Thursday, January 27, 2011

Revolution in Tunisia

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.

Thursday, January 13, 2011

The Constitution Revolution of 2011

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.

Sunday, January 09, 2011


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.

Saturday, January 01, 2011

African Land Grab

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.