp collecting. Young people will buy stamps showing their favorite musicians and movie stars, but they will not from that go on to collect the other new issues. Children once collected used stamps, saved from mailings, but the USPS does not profit from that. The Postal Service wants to sell mint stamps. But stamps made only to sell to collectors, with little or no actual use for postage, are not really postage stamps. They become stickers, just as medallions are not really coins.

These stickers and seals of living persons will raise some money for the USPS, but that will not solve its financial problem. The losses suffered by the Postal Service are too great to be covered by selling some more stamps. One problem is that the USPS has a board of directors of 535 persons - Congress. Members of Congress have prevented the USPS from closing post offices in their districts. The USPS must obtain approval for price changes from the Postal Regulatory Commission. The USPS should be let loose to make financial decisions like a private business, so long as it serves its mission to provide universal service.

If the USPS were to be privatized, then there would be no problem selling stamps showing living persons, as these images would no longer represent the state. But so long as the USPS is part of the federal government, its stamps should be treated like US currency. Imagine living persons such as current presidents on US currency. If living persons could be on a $1 bill, surely the president would be at the top of the list, followed by the head of the Federal Reserve system, and we would then have a royal currency, not the currency of a republic.

After the US Constitution was written, Benjamin Franklin was asked whether the US had gotten a republic or a monarchy. He replied, “a republic, if you can keep it.” When the US president appears on a stamp, we will know that we did not keep it.

How Deregulation Hurts the Economy

2011-06-16T06:31:00.000-07:00

Suppose that gambling were illegal. That restriction would be a governmental regulation. Then suppose that the government legalized gambling. That would be a deregulation.

Gambling can have victims, such as a gambler’s family, when the gambler squanders his earnings on games of chance rather than feed and house his family. Suppose then to avoid the deprivation to family members, the government bailed out gamblers. The government would give losing gamblers back their money, to avoid possible harm to their families.

What would be the result? Obviously there would be a huge amount of gambling. If one wins, one keeps the gains. If the gambler loses, he gets back his losses. The great increase in gambling would generate a huge amount of government spending in bailing out the gamblers who statistically would lose more than half the time.

The resulting huge increase in government spending would either stifle the economy with higher taxes or else generate an ever greater government debt. Either result would hurt the economy.

But which policy caused the damage? Is it the deregulation of legalizing gambling, or is it the subsidy to gambling? Clearly the damage to the economy would be caused by the subsidy. Without a subsidy, gambling could hurt individual families, but not the whole economy. The subsidy to gambling would generate major damage to the whole economy as deficits escalated, raising interest rates, reducing investment and growth, and ultimately resulting in a debt default.

The deregulation of the financial industry is similar to the deregulation of gambling. When speculators bear their own losses, this does not damage the economy as a whole. But when government bails out the losing speculators, that causes “moral hazard,” the taking on of excessive risk because the speculators know the government will share the losses.

Many journalists, politicians, and (sadly) economists have blamed the Crash of 2008 on deregulation. That makes it seem like there are no regulations, that anything goes, in finance. But in fact, there was only a small amount of loosening of restrictions on financial affairs. The Federal Reserve system was still there, regulating the banks. The FDIC was there providing deposit insurance as well as further regulation. The SEC was there regulating stocks and bonds to allegedly protect the public. The Community Reinvestment Act was still in force imposing yet more regulation. The Sarbanes-Oxley Act of 2002 had been enacted several years prior to the crash to regulate accounting. The FHA as well as the government-sponsored enterprises Fannie Mae and Freddie Mac regulated mortgages. State governments regulated insurance companies. Both the state and federal governments prohibited and regulated fraud.

Whatever freedom that banks, brokerage firms, insurance companies, mutual funds, hedge funds, and pension funds had to invest and speculate was not the cause of the “Great Recession” and financial crisis, just as the freedom to gamble does not bring down a whole economy. The cause of the recession and financial break-down was the enormous subsidies to the financial firms and to real estate holding. When AIG, Fannie Mae, banks, and others lost money on their mortgages and land-value derivatives, the federal government gifted them back much of their losses. Some of the funds have been paid back, but still, the fact that government will bail out a speculator makes him speculate too much, causing damage to the many homeowners and investors who do not get bailed out.

The regulation of fraud by the SEC did not prevent billions of dollars of ponzi-scheme fraud, despite warnings. One of the problems of regulation is that the bureaucrats end up serving the regulated industries. Economists call this “regulatory capture.” It is also referred to as a revolving door, as the regulators come from the regulated industry and return to it after having served the “regulated” special interests.

Regulations can either be market-enhancing or market-hampering. Marketizing regulations help make the economy more voluntary by prohibiting theft, and with liability rules making those who cause damage to compensate the victims. Interventionist regulations alter what would otherwise be honest and peaceful human actions. The deregulation of previous interventions is market-enhancing, and promotes prosperity if not linked to subsidy.

Public finance theory emphasizes the deadweight loss of the taxation of labor, capital goods, and funds, but subsidies are an even worse economic problem. Subsidies are pernicious because they have the appearance of helping, but have the implicit reality of being weapons of economic mass destruction.

The greatest subsidies are those least visible. The most vicious of all subsidies is the implicit subsidy to real estate, specifically land value, caused by public works and civic services not paid for by landowners. Governmental goods - streets, parks, transit, security, schooling, welfare aid - makes locations more productive, attractive, or affordable, generating higher rent and land value. The payment for these works by the affected landowners would take land values back down, but today the funding is almost all from taxing labor and capital.

This massive subsidy to land values redistributes wealth from workers to landowners, and even worse, generates speculation in real estate that carries prices beyond what can be afforded by households and enterprise. That makes investment stop, and then the economy falls.

The focus on deregulation is an example of people looking only at the superficial appearance, and not understanding the implicit reality. The main task of economics is indeed to enable people to understand the implicit reality beneath superficial appearances. The sad fact that even many economists are mesmerized by superficial appearance shows that most economists are not doing their most essential job.

The Conformal Economy

2011-06-05T08:07:00.000-07:00

In his book Cycles of Time, Roger Premrose carries further his analysis of the geometry of the universe, mathematical and geometric models of black holes and the origin of our universe. In this book, Premrose investigates the geometry of the big bang origin as well as providing a hypothesis about the ultimate fate of the universe. Will the universe continue to expand indefinitely, or does it go through cycles in which expansion is followed by contraction?

The explanation by Premrose is “conformal cyclic cosmology.” A geometry is conformal if its angular structure does not change when the distances are expanded or contracted. Consider a cube with a side of one meter. If we expand it to sides of ten meters, it is still a cube, with the same structure, thus conformal.

Because the early universe is conformal to the current universe, with the same physical laws and geometric structures, and the future expansion is also conformal. While one needs to be savant in physics to understand the Premrose hypothesis, the essential proposition is that the conformal geometry will cause the universe to stop expanding and again contract in an infinite cycle. The hypothesis is not yet a theory since it has not yet been tested by evidence.

There are geometries in economic theory, such as supply and demand curves, the production possibility curve, production functions, circular flows, and the histogram model of the law of rent. But there is also a geometry of the actual economy. This economic geometry is not a physical structure such as the angles of the hydrogen atoms in a water molecule, but rather an economic structure that is hidden from superficial appearance but forms an implicit reality.

The key economic geometry consists of the surplus generated by production. Neoclassical economics models this as a “producer surplus,” geometrically illustrated by a supply curve, a price line, and the area between the price line and the supply curve. That is the so-called “producer surplus”. You can see this visually in a web images search for “producer surplus.”

But neoclassical economics also understands that the long-run economic profits of firms in competitive industries is zero, after subtracting all costs, including normal returns to assets. Thus the “producer surplus” is an economic profit that does not go to the firm owner. It also does not go to wages if the labor market is competitive, as wages greater than normal will increase the supply of labor and drive the wage back down to normal.

The only other place that the surplus can go to in competitive markets is to land rent. Most of the “producer surplus” of an economy is land rent. Since no human being creates land, the title holders are not producers, but only receivers, and so it should be called a “non-producer surplus”.

As a surplus, land rent can be tapped for public revenue without hurting production and investment; indeed, the collection of land rent for public revenue is better than neutral, as the payment is based on the most productive use of land, pushing land to its most productive use.

A pure free market requires that the land rent be collected and distributed equally to all residents in the relevant community, either as cash or as public goods, including services. The equal sharing of land rent is the economic geometry of prosperity, economic justice, and sustainability.

But governments today have altered the economic angles of the surplus from production. They let title holders expropriate the rent, while imposing a tax cost on labor and capital. The geometry of destructive taxation is to shift up supply curves, making production more expensive, and to create a deadweight loss, a misallocation and waste of resources that reduces the surplus from both production and consumption.

Even worse, perverse taxation alters the dynamic geometry of economic growth. Much of the gains from economic expansion are captured by higher rents and therefore higher land values. Speculators buy plots of land to gain from the higher rent, and sometimes keep land in suboptimal use, thus pushing out margins of production to less productive margins, a perverse geometry that reduces wages and increases rent even more. This is malspeculation, a destructive land grab caused by massive governmental subsidies to real estate as artificially cheap credit and as fiscal subsidies, public goods paid for by taxing wages generates higher land values.

Meanwhile, to prevent inflation, the monetary authority reduces its excessive money expansion, so interest rates rise with the greater demand for investment and speculation. The dysfunctional economic geometry of malspeculators seeking large gains from leverage, using other people’s money, escalates land values to geometric heights that make real estate unaffordable by those seeking dwellings and work space. The most optimistic speculators see the geometry of ever rising land values and cannot judge when the peak will occur.

Comes then the stoppage of investment, as land value stop rising, the malspeculators panic and sell, and real estate prices crash, which also collapses the financial structure that is tethered to real estate loans and derivatives.

The fundamental geometric structure of the economies of the world have been conformal, unchanged for the past two hundred years. The growth of government regulations, institutions, and taxes are but a change in the size of geometric structures. None of the private and governmental developments of the past 200 years have changed the angles of the basic economic geometry - the private appropriation of the surplus, and the taxation of production.

The conformal economy results in an economic cycle of boom and bust. Malspeculation caused by the governmental subsidy to real estate creates an unsustainable boom, followed by the recession and depressed economy. Only a fundamental change in the economic geometry can eliminate the boom-bust cycle. That change is to stop taxing production and shift to public revenue from land rent.

The pure free market is like a cube whose lines form right angles. Government intervention - destructive restrictions and taxes - are like force applied to the cube to squeeze and twist it to create odd unstable angles. An efficiency tax shift to stop taxing production and consumption, and instead tap the rent surplus, will result in an economic geometry like the right angles of a cube, the sustainable, efficient, equitable and elegant economic geometry of the pure free market.

Rebuttal to Arguments Against Land Value Taxation

2011-03-06T09:34:00.000-08:00

On 18 October 2010 I wrote on Arguments Against Land Value Taxation (http://www.progress.org/2010/fold687.htm). I now provide the rebuttals.

1. Critics say that the supply of usable land can be expanded by filling, clearing, and levelling. No, because that does not change the cubic meters of space within the boundaries of the area. The improvements are capital goods, not land. Taxing land value does not tax the improvements.

2. Critics say that the supply of land offered in the market is not fixed. Yes, the quantities offered for sale are not fixed, but the total amount of land available is fixed. The sale of land just changes the persons who have title. The total quantity is important in setting the market rent and price of land. The fixed total quantity, and the fact that land was provided by nature, makes land rent an economic surplus that can be tapped with no economic damage.

3. Critics say that there is plenty of bare land, so there is no shortage of land, and no land problem. Yes, there is much unused land, but what matters is the scarcity of land in locations people want to use.

4. Critics say that much of the value of land comes from services and improvements such as streets, parks, and security, so land-value taxation would tax the capital goods along with land. No, because if the added value comes from privately provided works, the payment would go to the providers by contract. If the public works are provided by government, then the added rental goes to the government to pay back value received and avoid a subsidy to landowners.

5. Critics say that people have much of their asset value in land, and LVT would result in great losses and also wreak financial markets as much of lending is for mortgages. Not if those with net losses are compensated with bonds. See (http://www.progress.org/2006/fold461) "How to end stinking taxes immediately."

6. Critics of LVT claim that speculation is an essential part of a market economy, as entrepreneurs seek the best timing for development, and LVT results in premature redevelopment and causes too much building. No, because the tax on land value is independent of its actual use, based only on its potential in its highest and best use, and it is the lack of LVT that in some cases causes premature development expecting higher land value, and in other cases causes speculators to avoid developing, waiting for higher land values. LVT promotes the optimal timing as the opportunity cost of not developing is in money and thus has a greater impact. What is bad is not speculation as such but subsidized land value, distorting incentives.

7. Critics say that LVT redistributes wealth from landowners, but there is nothing morally wrong with an inequality in wealth and income. But when government provides public goods paid for by taxes other than on land, this pumps up rent and land value, redistributing wealth from workers to landowners. And for land value provided by nature, geoist ethics say that human equality requires an equal benefit from natural resources. Inequality in market wages respects equal self-ownership, while an unequal benefit from the natural heritage does violate our creation as moral equals.

8. Critics say that LVT is not fair to homeowners whose land goes up in value and whose wages do not rise. But LVT would provide an opportunity for companies to provide insurance against an unexpected increase in the land value tax. The insurance would have a cost at the time of purchase, so that the new title holder would know if he could afford the payments. Also, retired folks with low incomes could postpone the payments until the property is sold or inherited.

9. Critics of LVT claim that much of wages is due to luck, connections, and talents, so a portion is wages is unearned. But as Henry George wrote, justice is the end, taxation only the means. It is just for the benefits of natural resource to be shared, and for landowners to pay back the rental generated by public goods. Self-ownership is also just, even if some have greater wealth due to luck. Nobody is coercively harmed if one person has more talent than others. If others own your luck, you become a slave to them, violating self-ownership.

10. Critics of LVT claim that rent is often earned as landlords actively seek out the best tenants and the best use of a site. But this is not rent; the return on this exertion is wages. Those seeking the best tenants and sites are in the role of entrepreneur, not landlord. Some of the rental that tenants pay is wages to the entrepreneur and to the manager.

11. Critics say that the tax burden should be shared by everyone, not concentrated on landowners, and that since tenants don’t pay taxes, they will vote for bigger government. But the rent tapped for public revenue is what is paid by tenants. The rent could be taken directly from tenants, skipping the landlord middle-man. A “citizens’ dividend” or distribution of some of the rent to all residents would provide an incentive for people to avoid wasteful government spending, as that would reduce their cash dividend.

12. Critics claim that there is no precise method of separating land value from improvement value. They have not talked to professional real estate appraisers. Land value appraisal is needed for fire insurance, mortgages, the purchase of land with a building to be demolished, and other private transactions. Techniques to appraise site value include comparable sales of bare lots or lots sold for demolition, calculating the replacement costs of buildings minus depreciation, and maps of neighborhood properties.

13. Anarchist critics claim that LVT would finance government tyrants. But geoism is not just the taxation of land but equally sharing the benefits. Geoism opposes landlord tyranny.

14. Socialist critics claim that LVT leaves intact capital inequalities. But much of the historical inequality of wealth has come from land tenure. Over time, inherited wealth other than land dissipates or gets donated to charity. With good education and equal access to natural opportunities, inequalities in financial assets are not unjust so long as there is no force or fraud.

15. Critics of LVT claim that property ownership promotes civil values and stability. This has been disputed, but if true, the ownership of one’s human capital, future wages, buildings, and personal property should provide similar benefits.

For more detailed rebuttals, read the book Critics of Henry George.

Seize Democracy!

2011-02-17T07:59:00.000-08:00

The revolution in Egypt will inspire millions of people to defy their governments and no longer submit to tyranny. But the street protests ironically acknowledge the authority of the state chiefs. When protesters demand reforms, they recognize the rulership of the regime. An alternative would be to refuse the jurisdiction of the regime.

People country-wide would create local village and neighborhood councils. They would then engage in civil disobedience to the prior regime. They would refuse to pay taxes to the old regime. They would refuse to obey arbitrary restrictions, such as permits and license to engage in production and trade.

The prior regime could seek to stifle the local democracy. They could send in the police to break up local meetings. But people could meet in houses and cafés. It would be difficult for the regime to stop local meetings nation-wide. The people would also coordinate their activity via the Internet. Has there been an election via twitter?

The prior regime could send in thug police to wreak shops that refuse to pay taxes or bribes. They could arrest vegetable peddlers with no license. So the pioneers of seizing democracy would have to be brave. But we have seen that people will have courage when they know that the people are with them.

A group of neighborhood councils would elect a greater-area council, which would take charge of the highways and larger facilities. These councils in turn would elect the next wider council, and so on to a national parliament. The parliament then elects the president. All representatives are subject to recall and replacement at any time.

The Old Testament provides a guide to governance in Exodus 18:21: ye shall choose out of the entire nation capable and trustworthy persons who hate corruption, and ye shall appoint them to be leaders over thousands, leaders over hundreds, leaders over fifties, and leaders over tens. Thus the thousands, hundreds, fifties, and tens represent the areas of governance.

There would thus be a parallel people’s government along with the prior regime. The national army chiefs would then have to decide which government to recognize. The sympathies of the soldiers would be with the people, and the army would switch sides. The prior regime would be gone.

With power divided into neighborhood cells, it would be difficult for the military to capture power. Bottom-up small-group cellular democracy would be government by majority. But democracy is not enough. The people of Egypt also called out for “freedom! freedom!”.

Raw democracy can impose the tyranny of the majority on religious and other minorities. A danger of seizing democracy is that people have prejudices, and could falsely blame innocent minorities for their troubles. That is what has been happening in Iraq, where Christians are being persecuted and driven out.

Let us hope that the call for freedom in Egypt was for freedom for the people and not just freedom from the regime. When people seize democracy, they should at the same time declare a state of freedom. They can adopt one simple constitutional rule: do not coercively harm others.

Revolutionary democracy has to establish economic freedom, not just freedom of speech and religion. Having abandoned the old tax structure, it would be tragic for the new government to once again stifle the economy with coercive rules and punitive costs. The youths of Egypt were also rebelling against the lack of economic opportunity.

A free society requires a truly free market. The new realm should impose no restriction or tax on peaceful and honest enterprise. All that is needed is to penalize force and fraud. The councils would declare the land value as the legitimate property of the people, and collect a community rent from all land holders. The local councils could then pass on some of the rent to wider-area jurisdictions. The assessments and collections would be organized by a board with representatives from the whole set of councils. But ultimate power would rest with the neighborhood councils and the people.

We need to differentiate righteous revolution from tyrant take-overs. A righteous revolution establishes genuine democracy and freedom. No more pharaohs!

Power is ultimately with the people. Physics differentiates between potential power and kinetic power. The people of Egypt transformed their potential power into kinetic power. If their revolution be righteous, they would cast off the power of the old realm, while recognizing and protecting the individual power of each person in the new democratic liberated Egypt.

Rebellion in the Streets!

2011-02-13T07:53:00.000-08:00

Exciting and frightening! People in Tunisia, Egypt, Yemen, and elsewhere took to the streets to demand the replacement of the ruling regimes. It is exciting because the people no longer fear the guns of the state. The people have reinstated their sovereignty. They will no longer be dictated to.

But it is frightening also because we know from history what happened to the French, Russian, and Iranian revolutions. Around the world, the liberations from colonial rule degenerated into internal dictatorships and new oppressions.

The street rebels call for the dictators to step down. But they also need a vision of what will replace it. Otherwise, extremist supremacists, who are best organized, can become the new masters. Rulers need two tools to impose power. They need force, but they also need propaganda. There has to be some story that provides a willingness to follow by much of the population.

In the old Soviet Union, the story was state socialism, which was supposed to rationally plan the economy to serve the people. In Iran, the story is supremacist religion. In the United States, the story has been representative democracy. When many people stop believing the story, the regime’s rule is finished.

A third source of support for the state consists of benefits. In the United States, Europe, and Japan, the main benefits have become retirement income and medical services. Folks support the state because otherwise, where will they get their retirement income and medical benefits? In countries around the world, folks get various subsidies. They don’t realize that the costs imposed by the state far exceed the subsidies.

In Tunisia and Egypt, the people were getting few benefits from the state. In many countries, most people live at subsistence, just getting enough to survive on, while the wealth of the economy goes to the ruling class oligarchy. The regime depends on propaganda and force, but eventually the story goes stale, as it did in the old USSR. When propaganda fails, it becomes clear that the purpose of the state is only to serve the ruling class. Force alone cannot maintain the ruling class unless the rulers are willing to slaughter with no mercy, as happened in Iraq.

When all that is left is force, the regime is supported by fear. In Egypt, the propaganda was no longer effective. The Egyptian revolution of 1952, the military coup which overthrew the king, had gotten stale. The regime could not provide the people with economic benefits, since the very purpose of the state had become the enrichment of the rulers. U.S. government chiefs and others called for economic reform, but that was impossible, as it would have voided the purpose of the state to serve the landed ruling class elite.

Thus the chiefs hang on to power as long as possible. Shutting down communications is a sign of desperation, an act of futility, as commerce needs communications media. The people also recognize the shuffling of cabinet ministers as meaningless.

But the street revolutionaries should learn from the history of the French revolution. The French overthrew the monarch, and then mass democracy become mob rule and a reign of terror. The street rebels need to also learn from the Russian revolution, where a tyrant was replaced by a much worse regime that lasted for decades because they had a gripping story. Some rebels seek to impose a different type of tyranny, or they seek to copy the mass democracy that has failed and degenerated in much of the world. Mass democracy does not even work all that well in the USA, where it is ingrained in the culture.

If he were wise, here is what the government chief would do. He would declare a state of freedom. All censorship would be eliminated. All restrictions on non-harmful economic activity, gone. All taxes other than on land and pollution, eliminated. He would announce that sovereignty was hereby transferred to the people individually. The chief would organize local elections in villages and city neighborhoods, to which government power would be transferred. The chief would go down in history as heroic.

But such is a fantasy. It has never happened, because having been a tyrant, the chiefs think tyrant thoughts. And the people are not enlightened enough to demand free markets, decentralized governance, and the implementation of the universal ethic of liberty and human rights. What usually happens is that street rebellions result in violent chaos, and demagogues take over.

It is exciting that the people are boldly rejecting tyranny, but it is frightening that new tyrants with a fresher story may replace the old tyranny, rather than true liberty and democracy.

Revolution in Tunisia

2011-01-27T10:03:00.000-08:00

A dictator has to be extremely ruthless if he is to avoid being overthrown. The tyrant needs the absolute loyalty of the top military officers, and the military has to be willing to slaughter any opposition, if the dictatorship is to survive a rebellion.

Many tyrants are oppressive but not cruel enough to commit mass murder, or else their military chiefs stop being loyal. Examples abound, such as Romania, Iran, Serbia, South Africa, Uganda, Haiti, Argentina, Greece, and old Russia. So it was in Tunisia, where the protests and demonstrations drove the dictator out. Tunisians are now enjoying liberties such as being able to read previously forbidden books. Political parties that were banned have sprung back.

The ruling classes were still in government, so the protests continued, and some of the chiefs resigned. But the people of Tunisia now face a choice: what kind of government shall they have? Should they elect a president, or have a parliament select a prime minister?

Unfortunately the Tunisians will make the same mistake that was made when countries around the world gained independence or threw off dictators. They copied the mass democracy of Europe or the United States. They get campaigns with superficial slogans, mass rallies, speeches blasting the opponents, and hero worship. The result in many countries has also been voting fraud, refusals to relinquish power, and overthrow by the military. Too often, people cast ballots in a sham election, or the participation is restricted to favored parties.

What the Tunisians should do is establish democracy from the ground up. Start in the villages and city neighborhoods. A group of local councils would then elect a wider-level district council, and so on to the national legislature, which would then elect a prime minister. Decentralized small-group democracy would make it much less likely that extremist supremacists would topple the government, since they would need to take over all the small groups, not just the top chiefdom.

The economy played a big role in the overthrow of the regime in Tunisia. The restrictions on enterprise were so severe that a man could not sell vegetables, and he set himself on fire, sparking the revolution. To overcome its high unemployment and poverty, Tunisia needs economic freedom. Any peaceful and honest enterprise should be free of restrictions, taxes, and subsidies. Why should people be taxed when we can get adequate public revenue from nature?

With a chance at a fresh start, Tunisians should get their public revenue from land rent. The vegetable seller would pay rent for the space he occupies, with no tax based on his sales, profits, or value added. As a tax haven, Tunisia would attract investment from around the world.

Tunisians also have to pay attention to their money system. Imports and exports of the Tunisian dinar has been prohibited. The export of foreign currency has been restricted. The central bank of Tunisia should eliminate these restrictions and let the dinar trade freely.

If the economy of Tunisia thrives, real estate prices will rise further and capture much of the gains. Foreigners have been buying properties that are cheap relative to other Mediterranean countries, and much of the benefit from an economic expansion would go to foreign landowners, but even domestic landowners would get unearned windfalls. By tapping the rent or land value for public revenue, and a bottom-up governance that serves the people, the benefits from a better economy would go to all Tunisians rather than the few landed interests.

In 2006, the “Economic Freedom of the World” ranked Tunisia as 82 out of 141 countries, number 1 being the most free. Tunisia scored 6.4 on the freedom scale, 10 being the most free. The bureaucracy is excessive, and restrictions create corruption and bribing. In the economic freedom index of the Heritage Foundation and Wall Street Journal, Tunisia ranks 58.5 out of 100, with an index of 30 for financial freedom and 35 for investment freedom. Tunisia has high tariffs, import restrictions, a high income tax plus a value-added tax, and restrictions on foreign investment.

The governments of France, the U.S., and other powers had supported the dictatorship. They cannot promote complete economic freedom and small-group democracy, because the Western powers themselves don’t have it, and the chiefs don’t want it. It is unlikely that Tunisians will be influenced by this article, but the lesson for us is that because Tunisians will adopt mass voting and economic intervention, they will experience unemployment, inflation, poverty, and conflict. In the end, the Jasmine Revolution will turn out to be conservative, and not really revolutionary.

The Constitution Revolution of 2011

2011-01-13T10:48:00.000-08:00

A revolution is occurring in the way the U.S. Congress relates to the Constitution. During the Great Depression, all the branches of government changed the Constitution to “anything not prohibited is permitted.” Previously, the essence of the Constitution was the opposite, “anything not permitted is prohibited to the federal government.”

James Madison, a principal author of the Constitution, explained in the Federalist Papers #45, "The powers delegated by the proposed Constitution to the federal government are few and defined.” The federal government only has those powers enumerated or specifically authorized in the Constitution. Madison wrote in 1788, “the powers of the federal government are enumerated; it can only operate in certain cases; it has legislative powers on defined and limited objects, beyond which it cannot extend its jurisdiction.”

The Tenth Amendment makes it clear: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

But to push through legislation during the Great Depression, Congress and the president ignored the limitations of the Constitution, and then in the “Constitutional Revolution of 1937,” the Supreme Court caved in and consented to New Deal legislation such as Social Security.

The Supreme Court transformed the Constitutional powers for the “general welfare” and commerce “among the several states” to means “anything goes.” But if anything goes, then the enumeration of powers is meaningless.

The Tea Party movement has emphasized constraining the federal government to the enumerated powers. A going back to the original Constitutional constraints had long been advocated by the libertarian movement. In its opening sessions in January 2010, some members of the House of Representatives proposed the radical requirement that all bills cite its Constitutional authority.

The House also had a reading of the Constitution. This by itself means little, since the welfare state liberals believe in an elastic constitution, a “living document” that bends to political winds, that empowers Congress to do anything. In that case, the original Constitution is not living, but has decayed and died.

If the House implements the Constitutional authority concept, they may cite “interstate commerce” and “general welfare.” But that will make clear that there really is no enumerated Constitutional authority, contrary to the 10th Amendment.

Now there are Constitutional movements against the new requirement that U.S. persons must buy medical insurance. Broader, there is a realization that the concept of “anything goes” has created an ever larger federal government and an unsustainable welfare state. “Anything goes” is now being financed by trillion dollar deficits that are creating a federal debt and unfunded liabilities that cannot possibly be paid and fulfilled. Many Americans have become alarmed at the prospect of U.S. treasury debt becoming regarded as risky, creating much higher debt service payments, and then, in a future financial crisis, default.

The Constitution Revolution of 2011 seeks to stop the fiscal river of no return. Welfare state liberals scoffed at the Tea Party, but it now holds sway over the House of Representatives, where all fiscal bills originate. Just maybe the Constitution Revolution will save the United States of America from a worse financial crash than that experienced in 2008.

Malspeculation

2011-01-09T09:31:00.000-08:00

A central concept in the Austrian school of economic thought is “malinvestment.” The Austrian school began in the Austro-Hungarian empire in 1871 with the publication of Principles of Economics by Carl Menger. Menger developed the concept of the time structure of capital goods, a classification of capital goods depending on their periods of production, or how it takes for the capital good to provide its full return to the investors. Goods of lower order, such as inventory, circulate rapidly. Goods of higher order, such as real estate construction, have a long period of production.

An economic investment is the production of capital goods and human capital. The amount of investment depends on the expected profit relative to the prevailing interest rate, since one could alternatively buy interest-paying bonds. One invests if the expected rate of return, relative to risk, is greater than that of safe bonds.

In the business-cycle theory of the Austrian school, a “malinvestment” is an investment in capital goods that ends up causing a loss. The prefix “mal” can mean “bad” or “wrongful.” The most important systemic malinvestments are those based on an unsustainably low rate of interest. The rate of interest gets pushed down by an excessive expansion of the money supply. We witnessed such expansion of money and credit after 2001, when the Federal Reserve lowered the inter-bank-loan interest rate (federal funds rate) to one percent, and then again after the Crash of 2008.

The higher-order capital goods are the most sensitive to interest rates, as the asset is held for a long time. The biggest malinvestment has been in buildings. The real estate boom of decade before the Crash of 2008 included the construction of housing and commercial buildings that later incurred losses as borrower defaulted, leaving a mess of vacancies. The investors thought that demand would continue up in a straight line, whereas the boom peaked and crashed.

But what really rises and falls in the real estate cycle is land value. Real estate investors are also buying land in the expectation that land values will keep rising. The conventional ABC (Austrian business cycle) theory overlooks the role of land value in the boom-bust sequence. Since economic investments are an increase in the stock of capital goods and human capital, land is not an economic investment. If one buys land expecting its price to rise, that is a speculation. The buyer speculates that an increase in demand will raise the price.

A speculation is the purchase or sale of an asset in order to gain from a favorable change in the price. A malspeculation is the purchase of an asset based on mistaken beliefs, which results in a loss. During the real estate boom, there is both systemic (economy-wide) malinvestment and malspeculation. Real estate developers expect to profit not just from the capital goods, the buildings, but also from a further rise in the site value.

The 19th-century economist and social philosopher Henry George developed the theory of the business or trade cycle based on malspeculation in land value, although he did not use that term. Such malspeculation would not occur in a pure free market, thus the “business” cycle should more accurately be called "the interventionist cycle" or "the economic distortion cycle."

There are two major interventions that cause malspeculation. First is an injection of money into the banking system, an increase in loanable funds not caused by higher savings but by money expansion. The resultant cheap credit fuels both malinvestment and malspeculation in real estate. When the money injections stop, interest rates rise back up, and such projects and purchases slow down and stop. When land values stop rising, speculators sell, and the fall in land values brings down the financial sector that provided the mortgages.

The second major intervention is government spending for public goods. Public works and civic services raise land values, and when these works are financed by taxing labor, goods, and enterprise, then in effect landowners get subsidized. Much of the gains from economic expansion go to higher land rent and land value, which attracts speculators who expect great profits from the leverage of using other people’s money. Malspeculation carries land values beyond that warranted by the rents. Henry George called this a lockout of labor and capital. With the use of real estate now unprofitable and unaffordable, land values crash.

The boom-bust real estate and economic distortion cycles have repeated for that past 200 years, yet the 2008 crash surprised not just malspeculators but also economists, financial analysts, and governmental officials. The reason the cycle recurs is that, as the philosopher Hegel observed, people do not learn from history. Or they learn the wrong lessons. They shun Georgist theory, and thus become mal-economists, mal-financiers, and mal-authorities. As one would say in Spanish, todo es muy malo.

Add “malspeculation” to your dictionary. Malspeculation is a vital concept that curiously has not had a name, because the role of land in the boom-bust cycle has not been appreciated. The Crash of 2008 was caused by malspeculation, and so the word will find the light of day.

African Land Grab

2011-01-01T08:28:00.001-08:00

A new colonialism is gripping and grabbing the land of Africa. Foreign companies and governments are buying up huge tracts of land. Much of this land has been possessed and farmed by local residents for many generations. But now governments have claimed title and sold the land to foreigners. The traditional farmers then get kicked out, landless, homeless, destitute.

In many cases, large-scale commercial farming is replacing and dispossessing small traditional farms. The large farms produce more food, but much of it is exported rather than providing food for the local residents. Whole villages are wiped out, and the displaced people then move to the overgrown city slums.

During the 1800s, Africa was colonized by European powers, as even small Belgium got a large chunk in the Congo. All the colonies obtained political independence, but the neocolonialism is taking back the land from the Africans. The strong-man chiefs of state are selling off the land that properly belongs to the people of Africa. This time it is not so much Europe, but governments in North Africa, such as Lybia and Egypt, as well as companies and governments in Asia, that are taking lands in sub-Sahara Africa. Many of these transfers are leaseholds for decades at rentals much below the market rate.

Georgism, the economics and policies derived from the thought of Henry George, is sometimes thought of inaccurately as proposing that land belong to the government. But the policy prescription, also referred to as geoism, is that the benefits of land belong to the people in equal shares, hence government should at most be a collection agent for the people, and possibly also the spending agent for some public goods. The rights of possession would be retained by individuals in a market setting.

If foreigners can make some lands more productive, they should pay the economic rent of that land to the local and national communities. The people would then benefit from economic development and be compensated for not holding that land. A periodic rent payment is much better than a one-time compensation. Any payments to the dispossessed should take the form of annuities for life. The plantations and miners should also pay for any environmental damages.

The current land grab in Africa is just setting up new landlords who collect the rent that should go to the people. If the nominally independent governments of Africa were to act as the true agents of the people, they would recognize and protect the traditional rights of possession. Historically, Africans suffered from kidnaping into slavery, and the takeover of their land by foreigners, and now after expelling the colonial masters, they are once again falling into bondage.

The global demand for food and bio-fuel has been escalating as the economies of Asia and Latin America are rapidly expanding and getting wealthier. With much of their lands contaminated, deforested, and depleted, the ascending countries are once again plundering Africa, taking advantage of corrupt regimes to obtain land for agriculture, mining, and fishing

Some of these deals are replacing forests with plantations, and the deforestation not only destroys the wonderful wildlife of Africa, but then deprives the world of carbon-soaking plants. When a natural forest is cleared to plant sugar cane for biofuel such as ethanol, there is a net gain in emissions, so laws that mandate more use of biofuels are adding to rather than reducing global-warming gasses.

The colonial powers failed to prepare their African colonies for democratic governance. It is ironic that European powers that became democracies kept their colonies in tyranny. They transplanted mass democracy into these lands, but that is like planting banana trees in the Arctic. Mass democracy in Africa has been overthrown by dictators, has resulted in elections in which the rulers have refused to yield power, and has been subject to fraud. A stable democracy has to grow from the ground up, starting in democratic structures in the villages and city neighborhoods.

The United Nations is made of up representatives of countries with dictatorships and the chiefs of mass democracies, so don’t expect the UN to be of help rescuing Africa from the global land grab.

The Peak of the Welfare State Bubble

2010-12-22T08:28:00.001-08:00

Governments have always provided social services such as streets and highways, but the concept of government providing comprehensive welfare for the people began in Germany in 1883. Socialist ideas were gaining favor throughout Europe, and Chancellor Bismark sought to reduce the appeal of the German socialist movement by fighting fire with fire. Bismark initiated statist consumer socialism in order to stifle the popularity of statist producer socialism.

Socialism arose in Europe in reaction to the growing inequalities and continuing poverty that accompanied allodial kleptocracy, the economic system in which labor and capital were private but the rent of land was redistributed to a few wealthy landowners. Much of the gains from economic expansion and progress go to higher land rent, so workers were bewildered and angry as labor suffered from periodic depressions, unemployment, insecurity, and harsh working conditions.

Socialism sought to provide as the remedy the replacement of private enterprise by government. With the means of production owned by the state, the government would then provide the goods in an egalitarian distribution. There is a superficial appeal in the thought that central planners can allocate resources for the public benefit, but as shown by the Austrian economist Ludwig von Mises in his 1922 book Socialism, state ownership of resources prevents the economic calculation needed for efficient production. Another Austrian, Friedrich Hayek, showed how central planners cannot obtain the knowledge needed to manage a large economy.

But superficial remedies are always more popular than effective remedies that require an economic understanding of implicit reality. Moreover, the effective remedies to social problems requires the reversal of the policies that subsidize the powerful interests that control the government. Since the central aim of the German Empire was to serve its landed interests, such as the Junkers of Prussia, Bismark had to appease the public with the superficial remedy, the welfare state, with the Health Insurance Act of 1883, accident insurance in 1884, and old age pensions in 1889.

Other European countries and then the United States copied the German welfare-state paradigm. There were two competing reformist ideologies in the USA during the progressive era that began with the publication of Progress and Poverty by Henry George in 1879. The Georgists promoted the single-tax movement to equalize the benefits of land while keeping private the labor, capital, and possession of land. The other ideology was a welfare state financed by a progressive income tax, thus redistributive consumer socialism.

The welfare socialists won the tax battle with the 16th amendment to the US Constitution, which removed the legal barriers that had struck down the 1894 income tax act. The Great Depression then eliminated the political and legal resistance to the welfare state. Like European countries, the US got Social Security and governmental medical provision, unemployment payments, and accident insurance.

The fatal flaw in the welfare state is that it preserved the privileges of the landed interests. While value-added taxation and progressive income taxation take some of the land rent, landowners get it back plus much more in the greater rent and land value generated by public works, civic services, and welfare-state benefits. If that were not the case, land rent would be zero.

With public revenue from land rent precluded, the welfare state has to cannibalize the economy, extracting much from wages and enterprise profits. Given the existing high level of taxation, even greater taxes are unpopular. Since the politicians of mass democracy need popular approval, they resort to unsustainable borrowing. Hence we see massive government debt in Greece, Ireland, Spain, Portugal, Italy, Japan, the United Kingdom, the USA, and many of the US states. We are now at a historic time in which unsustainable deficits can no longer be sustained.

The welfare state system peaked out in 2010, with the expansion of federal medical care in the US. With sovereign debt now considered to be increasingly risky, and with government chiefs facing promises they can no longer fulfill, welfare states in Europe are now practicing austerity, sharply cutting back on welfare-state spending, despite the public reaction of demonstrations and riots. US state governments are also cutting back.

The last remaining hold-out is the federal government United States, which still has good credit. The temporary prevention of tax-rate increases, plus a reduction in payroll taxes, will boost the economic recovery, but it will add another trillion dollars to the federal debt. The worst welfare state problem in the USA is the promised pension and medical-service promises that cannot possibly be kept in real value.

Thus the US too will have to start cutting back the welfare state. The extension of the ozo-decade tax rates has shown the political resistance to higher tax rates, so the line of least political resistance is the purchase of federal debt by money creation, as the Fed is now doing. But money creation too is unsustainable, as higher prices and higher nominal interest rates will make money creation ineffective. What then? Either we get the effective remedy of ending the subsidy and redistribution to landownership, or else an austerity that will create hardship and riots as the welfare-state bubble bursts and leaves us with a welfare hell.

Can Ireland be Saved from Econeurosis?

2010-12-09T08:31:00.000-08:00

Ireland is one of the countries whose governments have fallen into deep deficits. The Irish deficit, including bank bailouts, is 32 percent of its gross domestic product. The bonds of Ireland are now regarded as highly risky. Ten-year bonds from Ireland, Greece, and other indebted members of euro-land are paying over 7.5 percent.

To avoid a default on its debt, the European Union and International Monetary Fund will provide a loan of 85 billion euros (US$ 113 billion). The chiefs of the European Union fear contagion, as a default by one country will induce others such as Spain to also default, and the loan losses would cause another financial crash.

As in the U.S.A. and other countries, the fiscal crisis in Ireland was caused by its unsustainable real estate boom, when its capital was doubling. Irish house prices have fallen by 50 percent. The Irish economy suffers an unemployment rate of 14 percent. The Irish government had previously resisted an aid program from the EU and IMF for fear of having to abide by the harsh terms of a loan agreement.

As with Greece, and aid package only postpones the fiscal program. The government of Ireland plans to increase tax rates and reduce its spending by 20 percent. Future generations of Irish will have to pay for the failed policy of subsidizing the Irish landed interests and their banking allies.

The economist Paul Krugman wrote a column in the New York Times entitled “Eating the Irish.” He invokes Jonathan Swift’s satiric “Modest Proposal” for Ireland to sell its children as food. The Irish were poor and starving in the 1700s and 1800s as the nation’s wealth went to the landlords. The Irish learned neither from economics nor from history, as they repeated the error of letting the gains from their great economic expansion go to ever higher land values, until real estate prices inevitably collapsed, which also crashed their banks.

But Krugman, like most other economists, has misdiagnosed the problem. He writes that these days, the problem is not the landlords, it’s the bankers. Wrong, it’s still the landlords, as the bank losses come from fueling the real estate bubble. But the real problem is not the landowners, but with the government subsidies to real estate in the form of public goods paid for by taxes on wages instead of land, thus generating higher rent and escalating land values.

The reaction of the government of Ireland, as in Greece and other indebted countries, is austerity. Of course excessive government spending should be cut, but vital services should be transferred to the private sector rather than eliminated. There have been huge demonstrations in Ireland in opposition to the cut in welfare spending.

The justification for government welfare spending is that it is compensation for denying economic opportunity to labor, by imposing burdens on enterprise and taking away much of the earnings of labor. By taxing wages, government prevents labor from buying the goods it produces. Government then provides the goods with welfare spending, but the taxes also create a resource waste, a deadweight loss that has to be made up by borrowing, and thus we get to the fiscal crisis. Higher taxes on labor and enterprise will make the problem that much worse.

There is an alternative to austerity and a new Irish economic famine. The Irish need to confront their centuries-old land problem. Ireland needs to stop subsidizing the landowners. The Irish need to keep their value-added tax at the minimum required by the European Union, and replace all their other taxes with user fees, pollution charges, and a tax on all their land value.

Ireland also needs to quit the euro and restore its own currency. They can call it the eireo (pronounced eye-row). The new central bank of Ireland can then pay off the bank loans with eireos. Usually, such money creation is bad, but just as sticking a knife into somebody is normally evil, when a dying patient is undergoing an operation, one needs to perform surgery. The monetary inflation of eireos would reduce the real value of the loans to the Irish banks, but the lenders should have realized that they were fueling a risky speculative land boom. Why should the Irish people suffer and not the financial fat cats who hold the Irish debt?

Land value taxation plus paying off the debts with new currency will save Ireland. Why are they not doing this? Why are economists not screaming this remedy to the world? Perhaps there is a mental disease one can call “econeurosis,” analogous to psychoneurosis. Econeurosis is a disorder of economic thought, the mental confusion of refusing to confront economic logic and reality, rooted in ego defense mechanisms and anchoring to learned doctrines.

At any rate, the Irish will suffer an economic famine for no good reason other than their refusal to understand economic logic.

Why Governmental Stimulus Fails

2010-11-28T08:14:00.001-08:00

Conventional demand-side Keynesian economic theory claims that when the economy is depressed, government spending will get multiplied into several times more increase in output. It is economic magic, like creating matter out of nothing.

There is one economic asset that can be created out of nothing, and that is fiat money. So the demand side policy is to create $100 billion of new money, spend it, and then, abracadabra! there magically appears $1 trillion of extra output and income. The new money has become multiplied by ten times thanks to the spending multiplier! Many economists, including Nobel-prize winners, believe in this magic. Here is how it works.

We start with the consumption function, which is private consumption as a function of income. Income is either spent for consumption or else saved, and the increase in consumption is less than the increase in savings as income grows, so savings gets ever bigger with greater income. Mathematically, C = b(Y - T), where C is private consumption, Y is income, T is taxes, and b (between zero and one) is the fraction of after-tax income used for consumption.

In an economy closed to foreign trade, output equals income, and total output Y equals the sum of consumption C, economic investment I, and government spending G, economic investment being an increase in the stock of capital goods. In the equation Y = C + I + G, substitute the consumption function for C. We derive an equation for income determination:

Y = b(Y - T) + I + G

Y = bY - bT + I + G

Y-bY = I + G -bT

Y(1-b) = I + G - bT

Y = (I + G - bT) / (1-b)

The spending multiplier is 1/(1-b). More consumption and less spending, thus greater b, makes (1-b) smaller and increases the multiplier. So if people save less and spend more, I and G will get multiplied into a much greater Y. For example, suppose b is .8, with folks saving a fifth of their income. Suppose I is $1 trillion, G is $1 trillion, and T is $1 trillion. Then

Y = (1 + 1 - .8) / .2 = 1.2 / .2 = $6 trillion of output and income.

Now increase b to .9, reducing savings to one tenth of income. We get:

Y = (1 + 1 - .9) / .1 = 1.1 / .1 = $11 trillion of output and income.

Wow! We got an increase in output of $5 trillion by reducing savings from 20 percent to 10 percent. Cut savings in half and we almost double the output! Isn’t economic magic wonderful!

But with the recession, people are saving more, not less. They are paying back debts and not spending as much. Those naughty consumers are not spending their money! The money is just sitting idle in the banks! Help! Ah, here comes government to the rescue!

Demand siders say that there is a lack of demand, and if private people are not spending enough, then government can step in to do the spending. What a wonderful doctrine for politicians! Government can spend lots of money, and the representatives can boast that they are stimulating the economy. The government borrows money and also creates money, so they can increase G without increasing T. The multiplier will then increase their spending several-fold.

But this has not happened. The US federal government spent $1 trillion for economic stimulus, and unemployment has hardly budged, and economic growth is only a couple percent annually, not the quantum leap up prescribed by the spending multiplier. Indeed, the multiplier has been less than one. Each dollar of extra government spending increases output by less than a dollar. When the government stops spending, this feeble stimulus also stops.

How do the demand-siders respond? They say that the stimulus was not big enough. But if the spending multiplier exists, it should have had a significant effect whatever its size. It’s just wrong. Can you find the flaw in the spending multiplier doctrine? Stop reading and think about it....

OK, did you figure it out? The flaw is that investment (I) is not an independent variable. Investment comes from savings. So more consumption implies less savings. If we put in an investment function as I = (1-b)(Y - T), then

Y = b(Y - T) + (1-b)(Y-T) + G

Y = bY - bT + Y - T - bY + bT + G

which gets reduced to G = T

With investment as a function of savings, there is no multiplier and no determination of income from a change in savings. Greater consumption and greater government spending do not stimulate. Yet the doctrine of demand-side stimulus is believed by most economists and by government officials. Stimulus spending did not work in Japan, and is not working in the USA.

What does work to stimulate the economy? The supply-side policy of reducing taxes on enterprise works in theory and did work in practice when presidents Kennedy and Reagan applied it. But economic growth following a tax cut can be misdirected into a real estate bubble, as happened during the presidency of George W. Bush.

The ultimate supply-side policy is to shift taxes off of labor and enterprise, and onto land value. That also prevents real estate bubbles. Only a shift to land-value taxation will promote a sustainable economic stimulus.

But spending is more popular than a tax shift, because the people are like small children who believe in the magic of a combination Big Brother and Santa Claus. Economists get government positions and columns in the New York Times by saying what the public and politicians wish to hear, that economic magic will bring us something for nothing.

The Federal Reserve’s Stimulus Bill

2010-11-14T10:06:00.000-08:00

The U.S. federal government’s one-trillion-dollar stimulus spending failed to jump-start the economy, contrary to demand-side doctrine. The demand-side policy believed by many economists, journalists, and politicians, says that when government spends an extra dollar, national output leaps up by several dollars.

The demand-side doctrine presented by the British economist John Maynard Keynes says that people use less of their income for consumption as their income rises; this is the “consumption function”. With less consumption there is less demand for output, so we get less production and less future income. So to increase output and employment, if folks don’t spend because they are saving instead, the government can step in, create or borrow funds, and spend the money. Those who sell the extra goods use the revenue to buy other goods, and so the initial government spending gets multiplied into much greater output.

The flaw in this argument is that economic investment, in more capital goods, comes from savings, so normally greater savings gets put to use in greater investment. But now in November 2010, Americans are saving more, yet industry is not investing enough. In 2011, with the Tea-Party-influenced Republicans in control of the House of Representatives, there will not be any new federal demand-side spending, although some infrastructure programs will likely be passed, as this will please the Republicans who now control more state governments.

Since Congress will do nothing to restore the economy, the chiefs of the Federal Reserve System are stepping in with a plan to buy treasury bonds with $600 billion of new dollars. The purpose of the bond purchase is to keep long-term interest rates low. This helps the federal government finance its big deficit, and puts funds into the banking system. The extra funds act like more savings to keep interest rates low. Low price inflation and low interest rates should create a favorable environment for business, and this policy has already boosted the stock market. American companies are also getting a boost from more exports as the rest of the world economy is recovering swiftly, while the U.S. lags behind.

So why is unemployment still high, and why is the economy recovering so slowly? Because even though interest rates are low, other costs will be rising. Taxes are scheduled to rise sharply in 2011. New regulations such as more 1099 tax forms have increased the costs of business. New medical insurance mandates have made labor more expensive. There was also “regime uncertainty,” as entrepreneurs have faced turbulent policy changes. The possibility of ever greater taxes and restrictions, combined with continuing governmentally-imposed credit constraints, have limited new economic investment.

What is needed to jump-start the economy is the supply-side policy of reducing the costs of enterprise. Government has imposed costs by restricting and taxing enterprise. Government subsidies also impose a cost on the economy, as the loss from taxation is greater than the gain to consumers. Supply-side policy cuts taxes and eliminates arbitrary restrictions.

The tea-party Republicans now in Congress will initiate legislation to reduce government intervention, but the Senate will block these acts, and those acts that do get passed will get a veto from the president. So don’t expect much supply-side policy.

The chiefs of the Fed are well aware that their $600 billion money expansion will have a future bill, increased price inflation, and that is actually intended. They think that higher inflation will get people to spend more today as prices will be higher tomorrow. But higher inflation will also increase nominal interest rates, as measured in the quoted rate or the money paid. Higher nominal interest rates will increase the cost of servicing the federal debt, increasing the federal budget deficit.

The new money could spark much higher price inflation, and indeed commodity prices have been rising. The Fed heads say they will unwind the money creation later, selling the bonds, but that too could have bad consequences, such as higher interest rates.

The reality is that greater output comes from production, and output increases when costs fall. Higher tax costs offset lower interest rate costs. Tax cuts will increase the budget deficit, but a tax shift will reduce tax costs without adding to federal debt. Everybody is talking about tax increases and tax cuts, but almost nobody is talking about tax shifts. The economy needs an “efficiency tax shift,” sharply cutting income taxes, shifting public revenue to land value. A tax on land value does not hurt production, since land is not being produced, and it does not increase rent, since higher rent creates vacancies and zero income for landlords.

Only an efficiency tax shift will create a swift and lasting recovery, and perhaps, by paradox, that is why nobody is talking about it.

Industrial Policy Fails

2010-09-20T10:06:00.000-07:00

President Obama has proposed another $50 billion for infrastructure, full deductions for investments in capital goods during 2010 and 2011, a permanent tax credit for research. These measures will do little to revive the economy.

The new infrastructure spending would be small, relative to the size of the economy. If a bridge here and a road there need repairing, then do it, but not to create jobs or stimulate the economy. These projects pull resources away from other activities, and they take some time to plan and implement. The government has already spent billions of dollars for stimulus, and unemployment is still high, and growth sluggish.

If the economic problem is lack of demand, why have the budget deficits of over a trillion dollars not provided sufficient demand? Because the problem is not a lack of demand. The government of Japan tried for a dozen years after 1990 to stimulate demand, and the economy remained flat.

Business can already deduct the cost of investments from their tax liabilities, so a full deduction just moves the tax deductions from the further future to the nearer future. That will provide a little help to business, but they will not expand so much if other taxes rise and reduce their profit.

The tax credit for research, experimentation, and development, is rather selective. Some types of research, such as new applications for programmable devices, are not eligible. Credits for particular activities are an example of industrial policy, in which government seeks to push economic activity in particular directions. But the chiefs of government cannot know which types of investment will be the most productive for the future. Industrial policy ends up distorting the economy and creating waste by arbitrarily subsidizing some activities and penalizing others.

Tax credits for research do little to reduce unemployment, because few workers are involved in such activity. Tax advantages for capital goods skew the economy against labor. When a company hires more labor, it is slapped with payroll taxes and medical costs, whereas if they buy machines, they get lower taxes. Thus it pays for firms to substitute capital goods for labor. The US government’s industrial policy pushes firms into labor-saving investments. If the goal is to reduce unemployment, this industrial policy is senseless.

The best policy for employment and economic growth is permanently low or zero marginal tax rates, and no subsidies. A “marginal tax rate” is the tax rate on additional income. The top marginal tax rate on dividend income is scheduled to rise from 15 percent to 39.6 percent in January 2011. The capital gains rate will jump from 15 to 20 percent.

So with one hand the government provides tax credits and deductions for particular activities, but with the other hand it takes away more of the profits from enterprise and investment. Some firms which have had profits in 2010 are paying these to the shareholders in dividends in 2010 when they would have used the funds for research and investment. It makes financial sense to pay the dividends now, before their steep rise in 2011. But it may have made greater economic sense to invest the funds if not for the tax increases.

The chiefs of government today seem to have a bias against low marginal tax rates for higher incomes. To get revenue, they could have proposed taxes on pollution or land value. They don’t seem to believe that the law of demand applies to the rich. They think that they can just take income from the wealthy with little economic impact. But that is not the way the world works.

After the transition, taxes on land value would have no economic burden, because by lowering the price of land, the tax would replace the mortgage interest that would otherwise be paid. The government seeks high taxes on the rich, which they then rebate implicitly with the rent generated by governmental infrastructure and rebate, but with a deadweight loss on the economy.

Not one in a million persons, and not one in a thousand economists, understand that much of taxation is at the expense of land rent. Production has a surplus that gets paid in land rent. Taxes reduce the surplus, as taxed enterprise bids down the rent. So taxes already take land rent, but in an indirect and hidden way, with a deadweight loss punch to the economy.

Once you understand the tax cat, you see that the current tax policy and tax proposals are economic madness. But the chiefs will not let the cat out of the bag.

Thus Spake Geothustra, Episode 4

2010-09-02T07:03:00.000-07:00

Geothustra was now old, with white hair, and word had spread in the region that there was a wise, though odd, guru who lived on the mountain. Now Geothustra had a stream of visitors who climbed up to tap his wisdom.

“I have become a caricature,” huffed Geothustra to himself. “A cartoon guru that people climb up to for one-liner answers. If such must be, then I shall be cartoon squared!”

Word spread that Geothustra wandered about the mountain naked, not caring if others were male or female. Often he was naked when visitors arrived. “This is how I assert and express my sovereignty,” he would explain to startled visitors.

There was a knock on the door, the 5th visitor for the day. “How can I get rich?” asked the visitor. “Compound interest,” replied Geothustra.

A young man came and asked, “How can I get a date?” “Ask a hundred women. One will say yes, although she may be the one you like the least.”

“How can I achieve peace on earth?” asked a young lady.

“Put in your will that you wish to be buried in soil,” replied Geothustra.

Another asked, “What is the true religion?”

Replied Geothustra, “Why do you think there is one?”

A teacher asked him, “What makes you so wise?”

Geothustra replied thus: “I go to the ground of things.”

A college student asked, “Is money the root of evil?”

Geothustra: “Why do you speak of money? You are not going to the ground of things!”

“What is the ground?” asked the student.

“The ground is the ground!” exclaimed Geothustra.

Another visitor overheard this. “Oh, Geothustra, you hit hard with your truths! From whence do you get your truths?”

“When one is in touch with the universe” explained Geothustra. “Truth comes to one of its own accord.”

A member of parliament asked, “What advice do you have for law makers?”

Replied Geothustra, “Will nothing beyond your capacity.”

Asked the legislator, “And what is my capacity?”

Geothustra: “Your capacity is exceeded when you believe you are more sovereign than others.”

One day there were a dozen visitors. Geothustra thought it would be appropriate to have a party. “This evening at my place, there will be dancing!” he said. There was an odd assortment of people gathered. Sitting together were two kings, an old magician, the brother of the pope, a beggar, a man afraid of his shadow, a woman who claimed to be spiritual but not religious, a soothsayer, a man voted the ugliest in the valley, and a donkey.

“Tell us a story,” said the magician.

Thus replied Geothustra: “I once met a woman whose name was Eternity. I loved her, but she did not reciprocate. I then realized that in seeking Eternity, I was willing beyond my capacity. Later I met a woman whose name was Destiny. I sought her too, but she could not love me, and I realized that again I willed to power beyond my capacity, as Destiny is simply what must be. Now I ask only for my sovereignty.”

Geothustra turned towards the woman who was spiritual but not religious.

“What is your name? If I may ask.”

She replied, “My name is, indeed, Sovereignty.”

“Oh!” exclaimed Geothustra. “Who here besides her is sovereign?”

The two kings raised their hands. “They call us the sovereigns.”

“You are all sovereigns,” said Geothustra. “But people give away their sovereignty, even while they over-reach into the sovereignty of others. Thus is it said, the law is an ass.”

The donkey went “Yee haw!”

“Is the donkey also sovereign?” asked the ugly man.

“Usually not,” answered Geothustra. “But then suddenly the donkey will refuse his load.”

“Now let’s dance!” said Geothustra. “Lift up your legs!”

“I don’t know how to dance,” said the pope’s brother.

“Then stand on your head and kick your legs,” answered Geothustra.

The kings were too embarrassed to dance. “We must maintain dignity,” they explained. What if one of our subjects were to visit here?”

“They are kings,” thought Geothustra, “yet they have heavy feet. They are slaves of custom and pomposity.”

“Keep dancing” exclaimed Geothustra. “Your very souls should be dancing!”

Geothustra’s cave was full of laughing and dancing. Except for the solemn kings.

Then late in the evening, out of the forest came a loud roar. They all looked towards the direction of the bellow, and there emerged a large yellow beast. The lion shook its head and roared out again, and then he came running towards the cave. Everybody except Geothustra and Sovereignty fled down the mountain.

“Everyone who hosts a party should have such a lion on hand,” said Geothustra.

“Oh, Sovereignty,” exclaimed Geothustra. “You are all I desire. I have been seeking the higher man, and now I have found the higher woman. Please, will you stay with me?’

“Yes, Geothustra, I will stay. For you have taught me to love the earth!”

“The higher man should ask for nothing more than his Sovereignty,” said Geothustra. “Accept nothing less, and demand nothing more.”

“You shall have your Sovereignty!” she said.

“I have fulfilled my destiny, for eternity.”

Thus spake Geothustra.

(This has been a deconstruction and reconstruction of Thus Spoke Zarathustra by Friedrich Nietzsche, Cambridge University Press, 2006; Fourth Part.)

Statist Fundamentalism

2010-07-16T07:18:00.001-07:00

“Market fundamentalism” is the belief that a pure free market would succeed in providing the goods wanted by people with equity, sustainability, and efficiency. Those who believe in market failure use the term in a negative way, the way atheists look down on religious fundamentalists. Critics of free markets believe that market fundamentalists are mistaken, as they believe that the free market has failed and cannot possibly succeed.

In contrast, the term “statist fundamentalism” has had little use, even though statist fundamentalism is much more widespread than market fundamentalism. Indeed, I conjecture that most people are statist fundamentalists. So it’s time to lay out what that means.

First, one has to define “free market” in its purity. A pure free market is an economy in which all human action is voluntary. A governmental intervention is a law or policy that alters what voluntary action would otherwise do. An act is voluntary if it does not coercively harm others. Thus a pure free market would have no restriction or tax on honest and peaceful production, trade, consumption, and produced wealth.

A truly free market would exist in either in peaceful anarchism or else under a government that protects property rights. In a completely free society, public revenue comes from user fees, compensation for damage such as pollution, and ground rent. Tapping land rent for public revenue does not interfere with production, and is consistent with property rights when we agree with the natural-law philosopher John Locke that the earth was given equally to all humanity.

“Statist fundamentalism” is the belief that a pure free market is severely inefficient, unjust, or has outcomes that are unsustainable. Usually, statist fundamentalists believe that free markets fail in all three outcomes.

Statist fundamentalism is based on three errors. First, statist fundamentalists confuse the mixed economy, the interventionist system of today, with free markets. Secondly, statist fundamentalists believe that interventions have little effect on economic outcomes. Third, statist fundamentalists do not understand economic theory in its totality, and they do not understand the concept of freedom.

The first fallacy is evident in the claim by statist fundamentalists that oil spills, the boom-bust cycle, unemployment, and poverty provide evidence of market failure. The implication is that today’s governments practice laissez-faire, with unconstrained free markets. This overlooks the actual interventions that governments impose: massive taxation, restrictions, and subsidies.

The claim that there are free markets also overlooks the fact that in most economies today, a substantial amount of the output, in some cases over half, is from governmental provision. We have had mixed economies, mixtures of markets and government. In all countries today, a key economic resources, the money, is provided and controlled by governmental central planning.

When confronted with the fact of intervention and governmental provision, statist fundamentalists claim that these have little negative effect. Statist fundamentalist believe that the tax system just takes money from people, with little effect on economic activity. They believe that regulations are minor, of little consequence. They argue that subsidies are mere transfers of money, and do not affect how markets work. That is why they advocate higher taxes and more restrictions, since they think it will do good without having any significant negative consequences.

The belief by statist fundamentalists that interventions have little effect implies that they do not understand both economic theory and the concept of freedom. Some statists believe that slavery was a free-market institution, not understanding that “free market”means freedom for all human beings. Statist fundamentalists believe that cheating, stealing, kidnaping, and trespass are all part of the market, no understanding that liberty means free from coercive harm.

Contrary to the beliefs of statist fundamentalists, a pure free market does not mean “anything goes.” The free market is based on ethical freedom, and theft, including fraud, as well as force, are outside the market, violations of market property rights.

In their misunderstanding of economics, statist fundamentalists believe that a pure free market would be plagued with high amounts of pollution, there being no regulations against it. They overlook the fact that pollution that invades the property of others is trespass, a theft of other’s property, and in a truly free market, polluters would have to compensate for the damage.

The claim by statist fundamentalists that markets fail to provide equity also shows their lack of understanding. The rule of the market is, to the creator belongs the creation. This applies equally to all persons. Equality also implies to what human action has not created, namely the land, and the benefit of land is its market rent. There is equity when land rent is shared equally and creators keep their creations. A pure free market is inherently ethical and equitable.

Since statist fundamentalism is based on fallacies, the correction of these fallacies implies that its opposite, market fundamentalism, properly understood, is based on sound logic and evidence. The fundamentals of ethics and economics imply that market fundamentalism is true and statist fundamentalism is fundamentally mistaken.

Taxic Waste

2010-07-06T07:48:00.000-07:00

The term “taxic waste” is not yet in economics dictionaries. Although “taxic” has been used with various meanings, world-wide-web search engines ask if you really mean “toxic waste.”

The term “taxic” is used in medicine, “taxic drug action” meaning a drug that has the same effect when more diluted. In biology, a taxic response is a movement in cells or micro-organisms response to stimuli, such as moving away from light. “Taxic” is also used in relationship to taxonomy, the science of classifications such as types of organisms. A “taxon” is a group of organisms which are analyzed to be one unit such as a species, the plural being “taxa.”

The Greek term “taxis” means an arrangement. The economic term “tax” derives from Latin “taxare” meaning to assess, related to “tangere” meaning “to touch.” There were no taxes in England until the Frenchified Normans invaded in 1066 and introduced the word “tax.” Instead, the English farmers had paid rent to the lords and tolls for passage.

We could solve our economic problems - depressions, budget deficits, and congestion - by returning to the ancient English system of having only rents and tolls. We could abolish not only the policy of taxation but also make the term “tax” obsolete. But so long as the status quo rules, and we are infected, plagued, and poisoned with taxes, the term “taxic waste” is appropriate and apropos.

The American economist Henry George provided a taxonomy of taxation, distinguishing taxation in form and taxation in substance. A tax in form is a compulsory payment to government which in substance is compensation for damage or a fee to use a resource or service. Thus, a pollution tax is a tax in form but not in substance, since the polluter would pay the same charge if his toxic waste invaded the property of a private owner. When the pollution invades the property of the people, such as the atmosphere, government can act as the agent of the people to collect the damage compensation in the form of a periodic tax in form.

A tax in substance is an imposed payment unrelated to any specific benefit. When you buy shoes and pay a sales tax, there is no specific government benefit associated with the act of buying the shoes. The tax is based solely on the ability to pay, or the government’s ability to extract.

The taxon of taxes in substance impose a toxic taxic response from the economy, creating costs beyond the revenue paid to government; hence this is called an “excess burden” and a “deadweight loss.” These costs, losses, and burdens are taxic waste. The waste can be idle resources, such as unemployed labor, empty offices, and idle factories. It can also be the misallocation of resources to uses less favored than what people would have otherwise obtained. For example, a high sales tax on cars may shift one’s income to riding taxis or buying an ugly old smog-belching car instead of a shiny new gas-efficient vehicle.

The taxic waste has been measured as being over ten percent of total income, and over time, it reduces economic growth, so that societies world-wide would today be much richer if they had not been dragged down by deadweight losses. You can learn the fulls details on taxic waste in the book The Losses of Nations: Deadweight Politics Versus Public Rent Dividends.

We can eliminate taxic waste more easily than the toxic waste such as the oil spill in the Gulf of Mexico. Replace taxes on wages, capital, trade, production, and sales, with the taxon of only taxes in form, such as on pollution and land rent, in addition to congestion tolls and user fees.

While economically feasible, shifting taxes to those only in form is politically difficult. The public does not understand the economics of taxation, and powerful rent-seekers pay candidates to subsidize their land value. The landed interests make property taxation unpopular by billing real estate taxes twice a year in big visible payments, rather than as monthly payments that could be budgeted along with utility bills, or even deducted from paychecks as are income taxes.

Because land rent is a pure economic surplus, tapping the land value for public revenue would not even burden the landowner after the transition, since the price of land would fall to a tiny amount, just enough to facilitate the real estate market. A tax on land value replaces what a new buyer would otherwise pay as mortgage interest.

A tax on land value does not change the economic rent of land. If a landlord was charging the rent the market could bear, a tax only on the rent or land value would not change what the market could bear, since the tenant’s benefit of the space would be unchanged, and the supply of land would not change. Thus a land-value tax is not passed on to tenants.

The toxic waste from the oil spill in the Gulf of Mexico is causing tens of billions of dollars in damage, but the taxic waste of taxation imposes trillions of dollars of economic damage annually. Depressions, unemployment, and big budget deficits are economic pollution caused by taxic waste. Only when people finally understand this will they get economically aroused and demand an efficiency tax shift to eliminate taxic waste.

Thus Spake Geothustra, Episode 3

2010-06-28T06:50:00.000-07:00

As he wandered, Geothustra beheld yonder a large city he had never visited. Out of curiosity, he walked towards it, and then a beggar, a wrinkled old man with white hair, held his palm out, and asked, “Five shillings please, for cigarettes?”

“Come with me to the city,” Geothustra answered, “and we can get you a job washing dishes, so that you may indulge in your vice.”

“No!” the beggar cried out. “Do not go to the city! You will suffer loss! Turn around!”

“Why there and not here?” asked Geothustra.

“Everything in the city is corrupted and crumbling. Thieves abound. There is filth everywhere. Nobody is safe.”

“This is odd,” said Geothustra. Here in the woods, it is peaceful. Here, there is blissful silence. But where people are gathered, there is noise and sadness. Why would people create misery for themselves?”

“I don’t know,” said the beggar. “I just need a smoke.”

“Maybe I can introduce there some new values,” said Geothustra.

“Useless!” cried the old man. “You will be ignored. Nobody will understand. There are many voices there, saying different things, and nobody knows who is correct.

“Excessive noise murders thoughts,” said Geothustra. “But do not logic and evidence tell us what is right?”

Just then, a woman who looked deceptively youthful appeared.

“Please stay here a while,” Geothustra called out to her. “You are beautiful, and I wish to enjoy your company for a little while. I am named Geothustra, after my grand-uncle Zarathustra. If I may ask, what is your name?”

“My name is Eternity,” she answered.

“If you went away and came back, would this be an Eternal recurrence?” asked Geothustra.

She smiled. “Let us go down to the city. There must be some good people there.”

“Everywhere,” said Geothustra, “there are those who call themselves ‘good.’ But they are flies which buzz around bothering people. They are mosquitos who sting and say it is for your good.”

“The good say they help the poor. Do you not pity the poor?” said Eternity.

“Pity fouls the air,” said Geothustra. “If all we do is give alms to the poor, then our pity becomes a cruel prison. That is why I despise pity.”

“The government should do something,”said the beggar.

“Who is in government?” asked Geothustra. “Those who lust to rule. They become hard hearted. Their democracy exploits the vanity of the people. The people are camels.”

“One hump or two?” asked the beggar.

“Nothing but humps,” said Geothustra. “Like a camel, the proletarian man kneels down and lets himself be burdened. He then walks around carrying a useless sack of rocks.”

“And it goes on for eternity!” said Eternity.

“Oh, I am falling in love with you!” exclaimed Geothustra.

“I need a cigarette,” said the beggar.

“Going back to the good,” said Eternity. “Why is it bad to be good?”

“The ordinary man believes that his good is a universal good. The superior being, who reasons rather than reacts, understands the difference between his personal good and the universal good. He rejects the chief who seeks to impose his personal good on all. The greatest evil is the sin of Adam and Eve, whose conceit led them to believe they could replace the tree of knowledge of good and evil, with a new plant of their own sowing. We need to go beyond the stifling good and evil dictated by cultural and personal conceit. Go your way, and let other folks go their ways.”

Spoke Eternity, “If you say this to the city folk, you will disturb their sleep, and they will not like it, despite their sleep being plagued with nightmares.”

“Very well,” said Geothustra. “We will not venture into the city. Instead, let us instead go into the woods, where there is a meadow, where the gods are dancing naked.”

“Why naked?” said the beggar. Geothustra noticed that his shirt was stained, his trousers were

torn, and his shoes worn out. Is naked worse than rags?

“The dancing gods are ashamed of all clothing,” said Geothustra. “It is the opposite of the city.”

“Dancing gods? You speak in riddles and stories,” said the beggar.

“These are metaphors and similes,” explained Eternity.

“I must speak in parables,” said Geothustra, “so that people ponder what I say, rather than reject it in reflex.”

“Like a poet,” said Eternity.

“Oh! I love you, Eternity!” exclaimed Geothustra.

“Tell us another parable,” said the beggar.

Replied Geothustra, “The sun pours gold into the sea from its inexhaustible wealth, so that even the poorest may row with golden oars, but man has ruined the sea and prefers to till rocky soil.”

“Government should give me free smokes,” said the beggar, “because I badly need them!”

Said Geothustra, “The rabble wants to live free of charge, but I propose a new nobility. If we accepted the gold naturally offered to us, then we would be able to earn wealth and receive goods in exchange.”

“Well,” said the beggar. “If you can’t give me money for smokes, good bye,” and he departed.

“He will be back,” said Eternity. “Beggars are an eternal recurrence.”

“What about truth?” asked Geothustra,.

“Truths are eternal,” said Eternity. “People cast them aside, yet truth always comes back. Truth gets lost and then rediscovered over and over again. Truth too is an eternal recurrence.”

“Oh, my soul,” spoke Geothustra, “I have longed for you all my life. There is no soul that could be more encompassing! Into your eyes I looked, and I caught a glimpse of nirvana. Never before have I found a woman whom I could love, Eternally, Recurrently, until now!

I love you, O Eternity!”

Thus spake Geothustra.

(Reference: Thus Spoke Zarathustra by Friedrich Nietzche, Cambridge University Press, 2006; Third Part.)

Gold as Implicit Money

2010-06-20T15:19:00.000-07:00

Economics encompasses two realities, the explicit and the implicit. The explicit is visible, obvious, recorded, and quoted. Explicit expenses are paid to others and recorded by accountants. The explicit is also called “nominal,” since that is what is named. For example, nominal interest is what a bank says it is paying, and the money it pays to depositors.

But there is also an implicit realm that is also real. Indeed, the implicit is more real than the explicit. What is explicit is often merely the superficial appearance. But things are often not what they appear to be. The reality beneath is implicit, not visible, not quoted, and not recorded, yet it is the true reality. Economists often use the adjective “economic” to designate the real thing in contrast to the explicit number or the accounting data.

An enterprise has explicit and implicit expenses. The explicit expenses are recorded by bookkeepers and accountants. The implicit expenses are non-recorded opportunity costs, such as what the owner of a business would have earned elsewhere, or what the assets of the firm would yield if sold and converted to bonds. The real cost of oil is not what the buyer pays but also includes the implicit costs of pollution damage not paid for by the customer.

Real interest is the nominal interest minus the inflation rate. Economic profit is accounting profit minus implicit expenses. Real GDP is nominal GDP (in current dollars) adjusted for inflation. Economists deflate prices and include implicit costs to get at the implicit reality.

Land rent is another implicit reality. The economic rent of land is the difference in the value of the output of a plot relative to the output at the least productive land in use. This rent is also the payment for the use of land at which the quantity of land available equals the quantity demanded by users. This implicit rent can be different from the explicit rental payment a tenant pays to a landlord. If the explicit rent payment is less than the economic rent, then the tenant is receiving the rest as implicit rent.

We can apply the explicit and the implicit to money also. Explicit money is the currency and bank deposits we use for transactions. Prior to World War I, in much of the world, explicit money was gold. Paper currency was a money substitute convertible into the real money, gold. Money substitutes such as traveler’s checks are explicit.

Today, governments and their central banks issue paper currency not convertible into gold, thus fiat money, based only on law and custom. Yet many governments also keep substantial amounts of gold. Why?

Because the cost of production of fiat money is basically zero, and so the value of fiat currency can ultimately fall to zero. Witness the currency of Zimbabwe, which has experienced hyperinflation. Governments and their central banks hold gold because it is implicit money.

Even though gold now is not used explicitly to exchange for goods, gold could be so used. Gold is a quite liquid asset, readily converted into currencies or readily exchanged for goods. Gold is a better store of value than fiat currencies such as the US. dollar, which have been subject to continuous inflation. Gold does not default, and gold does not go broke. Gold does not rust or deteriorate with age. Gold holds much value in a small volume.

In a financial crises or economic collapse, gold will still have value. If you want an asset that will have value one thousand years from now, you could not do better than gold. A plot of land may have value today, but not tomorrow if that location has gone bad.

A good currency is one that you can carry in your pocket. Some reformers have proposed commodities such as bricks or electricity or land as money. Good luck carrying bricks to the store! A good currency is one that one cannot cheaply make more of, as is the case with bricks or electricity. Land is fixed in supply, but you can’t put it in your pocket to carry to the store. You could say to the store owner, “I have a quarter acre of land in Vermont that I want to pay with.” Good luck with that.

You could try to base money on an hour of electricity, but if the government issues huge amounts of currency convertible into electricity, there would be so many notes that it could never all really be converted, so both the notes and electricity would trade at a discount relative to other goods. If you can’t carry it in your pocket, it is not good money, and the market will come up with an implicit currency that can be carried, such as gold.

Gold has natural properties that make it suitable to use as money, which is why the world moved to a gold standard prior to World War I. Governments prefer fiat money, because they can expand it at will, yet they hold gold because it retains value, and they can exchange it for goods when squeezed by circumstances. Its potential and eternal exchange value makes gold eternally and universally the premier form of implicit money.

2010-06-13T07:29:00.000-07:00

Attempts to Squash Challenger Political Parties

When Americans vote for candidates, most of them think they are choosing between Republicans and Democrats. The more fundamental choice is between the challenger parties and the establishment parties. When one votes for a Republican or a Democrat, in effect on is accepting the status quo, and is choosing among currents in the political mainstream instead of a different river.

In California, for example, besides the Republican and Democratic parties, there are several challenger parties: the American Independent Party for right-wing conservatives, the Green Party for radical environmentalists, the Libertarian Party for tolerant free-marketeers, and the Peace and Freedom Party for state-socialists.

Even though the small challenger parties seldom win elections, they offer a meaningful choice for voters who fundamentally reject the status quo. The policies of the establishment mainstream have resulted in the outcomes that are ruining the planet and the economy: massive pollution, a depressed economy, Grand Canyon sized budget deficits, high unemployment, and endless war.

Despite the small party membership and votes of the minor parties, the establishment feels threatened by the ideas generated by the challengers. They seek to stifle the voices of protest and radical change. An example was Proposition 14 on the California ballot on 8 June 2010. Proposition 14 replaced the party primary elections with an election in which voters will select from all the candidates from all the parties. The top two vote getters will then be on the ballot for the general election, even if both are in the same political party.

This proposition was bad on many dimensions. First of all, it violates freedom of association. Voters should be able to associate in a party of common interests, and then choose the candidate from their party. Why, for example, should those not in the Green Party be able to vote for a Green candidate, drowning out the voices of the party members? This constitutes party crashing.

Secondly, the voices of the challenger party will be extinguished in the general election. Even write-in candidates would not be allowed for state and national candidates. Not only that, challenger voices would be stifled even in the primary election.

In California, minor political parties retain their ballot status by polling at least two percent of the vote in a midterm (not presidential year) general election. Under Proposition 14, since only the major party candidates would be on the ballot, the challenger parties will lose their ballot status, unless the party membership is relatively large. Candidates of some of the smaller challenger parties will not be able to include their party affiliation in the primary election. Those not familiar with the party candidates would not know which candidate is in the Peace and Freedom or Libertarian parties.

The establishment parties get their funding from special interests and in return, provide them with subsidies. Our social problems can only be remedied with radical changes that would eliminate these privileges. Proposals to eliminate party voting would stifle these choices and voices.

We have today the forms of democracy, but not the substance. The establishment party bosses set the agenda by backing the establishment candidates. Occasionally a challenger within a party will win, such as the political upsets that occurred in the spring of 2010. But these candidates usually move towards the center in the general election.

Only the challenger parties can provide an alternative to the status quo in the general election. But the voters may not fully understand the effects of voiding party elections. They may not understand that the elimination of party primary elections would further demolish the substance of democracy, leaving a shell, an illusion of choice, that would be even more deeply exploited by the special interests.

Governmental financing externalities

2010-06-06T08:25:00.000-07:00

There have been proposals to tax soda drinks because they make people fat and unhealthy, and thus increase medical costs that are paid for by the government. The advocates of soda taxes claim that the sugary drinks create a negative externality, which the soda drinkers should prevent by paying for their future medical costs via the soda tax. However, these advocates evidently do not understand the economics of externalities.

An external effect, or externality, is an uncompensated impact on others. A negative externality imposes a cost on others. Pollution, for example, that trespasses into others’ property, without compensation to those affected, is a negative externality.

In contrast to a real externality, a physical invasion into others’ domains, a pecuniary externality is an effect on others caused by economic activities that do not physically invade others but affect them by a change in prices or profits. For example, if one company increases market share, the others which lose market share suffer a pecuniary externality. Economic analysis concludes that real externalities should require compensation, while pecuniary externalities should not.

A third type of externality is a governmental financing externality, in which the activity of some people impose a cost on others because they are forced to pay taxes to pay for that activity. That applies to the consumption of unhealthy food when taxpayers pay for the medical costs.

If people fully paid for their medical costs, then drinking unhealthy sodas would not impose an externality. The sugar would make the drinker fat and sick, and he would pay for the medical expenses. It is only because government subsidizes medical expenses with Medicare, Medicaid, and other governmental financing that a cost is imposed on others. So this is an externality caused by government policy.

Thieves impose a real externality when they invade property to steal wealth. Government likewise imposes a real externality when it forcibly extracts wealth from taxpayers. If externalities are bad and should be prevented, then the first policy response should be to abolish taxation except from sources, such as land, that do not suffer negative externalities.

The taxation of land rent obtains wealth which is a surplus, funds left over after paying for the costs of labor and capital goods. After the land-rent tax is in place, even the landowner suffers no externality, since the tax just replaces the mortgage interest he would otherwise have paid.

The argument for the forced extraction of wealth from soda drinkers collapses when one realizes that the tax itself is an externality, and that the governmental financing externality would not exist if we untax labor so that workers can then afford to pay for their own medical costs.

The concept of using taxes to reduce the consumption of unhealthy food, if applied generally, would get bogged down in controversy. For example, there are claims that some sugar substitutes are unhealthy. Some nutritionists claim that eating meat is unhealthy, and most experts agree that eating processed foods such as cookies is unhealthy. Others say these are acceptable in moderation. So a proposal to tax foods made from wheat flour, or with sugar, or too much salt, or sugar substitutes such as aspartame, or meat, or milk products, or too many chemical additives, would be disputed. There are difference in views about supplements such as vitamins, minerals, and enzymes. Controversies among experts in nutrition make economics look good by comparison.

The better proposal is disclosure. Require a logo such as a skull and crossbones for foods for which there is a wide agreement that they are unhealthy. A poison logo would be put on foods such as sugary candy, salty crackers, and fatty bacon. Such disclosure is now being made for fish that may contain mercury and on tobacco products, and there are warnings on some foods that pregnant women should not consume these.

A tax on an externality created by government policy is a perversion of the economic policy of charging for real externalities. As law professor Eugene Volokh has written, the “solution to this problem is to eliminate the government financing that created the ‘externality’ in the first place.” Just as pecuniary externalities have a different moral and economic effect from real ones, so should the policy for governmental financing externalities be to abolish them, not use them as an excuse to impose yet another tax externality.

There is No Economic Magic

2010-05-31T06:58:00.000-07:00

Magic means power beyond the laws of the material universe. Magic can invoke supernatural powers, or it can just be an effect that one believes cannot be explained by the known laws of nature. The origin of the word is Greek, magos, ironic because we think of the ancient Greeks as having originated systemic rational thought.

If one believes that there are no effects other than those that apply the laws of nature, then one does not believe in magic. Even a mysterious effect would still be caused by natural laws, even if we do not understand them. Ultimately, however, we cannot prove materialism, so it too is a religion, even if it is truth.

Many people do believe in magic. Some believe that the world is socially constructed, so that if we close our eyes and open our imaginations, we can redo the world just by visualizing something different. Many people believe in spells, incantations, and sorcery. They believe that particular individuals have psychic powers, or that priests can harness the powers of deity.

Even parents who do not believe in sorcery teach magic to their children. They tell children that there is this magical being in a red coat living in the North Pole, who rides a sleigh in the air pulled by reindeer, bringing toys to all good girls and boys. Why parents prefer not to take full credit for the toys that they give to their children is a mystery I leave to psychologists to explain. Perhaps, and I’m just guessing here, the Santa Claus myth is intended, however inadvertently, to prepare children for both religious beliefs and the magical belief in the paternal state.

I won’t here argue against magic in the physical world. It seems to me that physical laws become almost magical when practitioners of quantum mechanics report results such as particles being in two places at the same time, or forces that act instantaneously over distance.

What I do argue is that there is no magic in economics. We cannot raise our standard of living by means other than production. Just as in physics, there is no working perpetual motion machine, so too in economics, we cannot have outputs without inputs that get used up.

Yet most economists believe in economic magic. Conventional economic theory invokes magic, although non-economists, especially politicians, have an even greater belief in economic magic.

For example, many people believe that raising the legal minimum wage will help the poor and improve the economy because the poor will buy more stuff. Most economists realize that the extra payment to the working poor has to come from someplace, such as higher prices to consumers, and the higher wages would cause greater unemployment and a deadweight economic loss. The belief that higher minimum wages create more output is a belief that we can magically create output out of nothing.

Many people believe that trade barriers would increase domestic employment and output, whereas economists understand the law of comparative advantage, that trade takes place when the partners concentrate on producing those things in which they have a greater productivity relative to other products. Trade barriers act like higher transit costs that reduce the goods we can get in exchange for our exports. The belief that trade barriers can increase output is a belief that magically contradicts the law of demand; it is the magical belief that with a higher price, folks will buy more rather than less stuff.

But economists too fall under the spell of economic magic when they believe that government can improve market outcomes. They believe in market failure because they observe social problems such as unemployment, poverty, pollution, and sprawl, and jump to the conclusion that the market failed to be efficient, equitable, and sustainable. Free-market economists understand that there are severe governmental interventions that make our economy far from free, and that it is the interventions that cause the problems. The belief that more arbitrary regulation will make markets more honest, efficient, and equitable, amounts to a belief in economic magic, when the reality is regulatory capture: the regulators serve the regulated at the expense of rather than for the benefit of the public. Witness the failure of the SEC to prevent and compensate for the fraud of Ponzi schemes, or the failure of environmental regulation to prevent gigantic oil spills.

Much of conventional macroeconomics is economic magic. There is the belief that greater government spending will magically raise output, overlooking the reality that if the funds are obtained domestically, the governmental spending replaces what taxpayers and lenders would have spent privately. There is the broken window fallacy, the belief that breaking windows will increase employment from fixing the windows, overlooking the reality that the labor would have been more productively employed elsewhere. This is the magic invoked by “stimulus” spending, that we can spend the economy out of depression.

Probably the biggest piece of economic magic is the spending multiplier, the belief that if people consume more and save less, that extra consumer spending will become magically multiplied into much greater output. This implies that the income that is saved just sits there wasting away. This also implies that investment in more capital goods or in more human capital is autonomous, existing regardless of savings, whereas in reality, investment comes from savings. When one realizes that income not consumed is normally invested, the magic disappears.

Just as with the compulsion to lie to children and make them believe in a magical gift giver, a belief in economic magic, and government as gift giver, is deeply embedded in our culture. Most people are blindly culture-bound, so they are invulnerable to economic logic. Few people, even social scientists, can transcend their culture, and so pernicious cultural practices persist. Thus disasters such as war, the Great Depression, and the giant oil spill in the Gulf of Mexico.

Oil Spill: Who is Liable?

2010-05-17T11:09:00.001-07:00

The "polluter pays" principle is ethical, efficient, and sustainable. When there is an oil spill such as the disaster in the Gulf of Mexico, the involved oil companies are morally responsible to compensate society for the damage.

But such is not legally required today. In 1990 the U.S. federal government enacted the Oil Pollution Act that set a $75 million liability cap for financial damage and a $500 million cap for environmental damage. The current oil spill in the Gulf of Mexico, reportedly caused by a methane gas explosion, will impose damages of over $10 billion.

The company that is doing the drilling, BP, is paying for the costs of stopping the oil spill and cleaning up. There are also two other companies involved; Transocean owns the oil rigs leased to BP, and Halliburton did the cementing for the casing.

After the 1989 Exxon Valdez oil spill in Alaska, Congress made the oil companies responsible for paying for the cleaning, but put in these liability caps. Since the damage in this case far exceeds the caps, this becomes in effect a subsidy to the oil companies.

A bill has been introduced in Congress to raise the liability cap to $10 billion, but why should there be any cap at all? The companies should be fully liable for all damage caused. That would incentivize them to avoid such a potential cost by putting in stronger safety measures. Unlimited liability for environmental damage would induce them to obtain more insurance, and the insurance firms would insist on the strongest possible preventive measures. The shareholders would also not pay so much for shares of stock if the share prices were vulnerable to a plunge when the operations result in massive environmental damage.

There are now calls to suspend and stop drilling in the ocean. The fact is that there are already thousands of oil rigs in the oceans. As oil has gotten depleted on solid lands, the new finds are in the oceans, and the global economy still depends on oil. There needs to be a global environmental standard making all oil companies, including governmental firms, fully liable for all the damage they cause.

In 1990 Congress also enacted the Oil Spill Liability Trust Fund that compensates the victims of a spill for claims beyond the $75 million cap. That too has a cap, $1 billion per oil spill case. That cap should be eliminated, and the liability should be shifted to the oil companies. The Trust Fund could supplement what the oil companies pay, but it should not be a substitute.

An article in The Progress Report in 2009 stated that the federal and state governments had yet to collect all the funds that Exxon had agreed to pay for Valdez. More broadly, users of oil have not had to pay compensation for the environmental damage caused by burning oil. In effect, there are massive subsidies to oil producers and consumers, in their legal ability to impose the costs to society in general, including future generations.

More fundamentally, we can ask who is the proper owner of the oil in the ground, which nature provided? There are only two possibilities. One is the geo-egalitarianism, an equal sharing of the benefits of natural resources. The other is allodial homesteading, the full ownership of natural resources and their rents by those who discover them or by the heirs of conquest. The practice today is the latter. But the moral justification for that is incoherent.

If one accepts the moral equality of human beings, then geo-egalitarianism is the inescapable moral imperative. Thus is oil doubly subsidized. The profits of the oil companies include economic rent from the oil, gains not from labor and capital goods but from the value of the oil itself, a rent that properly belongs to humanity. Secondly, the oil companies profit from not having to pay the full social costs of the damage they cause.

It is not a puzzle why the planet is being plundered and ruined. The plunder is being subsidized by governments worldwide. These giant corporations have the political clout to obtain tremendous subsidies, and democracy is not stopping it. Something is terribly wrong as the world is falling apart, and governments are causing this by their failure to protect the property rights of the people. We are all riding down the river of doom to a coming global environmental collapse that will be far worse than the economic depressions we willingly impose on ourselves.

The Civilization Bubble

2010-04-18T09:13:00.000-07:00

There have been many financial and real estate bubbles during the past few hundred years, and there have been empire bubbles, but never before has there been the global civilization bubble in which we are now in. The bubble will collapse within a few decades. It will be the end of civilization, and will result in world-wide violence, deaths, and chaos.

Empire bubbles can last several hundred years, as for example the Mayan civilization or the Roman Empire. What brings down empires is invasion, bad economic policy, environmental exhaustion, or weakened tyranny. The Soviet Union, for example, was a statist bubble that was brought down by economic decay and weakened tyranny.

Most of the world is now in a global civilization. There are two enemies of this global order. One enemy is terrorist pseudo-religious supremacists. They could bring down the global civilization with electromagnetic bombs that would wipe out the storage and transmission of data that the world’s economy depends on. Very little is being done to protect the global electronic infrastructure from attack, thus the bubble.

The other threat to global civilization is internal, or as scientists say, endogenous. Global civilization is rushing towards an environmental collapse. There are hints of this in the plastic contamination of the oceans, the depletion of fresh water, the destruction of fish and corals, the eradication of forests, and possibly accelerated climate change. What will most likely bring down global civilization is the plundering and poisoning of the natural infrastructure of the earth.

The global civilization bubble began with the industrial revolution of the 1700s. The model that was adopted world wide was the extraction of material natural resources, processing them into products, and spewing the waste and pollution into the air, water, and soil, with no compensation for this trespass. The old English common law concept of nuisance was swept aside by government in order to subsidize industrialization. Witness developing countries following that same model today.

The economic policy that would avoid environmental destruction is to charge polluters the social cost of their use and abuse of the environment. Sustainable public finance includes public revenue from the natural rent of land, from the rental generated by public services, and from the dumping of pollutants into the environment. Sustainable public finance would also abolish the taxation of labor, capital, and trade, as these taxes create economic and therefore also environmental waste. Compensation for use and damage would minimize the harm, as the payments would shift production towards less damaging products and methods.

Interestingly, the beginning of the industrial revolution was accompanied by the development of the theory of efficient, equitable, and sustainable public finance by the first organized school of economics, the Physiocrats of France. Adam Smith was influenced by their theory of free trade and the single tax on the surplus that is land rent. Classical theory culminated in the works of Henry George during the last decades of the 1800s, as George integrated moral philosophy with economics in a policy of free trade and public revenue from rent.

The environmental aspect was nailed down in the early 1900s by the economist Arthur Cecil Pigou, who theorized on what came to be called the Pigovian policy of charging for significant externalities such as pollution. Complementary to pollution charges and land value taxation is marginal-cost pricing, which was thoroughly analyzed by the Nobel-prize winning economist William Vickrey. Pigovian policy should not just be applied to pollution, but also to the exhaustion of natural resources such as fresh water as well as to traffic and parking congestion.

The political question is why governments world-wide are allowing industrialists to unsustainably pollute the planet and not enacting the solutions provided by economics. For that, we turn to political science and the economic theory called ”public choice.” The model of voting that evolved in the United Kingdom and is now spread world wide is that of mass democracy, of masses of individuals voting for candidates about whom they know next to nothing. Voter ignorance and the inherent demand for campaign funds provides an incentive to rent-seeking special interest such as the polluters to provide support to government chiefs in exchange for privileges.

The model of democracy that would remedy special interest subsidies and plunder was developed interestingly enough by anti-statist anarchists. Their vision was small voluntary communities which would elect representatives to higher-level associations for mutual aid. Bolshevik communists adopted this plan, and proposed a union of “soviets,” which means “councils” in Russian. Their slogan was “all power to the soviets!” But when the revolution came, power in the Soviet Union instead became concentrated in the Communist Party, and the anarchist model of small-group bottom-up democracy was lost to global civilization.

Global civilization is therefore now like an ancient Greek tragedy, as it moves inevitably towards a tragic collapse of its environmental foundation. Although many people are aware of the impending doom, their warnings and calls for reform are futile, because mass democracy prevents any significant change. Almost nobody is calling for a reform of democracy, and so we are like boats in a fast-running river headed towards a waterfall of global environmental collapse with no way to stop the boats or get off.

What may save humanity is the existence of a few small primal societies in the jungles of the Amazon or Africa or pockets of Asia which are not yet in the global civilization. As the rest of the world dies in starvation and conflict, these remnants would survive, but the earth will after that never be same jewel of natural richness that humanity enjoyed before the rise of agriculture.

Credit Booms Gone Wrong

2010-04-04T07:56:00.000-07:00

Recent research by economists Moritz Schularick and Alan M. Taylor have confirmed the theory that economic booms are fueled by an excessive growth of credit. They have written a paper titled “Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870–2008" (http://www.nber.org/papers/w15512), published by the National Bureau of Economic Research.

A major cause of the Great Depression was a credit boom, as analyzed by Barry Eichengreen and Kris Mitchener in their paper, “The Great Depression as a credit boom gone wrong” (BIS Working Paper No. 137, http://www.bis.org/publ/work137.pdf). Eichengreen and Mitchener cite Henry George’s Progress and Poverty as providing an early theory of booms and busts based on land speculation. They also credit the Austrian school of economic thought, which in the works of Friedrich Hayek and Ludwig von Mises, had developed a theory of the business cycle in which credit booms play a central role. Henry George’s theory of the business cycle is complementary to the Austrian theory, as George identified the rise in land values as the key role in causing depressions.

An expansion of money and credit reduces interest rates and induces a greater production and purchase of long-duration capital goods and land. The most important investment and speculation affected is real estate. Much of investment consists of buildings and the durable goods that go into buildings as well as the infrastructure that services real estate. Much of the gains from an economic expansion go to higher land rent and land value, so speculators jump in to profit from leveraged speculation. This creates an unsustainable rise in land value that makes real estate too expensive for actual uses, so as interest rates and real estate costs rise, investment slows down and then declines. The subsequent fall in land values and investment reduces total output, generates unemployment, and then crashes the financial system.

We can ask whether this theory is consistent with historical evidence. One strand of evidence is the history of the real estate cycle, which has been investigated by the works of Homer Hoyt, Fred Harrison, and my own writings. Another strand is the history of credit booms, as shown by Schularick and Taylor, who assembled a large data set on money and credit for 12 developed economies 1870 to 2008. They show how credit expansions have been related to money expansions, and how financial innovations have greatly increased credit. Because economic booms are fueled by credit expansion, Schularick and Taylor note that credit booms can be used to forecast the coming downturn.

Followers of Henry George have focused on the real estate aspect of the boom and bust, while the Austrian school has focused on credit, interest rates, and capital goods. A complete explanation requires a synthesis of the theories of both schools, but these recent works on credit booms have not recognized the geo-Austrian synthesis. In order to eliminate the boom-bust cycle, both the real side (real estate) and the financial side (money and credit) need to be confronted.

Current Austrian-school economists such as Larry White and George Selgin have investigated the theory and history of free banking, the truly free-market policy of abolishing the central bank as well as restrictions on banking such as limiting branches and controlling interest rates. In pure free banking, there would be a base of real money such as gold or a fixed amount of government currency. Banks would issue their own private notes convertible into base money at a fixed rate. The convertibility and the competitive banking structure would provide a flexible supply of money along with price stability. The banks would associate to provide one another with loans when a bank faces a temporary need for more base money, or a lender of last resort.

Both the members of the Austrian school and the economists who have studied credit booms have not understood the need to prevent the land-value bubble by taxing most of the value of land. That would stop land speculation and eliminate the demand for credit by land buyers.

But the credit-bubble theorists have not understood that financial regulation and rules for central banks cannot solve the financial side of credit bubbles. Credit booms always go wrong. As the Austrians have pointed out, there is no scientific way to know the correct amount of money or the optimal rates of interest. Only the market can discover the rate of interest that balances savings and borrowing, and only the market can balance money supply with money demand.

Thus the remedy for the boom-bust cycle is both land value taxation and free banking. Land speculation would not be as bad without a credit boom, but will still take place as land values capture economic gains and land speculators suck credit away from productive uses. But also, a credit boom with land-value taxation will still result in excessive construction and the waste of resources in fixed capital goods, reducing the circulating capital need to generate output and employment, as Mason Gaffney has written about. Economic bliss requires both the public collection of rent and a free market in money.

Thus Spake Geothustra

2010-03-18T20:11:00.000-07:00

When Geothustra was 18 years of age, he left his home in the valley of Zero-Master, and went up to the mountains, where he enjoyed a niche in solitude. But in the year 2001, on his 30th birthday, he felt the need for human company, and so he descended into a valley town which was holding its market day.

“I wish to buy apples,” declared Geothustra to a vendor, but was told, “there are none today. There has been a shortage for many months. But they would be cheap if there were any.”

A young man was leaning against a tree. “And what work do you do?” asked Geothustra.

“I am unemployed,” said the young man. “There are not enough jobs.”

“Have you not heard?” Geothustra shouted out. “The market is dead!”

“What? We have markets,” said a young maiden. “Do you not see vendors selling and folks buying?”

“May I set up a tent and also sell goods if I find an empty plot?” asked Geothustra.

“Only if you get a permit and pay rent and taxes,” replied the maiden.

“I bring you new values,” said Geothustra. “If you understand, you will be superior beings who cast off all permits and taxes.”

“We like our values just as they are,” said an old man.

“What is this foul stench I smell?” asked Geothustra. He went to the edge of the merchant shop zone, and there he saw a mountain of garbage, and toxic water flowing from it.

Geothustra called out to the town folk: “You are despisers of life! Your desecration of the earth is madness. Why do you do it?”

“Our leaders have promised to clean it up,” said the unemployed young man.

“And yet,” said Geothustra, “the stench remains. Your chiefs walk on crooked legs.”

A man in a purple uniform came up to Geothustra and said to him, “Be careful of what comes out of your mouth, just as you watch what comes into it.”

“Then I will let my body speak,” Geothustra replied, and he disrobed.

“You are in violation of the law!” shouted the policeman.

Geothustra replied, “I speak without words to those who despise the body. For they disrespect what is human, so very human.”

“Come with me,” said the policeman,

Replied Geothustra. “I bring new values, and force cannot confine them.”

“Why are you such a trouble maker?” asked the policeman.

“A noble man always stands in the way of tyrants,” said Geothustra.

“Say what you will,” said the policeman. “I represent the state, which represents the will of the people.”

“What you represent,” said Geothustra, “is the will to power. The state prohibits theft, yet it is the biggest thief. The state is a cold monster. Its first lie is that it is the will of the people.”

“This is sedition. I’m going to arrest you,” said the policeman.

Geothustra put his arms forward to let the policeman shackle him. “You can take me to prison, but your crown is made of mud.”

“Let him go!” said the maiden. “He wears no garb because we are his friends.”

“If you were a god, what would you wear?” Geothustra asked the policeman.

“But I am not a god,” he answered.

“Yet you play a god,” said Geothustra. “Are you a tyrant? If the agents of the state are tyrants, they cannot be friends of the people.”

“Unshackle him, please!” cried the maiden. “I want to hear what are the new values.”

“I shall unshackle him if he puts his garb back on,” said the policeman.

“You have it backwards,” said Geothustra. “First I will be free. Then I shall of my own free will put on the garb, since my body has had its say.”

After he dressed, the town folk crowded around him. “The new values!” they cried, “What are the new values you bring us?”

Said Geothustra: “Let people become themselves. Be skilled with arrows. And share the earth.”

“Share the earth?” asked a vendor. “Are you against private property?”

“Possess what you will,” said Geothustra, “but share equally in the benefit of the earth.”

“We like our values just as they are,” said the old man again.

“He’s a communist,” said the unemployed man.

“The old values despoil the earth and despise the human. The old values have no goal,” said Geothustra. “But your will to power rejects new values. Enjoy your stench.”

Geothustra turned and began to walk back to the mountain.

“Will you return?” asked the maiden.

Geothustra stopped and turned towards the maiden. “I shall return, when I can celebrate with you.”

“This was an experiment,” said Geothustra as he walked away, “and experiments never fail. Do not remain my student. Go beyond me, and find a yet greater truth.”

Thus spake Geothustra.

No Tax Favors for Government Employees

2010-03-07T07:44:00.001-08:00

There should be no tax favors for the employees of governments. Tax breaks for “public service” amounts to a tax-free increase in their wages, which does not show up in the government’s budget. It is not just sneaky and unfair; it implements a political bias for government and against private enterprise.

In his “State of the Union” address, President Obama advocated debt forgiveness for students who obtain loans and then spend ten years as government employees. This is an expansion of debt cancellation programs that already exist. The College Cost Reduction Act, implemented in 2009, but enacted under President Bush, provides that loans backed by federal guarantees are forgiven after 10 years of public service in government as well as in nonprofit organizations. That program does not include private loans.

If the citizens wish to raise the wages of government employees, they should just do this by raising their money wage, rather than doing this implicitly with tax-free debt cancellations. But many government employees are already overpaid, as they not only get equal or better money wages than those in private enterprise, they often get early retirement and pensions almost the size of their salaries. Many states such as California have chronic large budget deficits because of the high cost of government employees.

What is superior about government work that entitles employees of the state special favors? Are they better people? Is government service intrinsically better than private-sector service? The term “public service” implies that government workers serve the public whereas those in private industry serve just themselves.

The confusion here is the term “public,” which means either people in a community or else government. The public sector is the governmental part of the economy. But “open to the public” means open to people in general. So, does “public service’ mean service to the public, or does it mean governmental service? It is a “weasel word,” as economist Friedrich Hayek put it, that uses one meaning to imply another.

“Tax breaks for governmental employees” does not sound as good as “debt forgiveness for public service.” But people who work in private industry also serve the public. Adam Smith explained that in making bread to earn a living, the baker serves the public by providing it with bread. A teacher in a private school serves the public just as much as a teacher in a governmental school. Why should the governmental teacher get his loan erased while the private school teacher with no higher wage have to keep paying the interest and pay off the principal?

Governmental workers do not have halos on their heads. They are not gods who merit special privileges. The United States of America is a republic, and our Constitution prohibits granting privileges to nobility. Government service should not be a royal aristocracy. It is bad enough that government imposes restrictions and taxes; those workers doing that should also have extra privileges?

The law should abolish existing debt forgiveness for those in government or nonprofit organizations, and treat every worker equally. The wage should honestly be put just into their money salary, for all to see, and any debt forgiveness should not discriminate by a category of employer.

Equal rights for all, privileges for none! That should be our motto. President Obama, tear down that royalist wall!

US GDP Fourth Quarter 2009

2010-02-07T11:08:00.000-08:00

The U.S. GDP, measuring the output of the economy, was reported at $14.463 trillion as of January 31, 2010. In the fourth quarter of 2010 (October, November, December), the annualized growth rate was reported as 5.7 percent, in contrast to a 2.2 increase in the third quarter, and a .7% decline in the second quarter.

The categories of spending are consumption, investment, government, and exports. Consumption increased at an annual rate of 2 percent. Durable goods such as cars home furnishings declined by .9 percent after having advanced by 20.4 percent in the third quarter. Government programs such as the “cash for clunkers” that subsidized the purchase of new cars are making economic activity more turbulent, as for example people bought cars sooner, but then car purchases fell later.

But overall the purchases of both goods and services rose. The purchase of nondurable goods role by 4.3 percent, a big jump from the 1.5 percent increase in the third quarter and a negative 1.9 percent in the second quarter.

Gross private domestic investment jumped up by 39.3 percent, a huge increase over the 5 percent advance in the third quarter, and the 23.7 percent fall in the second quarter. Economic investment, an increase in capital goods, drives the business cycle. A fall in investment, especially the big fall in construction, led the GDP plunge, and investment is pulling the economy back up.

Fixed investment was up 3.5 percent, after having fallen by 1.3 percent in the third quarter. Equipment and software was up 13.3 percent, after a 1.5 percent rise in the third quarter, and negative numbers before that.

Economic investment includes inventory. Private inventories fell by $40 billion, meaning that companies are using up goods faster than they replenish them. But in the third quarter, inventories fell by $156.5 billion, so this is a big improvement, as companies restocked by $16.5 billion more.

Exports rose by 18.1 percent, with exported goods rising by 28.1 percent. Imports only rose by 10.5 percent. Government spending for goods and services actually fell by .2 percent, because state and local spending fell by .3 percent due to cutting back spending. Federal nondefense spending rose by 8.1 percent, while military spending fell by 3.5 percent.

Folks, the recession is over. The economy is still depressed, but it is no longer falling. I wrote back in April 2009 (http://www.progress.org/2009/fold610.htm) that the second derivative had turned positive. That means that the change in the rate of growth had gone from negative to positive: the downturn was slowing and would become an upturn. I also wrote that “The recession will most likely end in the fall of this year 2009.” And so it did.

The doom-and-gloomers were saying that the economy would plunge into another great depression, with massive business failures and unemployment. Perma-bears were forecasting that the stock market would plunge down almost to zero. That has not happened, because governments have not repeated the worst of the mistakes of the 1930s.

The US enacted a high tariff in 1930, and other countries also raised trade barriers, which brought international trade to a screeching halt. The Federal Reserve system failed to prevent a huge deflation, which raised real interest rates, halting investment.

This time around, there has been some protectionism, such as a “buy American” element of the stimulus program, but trade barriers remain relatively low. The Fed this time greatly expanded the money supply, so the deflation of 2009 was mild. It was mostly falling land values, a plunge in the stock market, price reductions for goods, some lowered wages, and most of all, low interest rates, almost zero for interbank loans.

Now the US federal government is engaged in a jobs program, seeking to reduce the unemployment of 10 percent. Government chiefs are boasting that the trillions thrown at the financial firms, the car companies, and stimulus projects prevented a bigger collapse and are pulling the economy back up.

Well, if government borrows and creates a few trillion dollars and injects it into the economy, it is going to have some effect. But it is like being pumped up with stimulus drugs. Later, the drugs damage one’s health. The price of this stimulus will be a much higher federal debt and high inflation.

It was not necessary to bail out the financial sector, and spending money just to create jobs mostly shifts jobs and caters to special interests. Folks are crying out, where is my stimulus? Banks, Fannie and Freddie, insurance firms, are taking government money, giving their chiefs big bonus payments, and using the stimulus money to pay for lobbies to get even more.

I had said that if government seeks to increase demand and rescue folks from debt, unemployment, and business failure, it could have given every person several thousand dollars in cash. That would have quickly restored the economy according to the goods that people wanted. Firms would have responded to market demands, not selective governmental favoritism. And the money would not have increased the federal debt. Now we have a greatly expanded money supply and also a bigger debt.

The economy will rise again, only to burn and crash once more. Few are learning the right lessons from the Great Recession. They are focusing on the financial firms and not on the land values they were speculating on. Only when we tap the ground rent for public revenue, and so push land values down to almost zero, will the real estate and business cycle be extinguished. Then we will have an economic Isaiah 2:4: they will beat their land speculation swords into productive plows, and nations shall not suffer depressions any more.

The Tragedies of Haiti

2010-01-31T07:56:00.000-08:00

The greatest tragedy of the earthquake of 12 January 2010 in Haiti was that the devastation was caused more by human failure than the natural disaster. The earthquake that hit the San Francisco Bay Area in 1989 was about as strong, causing the Bay Bridge to break, but killed only 63 people.

Before the Spanish came, the island of Hispaniola had been divided into chiefdoms, and the two western ones, Jaragua and Marien, became Haiti. Haiti’s first tragedy began with the arrival of the Spanish, who sickened, enslaved and killed off the native Taino Indians.

The second tragedy of Haiti was the importation of African slaves by the Spanish. French pirates and colonists cam to Haiti, The Treaty of Ryswick of 1697 split Hispaniola between Spain and France. Many more French settlers arrived and established plantations producing sugar, coffee, and indigo with slave labor.

A slave rebellion, inspired by the ideals of the French Revolution, fought the French government from 1791 to 1803. The liberated armies were commanded by General Toussaint L’Ouverture. The French National Assembly abolished slavery in the French colonies in 1794, but later Napoleon sent troops to regain French control.

French General Charles Leclerc invited L'Ouverture to meeting, but then kidnaped him and sent him to France, where he was imprisoned and died in 1803. Some 50,000 French soldiers died in the attempt to capture Haiti; the death toll for the rebels was 100,000, and some 24,000 European settlers also perished..

Jean-Jacques Dessalines led the Haitian toops to victory against the French. Haitians proclaimed independence on 1 January 1804, naming the country Haïti, on of the Taíno names for the island. Several thousand French settlers fled, taking their slaves with them, and settled in New Orleans, which had the lasting effect of strengthening the French culture there.

Instead of welcoming Haiti as the Western Hemisphere’s second independent country, the U.S. government shunned it. President Thomas Jefferson, fearing that the Haitian slave revolt would spark an American slave rebellion, imposed a trade embargo on Haiti that lasted until 1862. Ironically, the independence of Haiti created the United States of America as a continental power. Without Haiti, the Louisiana Territory was difficult to defend, and rather than being profitable as was Haiti, Louisiana was costly to administer. Needing funds to wage war on Great Britain, Napoleon sold Louisiana to the United States in 1803. Yet the U.S. compounded an ungrateful lack of political recognition with barriers to trade.

The third Haitian tragedy began when instead of establishing democracy, Dessalines drove out and killed the remaining Europeans, and became a dictator. Haiti was instrumental in the struggle of the Spanish colonies for independence, assisting the leader Simon Bolivar. In 1822, Haitian president Jean Pierre Boyer conquered the Spanish side of the island and freed its slaves. He also turned the Haitian workers into peasants forbidden to leave the farm lands.

The fourth tragedy began in 1825 when King Charles X of France sent troops to reconquer Haiti. President Boyer signed a treaty by which France recognized the Haitian independence in exchange for a payment of 150 million gold francs, reduced in 1838 to 90 million. It was allegedly a compensation for profits lost from slavery, but there was no compensation to the slaves. The lost profit was really wages stolen from the slaves and land rent stolen from the Indians. With the economy still ruined by destruction during the rebellion, resources that could have been invested in developing the economy were instead sent off abroad.

The United States recognized the independence of Haiti in 1862 and sent Frederick Douglass to be the consular minister. There were later several interventions by American and European forces, and from 1915 to 1934, the U.S. military occupied the island. They built up the infrastructure using forced labor, but did little to establish genuine democracy.

The fifth tragedy of Haiti occurred in 1957 with the election of Dr. François Duvalier as President. “Papa Doc” became a dictator and ruled until his death 1971. His son Jean-Claude “Baby Doc” then ruled untl 1986. Violence, corruption, and political turbulence continued with the election of Jean-Bertrand Aristide in 1990, who was later overthrown and returned.

The sixth tragedy of Haiti has been environmental. The French began clearing forests for their plantations. Later, almost all the forests were chopped down to use for fuel, which has caused erosion, floods, and the loss of the land’s fertility. A major reason for Haiti’s being the poorest country in the Western Hemisphere is the depletion of its soil. Much of its food is now imported.

Haiti’s economic tragedy is tied to its political tragedy, as corrupt chiefs have siphoned off much of the produced wealth. Massive foreign aid, making up a third of the government’s budget, has not created prosperity, because it has not confronted the political, environmental, and economic causes of Haiti’s poverty. Haiti’s government has also borrowed from the IMF and World Bank, and the debt service offsets much of the aid. Much of the debt was incurred during the Doc years.

Haiti was wealthy when it was a French colony. The country’s poverty originated in 1825, when it had to borrow from French banks to pay the coerced indemnity debt. Much of the political turmoil in Haiti stems from having its generated wealth go to foreigners to pay the debt.

The National Bank of the Republic of Haiti became entangled with U.S. banks in financing railroads in Haiti. U.S. companies pressured president Wilson to take control of Haiti’s custom houses that collected revenues from tariffs. Thus was created Haiti’s seventh tragedy, imperialist intervention by the United States, especially the invasion of U.S. marines in 1915 to secure U.S. financial interests.

When World War I began in 1914, U.S. Marines entered the capital Port-au-Prince and took $500,000 of currency to New York, making Haiti dependent on the U.S. for the use of its own money. The U.S. strengthened its hold in 1915 with the occupation by the U.S. Marine Corps, in order to pay off U.S. creditors. Loans originally made to Haiti to pay off the former French landowners were later bought by U.S. lenders. The U.S. military was engaged to force Haitians to keep paying ransom for their liberation! Except that now they had U.S. masters. These loans were finally retired in 1947.

The eighth tragedy of Haiti is this most devastating earthquake. After the immediate provision of food, medical aid, and security, the U.S., France, and other countries need to take responsibility for their role in creating poverty in Haiti.

First, the U.S. and other countries should drop all barriers to imports from Haiti. Second, they should promote political stability, the rule of law, and genuine democracy by advocating local democracy and bottom-up voting and governance. Third, the Haitians should reduce corruption by creating a new police force that is paid well and devoted to safety rather than bribery. Fifth, Haitians should establish a truly free market in which there are no arbitrary restrictions on establishing enterprise, and no tax on labor, trade, and enterprise, with public revenue instead from land value, along with user fees and pollution charges.

With economic freedom, investment would pour into Haiti to make the economy flourish as it did during the French days, but now, the wealth would be retained by the people, who would be finally liberated from slavery, foreign domination, and tyrants.

Government Loves Landowners but Hates Landlords

2010-01-21T13:22:00.000-08:00

They call them “landlords,” but they also lease the dwelling places, pieces of buildings, which are capital goods, not land. The “land” lord also provides labor services. They could be called “dwelling lords.” But often they are not really lords, since the real boss is the state, which lets financial wolves prey on helpless dwelling providers.

A case study is what happened to Daniel Bader in 2006. He was accused of familial-status discrimination by the California Department of Fair Employment and Housing (CDFEH). His big crime? On the Craigslist web site he posted a “for rent” ad which included the phrase, “perfect for 1 or 2 professional adults.”

In a truly free society, people have freedom of speech, and that includes entrepreneurs who advertise, so long as they are peaceful and honest. Moreover, the ad did not say that the rental was for adults only. His intention was not to discriminate against families with children. This dwelling provider just sought to describe what the unit in the back of his house was well suited for. He had rented to families with children in the past. Nevertheless, the Fair Housing Council of Orange County (FHCOC) filed a formal complaint when they saw the ad and demanded $4,000 plus five years of “continuing education” at $250 per class at their training facilities.

Most landlords cave in and pay the extortion loot. Why does the state impose this oppressive cost on dwelling providers? It is at first glance puzzling, because all levels of government provide massive subsidies to landowners, with big tax exemptions that make their rent and land more valuable as governments provide public goods that generate rent, paid for mostly by taxes on labor and enterprise.

The state loves landowners, so why does it hate landlords? It seems to me that this all makes sense if one realizes that it is the big landowners that are the prime beneficiaries. A democracy requires the support of the majority, so the state also subsidizes the petty landowners. They become allies of the big landowners. Since tenants also vote, the state also cleverly turns tenants into allies of the big landowners by shifting rent to them via rent control and anti-discrimination laws. The result of such laws, even when enacted with good intentions, is the creation of predators such as “fair housing councils.”

Daniel Bader refused to pay the extortion, so the CDFEH filed an 'unlimited damages' lawsuit against him in Orange County Superior Court. He countersued the CDFEH, FHCOC, and the CEO/Chief Counsel for the FHCOC. His lawsuits were thrown out by the judge, and he was ordered to pay their attorney's fees, over $20,000. The judge ruled that these agencies had free speech rights and were entitled to file the lawsuit and demand monetary damages against Bader. But evidently Bader has no free speech rights for his ads. Moreover, a lawsuit is not really free speech. Evidently, governments see landlords as easy prey.

What saves us from complete tyranny is trial by jury. On the eve of the scheduled jury trial in January 2009, the CDFEH dismissed the lawsuit against Bader. When his lawyer made a motion for the reimbursement of over $44,000 in attorney's fees and costs, it was denied. The predators can win their war on landlords even when they can’t win in court, just by imposing legal costs.

The case is currently on appeal, scheduled for Feb. 19, 2010. The website relates the story, and it has also reported in the Los Angeles Times and Orange County Register, as shown in the web site. Bader was also interviewed on radio and on the Bill O'Reilly show.

Dwelling providers should realize that their ads, especially in the Internet, make them targets for extortion by “fair housing” predators. Many landlords are naive; they don’t realize that they are being hunted. As told by Bader, if the dwelling provider settles with these agencies and pay their demand, they make the “landlord” sign a confidentiality agreement, and then they call the payoff a “donation.” These leeches can do this because they are backed by the power of the state.

These “fair housing” organization are funded by government. Their mission is allegedly to educate the public, but the real goal is to instil fear on dwelling providers, shifting power to tenants. Court judges are parties to this extortion, as shown by the Bader case.

Ultimately this predation under the name of “fair housing” hurts tenants, especially groups who really have suffered arbitrary discrimination, as these costs increase the risk of providing dwellings. These costs are ultimately passed on to tenants or else reduce the supply of rental units, making housing that much more expensive or unavailable. It’s just one more example of the maxim that the state is a cruel master.

Baby’s a Tuna, and It’s Feeling Blue

2010-01-17T09:17:00.000-08:00

Bluefin tuna are being hunted to extinction. They have already been reduced to a small fraction of the global numbers of a hundred ago. They may disappear from the Atlantic Ocean by 2012. The average weight of those caught has already been dropping. Other kinds of tuna and related fish are also being slaughtered, but the bluefish will be the first to go under.

Bluefin tuna are the genus Thunnus in the family Scombridae, with several species, among them Thunnus atlanticus (blackfin tuna), Thunnus orientalis (Pacific bluefin), and Thunnus thynnus (Northern bluefin).

The bluefin have a big problem: they taste very good. Tuna have been eaten for centuries. Indeed, the word “tuna” comes from ancient Greek. Canned tuna greatly increased the consumption, but what is finally terminating the bluefin is sushi. Four fifths of the bluefin tuna consumption is for sushi and sashimi. Sushi is seaweed-coated vinegar rice wrapped around a morsel of food such as raw fish, and sashimi is the raw fish by itself.

Bluefin tunas taste good because unlike most fish, they are homeothermic (warm blooded); they metabolize their temperature, like mammals and birds. With a higher body temperature than the surrounding cold water, tuna have a large ocean range. The warmth also enables tuna to swim fast (“tuna” in Greek means “to rush”), which enables them to catch more prey. So bluefin tuna grow up to a size of up to four meters.

Their warm bodies produce a red fatty underbelly called “toro” in Japanese. While the Spanish cry “toro!” when a bull charges, Japanese consumers call “toro!” for the delicious uncooked fatty parts of bluefin sushi and sashimi.

Traditional sushi was made of fermented fish and rice. The word “sushi” meant “it is sour.” Today’s sushi is not fermented, and can be made quickly. It is Japanese fast food. While there is a tiny health risk from eating raw fish, the bigger danger is the mercury in large fish such as tuna, which are at the top of the food chain, just below man. But the mercury has not stopped people from gobbling tuna world-wide. The problem of parasites in raw fish is solved by freezing the fish and then thawing it so that it seems raw again.

In Europe and elsewhere there are now so-called tuna “ranches.” They don’t really raise the tuna as in real ranches; they hunt wild tuna and then keep them in circular nets. These menageries feed the tuna sardines and other fish to get them big and fat. When the wild tuna are caught, they include young ones that don’t grow up to make other tuna, so this “ranching” is quickly depleting the stock of tuna, especially the bluefin. Baby’s a tuna, and it’s feeling blue!

It is possible to completely farm-raise tuna; this has been successfully tested in Kinki University in Japan. Evidently they managed to remove the kinks from raising tuna, and an Australian university has now also bred tuna in captivity.

Because of the high demand, a bluefish tuna can sell for $100,000 in Japan. The depletion of Bluefin tuna is a prime example of what is called the “tragedy of the commons.” The oceans are a common natural resource, with nothing to stop fishers from catching unlimited amounts of seafood. There are international rules and organizations that have jurisdiction in the oceans, such as the International Commission for the Conservation of Atlantic Tunas and the Commission for the Conservation of Southern Bluefin Tuna.

Unfortunately for the Atlantic tuna, the limits set by ICCAT are too high for sustainability, and the restrictions are not being enforced. About half the bluefin catch is not reported. The members of ICCAT have not authorized the organization to catch and punish the poachers.

Wild tuna are economic land, a natural resource. They are a common heritage that should be preserved, hunting only taking the annual increase, like consuming only the interest from savings. When fishers take the tuna with no compensation to humanity for depletion, they are in effect stealing land that belongs to humanity, including future generations.

Bluefin tuna should be classified as endangered, with sustainable limits to the catch, and the payment of fees that would finance the enforcement. Ecologically sound tuna farming should be promoted to replace wild tuna, and biologists could experiment with producing tuna flesh synthetically, avoiding having to raise the fish.

The depletion of bluefin tuna is a prime example of massive government failure, the refusal of governments to establish and enforce humanity’s property rights in renewable natural resources. Tuna fishers are in effect getting short-term subsidies, as they are granted an exemption from paying the social cost of their activity.

What can we do? We can contribute to organizations such as the WWF (World Wildlife Fund or World Wide Fund For Nature) or the Tuna Research and Conservation Center in California. We can contact government representatives to create pressure to preserve the ocean wildlife. We can also ask food stores and restaurants to either not sell bluefin tuna or to inform customers that the bluefin are endangered.

Unlimited Subsidy to Land Values

2010-01-10T08:27:00.000-08:00

The U.S. President’s administration announced on 24 December 2009 a holiday gift to American landowners. The government removed the cap it set on subsidies to Fannie Mae and Freddie Mac, the government-backed enterprises that buy mortgages from banks and other originators. The removal of the cap before 2010 avoided the embarrassment of needing Congressional approval.

This policy move can be understood if one recognizes the main aim of government policy since the beginning of American history. The main purpose of the U.S. government is to subsidize land values for the big players. The biggest subsidy is implicit: the public goods provided by government generate greater land rent and higher land values. This happens because only a tiny fraction of government revenues are paid for by direct taxes on land. Workers and enterprise owners are taxed to provide the public goods, and then they pay the higher rent generated by the public goods. Government thus redistributes wealth from workers to landowners.

The government generates a boom-bust cycle as land rent absorbs the gains from an economic expansion, and then speculators jump in to ride the surge in land values. This speculation lifts land prices even higher, until it is priced too high for those who seek to actually use real estate, and then land values collapse.

Almost all real estate is purchased with borrowed funds, so the subsidy to land values extends to the financial industry. Mortgage interest is tax-deductible in the U.S. to reduce the net mortgage interest cost. When the economy is depressed, the Federal Reserve expands the money supply to push interest rates low and thus subsidize the purchase of real estate.

But even those basic subsidies were not sufficient to prop up land values during the Great Depression. So the U.S. government promoted a secondary market in mortgages by creating Fannie Mae and later Freddie Mac. They buy mortgages from banks and then hold some and also package some into securities for sale to financial firms such as hedge funds. F&F now hold or guarantee about half the mortgages in the U.S.A., with a total value of $5.5 trillion.

Because Fannie and Freddie are backed by the U.S. Treasury, they can sell their bonds at a lower interest rate. The banks can thus keep lending mortgages to real estate buyers, sell them to F&F, and then make more mortgages. The government has thus created a perpetual mortgage machine.

During the real estate bubble preceding the Crash of 2008, financial innovation created trillions of dollars of clever derivatives based on mortgages, such as fake insurance on mortgage securities. A big problem with the government subsidy of land values is that it is not sustainable, as it has always created a boom followed by a bust. So government steps up the subsidy by propping up land values after the crash. That is what is happening now.

Fannie and Freddie suffered colossal losses during the Great Recession of 2007-2009, and they were bailed out by Congress, which provided over $110 billion to F&F. But the losses continue, with a projected total of $170 billion, since defaults in commercial real estate have followed those in residential real estate, and there could be more big losses in the last quarter of 2009. The chiefs of the federal government now realize that any cap on the bailouts would stop the bailouts or make F&F bonds more risky, and thus cause F&F to buy fewer mortgages. To keep the perpetual mortgage machine rolling, the government has eliminated the cap on bailouts to F&F. There is now in effect an unlimited government subsidy to land values. F&F losses of mortgages due to falling land values will continue to be subsidized by U.S. taxpayers.

Government chiefs say that F&F provide play a “vital role” in real estate markets. They do play a vital role in the scheme to subsidize land values, but real estate was bought and sold long before these government-sponsored enterprises were created. The government backing is no more necessary than is the government subsidies to farmers that push up the price of agricultural land.

Not all of the government subsidy to Fannie and Freddie goes to land rent and land prices. Some of the subsidy goes to the CEOs and other chiefs of F&F. These chief executive officers could each get “paid” about $6 million. The previous chiefs of F&F got even more remuneration before they got kicked out in 2008, and they would have gotten still more if the government had not blocked their “exit packages.”

Why do the F&F CEOs and financial officers get so much for running enterprises that make huge losses? Because other CEOs get similarly high payments. CEOs are now being paid multi millions of dollars just because that is what other CEOs are getting. The government has set some performance goals for the CEOs of F&F, but these are currently a secret. Perhaps the goal is to manage the losses efficiently. If you are an efficient loser, you will be given millions of dollars. This makes sense once you realize that the real losers are American taxpayers.

The losers include the typical American home owner. His property tax is low, but he pays high taxes on his wages and his interest income, and if not for the subsidy to land value, he would have bought his land for very little, and greatly reduced his mortgage payment. But not one in a thousand persons understands this, so the great American land subsidy goes on and on. Happy new year.

Somewhere Hidden Something Goes

2010-01-05T06:11:00.000-08:00

As you read this, fifty trillion neutrinos are passing through your body each second. Neutrinos are tiny neutral particles. The sun emits illions of them, and they pass through the earth without affecting it. We cannot see or feel them; it requires a particle detection laboratory to measure them. Neutrinos are hidden from sight, sound, and touch, but they are real.

Science has provided us with much knowledge about the human body, but much of what goes on inside is hidden. There can be disease building up in our bodies that is not easily detected. Somewhere hidden in our bodies, something can be going on, and we will not know it until it becomes too big and bad to stay hidden.

There could malicious programs that snuck into your computer undetected by protective software. Webs site are collecting data on you, hidden from your view. Programs are running in a PC that you can see if you type control-alt-delete, but they do not tell you what goes on, and there could be programs that do not show up there. Someone somewhere could be collecting data and recording what you do. Even the originator of a program will not know who gets infected, as the program itself generates offspring robots. Somewhere hidden, something goes, and perhaps nobody knows.

Don’t ask from whom the economy hides; it hides from you! Economic data can be different from what they appear to be. The main benefit from learning economics is to be able to understand the reality that lies hidden beneath superficial appearances.

For example, you might think that when a bank says it is paying you four percent interest, you are getting $4 annually for each $100 in your account. That is the superficial appearance. But some of that gain is not real, since it just makes up for inflation. To get the real interest rate, subtract inflation from the quoted or nominal rate. So if inflation is three percent, the real interest would be four minus three, thus one percent real interest, or $1.

But the U.S. Treasury does not keep it real. It taxes the nominal, not the real, interest. So if the tax rate is 50 percent, the state takes $2 from the interest. You real after-tax interest then becomes a minus one percent. Hidden from sight, inflation and taxes take away much of what you earn.

The real profit from enterprise is also hidden. A business man may think that if his revenue for the year is $1,000,000 and he pays $800,000 for labor, rent, and equipment, his profit is $200,000. But economic reality says otherwise. Somewhere hidden are costs not recorded by the accountant. If the entrepreneur had worked as an employee for somebody else, and he would earn $150,000, that is a cost of being in business as wages foregone. If he owns assets in his business and they could fetch $50,000 in annual interest, that too is an implicit cost. Subtract these from the accounting profit, and we get an economic profit of zero. In reality, he is not making any profit, as there are costs going on that are hidden but real.

Phenomena such as land rent are to a great extent hidden. The economic rent of land is what the highest (or second-highest, technically) bidder would pay to use that land. An owner who also uses and occupies the land is also paying and receiving rent; implicitly paying as tenant and receiving as owner. So land generates rent just as magnets generate a field, even without our seeing it.

What is hidden can be more real than what we think we observe. What we think we see is in large part an interpretation of what we observe. We can experience an emotional reaction to a picture or scene that is based on our beliefs and values rather than the physicality of the object.

One reason why government planing and control so often fail is that much of the economy is hidden from view. As the economist Friedrich Hayek pointed out, the knowledge relevant to production, exchange, and consumption is decentralized, changing, and tacit. Much of the knowledge is not written down, but in our minds, and we might not even be able to fully explain it.

Comes the government, and it thinks it can plan and provide for our welfare, including our old-age income, our medical services, our education, and our safety. It can do these things, but government agents cannot peer into our minds to discover what we really want, and they cannot see into the uncertain future to realize what is best of any person or society, When government uses force, it is altering reality into outcomes with unintended and unknowable consequences.

Faced with uncertainty and lack of knowledge, with hidden forces going on, it is best for each adult to set his own course. If we can keep our full wage and share the rent, we would all be able to choose our own bliss. Nobody can know what makes me happy but me, and even I don’t always know, so it’s best not to meddle.

Danish Pays Trees

2010-01-03T08:08:00.000-08:00

A “Danish” is a sweet, flaky, layered pastry with fruit, nuts, jam, cheese, or custard in the middle. It is not of Danish origin, but was brought to Denmark by cooks from Austria during a bakers’ strike in 1850. In Denmark it is called “wienerbrod,” or “Viennese bread.” In Vienna they call it “Golatschen.” The ultimate origin may be the Turkish baklava, which is also sweet and flaky.

The outcome of the Copenhagen Climate Conference of December 2009 is much like a Danish Pastry. It may taste good, but it is not a healthy way to start your day, since it is made with sugar and white flour and fat from milk, eggs, and butter.

Just as a Danish pastry is not really Danish, the Climate Conference will not really reduce climate change. The outcome of the conference can be boiled down to this: the developing countries are extorting $100 billion from the wealthier developed countries to prevent them from chopping down what remains of their rain forests.

Billions of dollars will go to the chiefs of the less developed economies, with little benefit to the people of these economies, while much deforestation will continue anyway. The extreme corruption of these governments will prevent effective measures against climate change. There will just be token forest parks that cannot sustain much wildlife. The conference agreement set a goal of limiting global warming, but has no compliance provisions.

In Brazil, for example, there are many economic interests that are destroying the rain forest. The miners are using chemicals that poison the waters and soil; they accuse the ranchers of using up much more land. The ranchers say that they are feeding people with their cattle, and sometimes they save a few trees, so they aren’t so bad. The native Indians preserve their trees, but they complain that the ranchers are going to be paid to stop chopping down more trees, while Indians, who have not destroyed the forest, will get nothing. To get the payments, the Indians say they too will have to chop down trees. So the scheme may end up destroying more trees than it saves. Moreover, the budget to enforce environmental protection has been minuscule.

Many newspaper editorials have described the outcome of the Copenhagen Climate Conference as a failure, even a disaster. Something was rotten in the conference in Denmark. The rot is the refusal to implement the most effective way to minimize pollution: a “green tax shift.”

A “green tax” is payment made by polluters to compensate society for the damage. The green tax shift is a revenue-neutral implementation of the polluter-pays principle. The tax revenue from the polluters is used to reduce taxes on income, sales, goods, and value added. A complete green tax shift would replace all other taxes with levies on pollution and land value. The land-value tax would complement the pollution tax, as it would promote an efficient use of land. Moreover, a pollution tax is a land tax in levying a fine for dumping pollution into air, water, and soil land.

The burning and chopping down of forests in Brazil, Indonesia, Africa, and other places is contributing more to global air pollution than cars. But the chiefs of developing countries can rightly accuse the chiefs of developed economies of failing to set a good example.

The U.S. government chiefs seek to implement a pollution permit system, in which permits would trade in a global market. A company that is producing goods and holds permits to pollute could make a big profit from shutting down, as it would then be able to sell its permits.

We have just gone through a financial boom and bust, in which derivatives causes colossal losses for financial firms. Now they want to set up a permit trading scheme that will be subject to the same bubbles and crashes. Pollution permits will spark options, futures contracts, and other derivatives which will be a speculator’s delight. Traders will buy up options and futures contracts to drive up the price of permits, making them costly for those who actually want to produce stuff. Permits will be owned by mutual funds as an “investment.” Meanwhile, brokers will get commissions and “investment” bankers will get fat bonuses for their financial creativity.

The green tax shift avoids these gyrations, and simply charges polluters in proportion to the damage. There is no long-term economic cost to a green tax shift, and indeed there is an economic gain, since the reduction in taxes on low-pollution industries reduces the excess burden of taxation. Any country can implement this on its own, but the U.S. administration has rejected environmental taxes, since industry prefers the permits, which become for them a profitable asset that can be manipulated to reduce competition from new firms.

The same failure doomed the earlier Tokyo Protocol, which failed to apply equal environmental rules to developing countries. Environmentalists should also accept responsibility, because they have not sufficiently focused on pollution charges. The green tax shift will resonate with the public. They will see the triple-win benefit from the green tax shift: a more productive economy, more liberty, and less pollution.

The Justice Party of Denmark had some success in shifting the country’s public revenues to land value. Denmark also has a carbon tax, which has reduced per-capita emissions by reducing the use of coal. A more complete green tax shift in Denmark would set a great example and would make “Danish” a term for saving the planet in addition to the flaky pastry.

What Policy Makers and Opinion Formers Should Know

2009-12-10T08:30:00.001-08:00

Begin a talk by telling your public what the story is about. There are moral, political, and economic propositions that are fundamental, yet remain misunderstood or unknown. Those interested in the logic and evidence can search for fuller explanations; here the aim is to lay them out very briefly, because you are busy personae.

There is an objective morality, a universal ethic by which acts that coercively harm others are evil, acts that are welcomed benefits are morally good, and all other acts are neutral. Each person is properly an equal self-owner, and equality requires an equal benefit from the natural bounty, which in the economy becomes measured as land rent.

Acts which are unwelcome are divided into offenses and harms. If an act is disagreeable merely from the beliefs and values of the person affected, the act, while personally bad to the recipient, is morally neutral by the universal ethic, otherwise there is no freedom. Thus only evil acts, those which coercively harm others, should be prohibited and penalized by government.

It is evil to impose religion by force, beyond what is mandated by the universal ethic, and if you think your religion requires this, then you make yourself a god, but you misunderstand, because man is not god.

Pollution is trespass and invasion into the property of others, and requires restitution for the damage. The most effective policy for pollution and congestion is a direct charge on these, compensating for the effect, rather than restrictions that do not let people respond according to their costs and benefits.

Taxes on income, goods, production, consumption, trade, and value added all impose the waste of not letting resources go to where they are most wanted, and reducing the growth that lifts folks out of poverty. The most efficient and equitable sources of public revenue are land rent, pollution charges, and voluntary user fees. There is no need to make workers poorer by taxing their wages and spending.

We can help resolve territorial ethnic conflicts as in Israel and Palestine and in Kashmir with joint sovereignty in disputed areas and by making those who occupy disputed land pay rent to compensate excluding others.

Politics becomes dirty because a mass of voters elects strangers, and the candidates require money to make themselves known, although they can never be really known to the masses. This can be remedied by voting only in small groups, starting with a neighborhood of about a thousand persons. Neighborhood councils then elect higher level councils in a bottom-up multi-level voting system all the way to the top.

Unemployment is caused by restrictions and imposed costs that prevent workers from accessing resources to produce and trade. The natural economy of humanity is universal prosperity, because natural resources are still abundant, and technology multiplies our power to create. But our economies are instead kleptocracies, the rule by thieves. Stop taking the bread produced by the worker, and he will engage his time to make to make bread until the value of an extra loaf equals the value of extra leisure.

The natural rate of interest adjusts savings to investment, and the natural price level adjusts income to spending. Governmental control of money does not let these do their jobs, and creates distortions resulting in inflation and depressions. Free-market money and banking provides a stable yet flexible money supply and a rate of interest based on preferences rather than manipulations. The best economic stimulus is economic freedom.

Many children are unschooled, and too many are schooled but not educated. Let parents and students choose the best educations with vouchers good for private and governmental schools. So long as there are poor folks, there is no need for government to take over basic services, since vouchers can enable the poor to use them.

Children have a right to be fed, educated, and cared about, but adults should not be treated like children. There is no adult moral right to food, medical services, housing, and retirement pensions. There is only the right to apply your labor, keep what you earn, and obtain an equal share of nature. Government denies the natural rights, and then compensates for the resulting poverty by making folks dependent on legal entitlements that eventually bankrupt the economy.

I lay it all because I get irritated by poorly formed policies and opinions, and I want to be able to point here and say, this is what I think you should know. But I expect no miracles.

Cap and Command

2009-11-29T07:41:00.000-08:00

Often laws passed by Congress contain much more than what appears in the title of the legislation. That is the case with the “cap and trade” law passed by the House of Representatives. That law also contains command-and-control regulations that affect owners of dwellings. It should be called “cap and command.”

The law would include a requirement for an energy audit when a building is purchased, before the transaction is closed. If a house did not pass some requirements, the seller would have to install insulation and other retrofitting. Perhaps the windows would need to be replaced, or the buyer would have to alter the furnace. The seller might have to install a timed shower governor that stops the water after a few minutes of use, forcing people to take quick or cold showers. The costs of the replacements would usually be passed on to the buyer. The extra expense would include the inspection of the house, which could cost $400 or more.

The timing for this mandate is terrible, since the housing market is just starting to turn around. Just when prices are no longer falling and buyers are responding to tax credits, wham! The cost of buying houses in many older neighborhoods will zoom up, and properties will linger in the market unsold once again.

Because old houses compete with new houses, and there are still many houses sitting unsold, the selling price of many older houses will fall. The cost of installing new appliances and replacing fixtures will be passed on from a lower market price of the building so that the purchase price to the buyer is not so high. So the burden of cap-and-command will be split between the buyer and seller, depending on the alternatives in that neighborhood.

Such commands and controls is why the proposed law contains 1400 pages. Any law that thick is most likely bad legislation. Most Congress personae do not read laws that long, since there are not just a lot of pages, but the wording is in thick legalese, making it a torture for ordinary folks to slog through.

The costs of such government mandates are in effect a tax. The government could instead just levy taxes and use the revenues to pay for these costs. By making it command and control, the regulation cost does not show up in the government budget.

The efficient way to reduce pollution is with a periodic charge. Make the polluter pay for the social costs when he pollutes, not when a particular transaction takes place. With pollution charges, the polluter will respond according to his own costs and benefits. Instead of dictating how long you should shower, and at what temperature, the resident would decide whether the benefit of using more energy and polluting more is worth the cost. People would do whatever has the lowest net cost, paying the charge or avoiding it by reducing pollution.

Moreover, the focus of policy should not be on energy use, but directly on what is bad, the pollution. It should be none of government’s business how much energy one uses. Energy is just another product, like bananas and haircuts. If one is willing to pay to use more energy, it does not harm anyone else. What harms is the pollution, and much of pollution does come from heating and cooling buildings. But all that is needed is a monthly payment when one pollutes. A buyer of a building could voluntarily pay for an inspection to see what the energy costs are, and he would also know how much is being paid in pollution charges.

There is also a health danger in internal pollution. A house might be fully insulated and not be emitting any pollution to the outside, yet trap the pollution inside and endanger the dwellers..

The bill passed by the house also mandates changes to building codes that would increase the costs of construction. Building codes have been under the jurisdiction of local governments, which can be adapted to local climates and local materials. But now the federal government would intrude into local governance with one-size-fits-all regulations.

Congress is imposing a huge deadweight loss on the economy with this legislation, as a waste of resources and a reduction in social well being. This legislation is one more reduction in liberty and a steep increase in big federal government. And in the end, this legislation is bad for the environment, because when folks rebel against being forced to take cold showers, they will not replace tyrant commands with a green tax shift, but will be disgusted with the entire green agenda, and so pollution will continue to poison and plunder the planet.

The Jobs Summit

2009-11-25T08:10:00.001-08:00

President Barack Obama will be hosting a White House forum on jobs in December 2009. Unemployment continued to rise during 2009, and the president seeks to stoke the economy to create more jobs, jobs, jobs.

The summit will gather together people from diverse fields: economist gurus, the small-business bourgeoisie, grand poobahs of big business, financial fat cats, and union bosses. Evidently, Obama forgot to also invite some actually unemployed workers. He also left out psychologists, priests, community organizers, political pundits, and plumbers. Despite this lack of full diversity, the gathered will discuss how to accelerate job creation. The federal government has put the unemployment rate at 10.2 percent as of November 2009, but if one includes those who would like to work but have forsaken job search, and those who are underemployed, the jobless amount to about a fifth of the labor force. Thus there is political pressure for the president to appear to be doing something. A gathering to discuss the problem will be splashed in the media and crate buzz.

But asking how to create jobs has it backwards. The fundamental question is not how to create more jobs, but how to stop government from destroying jobs. It is like hunters who go into a field and shoot every deer in sight, and then hold a meeting on why the deer have disappeared.

Henry George had a parable about the unbounded savannah. Suppose there is an infinite field of free land in which farmers could apply their labor to grow corn. Would there be any unemployment? Of course not, since anybody could get some land and employ himself to grow corn. When there is unrestricted access to natural resources, there is no unemployment.

In primal human society, villagers could go into the fields to hunt and gather. Sometimes they might not find enough food, but there was no lack of work, since one could keep on searching, digging, and foraging, and then do some crafting and trading.

Now, in the 21st century, employment should be much better, but instead, it is worse. It is illegal to pick the berries. Suppose a man goes down the street peddling goods to the public. A police officer arrests him, because this is illegal. The jobless man offers to pull weeds in the gardens of folks too busy to do it, and he would do it for a few dollars per hour, but it is illegal to hire workers at that low wage. He can’t go into the fields, he can’t freely offer his labor, and if he does work, he is poor because he can’t keep his full wage.

Primal man could get housing by going into the field to gather some sticks and fronds and build a house at the edge of the village on free land. The 21st-century homeless unemployed man gets some cardboard out of a garbage bin and builds himself a little house in a vacant lot, but is then fined for trespassing and for violating the building code.

Humanity has advanced from primal times when there was full employment and unlimited housing to the 21st century world of high technology where over a tenth of the population has been locked out of employment and can’t find a place to live. The modern world has more natural resources than the ancient world, because modern technology can make greater use of natural materials. Employers should be screaming for more labor. Instead, we have workers crying because they can’t get job, even while factories languish. Folks can’t find housing, while millions of homes sit empty.

There is in nature no reason for unemployment. Human desires are unlimited, so there is always a demand for something. The only reason an unemployed carpenter cannot trade with an unemployed tomato grower is that some force has imposed a barrier preventing them from trading tomatoes for chairs. The only agent that has the power to prevent trade is government.

Government imposes restrictions and costs on enterprise and labor, requiring expensive permits, licenses, badges, and taxes. Primal man had access to communal land, but modern man has lost free access. It goes back to conquest, as the land was taken by the war chiefs and then the peasants had to pay rent plus taxes.

The land title holder exclaims that he bought the land with his own money, so why should he not have exclusive access? In olden days the slave owner too claimed that he bought the slaves with his own money, so he is entitled to the gains from their labor. Religious folks go to church clutching their Bibles, in which it is written in Ecclesiastes 5:9, “the profit of the earth is for all,” but when this is pointed out, they instantly become atheists.

The role of the economist gurus in the summit is to declare to the media, “The issue is complex. There are no easy answers.” That leaves the government blameless.

But the economic answer is clearly evident. We can restore full employment by going back to the rules of primal economies. Let anyone go into the field and apply his labor freely. We cannot now have unlimited access to natural resources, but we can have the possessors compensate the rest of society for exclusive access. The righteous market, with unchained labor and an equal sharing of nature’s bounty, will eliminate unemployment.

Subsidies to landowners, including cheap credit, generated the real estate bubble that burst and made workers lose their jobs. Instead of preventing the next boom and bust by shifting taxes from wages to land rent, the jobs summit will propose low-interest loans to business, and limited tax credits. But land rent will rise to absorb the gains, and there will still be imposed costs in hiring labor, so in the end, the proposals of the jobs summit will fail.

US GDP 3rd Quarter 2009

2009-11-08T08:27:00.000-08:00

The U.S. GDP, measuring the output of the economy, was reported at $14.3 trillion as of October 31, 2009. In the third quarter of 2009 (July, August, September), the annualized growth rate was 3.5 percent, in contrast to a .7% decline in the second quarter.

The recession has ended for the U.S. economy. A recession is a substantial fall in output. The economy is still depressed, but no longer receding. On April 30, 2009, my article “The Second Derivative Turns Positive” stated that the rate of economic decline was decreasing, which would later end the recession. So it has come to be. The big rise in the stock market after March 2009 reflected the coming end of the recession.

Let’s examine the GDP data to see the particulars. Consumption increased by 3.4 percent, with the durable goods expanding by a whopping 22.3 percent. People were buying many more cars and home furnishings, but much of this growth was artificial, due to the credits offered by government to buy cars and houses. To some extent, this just accelerated some purchases by those who would have bought later.

In the long run, paying people to buy new cars and then destroying the old ones is a big waste of resources. Sure, GDP goes up, but it would be better just to give people money than to destroy valued resources. The “cash for clunkers” program is like breaking windows so that we can make work producing new windows. The French economist Federic Bastiat famously wrote about the “broken window” fallacy that still seems to fool the public.

Private investment increased by 11.5 percent. This refers to economic investment, an increase in the stock of capital goods, not financial investment in shares of stocks and bonds. There was an especially large increase of 23.4 percent in the construction of residential real estate, after having fallen each quarter from 2007 until 3rd quarter 2009. But that too is somewhat artificial, as the federal and state governments have propped up real estate with tax credits and other benefits.

Exports also contributed to growth, after declining in the previous four quarters. Expansion in foreign countries created a greater demand for U.S. goods and services. Not surprisingly, federal spending increased also, by 7.9 percent. National defense spending increased by 8.4 percent, after having also risen in the second quarter. This increase in federal spending comes from borrowed money, and will cause problems in the future. The U.S. dollar has been sinking while gold rose to new heights as measured in current dollars.

The big question now is whether the expansion will continue, or else whether output will again decline, creating a W-shaped double recession. W-recessions are uncommon, but the government could push the economy back down if it enacts steep increases in income taxes. There is already legislation to impose a “surtax,” an increase in the top income tax rate, of 5.4 percent to pay for expanded federal medical care. In addition, the tax cuts enacted at the beginning of the decade are scheduled to expire in January 2011.

The “cap and trade” proposal for pollution is in effect a tax on production, and the minimum wage increase of July 2009 was in effect a tax increase on employers. The higher minimum wage raised the teenage unemployment rate from 24 to 26 percent, and for black teen males, the unemployment rate went up from 39 to over 50 percent.

Instead of “cap and trade,” Congress could enact a revenue-neutral “green tax shift,” a tax on pollution offset by lower taxes on income. Industry prefers the permits, which would trade in a market that could be manipulated as holders game the system. It’s a great way for the big firms to stifle competition from new small start-up firms that would have to buy permits from the established big firms, the permit cartel, at inflated prices.

There would be futures markets, options, guarantees, and other derivatives on the pollution permits, and speculation that would pull the permit prices up. Loans to buy permits, followed by a crash in the prices of permits, would bankrupt banks and insurance companies. But don’t worry, the government would bail out the big players.

The wealthiest few percent of the population already pay a great portion of the taxes, and this becomes a narrow tax base that can flee, hide, and shrink. Already wealthy individuals are looking at exit options. Latin America, for all its problems, becomes more attractive as the state and federal governments increasingly prey on the rich.

Most people, and even most economists, have not realized that the rich get much of their tax payments back in the form of higher rent and land value of their real estate holdings. But if taxes rise too much and the funds are spent for transfers that make the economy less productive, the rich will no longer get back more than they paid in, and we can then watch as economic investment and production flee and hide from the tax man.

If we gave people an explicit choice between shifting taxes to land value and pollution, or an even worse economic collapse years hence, would folks choose the collapse? Because by not doing the tax shift, in effect they are choosing disaster.

Capitalism: a brilliantly confused story

2009-10-22T06:13:00.000-07:00

What is “capitalism”? It is the free market. It is private enterprise. It is a label for the economies of the world. It is the mixed economy, government plus market. It is the practice and doctrine of governmental interventionism. It is the exploitation of labor by the big owners of capital. It is the source of our economic problems. All of these have been used to describe “capitalism.”

And that’s the problem; the term “capitalism” has no specific meaning, and has had contradictory meanings. Consider the following propositions:

1. The U.S. economic system is capitalism.

2. The U.S. economy has social problems such as poverty and unemployment.

3. Therefore, capitalism causes such social problems.

If “capitalism” in the first proposition means merely a label for the economic system, then the third proposition is meaningless, since a label does not tell us the cause of social problems. These propositions are the heart of the film Capitalism: A Love Story by Michael Moore. What is really going on in this brilliant but confused critique of “capitalism” is a sly shift in meaning. In the first statement, “capitalism” means private enterprise. In the third statement, “capitalism” means the actual economic system, which consists of a mixed economy.

The propaganda message is that private enterprise or the “free market” causes our social problems. It seems like a logical argument, but the logic is invalid, because the term “capitalism” has two quite different meanings in the first and third statements.

In the film Capitalism: A Love Story, Michael Moore provides many examples of governmental abuse and of colossal subsidies to financial interests. There is a judge who sent harmless teenagers to long terms in a private juvenile prison, having received payoffs from the private firm, and he calls this “capitalism.” He brilliantly depicts how Congress was bribed and panicked into giving away hundreds of billions of dollars to bail out the chiefs of finance. That too is “capitalism.” But it is hardly free enterprise.

Moore comically seeks to arrest the chiefs and get our money back, but why not also arrest their benefactors in Congress, who gave them the money? Moore shows how the financial industry handed millions of dollars to legally bribe members of Congress, and how the financiers became the chiefs of the U.S. treasury. We can see more clearly what is going on if we use this definition for “capitalism”: Capitalism is the control of government by the big landed interests and their financial-capitalist partners in order to obtain subsidies and other privileges.

The term “capitalism” has been the most successful propaganda term in human history. First, the word slyly puts the blame for social problems on a non-existent “free market” and not-so-private enterprise by shifting the meaning of “capitalism” as discussed above. But even more importantly, the term “capital” masks the underlying and more fundamental interest that receives governmental privileges: real estate, and more specifically, the big landowners.

If you want to understand the economic policies of governments world-wide, and the main cause of social problems, it becomes clearer if you grasp this proposition: The main purpose of government is to serve the big landed interests.

The U.S. government has subsidized and protected the big landowners from the beginning of its history. Land speculators were chief among the interests who promoted the American revolution, so that they could grab the land beyond the Appalachians. Landowners promoted the adoption of the U.S. Constitution to strengthen the central government so that the native Indians could be more effectively removed. The U.S. government then gave away millions of acres of land to the railroads and to land speculators. Only a small proportion of the land stolen from the Indians was homesteaded by settlers (see my article on “Ground Rent Seeking in U.S. Economic History” at )

Tax advantages given to real estate owners include deductions for property taxes and interest, tax-free capital gains, tax-free trading of property, and the deduction from taxable income of legal-fiction depreciation. But the biggest subsidy to landowners is implicit: it is the enormous increase in land rent and land value due to the public goods provided by government. Streets, parks, security, schooling, transit, etc., all make land more attractive and productive. The rich pay high taxes, but they get it back, and often much more, in higher land value. Taxes fall most heavily on the middle class, as the state tax-confiscates about half the wages of a typical worker, including the taxes the pay when from their remaining wages they buy taxed goods.

Michael Moore depicts the tragedy of folks losing their homes, jobs, and money, but he does not delve into the cause of such problems. The economist Henry George put it well, when he wrote in his book Social Problems, “There is in nature no reason for poverty.”

Land is a creation of nature, not human action, and its value comes from natural features and the population, commerce, and public works of the community. Land rent is a pure surplus that mother nature offers to us as a gift by which to finance the public goods provided by government. But you have rejected mama’s natural offer. Instead, you, by voting for the status quo governmental chiefs, you attack the earnings of labor, and with that loot, you provide public goods that pump up land rent and land value. Yes, you, the voter!

What happens then is that rent absorbs much of the gain from economic expansion and progress. Speculators jump in to leverage profit from the land-value rise. Landowners buy land with borrowed funds, so they engage their partners, the banks and other financiers. To further boost land values, the U.S. government sponsored Fannie Mae and Freddie Mac to buy mortgages and then package them into securities sold to hedge funds and other financiers. Thus the financial sector has created mountains of debt and derivatives ultimately grounded in land value.

But land has no cost of production. Its price can fall to zero, and the land will still sit there. Speculation raises land values to peaks unaffordable for actual use, and then land values plunge, and the leveraged mortgages and derivatives crash. That is the source of panics and depressions.

There is only one remedy for the boom-bust cycle, and that is to stop subsidizing real estate. Tax most of the rent and land value, so that landowners pay back value received, and stop taxing labor and enterprise. Wages would rise and land values would fall, and then houses would become affordable. The mortgage would be only on the building, not on roller-coaster land values. The financial superstructure based on land values would disappear.

None of this explanation appears in the film “Capitalism,” and if it did, we would see clearly how empty, how meaningless, how deceptive, how confusing, and what a tragedy it has been to use the term “capitalism” as if it meant or explained anything. A “love story”? The meaning is ironic, but confusion goes way beyond irony, as policy folly has not only caused human misery but is now catapulting the global economy into yet another boom and bust sequence that, because bailouts will no longer be possible for tapped-out governments, could really end in the collapse of civilization.

Tax Reformers Propose Fiscal Suicide for California

2009-10-04T07:43:00.000-07:00

California’s governor Arnold Schwarzenegger by Executive Order S-15-09 created a Commission on the 21st Century Economy to propose reforms for California’s public finances. The Commission has 14 members, including prominent economist Michael Boskin.

The aim of the Commission is to establish a “21st Century tax structure” that reduces the volatility of the state’s revenues, promotes prosperity, reflects “principles of sound tax policy including simplicity, competitiveness, efficiency, predictability, stability, and ease of compliance and administration,” and that is “fair and equitable.”

The Commission’s proposed tax plan has the following elements, to be implemented in 2012. (Go to meetings and find under “documents” of Sept. 10, 2009, “Description of the Tax Packages” and “Descriptive Information about the Proposed Changes to the Personal Income Tax” and “Updated version of the Business Net Receipts Tax Description.”)

1. The personal income tax would be restructured to reduce the tax brackets from six down to two. Many tax credits and deductions would be eliminated. The top tax rate would be reduced from 10.3 percent to 6.5 percent.

2. The corporate income tax would be eliminated.

3. The sales tax would be replaced by a business net receipts tax. The tax base would be gross receipts minus the purchases of goods, in effect a value-added tax, not including the value added by employee labor.

4. The state would increase its “rainy day reserve fund,” with greater limits on spending it.

The simplification of the state’s income tax and the reduction of its top tax rate would be very good for the state’s economy, and an increase in the states’s “rainy day” fund would also be beneficial. However, the proposed net receipts tax would promote fiscal suicide.

A receipts tax means a tax on the revenue of a business, in contrast to an income tax on the profit, or revenue minus costs. A net receipts tax is better than a gross receipts tax, but it still taxes the revenue of a firm rather than its profit. Even if a firm is losing money, it would still have to pay a tax. Even if the revenue minus the cost of goods purchased is positive, the firm would have a loss if its labor expenses are greater than the revenue net of purchases.

A value-added or net-receipts tax is applied to each stage of production, such as taxing the production of wheat, then flour, then bread baking, and finally the bread selling. European countries have adopted the value added tax because they can then easily subtract it for exports, giving them an artificial competitive advantage to the USA, which is not allowed to provide a tax break for its exports, under the rules of the World Trade Organization.

There is little economic gain from switching from a sales tax to a net receipts tax, and there is an economic loss switching from a tax on corporate profit to a tax on revenue, since the income tax only taxes net gains. Also, the elimination of the corporate income tax would provide a privilege to corporations relative to individually-owned firms subject to the personal income tax. The retained earnings of corporations would be tax free, while a partnership or single owner would have to pay both the net receipt tax and the personal income tax.

Public-finance economist Mason Gaffney has analyzed the quantum leap effect of a receipts tax. In physics, a quantum leap is a sudden large change in energy. The economic analogy is a large change in production when land use changes.

Many firms that operate in national or global markets cannot pass on a sales or receipts tax to the customers. The tax burden is entirely on the profit of the firm, and if it were making only normal profits or less, the tax would wipe out the profitability of the company, and it would then shut down. If the site of the firm were being used in its most productive use before the tax, then the firm that replaces it generates less production, even if it is better able to pay the tax by passing it on to customers.

Therefore the receipts tax result in a quantum leap downward of less production, less investment, less employment, less growth, and less tax revenues. It is fiscal and economic suicide. We cannot know what enterprises would have arisen if not for the tax, but the deadweight loss is much greater than the standard analysis of the excess burden from passing the tax on to consumers, reducing some but not all of the output. The quantum leap effect completely wipes out the firm or even an industry.

Why did the geniuses of the Commission on the 21st Century Economy propose a net receipts tax? Because they dare not propose to reform the state’s dysfunctional property tax. California’s Proposition 13, passed and constitutionalized in 1978, reduced the real estate tax to one percent of purchase price with a maximum annual increase of two percent. The homeowners of the state have become allies of the large landed interests to oppose any change to Proposition 13, which has become California’s state religion, holier than God.

If the Commission were true to its aims, it should have proposed an efficiency tax shift, the replacement of the state’s income, sales, and property taxes with three truly 21st century revenue sources: a pollution tax, a levy on land value, and user fees. These would have no deadweight loss, and the quantum leap of that tax reform would be a volcanic eruption of growth, employment, and higher wages.

If you would like to comment on the Commission’s proposal, go to its contacts site and tell them what you think of their proposals and what you think would be better. You might first look at the already received, but it will not hurt to have more voices in favor of an efficiency tax shift!

The "Cap and Bribe" Folly

2009-09-12T08:01:00.000-07:00

There is a movement in government circles to bribe less developed countries into accepting limits on their pollution. A document of the G20 Climate Finance Experts Group (http://www.docstoc.com/docs/10460977/document_cw_04) call upon the wealthier developed countries to give environmental protection money to the governments of developing countries.

Congress and the Obama administration are assembling a “cap and trade” law that in effect is a tax on pollution. Some are thus calling it “cap and tax.” The total amount of pollution will be capped with an upper limit, and companies will buy pollution permits in order to be able to produce and pollute. This will amount to an enormous tax on production.

A pollution tax would not harm the economy if it were revenue neutral, so that income taxes would be cut by the amount of the pollution tax, Indeed, such a “green tax shift” would benefit the economy, since income taxes have a deadweight loss, a burden on the economy beyond the tax burden. In contrast, pollution taxes do not have this excess burden, since the tax shift removes the social cost of the pollution, in effect removing the subsidy to polluters.

But no! The cap-and-trade being enacted by Congress and pushed by the executive branch will not be accompanied by an equal income tax reduction. Just the opposite: the Obama administration seeks tax increases on upper-income families and businesses. Moreover, the cap tax will be imposed on everybody, rich or poor.

Now comes word that instead of using the pollution tax revenue to reduce punitive income taxes, the cap tax will be used to bribe developing countries to reduce their pollution. This bribing is completely unnecessary. China, India, Indonesia, and all other developing (or not developing) countries can efficiently reduce their pollutions with a green tax shift, a tax on pollution offset by reduced taxes on income, value added, goods, and trade.

Pollution control is mandatory if humanity is to survive, but the way that governments world-wide are going about it is astonishingly insane. Regulations, cap and trade, and subsidies have not worked, as the plundering of the planet may be accelerating, not slowing. An example is the huge and growing mess of plastic litter amassing in the Pacific Ocean.

The solution is so simple, that a 5th grader would have no trouble understanding it. Just punish the polluters with a stiff charge equal to the cost of the damage. There is no need for a complex “cap and bribe” system. Just send the polluters a bill. They will then decide whether it is cost effective to keep on polluting, and if they do pollute, they will have compensated society for the social cost.

There is no need whatsoever to bribe less-developed countries to reduce their pollution. They too can have green tax shifts. They refuse to do so because they seek to extort bribe money from the USA and the European Union. The more developed world should refuse such extortion.

The chiefs of China know they need to reduce their pollution, since China is slowly poisoning its economic base. China is committing slow suicide by ruining its rivers, contaminating its soil, expanding its deserts, and choking on air pollution. China is on a rise and fall parabola path. But the prospect of multiple billions of dollars extorted from the USA prevents the Asian, African, and Latin American chiefs of state from confronting their pollution problem. The prospect of cap and bribe is increasing rather than reducing pollution.

If you think the angry reaction of some Americans to the socialization of medical care is worrisome, wait until the American public becomes aware of the cap-and-bribe policy. Americans will turn against pollution control, revolted by the prospect of giving away billions to China and India, when Asians already hold trillions of dollars from the trade deficit. This will set back pollution control, leaving wide open the path to an earth-destroying climate catastrophe.

A Free Market in Medical Services

2009-08-02T09:35:00.000-07:00

There are two directions for the reform of the U.S. medical services systems. One is towards welfare statism, the control of the medical system by the federal government, and the other is towards economic freedom, providing individuals and families a free choice in medical care.

Economic theory points to a pure free market providing the most productive and equitable economy and therefore medical services. Central planners lack the knowledge to efficiently allocate resources, and politics skews the outcome towards special interests.

Here are the reforms need to have a really free market in medical services:

1. Reform tort law. In lawsuits, the law should make the loser pay for the legal costs of the winner. If a patient sues a doctor and loses the lawsuit, the lawsuit should not impose legal costs on the innocent doctor. That would greatly reduce medical costs.

2. Legalize medical drugs. There would be no restrictions on medical drugs, including medical marijuana. The FDA could require warnings and information, but not ban any medicine.

3. Make taxation medically neutral. Given the current income tax, medical benefits should be subject to the same taxes as money income. Medical expenses should be tax deductible. So a $5000 medical benefit would be subject to the income tax, but the $5000 payment to either medical expenses or a medical savings account would be deducted from taxable income, leaving the income in effect tax free. Since there would be no tax advantage to employer-provided medical insurance, the system would shift away from that, towards individual responsibility.

4. Protect against genetic and childhood problems. Parents incur a moral responsibility when they choose to create a child. Parents would be required to buy genetic medical insurance for their children before they are born. This would be a lifelong coverage for any medical problems the child is born with. Parents would also be legally required to provide medical services for their children up to the age of adulthood (18 years of age), and these policies would continue to cover problems acquired during childhood. That solves the pre-existing medical condition problem.

5. When a child becomes an adult, he would be automatically be enrolled in a standard catastrophic medical insurance program created by a consortium of insurance firms, paid for by the individual. If one wanted to, one could quit the program. By default, most people would have protection from severe illness and injuries.

6. As a substitute for commercial insurance, people would create “friendly societies” or cooperative mutual-aid organizations to provide themselves with medical services, just as people create credit unions for mutual financial services. These societies would encourage good health and provide genuine health care, with discounts for exercise, healthy diets, and not smoking.

7. There would be a constitutional “law of the market” which would require that all products be safe, healthy, effective, and environmentally friendly, unless stated otherwise. The public would be warned that the excessive consumption of meat, fat, salt, sugar, and white flour ruins their health. They would be warned that crop monoculture, pesticides, and excessive fishing and tree cutting are destroying the earth’s ecology.

8. Medicare, medicaid, and other federal welfare programs for the aged and poor would be replaced by vouchers for medical services, paid for by the states. All legal residents would get a voucher. The voucher would pay for the standard catastrophic medical insurance program or other medical expenses. That solves the medical care affordability problem. Such vouchers would not be needed in a completely free market, since a pure free market would make labor tax free and abolish poverty, but given the current system, with its poverty, vouchers would take us to the frontier of a free medical market in medical services.

9. Adults who refuse to purchase medical insurance would be legally responsible for any medical expenses they incur beyond that paid by the medical voucher. Bankruptcy would not eliminate this liability.

10. Schools would be encouraged, and governmental schools required, to teach good nutrition. That would include the benefits of a whole-plant diet, moderate sunlight for vitamin D, and what is known about vitamins, herbs, minerals, enzymes, and other supplements.

11. For optimal health, there would also have to be policies to reduce environmental pollution, including pollution from discarded and flushed medical products. All levels of government would have polluter-pay policies, so that pollution would be subject to either lawsuits or pollution charges. A pollution charge would be required to be paid by local agencies which do not fully neutralize medical waste.

12. A pure free market in medical services would have to include a free-market fiscal policy. Taxes on production, consumption, and exchange would be replaced by levies on pollution and land value. Higher wages, and keeping one’s full earnings, and lowering costs, would make organically-grown food, adequate housing, and protective medical services that much more affordable.

These twelve reforms would greatly reduce medical expenses, respect the right of individuals to choose their services, and fix the problems that now make medical services a sick system. Otherwise, if the USA treads the path of central planning, the result will be governmental rationing that will both deny choice and inflict suffering on those unlucky persons whose medical conditions the medico-bureaucrats decide are not worth treating.

Pope says private enterprise should correct government failure

2009-07-14T06:16:00.000-07:00

In July 2009 Pope Benedict XVI published “Caritas in Veritate” (Charity in Truth), his first papal encyclical on economic policy. He criticizes the concept that the goal of private companies should be to benefit the owners, such as the shareholders of corporations. The pope notes that the global economy has ruined the environment, generated great inequalities of wealth, and brought about a global depression.

The pope does not advocate state socialism, but rather calls on private enterprise to have as goals also the well being of society. Firms mush pay attention to the moral consequences of their decisions. What’s wrong with that?

Regarding pollution and other environmental destruction, since the atmosphere and oceans have no private owners, they are owned by the people, and governments have assumed the role of agents for the people. Thus governments have the moral obligation to charge polluters for the social cost of dumping waste into these areas. When they do not levy pollution charges, then they give the polluters an implicit subsidy.

If government subsidizes an activity, we get too much of it, more than is optimal. One cannot blame private enterprise for accepting the pollution subsidy. If folks don’t like the pollution, they should tell their agent the government to stop the subsidy.

Now comes the Pope saying that business should not maximize profit, but incur the cost of polluting less, even though government is offering a subsidy to pollute. In effect, the pope is saying, don’t take the subsidy. But that’s not the way the world works. Firms are in competition, and a firm that has a lower cost will have a competitive advantage. So firms will minimize costs by accepting the pollution subsidy from the state. If firms got together and agreed to all pollute less, governments would accuse them of collusion and impose heavy fines.

The pope wants firms to pay their workers more and to help the poor. Some firms indeed do charitable works, but why is there poverty in the first place? Economies with greater economic freedom, such as Hong Kong, have lifted their populations out of poverty, while those with little economic freedom, such as North Korea, have stayed poor or, like Zimbabwe, gotten poorer. Poverty can be extirpated, removed by the roots, with free trade and a free market.

Remove taxes from labor, enterprise, and goods, and shift them to land value. That equalizes the benefits from natural resources, removing the root cause of poverty. But the pope is not advocating this. His policies let government perpetuate poverty, and then he calls on private enterprise to correct this government failure. Maybe this is one of those religious mysteries.

What about the Great Recession, financial crash, and economic gyrations? Governments control the money supply, push interest rates around, and subsidize real estate, thus creating the booms and busts. The pope wants private firms to correct this also.

Why does the pope not call on government to reform itself, to stop subsidizing pollution and land values, and to stop penalizing labor with restrictions and taxes? Why does he not prevent the problems rather than let them happen and get business to mop up?

I don’t know why the pope condones government failure and then blames private enterprise. But I do know that the social reformer Henry George wrote about how we can apply on earth the economy in heaven. In his speech “Thy Kingdom Come,” George asked how land would be allocated in heaven. Would the first resident claim all the land and charge the others rent? Heaven forbid! All angels and other heavenly residents would share equally in God’s creation, and so God’s will on earth as it is in heaven is that the profit of the earth be equally for all.

But the pope did not say anything like that. He lets the profit of the earth go to corporations, and then asks the corporations to give the earthly profits back to the people. Why not let the profit of the earth go directly to the people in the first place?

It may well be church authorities and not God that work in mysterious ways.

Mass Democracy Fails in Iran

2009-07-09T18:52:00.001-07:00

The protests about the election for president of Iran, and the violent response of the government, do not just indicate a problem with the vote count, but more deeply a problem with mass voting. Among its many flaws, mass voting is vulnerable to miscounting and election fraud.
If the government is in charge of counting the ballots, there is a temptation to skew the results in favor of the ruling party. This has occurred worldwide. Election results have been suspect in Zimbabwe, Kenya, Mexico, and many other countries. As we know, in the USA, the Florida vote count for president in 2000 was controversial, and there were questions about the vote count in Ohio in 2004.

Mass democracy creates a need to use the mass media to get attention and create a favorable image, but these messages can be misleading. But there is no way in mass voting for the typical voters to know the candidates personally, and there is little incentive for most voters to become well informed.

The opposite of large-group voting is small-group voting. People can know their candidates personally if they vote in a tiny group, such as in a neighborhood of about a thousand persons. Suppose in Iran the people only voted for a neighborhood council. There would still be factions and parties, but one could personally question and know the candidates. There would be candidate forums, and it would be inexpensive to distribute literature. Money could still be spent, but it could be effectively countered with personal communication.

The neighborhood council elections would use paper ballots, not machines. All machine voting is vulnerable to manipulation, and it is impossible to have a perfect test of any machine vote counting. With paper ballots, the counting would take place in public, and could be witnessed by anybody. The voting itself could be witnessed, as anybody could watch the voters go into booths and place the ballots into a box. As soon as voting ends, the ballots get counted. Thus election fraud could be minimized.

Even if, despite these safeguards, voting fraud takes place, it would be within one neighborhood district. Massive systemic fraud would be difficult to carry out if people everywhere are watching. In contrast, when the ballots are taken to a government office with restricted access, outsiders can’t know how the ballots are being counted. If the votes are counted by machine, as is common in the USA, the counting is inherently secret. Nobody knows for sure what is in the black box.

Another type of election fraud is ballot stuffing. The ruling party puts in fake ballots, or has its agents adopt the names of dead people for fraudulent voting. In the neighborhood council vote, the locals can know who really lives there, and the representatives of the parties could double check the signatures and identifications, if they wish.

Since in small-group voting, the people only elect a neighborhood council, the next higher level of government, such as a city council, is elected by the representatives of the neighborhood councils. The city councils then elect the provincial legislature, and the provincial or state legislatures elect the national parliament or congress. The national representatives then elect the president of the country.

When the people vote for a president, this generates hero worship and demagogues. With the economy in shambles and the people suffering from crime, pollution, and restrictions on speech and religion, people look to their favorite candidate as a messiah, but it is impossible for any leader to achieve salvation, because the system of mass democracy is inherently dysfunctional.
With small-group voting, there is much less of a tendency to turn party leaders into gods. National salvation becomes rooted in the genuine democratic process rather than being thrust on the goodwill and competence of a hero leader. If the chief turns out to be not so great, the parliament can dismiss him and elect somebody else, without the trauma of impeachment.
The Persians made a big mistake when they a century ago copied the voting model of the United States and western Europe, of having the chiefs of state elected by the people. It would have been better to have copied the anarcho-socialist model initially favored by the Bolsheviks of old Russia. The term “soviet” means “council” in Russian. The original model of the Russian socialist was “All power to the soviets!” The Soviet Union was to be a union of councils.

Of course in practice, the Communist Party became the ruler in the Soviet Union. The people did elect the representatives to the soviets, but the candidates had to be members of the Communist Party. For a true small-group democracy, there should be no restriction on who becomes a candidate other than being an adult member of the community.

If Iran practiced small-group democracy, the elections results would achieve the aim of democracy, social peace. But then the current chiefs would quite possibly lose their positions. That is why Iran will continue with mass democracy. But what is the excuse in the USA, UK, and other long-established democracies? Why do we continue with the massive failures of mass democracy?

How Obama could be the Greatest President Ever

2009-02-15T07:04:00.000-08:00

A crisis is an opportunity for revolutionary change. Obama could become the greatest president ever, and fulfill the hopes he inspired, by making radical changes. He could put the economy on track to prosperity, reorient American foreign policy towards harmony, and refresh the American spirit of liberty.

The government could end the recession within three months with "money to the people." Congress would authorize the U.S. Treasury to print thousand-dollar bills, and give every U.S. resident six of them. That would be debt-free and would end the negative-feedback loop of higher unemployment creating ever less demand for goods, which then makes companies shut down and lay off workers. The recession creates economic lockjaw: banks fear to lend because companies are shutting down and workers are losing their jobs. Cash is the ultimate credit and the antidote to credit freeze. "Money to the people" is almost a free lunch, because the recession is causing deflation and fear of further price declines. Monetary expansion is bad medicine except in an economic depression with deflation, when it is a good tonic if given directly to the people, not to the risk-fearing banks.

For long-run prosperity, Obama should promote radical changes in taxation. Don’t tax the rich just because they have wealth. Instead, tax subsidies so that they are no longer subsidies. Polluters are subsidized if they do not pay the social cost of their emissions, so tax pollution. Landowners are subsidized from the increase in their rent and land value due to public works and civic services. Tax land value to eliminate this subsidy. A land value tax will make the economy more productive, as the land-value subsidy promotes inefficient uses of land and the excessive speculation that results in the boom-bust sequence we are suffering from now.

In foreign policy, Obama is confronted by the unsolved conflict over Palestine and the wars in Afghanistan and Iraq. Besides bringing home the US troops, Obama could promote a lasting democracy in Iraq by promoting an equal sharing of the oil profits, decentralized governance and voting, and protection for persecuted minorities. In Afghanistan, pay the farmers to grow alternatives to opium, and decentralize democracy to bring political power to the people.

Restore trade with Cuba. Stop promoting the war on drugs that is tearing Latin America apart with violence. Apologize for having overthrown the government of Iran in 1953. For the Arab-Israeli conflict, recognize an independent Palestinian state in which the Israeli settlers of the West Bank pay rent for the lands they hold. Most important, declare that American foreign policy will henceforth avoid interfering in the domestic affairs of other countries. Declare also that Americans are willing to talk to and negotiate with all adversaries.

Strengthen American freedom by promoting a constitutional liberty amendment: "Congress shall make no law restricting any peaceful and honest adult human action, not involving force or fraud, any state interest to the contrary notwithstanding." A first step would to be to legalize medical marijuana.

Obama has said he would confront the growing underfunded liabilities such as for Medicare and Social Security. A greater government takeover of medical services would compound the problem. The reason folks cannot afford medical care is because the money to pay for it has been take from them in the first place. Obama should separate the poverty problem from the medical problem. Make medical payments tax deductible, to unlock insurance from employment. Reform the legal system to having the loser in medical civil lawsuits pay all the legal costs. Then allow workers to opt out of medicare and provide their own medical care.

Obama could be truly great by getting welfare-state liberals to understand that state socialism cannot improve on the choice and productivity provided by a free market. Allow workers to switch from Social Security to individual accounts funded at first by U.S. Treasury bonds. That would replace the current Ponzi scheme with accounts that finance retirement from the worker’s own wages.

The global economy will recover from the Crash of 2008, but the massive bail outs and greater debt will cause problems far into the future. Where will the money come from for the coming trillion-dollar deficits? If it comes from money creation, the result will be inflation much worse than during the 1970s, and a global flight from the U.S. dollar.

There is a way out, but it requires the greatness of economic enlightenment. Establish sound money with free-market banking: stop the expansion of money by the Federal Reserve, and instead let banks issue private currency redeemable into Federal-Reserve-note money.

The US can reduce its trade deficit and borrowing from abroad with a radical tax shift that reduces the cost of exports, stops economic waste, and induces high economic growth. That is the tax shift described above. Stop taxing labor, goods, production, and investment. Instead, just remove all the subsidies, such as to pollution, to farmers, and to land holding.

Taxing land value and pollution, plus user fees, could provide sufficient revenue while eliminating the need to compensate people for denying them economic opportunity. That implies that there would be no more transfer payments: no more governmental payments for medical care and retirement. That cuts the budget in half while raising wages and reducing the cost of living.

These are the radical steps that could make Obama the greatest US president ever. If not, small change will be ineffective, hope will be lost, and America will continue on the path towards self-destruction. Can Americans make the revolutionary changes needed to avoid disaster? Obama has inspired many us with the answer. Yes we can! However pessimistic we feel, we can yet remain hopeful. That is the real audacity of hope.

I.O.U. an Answer

2009-01-13T06:30:00.000-08:00

I.O.U.S.A, a film about the U.S. debts and deficits, has been playing in theaters and on television. I saw it on CNN. The film’s website is http://www.iousathemovie.com. The producer, the Peter G. Peterson foundation, has the web site www.PGPF.org, where you can view 30 minutes of the film. The movie explains how the U.S. government debt has escalated, and also discusses the trade deficit and touched on the savings deficit and the "leadership deficit."

With many visual effects and interviews, the show explained how the unfunded liabilities for Social Security, Medicare, and Medical are the biggest elements of federal debt, and these deficits - promises not backed by funding - threaten the viability of the U.S. economy.
Despite the show featuring prominent economist and past government officials, the film lacks answers to the deficit problems. The only specific remedies are on Social Security, in which the answers suggested were to raise the age for full benefits, reduce the rate of growth of payouts, and increase taxes.

The film does not discuss the alternative of replacing Social Security with private accounts that would hold U.S. treasury bills. Such accounts would provide a greater retirement payout, and since the funds would belong to the individual, he would be able to borrow against it in an emergency. Today’s Social Security account is not your money until you actually receive it, and how much you receive depends on how much Congress wishes you to get.

There were no remedies provided for the biggest entitlement problems, Medicare and Medicaid. As the population ages, the Medicare costs of treating the elderly is escalating, and without changes, will dominate the federal budget. The film also had no answers to the trade deficit and the savings deficit. Maybe the new administration will at least end the leadership deficit.

One can ask, why no answers? Over and over again, the film talks about the problems, but provides no solutions other than for Social Security. The aim of raising awareness of the deficits is good, but the film fails when the viewers are left hanging there with no remedies.

It seems to me that possibly I.O.U.S.A. lacks answers because the producers don’t have them. Another reason for the lack of remedies is that they would be unpopular. To reduce the Medicare deficit, one needs to reduce the benefits, to change it to only insurance for catastrophic expenses. But that would be unpopular with those receiving Medicare benefits, and might result in criticism for the film. So they are silent on the remedies.

The film has been compared to the movie "An Inconvenient Truth" by Al Gore, about climate change. It is a good comparison, because "'An Inconvenient Truth" also lacks meaningful remedies such as pollution charges. Perhaps there too, answers would reduce the popularity of the film.

Of course the general answer to a budget deficit is to reduce spending and raise revenue. But that is not a real answer. We need to analyze which programs would be reduced, and which would be the sources of new revenue. Without specifics, there is no real answer.

The effectiveness of remedies depends on how radical you want to get. The more effective the remedy, the further one needs to go away from the status quo. For example, one can reduce benefits in Medicare, but that leaves the elderly with insufficient medical care. The elderly do not have sufficient funds for care because of the high expenses and lack of savings. They lack savings because taxes have drained their wages of funds that could have been saved. If taxes for Medicare go up, then that leaves even less for savings, and can reduce the incentive to work.

These deficits come from deep flaws in the structure of taxation and government, ultimately from flaws in the constitutions of the federal and state governments. The incentive of government chiefs is to please the voters and the special interests that fund their election campaigns. People like benefits such as medical care, and they don’t like to pay taxes on their wages. So the inexorable incentive is for government to provide benefits and push the cost into the future. The special interests provide needed campaign funds in exchange for favors such as trillions of dollars to bail them out of their failed financial speculations.

The U.S. Constitution endows Congress with the general power to tax and to borrow. That was a big mistake. Congress should have authorized Congress with the power to tax only land value and harms such as pollution. The Constitution should authorize Congress to borrow only for productive investments, not for consumption spending including military expenses.

With no taxes on wages, folks can then save much more, and they would have more incentive to save with no taxes on interest and dividends. Higher wages would enable folks to buy their own medical insurance and retirement insurance. Federal entitlements could then be scrapped. But such remedies are radical, and I.O.U.S.A. did not seek radical answers. Indeed, the film favors keeping Social Security. But status-quo thinking is what got us into the deficit mess.

So, unfortunately, this well-intended film will become part of the problem rather than the solution, because without answers, the film crowds out attention that could have been placed on the remedies. The deficits are deep problems, and only radical remedies can extirpate deep problems.

How to Make the new Year Better

2009-01-01T10:48:00.000-08:00

Many economists and financial analysts are making conjectures about when the recession will bottom out and how strong the recovery will be. The speed of recovery depends on the policies of government world wide. With the best policies, the economy could recover within three months. With bad policies, such as occurred during the Great Depression, the economy could stay down for years.

One bad policy that made the depression worse was the erection of trade barriers. The US enacted a high tariff in 1930, and other countries also restricted imports, and world trade broke down. Companies that sold goods abroad could no longer stay in business. Farmers suffered as foreigners could not buy their crops.

Unfortunately, many countries today are repeating this policy error. The German philosopher Hegel was right when he observed that governments do not learn from history. Indonesia is requiring new licenses and taxes for imports. Russia has raised tariffs on imported cars and food. India has levied a tariff on imported soybean oil. The chiefs of each country think that they are protecting their home industries, but they are ignoring the lessons of the Great Depression, as trade limitation is contagious. If political pressure induces them to do something, a money subsidy is preferable to a trade barrier, since that does not distort prices as much.

Another policy failure during the Great Depression was higher taxes. Government revenues are down during the recession, but raising income taxes just makes more companies fail, and then more workers are thrown out of work. Governments stupidly raise their existing income, sales, and value-added taxes, instead of following the economic wisdom of taxing bad things such as pollution.

Governments can make the new year better by enacting optimal supply-side and demand-side policies. Supply side policy seeks to increase the supply of goods by reducing government-imposed costs. Governments can reduce excessive regulations such as the Sarbanes-Oxley law that imposes millions of dollars of costs on company accounting for little benefit. Governments can also reduce marginal tax rates, the tax rate on additional earnings.

In Obama’s presidential campaign, he sought to tax the rich more. Those with higher incomes do much of the investing and hiring of workers. Such tax increases should be avoided, and the tax cuts of the early decade should be made permanent. Aside from pollution taxes, if government chiefs seek more revenue, they can levy a tax on land value. The tapping of land rent for public revenue would, contrary to other taxes, push the economy towards greater production, since an underused plot of land would pay taxes based on its most productive use. A tax on land value is the ultimate in supply-side policy, especially when combined with a reduction of taxes on wages, goods, trade, and value added.

Critics say that since a tax on land value would make the price of land fall, this would make the real estate crash even worse. Many more properties would be worth less than the mortgage. But the best time to do this is when land values have already fallen, not when they are rising and peaking. During a boom, real estate interests oppose a land value tax spoiling the party. So there is nothing to gain by waiting for land values to rise before levying a tax. Do it now.

In an efficiency tax shift, eliminating taxes on wages, profits, sales, and value added, replacing them with taxes on pollution and land value, most folks would have net gains. The greater tax on the land value of a typical house would be less than the eliminated tax on the building, wages, and income from savings and investments. Those with net losses could be compensated with either money or bonds. The bond would be repaid by the volcano explosion of output as the unshackled economy would sprout up at rates we cannot imagine today. It would make the recent growth of China look like a snail’s trek.

But economic emergencies may well also warrant demand-side policies. The usual policy of money expansion does not work in a depressed economy. The central bank buys bonds and creates the money to pay for them, but the money just sits in the banks as reserves or government bonds, as the risk of lending is high. The usual policy of government spending also does not work well. Public works such as highways bridges take time to plan and only employ particular types of labor, often at the expense of other projects. The best demand-side policy is "money to the people." Print currency and distribute it equally to everybody. People will then buy stuff, pay off debts, and add capital to banks. Moreover, printing the money would be debt free.

As to monetary policy, enough already! When will central bankers understand that their policies are futile and create more trouble down the road? There is no scientific way to know the precise optimal money supply or interest rate. The manipulations of central banks and governments do not allow interest rates to do their job of allocating funds between consumption and investment, between the future and the present, between savings and borrowing. Central banks should freeze the national currency and let private banks and other institutions expand the money supply in the future, with bank notes and deposits convertible into the national currency.

Car makers are losing billions of dollars, and seek subsidies so that they can continue to loose money rather than recognize their bankruptcy. This may seem shocking to free-market guys, but better than pouring unlimited money down the drain, better than loans that cannot possibly be paid back, would be to nationalize the automobile firms. Folks would then not be scared off from buying cars, and millions of workers would stay at their jobs. Let the value of the shares and bonds fall to zero. Then the government could restructure the companies and sell them off. These companies and unions committed deception in the past by promising pensions that were not funded. Nationalization would be their well-deserved punishment.

To make the new year much better would require radical changes. Now is the time when people want and expect change. The question is whether the new administration will offer small and ineffective change, or the bold, radical, volcanic changes that would quickly turn the economy around and provide not just hope but the reality of prosperity, social peace, and economic justice.

How to Extirpate Poverty

2008-12-21T10:46:00.000-08:00

To “extirpate” means to complete eliminate, from the Latin word meaning to pull out by stem and root. To extirpate poverty means to eliminate its cause, so that it does not come back. Fundamentally, poverty comes from a low wage level, so we need to examine what makes a wage level low.

The wage level of an economy can be thought of as the wages paid to unskilled people. Those with greater skill and talent get higher wages, so some think that the solution to poverty is better education. But a stagnant economy also depresses the return to human capital, the extra wage for those who are more productive. In a thriving productive economy, even those with few skills are better off than skilled labor in a depressed economy. Indeed, in an unproductive economy, those with skills often find little market for their human capital.

The wage level of an economy is set by marginal labor, those who work at the least productive land in use. The classical “law of wages” says that when workers are mobile, the wage at the margin of production will set the wage level for the rest of the economy.

The margin of production has several edges. There is the horizontal extensive margin of land that is just barely worth using, land so unproductive it fetches no rent. There is the vertical extensive margin of the space above a city, into which taller buildings can rise, without increasing the site rent. There is also the intensive margin of adding more workers to land already being used. The wage at the intensive margin will equalize to that of the extensive margin. Workers are paid what they add to production, which is called their marginal product.

As explained by the economist Henry George in his book Progress and Poverty, the margin of production moves out farther and faster to less productive land when people can hold land even if they don’t use it. Those who want to use land must then push the margin to less productive land, which lowers the wage and increases the rent. After paying for labor and capital goods, what is left is land rent. As the margin of production moves to ever less productive land, wages fall and rent rises.

We can raise wages and reduce rent by avoiding the under-use of land, moving the workers back to more productive land. Land is used most productively when the rent is collected for public revenue or for distribution among the residents. Land is then not worth holding unless one uses it in its most productive use, since the rent paid to the community is based on the highest and best use of the land.

This would involve a tax shift, in which taxes that come from wages are replaced by public revenue from land rent, or from voluntary payments by folks who receive an equal share of the rent. Workers would get a double gain: higher wages from putting land to its most productive use, and the gain from keeping one’s full wage.

A complete efficiency tax shift would also eliminate taxes on interest, business profits, dividends, and value added. The increase in investment would make the economy grow faster, raising the wage level until poverty is extinguished.

The reason why poverty does not disappear today is that much of the gain from an economic expansion ends up increasing land rent rather than wages. If the rent is used for common benefits or distributed equally, then the public would benefit from both higher wages and a share of the greater rent. The elimination of wage taxes would also stimulate investment in human capital, since the reward would be higher. There would be more self-employment and more entrepreneurship.

The collection of the land rent would also eliminate economic depressions. The capture of economic expansion gains by land rent and land value spurs land speculation that carries the price of land so high it is no longer affordable. Investment slows down, causing a recession. This is what we witnessed during the past few years. The abolition of depressions would eliminate the cyclical poverty of hard times in depressed economies.

Governments today do not extirpate poverty. They treat the symptoms with assistance for food, shelter, and medicine. The poor fall into a poverty trap, since getting a job implies a loss of the welfare benefits. The highest tax rates are on the poor seeking to escape poverty, since they have to pay taxes, pay to take care of children, pay for transit, and they lose the free benefits. There then develops a culture of poverty, where children are brought up to see themselves as victims who can at best just beg for more welfare favors.

Only the efficiency tax shift, replacing taxes on wages with taxes on land rent, will go to the root cause of poverty, and pull out those roots. Anything else just makes the poor feel better, but they remain poor. As Henry George write in his book Social Problems, “There is in nature no reason for poverty.” There is no poverty in heaven because everyone there has an equal share of the heavenly places, and their activities are not hampered with taxes. To extirpate poverty, let us do on earth what is done in heaven.

Free Banking Explained

2008-11-23T07:38:00.000-08:00

by Fred Foldvary

Free Banking is free-market banking. In pure free banking, the money supply and interest rates are handled by private enterprise, there is no restriction on peaceful and honest banking services, and there is no tax on interest, dividends, wages, goods, and entrepreneurial profits. Free banking provides a stable and flexible supply of money, and allows the natural rate of interest to do its job of allocating funds among consumption and investment, thereby preventing inflation, recessions, and financial panics.

To understand free banking, we first need to understand the relationship between capital goods and interest rates. Capital goods, having been produced but not yet consumed, have a time structure. Think of it as a stack of pancakes. The bottom pancake is circulating capital goods, which turnover in a few days, such as perishable inventory in a store. The higher levels take ever longer to turn over. The highest pancake level consists of capital goods with a period of production of many years, the most important type being real estate construction.

Lower interest rates make the pancake stack taller, while higher interest rates make it flatter. Think of trees that take 20 years to mature. Suppose the trees are growing in value at a rate of three percent per year. If bonds pay a real interest rate of four percent, and the interest rate is not expected to change, then the trees will not be planted, since savers will put their funds into bonds instead. But if bonds pay a rate of two percent, then the trees get planted. So the lower interest rate induces an investment in long-lived trees and steepen the capital-goods pancake stack.

In a pure free market, the time structure is in economic harmony, because investment comes from savings. If more folks save, the banks lower the interest rate to lend out the extra money, and the greater investment from borrowed funds is offset by the lower consumption of those saving their income instead of spending for consumption.

But with central banking, such as with the Federal Reserve system, an injection of money has the temporary effect of greater savings. Banks lower the interest rate to lend out the extra money. But folks have not changed their intended consumption, so the new investment battles with planned consumption for resources, and prices go up.

The fundamental problem with central banking is that the optimal money supply and rate of interest are unknowable. Another problem is that despite the technical independence of central banks from the rest of the government, in practice when the economy is down, there is political pressure for central banks to stimulate the economy with money expansion.

The key problem is that the artificially lower rate of interest induces greater investment in the higher order capital goods such as real estate construction, and also associated goods such as wood for construction and durable goods such as furniture. The pancake stack has been made steeper, but that is not sustainable. Funds that would have gone to circulating capital instead get locked up and then wasted in excessive investment in higher-order capital goods such as real estate. We have seen in 2008 a glut of empty houses, some of which get looted.

The central bank later stops the great expansion of money in order to avoid too high inflation, but that then halts the real estate investments. Workers get laid off, the firms suffer losses, and the economy goes into recession.

The expansion caused by the injection of money feels economically good for a while, but it is like a drug that wears off, causes addiction, and ruins the health of the economic body. With the artificial rate of interest below the natural free-market rate, land speculators also borrow funds. Speculators buy real estate expecting the land value to rise. The economy gets a real estate bubble caused by money expansion and land-value subsidy. Public goods such as streets, transit, schooling, security, and various subsidies all make neighborhoods more productive and attractive. These benefits boost land rent and land values.

Site values capture much of the benefit from an economic expansion because the governmental works and services are paid for mostly from taxes on labor, enterprise, and trade. This is a huge implicit redistribution of wealth from workers and entrepreneurs to landowners. During an economic boom, the demand for land by overly optimistic speculators pulls up the prices of land beyond that warranted for current use. Those who actually want to use land for residences and business stop buying, which combines with higher interest rates and higher prices to reduce investment.

Investment drives the business cycle. As investment falls, the economy follows into recession. Land values fall, companies go bankrupt, unemployment rises, and property owners can’t or won’t pay their mortgage interest. With mounting losses, banks fail, and the value of speculative derivatives, based on land values that are now falling, collapse. The financial waterfall brings down insurance firms, banks, hedge funds, and brokerage firms which had bad investments and failed speculations.

With free banking, all this is avoided. The rate of interest is not distorted by injections of money from a central bank or government, but is set by the market for loanable funds. The supply of funds comes from savings, and the net demand (subtracting borrowing for consumption from savings) comes from those who seek funds for investment. The natural rate of interest is based on time preference, the general preference to have goods such as cars sooner rather than later. With free banking, the natural rate does not get distorted by the manipulations of a central bank.

If the United States shifted to free banking, the current supply of paper dollars, of Federal Reserve note currency, would be frozen. The future supply of money would come from the paper currency issued by private banks and from new coins. There could be a monetary role for government in minting coins: accepting metals from the public and making coins out of them.
The government could also convert its gold hoard into coins sold to the public.

If someone withdraws money from a bank’s ATM, the money would be inscribed with the name of the bank rather than that of the central bank. But anyone could go to the bank and get Federal Reserve notes in exchange for the notes of the central bank. Legal tender laws, which require us to accept federal money in payment of debts, and other laws that make government currency a monopoly, would be abolished. The Federal Reserve Bank would also cease to exist.

Businesses often need to borrow funds for a short while to finance their operations. The loans are paid back from the sale of goods. With free banking, firms could also pay for labor and supplies with bills of exchange. These would be tradeable IOU notes payable within 90 days. A firm that sells wood to a furniture maker could accept payment for the wood in bills of exchange, which it could then use to buy lumber, or it could deposit the bill in a bank. The furniture maker could obtain funds from a bank in order to pay wages, using a bill of exchange which the bank would discount, e.g. it would accept a one million dollar IOU in exchange for $990,000 in cash. Within 90 days, the furniture company would repay the bill of exchange with the cash it gets from the sales of the goods. Alternatively, the firm could issue commercial paper, very short term loans that get sold to money market funds, whose liquid funds also serve as money substitutes.

Reflux, the convertibility of money substitutes into real money, would prevent a bank from an excessive issuing of its notes. The supply of private bank notes would be limited by the demand by the public to hold them. The real money would be federal reserve notes in the hands of the public, and private bank notes and funds in accounts would be money substitutes, acting like money but always convertible into real money.

With free banking, there is no governmental restriction on branches. There is no governmental deposit insurance. There is no reserve requirement, the legal requirement to have some fraction of deposits held in cash. There are no legal limits to other businesses a bank can engage in, so that a bank could also offer insurance or a retail store could also offer banking. There would be no restrictions on interest rates. There would also be no explicit or implicit governmental loan guarantees, such as for the government-sponsored enterprise Fannie Mae. Any secondary market in mortgages or other loans would be purely private.

Also, in pure free banking, there would not be any taxes on interest income. Taxation, as well as the deductibility of mortgage interest payments from taxable income, distorts the incentives of savers and borrowers, which also shifts the rates of interest away from their natural rates. But if interest is tax free while wages and profits are taxed, that also distorts the natural interest rate as resources shift to tax-free sources of income.

To have a pure natural rate of interest, government has to also avoid subsidies, which distort resources towards the subsidy. In pure free banking, public revenue must be based on sources that would otherwise be subsidized, namely pollution charges and land value. The tapping of site values for public revenue prevents the subsidy of the higher rent and site value from governmental public works and services.

With free banking, the natural rate of interest would not be obliterated, since money supply would be set by the public’s demand to hold money rather than an artificial injection by a central bank. Money would not be a government monopoly, but would be provided by competing private banks. But there would be a common unit of account such as the U.S. dollar. The currencies of the banks would all be in the same dollar units and be accepted at stores and by all banks. Only the notes of the largest banks with good reputations would circulate widely, although it would also be possible for there to be local currencies from trusted issuers.
There would also be supplements and alternatives to banking, such as LETS, local exchange trading system, where users could trade with debits and credits to accounts.

Every historic economic boom, at least in the USA, has been accompanied with excessive credit creation, and every financial crisis and depression has been plagued with excessive credit constraints. Free banking avoids the credit bubble and thus also the credit collapse. But the complete elimination of the boom-bust sequence requires the elimination of land-value subsidies, since otherwise even market-based economic expansion would induce land speculation, as that would offer higher gains from leverage than the production of goods, and rising land values would induce derivatives.

Eventually, if most of the economies of the world practiced free banking, there would be a demand for a global currency, and the most likely candidate is gold, which was the global currency before World War I. With gold as the real money, the private bank notes as well as funds in accounts and also bills of exchange would be money substitutes. One could convert paper currency or account funds into gold coins on demand. A small amount of gold would back up the value of purchasing media, and most purchases would use electronic media, not physical gold.

In free banking, the banks and other financial institutions would join together in mutual aid organizations. If one bank ran out of gold or paper notes, it would be able to borrow from other banks. One would not need a central bank as a lender of last resort, since banks would be able to borrow from the mutual aid association.

The natural expansion of money with increasing wealth and population creates a gain called "seigniorage," the difference between the revenue and the cost of the expansion. With central banking, some of the gains go to the central bank, and the rest of the gains are shared by lenders and borrowers as the gains attract more funds that then lower the natural rate of interest. The private banks do not gain if the system is competitive, since any temporary profits would induce an increase supply of lenders that would drive the gain back down.

Some would-be reformers advocate that the government directly issue currency and gain from the seigniorage, but that would involve the problems of knowledge and incentive. There would be a political incentive to issue too much currency, causing price inflation. There is also the inevitable knowledge problem: there is no way for a monetary authority to know the optimal money supply and interest rate. So any creation of money by a government as a monopoly would distort the interest rate and create instability and waste.

Free banking is not just hypothetical, as it had been practiced in many economies prior to the Great Depression. One well-researched example is the free banking practiced in Scotland until 1844, when the Bank of England took over, described in the book Free Banking in Britain, by Lawrence White. Books explaining free banking include George Selgin’s The Theory of Free Banking and Free Banking by Larry Sechrest.

Land-value taxation alone would greatly reduce but not eliminate the business cycle, since the manipulation of lower interest rates by central banks would still induce excessive real estate construction and purchase, and the interest rate would not be allowed to do its job of harmonizing investment and consumption. But without public revenue from land rent, pure free banking is impossible, since taxes and land-value subsidies would distort interest rates. We therefore need to solve both the money and the land problems. The solution is free banking combined with public revenue from land rent.

Why the Crash of 2008 is not a Market Failure

2008-11-02T07:46:00.001-08:00

Why the Crash of 2008 was not a Market Failure

by Fred E. Foldvary

All national economies today are mixed economies, a combination of markets and governmental intervention. In a pure market economy, all activity is voluntary, with no restriction on peaceful and honest human action. A governmental intervention changes what people would otherwise voluntarily do. Government policy can be either market enhancing, such as by penalizing theft, or market hampering, such as by taxing human action.

For any outcome such as a recession, we need to carefully analyze whether the cause is the market or whether it is intervention. Yet nowadays there is a chorus of politicians, journalists, and even economists who have leaped to the conclusion that the Crash of 2008 was a market failure. They say there was too little regulation, and that the lesson from the global financial crisis is that government needs to closely supervise the economy and correct market failures.
Such conclusions are made with no economic analysis. Blaming deregulation ignores the heavy hand of governmental institutions such as the Federal Reserve, the Securities and Exchange Commission, Fannie Mae and Freddie Mac, and the FDIC. More importantly, the focus on regulation is too narrow. The broader issue is intervention, which includes taxation and subsidies along with regulation.

First of all, the USA as well as all major countries practice state socialism and central planning with their central banks issuing and controlling the money supply and manipulating interest rates. Secondly, all countries tax and subsidize human action. Third, all governments restrict trade.

A tax on voluntary activity restricts human action. We would not really have free speech if one had to pay a tax when one gave a speech. When government imposes a cost on human action, there is less of it, by the law of demand, by which higher costs reduce activity. A subsidy is a negative tax, and also distorts outcomes, since with a lower price, those who value the activity at less than the real cost do it, which reduces the amount of higher-valued goods.

There is what is called the “first fundamental theorem of welfare economics,” which states that a pure free market maximizes economic efficiency. The second fundamental theorem states that an efficient allocation can be achieved by the equilibrium of a free market. The theorems are framed with specific conditions about competition, but the concept applies generally. A pure free market maximizes productivity, and no intervention can improve the outcome.

Most economists ignore these fundamental theorems, because they think these only apply to so-called “perfect competition,” to many tiny firms producing an identical product. But the reason markets maximize well being goes way beyond these fundamental theorems. Only free markets can perform the economic calculations needed to maximize productivity and avoid economic waste.

Prices are not just what people pay for stuff. Prices, including wages and interest rates, have a vital job to do in an economy. Human desires are unlimited, but many resources are scarce. A market price effectively adjusts desire to scarcity. It is the job of the interest rate to equalize savings and borrowing, and thus also net savings and investment. The natural rate of interest ensures that all income is allocated to consumption and investment. The market wage ensures that all who seek work become employed. Market prices prevent shortages and surpluses. Market-based profits signal that more of the profitable stuff be made and that losing products and enterprises cease to exist.

Entrepreneurs drive the economy, bringing new products and methods to the market. Tax them, and we get too little innovation, risk taking, and growth. Subsidize entrepreneurs and speculators, and we get too much risk and a misallocation towards goods of lower social value. Any arbitrary restriction, not to prevent force and fraud, distorts well being by preventing folks from getting what they want and, more importantly, because the chiefs of government lack the knowledge of how to run an economy, and their incentive is to please those who finance their power.

Contrary to critics who think that markets are inherently unstable, it is the interventions that cause the economic roller coaster. Every recession is caused by the previous boom, and every economic boom has been accelerated by government subsidies. Artificially low interest rates, expansionary policies, and guarantees for loans and deposits, all pull resources into unsustainable speculative bubbles.

The biggest governmental distortion is the implicit subsidy to land value. These are generated by special tax deductions and exemptions for real estate, by loan guarantees, by the subsidized secondary market for mortgages bought and securitized by Fannie Mae and Freddie Mac, by regulations pushing risky loans for low-income buyers, by allowing deception or negligence in bond ratings, and the moral hazard of encouraging risk with bailouts.

Those interventions, however, are swamped by the colossal subsidy to land value of governmental works. Highways, streets, parks, security, schooling, and all the other government services and subsidies all increase the demand for the lands serviced by these works. If landowners directly paid for these, the payments would capitalize land values back down. But since taxes are almost all on labor, business profits, goods, and trade, worker-tenants get double billed, paying both taxes and higher rents, while landowners get subsidized.

Land values capture much of the gain from economic expansion, and then rising land values induce speculation that adds to the demand and pushes land values to such a high level that those who want to buy land to use it get squeezed out. Land values then stop rising, and the previous construction becomes a “malinvestment,” vacant properties.

We have seen land values plunge, and since most of that value is mortgaged, the real estate crash brings down the whole financial system. The securitized mortgages and derivatives on these loans collapse, creating colossal losses for banks and other financial firms. With loan assets wiped out, banks stop lending, and enterprises dependent on credit fail and employees lose their jobs. That became the situation in 2008.

The key intervention is the land-value subsidy, which makes land value capture the economic expansion, which then attracts the speculators and fools the builders into thinking they can profit from construction as the land appreciates. Warnings of a real estate bubble go unheeded as these actors get blinded by the huge profits and bonuses, and the chiefs forget their fiduciary duty to their shareholders, as with their golden parachutes they can jump off the nose-diving firms. There is indeed massive corruption and greed, and regulations should penalize negligence and fraud, but the greed was stimulated by the land-value subsidy.

Yet both critics and defenders of markets ignore the role of the land-value subsidy. Often this is willful ignorance and deliberate rejection. Conventional economics ignores land and the capitalization of public works into site values -- you will not find this in any commercial economics textbook. Moreover, both pro-market and anti-market think tanks that supposedly educate the public institutes are funded by landed interests, so their publications have to reject any article that hints at the land-value subsidy.

The landed interests -- big landowners, real estate firms, developers, oil companies, and the financial firms that service them -- not only fund political campaigns, but they have also corrupted economic thought, blinded all the free-market institutes to the role of land, and promoted the statist bias against markets. Any bad outcome such as recession, unemployment, poverty, and pollution is ascribed to market failure, and government is always cheered on as the benevolent and competent fixer. The landed interests promote statism because that enhances their land subsidy.

The 2008 bailouts and government takeovers of banks, bad loans, insurance firms, Fannie and Freddie, and the massive injection of funds into the financial system all have one overriding goal: to maintain the subsidy to land values. If the goal instead was to stop the economic collapse, it would be more effective, simpler, debt-free, and less interventionist to just give every person several thousand dollars in currency. Economies are crashing because of credit constraints, and cash is the ultimate credit.

Statist doctrines misled economists and government chiefs to blame the Great Depression of the 1930s on markets instead of interventions. The US government responded by ending the gold-money standard, greatly increasing regulation, and creating institutions such as Fannie Mae to subsidize mortgages. These governmental institutions, guarantees, and subsidies all failed to prevent the Crash of 2008, and the Federal Reserve also failed to prevent it. Yet instead of concluding that regulation has failed, people say that the market has failed. But nobody has explained how something that does not exist -- a pure free market -- can possibly cause anything.

2008-10-13T07:31:00.000-07:00

Money to the People!

by Fred E. Foldvary

As this article is being written on Sunday morning, Sept. 28, 2008, Congress will soon pass the $700 billion bad-mortgage bailout requested by the executive branch. With a majority that includes both of the establishment political parties, the bailout will not become a partisan issue. Congress and the administration sought to finish an agreement before the Asian financial markets opened on Monday, as a crash there would again infect the US.

The purchase of mortgages by the government-sponsored enterprises, Fannie Mae and Freddie Mac, and their packaging and sale to financial firms, was supposed to provide safety via diversification, but when the whole real estate market crashes and many mortgages go into default, the slicing and packaging of bad mortgages instead becomes a financial waterfall.
With a real estate crash, financial insurance also fails. One type of debt insurance is called “credit default swaps.” Insurance companies, hedge funds, and others sold insurance for defaults, but did not have sufficient funds to back up that insurance against large losses. When the losses occurred, the firms collapsed.

American voters and taxpayers are angry about this biggest bailout in world history. Somebody who pays much of his income to a mortgage is justified in being outraged at the prospect of the government bailing out irresponsible financial companies while they struggle to make the payments. In response, Congress modified the proposal so that the government will obtain stock warrants, giving the federal government a share of the gains when the stock prices of the firms rise. There will also be an oversight board to supervise the program and some help for homeowners.

It is not clear whether there would be a financial catastrophe if the bailout were not passed. Credit is still available; millions of people are still using their credit cards. Businesses are still getting loans. However, it is true that many firms can’t obtain funds except at quite high risk premiums, or not at all. The credit markets are somewhat stuck, but maybe that is because lenders are waiting for the government to act.

Any plan that bails out banks and mortgages is going to favor some at the expense of others. Many who have been dutifully paying their mortgage payments, or fully own their homes, will not get any aid. If there is a major liquidity problem, and if government has to step in to prevent financial chaos, the egalitarian solution would be to provide money to everyone equally. Money to the people!

The US Treasury Department would print $1000 bills and give each American national (citizen or permanent resident) 6 of those bills, so $6000 in currency to each person. With 300 million Americans, the total would be $1.8 trillion. The egalitarian bailout would avoid more government debt, as it would be paid for by printing money rather than borrowing.

Everybody would report to their local post office and get six crisp $1000 bills after recording their names and IDs. Most folks would then deposit the funds into their bank accounts, and poof, the banks now have more money to lend out. People would use the funds to pay debts, buy stuff, and possibly invest in stocks. The stock markets would zoom up, and we would not be rewarding irresponsible financial chiefs.

Of course this would be inflationary, but that would have a benefit of reducing the real value of all debt denominated in US dollars. Lenders would lose some of the purchasing power of the loan payments they receive, but that is better than defaults.

It would require several weeks to set up the egalitarian bailout, as the government would need a data base of all US nationals, and it would take a few weeks to design and print the currency. But the anticipation of everyone getting $6000 could itself already unfreeze the credit markets.
However, this will not happen, as the mortgage bailout seems imminent. Once again, the real estate interests and their financial symbiants will get rescued from the folly of ignoring the inevitable real estate cycle. The real estate cycle is caused by government and gets rescued by government. This indicates the real purpose of government: to protect and subsidize the landed interests, including lenders who use land as collateral. Since land values periodically crash, the real interests need to be bailed out if they are to keep being protected. Meanwhile, worker-tenants pay not only taxes but higher rents to the landed royalty.

A government of the people rather than of the landed royalty would require either anarchism, so that all state subsidies to landed interests cease, or else the public collection of all the economic rent, and its equal distribution to the people as cash or as civic services. That rent would replace all punitive taxation, would eliminate recessions and depressions and poverty, and would remove the suffocation of enterprise now taking place. But the very system of land royalty also controls education, so few will learn the right lesson from the great real estate crash of 2008.

2008-10-13T07:27:00.000-07:00

Gold, Interest, and Land
by Fred E. Foldvary,

Three seemingly unrelated variables are in fact deeply connected. Gold has been the most widely used money, and in a pure free market, gold would most likely come back as the real money. Free-market banking would mostly use money substitutes such as bank notes and bank deposits, but these could be exchanged for gold at a fixed rate. Free banking would combine price stability with money flexibility.

Interest is ultimately based on time preference, the tendency of most people to prefer present-day goods to future goods, due to our limited lifespan and the uncertainty of the future. In a free market, the rate of pure interest would be based on the interplay of savings and borrowing. Interest is not just income and payment, but has a vital job in the market economy. The job of the interest is to equilibrate or make equal the amounts of savings and borrowing. This also equalizes net savings (subtracting borrowing for consumption) and investment. Investment comes from savings, and the job of the interest rate is to make sure that net savings is invested.

Economic land, meaning all natural resources, is related to interest, since land is usually bought with borrowed funds. The buildings and other capital goods in land are also often produced using borrowed funds. Thus the vital connection is credit. Developers borrow money at some rate of interest to buy land and construct buildings, and then households borrow to buy the real estate. With equity finance, such as with partnerships and shares of stock, the rate of return on the assets are related to the rate of interest. The interest rate also capitalizes rent into land value, as the price of land rises as interest rates fall.

In a pure free market, gold, interest, and land are in harmony. The pure market interest rate is set by the equilibrium of savings and borrowing. Income not saved is used for consumption, and savings goes to investment, so all income is spent. Landowners pay for territorial services such as streets, parks, and security, and with no subsidy, there is no excessive land buying and construction, and no holding of land out of use in anticipation of future subsidies.

In a pure free market, there is no real estate boom-bust, and no business cycle. There is full employment, because workers keep their full wage, and the cost of labor is not artificially increased by taxation and restrictions. There is no credit crisis, because with no subsidies, land prices would be very low, and borrowing would be for capital goods and enterprise, not for land.

In today’s economy, we use fiat money, not based on any commodity. Money is centrally planned by the monetary authority. Since the correct money supply is unknowable and can only be determined by a pure free market, the central bankers will often create instability in their attempt to either stimulate or “cool off” an economy. The interest rate is unable to do its job, since it is manipulated by the changing money supply, and inflation masks the real interest rate. Markets cannot properly conduct economic calculation, because the observed interest rate involves both inflation and the artificial rates targeted by the central banks.

In today’s economy, land values are grossly inflated by subsidies, mostly implicit. Low interest rates caused by money expansion promotes real estate construction and purchasing, inflating land values. Not only do landowners get the implicit subsidy of services paid for by taxing workers and business, but real estate gets special tax breaks: tax deductions for interest and property taxes, capital gains exemptions and postponements, multiple depreciations, and low capital gains taxes. Housing guarantees and government-sponsored secondary mortgage markets further puff up land values.

Fiat money rather than gold; manipulation and inflation rather than the natural interest rate; and land-value subsidies, all skew and distort prices and profits. An unsustainable land boom financed by artificial credit has to collapse, and the financial crash then further brings down the economy.

And then politicians, commentators, and even economists blame the non-existent free market. Why are they blind to the interventions? There is a cult called “statism” that most people suffer from. Curing it is almost impossible, since the state also controls education. Even when statists are given the explanation, they don’t believe it. Logic and evidence cannot penetrate a deeply held bias. Perhaps the remedy will be the creation of new countries on floating platforms in the ocean, islands of economic sanity in a world of economic madness.

Welcome to Fred Foldvary's blog.

2006-02-26T11:53:00.000-08:00

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We discuss economics, ethics, governance, and other topics of interests.

Fred Foldvary
ffoldvary@gmail.com