Arguments for stimulus and how to counter them

It has now been five years since the passage of the American Recovery and Reinvestment Act of 2009. Several commentators are claiming that the stimulus has been successful, despite its unpopularity, or that it was at least an improvement over a laissez-faire approach. Let us examine these claims.

The Federal Reserve, the TARP program, and the auto industry bailout prevented an economic collapse. The stimulus saved or created 6 million jobs.

Such claims are an example of the broken window fallacy. While they point out the jobs that were created by the stimulus, they ignore the jobs that could have been created if the money had been left in private hands. Many supporters of Keynesian stimulus have anticipated this argument and have offered rebuttals. Let us examine some of these.

The broken window fallacy does not apply because desired savings are not automatically converted into investment spending, so that government borrowing need not come at the expense of private investment.

To some extent, this is a fair point. The broken window fallacy is necessary but not sufficient to explain why stimulus is not effective. Due to the nature of debasement and borrowing, another argument is needed to explain why exploiting the velocity of money and stealing from the future to feed the present will not be effective.

Many proponents of austerity will say that the stimulus money must come from somewhere, but this is not true. Its fiat nature in modern economies allows it to be created out of thin air. But its value must come from somewhere. In the case of currency debasement (also known as quantitative easing), the value is extracted from all existing money in the economy. But as this extraction of value takes time to occur, the original spenders get to spend the money at its current value, while those farther down the line get to spend the money at its debased value. This effect helps to make the rich richer and the poor poorer, and is thus a form of income inequality caused by governments.

In the case of government borrowing and deficit spending, the value is extracted from the future productivity of the tax base, thereby selling the unborn into debt slavery. Thus, while stimulus does increase the resources used at present, this comes at the expense of having less resources to use in the future. The effect on the economy is much like the effect on a farmer who runs out of food in the winter and decides to eat his seed crop. He will be better off for a time while his resources last, but he is consuming the resources in the present that he needs to use next spring to provide for himself in the future. (This metaphor may fly over the heads of some younger farmers, but those who were farming before seed companies were able to use the legal fiction of intellectual property to force farmers to purchase seeds from them each year will understand.)

Governments had to spend because the private sector would not.

Spending occurs in the private sector when people have money to spend and believe that they will receive a reasonable return on investment. The problem is that a large amount of private capital was lost in the housing bubble. This bubble was caused by Federal Reserve policies from 2000 to 2004, which true to Austrian business cycle theory, set off a wave of malinvestments in housing that collapsed in 2008, following a tightening of monetary policy in 2006. As the Federal Reserve is authorized by Congress to perform its manipulations of the economy, we are left with the idea that government intervention is the solution to a problem created by government intervention, which is a contradiction.

Now let us consider what happens when governments spend money because the private sector will not. First and foremost, there is cronyism. The politically connected members of the 1 percent are most likely to receive stimulus funds. There is also a lack of profit motive. Governments do not have to earn a reasonable return on investment because they obtain their funds at gunpoint rather than by voluntary means, and they have excluded all competitors from their geographical areas. Thus, they have no incentive to invest wisely with stimulus funds, and they frequently do not. These malinvestments, in the worst cases, can help to fuel the next business cycle.

Spending cuts since 2011 have destroyed jobs. A sort of reverse broken window fallacy is at work here, as one cannot see the jobs that would have been saved if higher levels of spending had continued.

There is something to this argument, even though there is no way to be sure that spending cuts destroyed jobs because we have no control group to observe. But it must be remembered that jobs which are sustained by elevated government spending are temporary jobs which will end whenever elevated government spending ends. Eventually, such spending must end in one way or another, so these jobs were destined to be lost at some point. But again, we have the broken window fallacy of ignoring what the private sector can do if money is not taken out of it to fund stimulus, as well as the seed crop consumption problem if stimulus is funded by debasement or borrowing.

Now let us consider two more arguments:

Europe tried an austerity approach that failed, and this provides a control group which shows what happens without stimulus.

Quite simply, Europe did not engage in austerity. There have been riots in protest of proposed austerity measures, as well as theft from the bank accounts of private citizens to help keep government spending going, but very little in the way of actual spending cuts. According to Eurostat, only eight countries in Europe (out of 30) cut government spending between 2008 and 2012. But even if there had been austerity and accompanying economic hardships, short term losses are to be expected as the economy adjusts to a lack of stimulus, but this will result in long term gains.

Also note that unlike the US, individual European countries cannot use central bank manipulations to attempt to solve their problems. But this is probably a good thing, as will be shown below.

The stimulus should have been larger, but doing something was better than laissez-faire.

The historical evidence does not support this assertion. By comparing the laissez-faire approach used from 1887 to 1913 with the Keynesian approach used from 1933 to present, we find that while stimulus by governments and central banks spaces out recessions to an average of every 5.7 years from every 3.9 years, the recessions which do occur are much deeper, doing 46.11 percentage-point months of industrial production lost until previous peak is regained (PPM) of damage to the economy per year versus 40.98 PPM of damage per year with an Austrian approach. Factoring the time difference and damage difference together, this means that a Keynesian-managed recession is 64 percent worse on average than an Austrian-managed recession.

By using the same methods used by Adorney, we find that the period of monetary stimulus only from 1914 to 1932 resulted in a recession every 3.2 years on average, doing 137.3 PPM of damage per year. This makes an average recession managed solely by a central bank 67 percent worse than an average Keynesian-managed recession and 175 percent worse than an average Austrian-managed recession. Clearly, central banking alone produces by far the worst results. While a period of government stimulus without monetary stimulus would be interesting to examine, no data for such a period exists.

Like the seed crop consumption analogy discussed earlier, we see a short term gain followed by a long term loss. Increasing the amount of stimulus to get over one recession will set the stage for a much worse long-term recession, one which may not be responsive to stimulus.

Coal Ash Pollution And A Free Market Solution

On Feb. 2, a 27-acre coal ash pond operated by Duke Energy leaked into the Dan River in North Carolina, releasing up to 82,000 tons of coal ash mixed with 27 million gallons of contaminated water.

Environmental regulators first reported that arsenic levels in the water were safe, but later acknowledged that they had misreported test results, which showed that arsenic concentrations exceeded the standard of 10^-5 grams per liter. Other tests showed elevated levels of copper and iron in the water. Coal ash is also known to contain cadmium and selenium, the former of which is extremely toxic and the latter of which is a trace nutrient but is toxic in large amounts.

“We’re not downplaying risks. We’re doing our objective analysis of what we’re seeing so far, and I think we are concerned,” said Jamie Kritzer, a spokesman for the North Carolina Department of Environment and Natural Resources. “The Dan River is a gem, and people value it throughout the state for not only being a source of drinking water, but also for its aquatic life that it provides a home to and all the recreational uses. This is certainly something that concerns all of us.”

Situations like this one present one of the greatest challenges to free market advocates, as many people cannot envision how people could solve a problem like environmental pollution without government intervention, and will thusly support state action out of this believed necessity. It is therefore worth examining how voluntary methods can solve pollution problems, as well as how statist methods actually interfere with solving pollution problems.

First, we must define what pollution is. The Free Dictionary provides a useful definition: pollution is the contamination of soil, water, or the atmosphere by the discharge of harmful substances. As such contamination results in damage to private persons and property, this creates a tort (specifically known as a mass toxic tort) for which victims may sue the polluter for damages and restitution.

But this is where government intervention actively prevented a free market solution to the coal ash problem. According to the AP, three citizen lawsuits prior to the recent leak concerning the danger of such pollution and ongoing leaks of coal ash dumps were blocked by the N.C. Department of Environment and Natural Resources, which asserted its regulatory authority to take enforcement action and then declined to take such action. The agency has now proposed a settlement in which Duke would pay slap-on-the-wrist fines but is not required to perform any restitution for its property damage. Those who would suggest an increased need for regulation should bear in mind how regulation stopped a potential solution to the problem, as well as how large corporations can bribe politicians and regulators to treat them favorably (and any competitors unfavorably).

The solution is thus counter-intuitive; less regulation leads to less pollution because allowing pollution (or the imminent threat thereof) to be treated as a violation of property rights and thusly handled by civil courts (or private dispute resolution organizations) can lead to action in time to prevent an environmental disaster, while stopping this process with government regulation and oversight allows polluters to get away with substandard environmental protection until it is too late.

On Peter Schiff, minimum wage, offensive terminology, and philosophy

On the Jan. 28 episode of “The Daily Show with Jon Stewart,” correspondent Samantha Bee interviewed businessman and financial commentator Peter Schiff on the subject of the minimum wage. In the interview, Schiff made the controversial statement that the work of a mentally retarded person would be worth only $2 per hour.

The interview provoked a response by Allen Clifton of Forward Progressives. While Schiff’s comments certainly deserve a thoughtful response, this was not quite it. Let us examine this piece philosophically and provide rebuttal where necessary.

“I’m sure many of you have met those people who ‘just don’t get it.’ I had a friend growing up who was born into a wealthy family. I remember a debate I had with her once about who had it harder, rich people or poor people. She said rich people did. Her example was that when her basement flooded the damage amounted to over $100,000 to fix, whereas a poor person who can’t pay for their electric bill only needs a couple hundred dollars.

I remember this debate so vividly because I honestly couldn’t believe the ignorance. She just didn’t get it.

Well, that’s the same feeling I had watching an interview from The Daily Show where the CEO of Euro Pacific Capital, Peter Schiff, discussed his ridiculous beliefs about the minimum wage.”

With only the information given, the girl mentioned above does appear to have an ignorance of economics. But as we will see, Mr. Schiff’s position against the minimum wage is not ignorant, even if he does make a terrible argument in defense of his position.

“His belief is in line with many ‘free market loving’ Republicans who believe that workers should be paid what they’re worth. Which sounds great, until you realize the reality that the “worth” of a worker is determined by the person paying them – a person whose only real concern is growing their wealth, not yours.”

The quotation marks around “free market loving” are fair, as Republicans are statists who do not believe in a truly free market with no government interference. However, the next sentence is false. The truth is that the worth of a worker is not determined solely by the person paying them; it is also determined by the maximum worth of that worker assessed among all possible employers, modified by the costs of travel to a different place of employment, the inconvenience of finding a different employer, the inconvenience of starting one’s own business versus continuing to work for someone else, and so forth.

“By all means if we want to hire tens of millions of independent arbiters to go into every job, assess the work each worker does then assign a fair value to each employee that their employer must pay – then I fully support abolishing the minimum wage. Because I can promise you one thing, most workers would be paid much more than they are now.”

This is not an abolition of the minimum wage at all. It is just a more intrusive means by which the state could interfere with the labor market by mandating a certain wage for a certain amount of labor of a particular type. As for a fair value, it cannot be determined in such a manner. A fair value is a value agreed upon by both buyer and seller without the use of coercion or fraud. An arbiter as described above, who is actually not independent because he or she is employed through the state, will have his or her assessments enforced by coercion applied by agents of the state. Essentially, this would create a planned economy. Take a close look at North Korea or the former Soviet Union to see how well this tends to work.

“Honestly, who really feels that they’re paid what they’re worth?”

Probably no one, from lowliest worker to wealthiest CEO. But feelings are economically irrelevant unless one acts upon them. A person who feels he or she is worth more should demonstrate this by either becoming more productive, finding another employer who will pay more, or starting his or her own business. There are government barriers that make these actions more difficult, and these should be targeted and eliminated.

“Look at teachers. They mold the minds of our future generations, yet their salaries are often below $50,000 per year.”

Under the current system, teachers mostly indoctrinate children with a pro-state view of the world. There is no reason to assume that a state-run public education system is necessary, especially with developments of private alternatives such as the Khan Academy and the theories of unschooling and natural learning. If the system is unnecessary, then the jobs will not exist, so speaking of the salaries for such jobs becomes meaningless.

“Firefighters risk their lives saving others, yet they’ll never be part of the top 1%.”

This is because there is a difference between loss prevention and wealth creation. If acts of loss prevention were to create a “top 1 percent” degree of wealth for those preventing losses, then they would have to cost more than the objects whose loss was prevented. Then it would make no economic sense for there to be activities of loss prevention, such as firefighting.

“So don’t give me this nonsense about ‘workers should be paid what they’re worth.’ Especially when you see the pay of some of these executives making 300-400 times more than the average employee at their company.”

On the contrary, paying workers an amount other than what they are worth is nonsense. Paying workers less than what they are worth makes it unprofitable for a worker to work at a certain job, while paying workers more than what they are worth makes it unprofitable to keep employing them. As for executives, if they make this much more in a free market, it is because their efforts are worth that much to shareholders. Of course, there are government interferences that help to create this disparity in the current market, such as a corporate law system that tends to shield the wealthiest people from competition, criticism, and liability.

“Well, Mr. Schiff took it a step further by basically saying the ‘mentally retarded’ should only be paid about $2 an hour. In other words, if you suffer from some kind of disadvantage in life which has precluded you from obtaining many skills required for better employment opportunities – you should be devalued as a human being.

Oh, but he wrote an ‘explanation.’ Basically he blamed Comedy Central for airing that part of the interview, claiming that the only reason he used the phrase ‘mentally retarded’ is because he couldn’t think of the proper phrase.

Using that logic, it’s perfectly acceptable to say anything derogatory if the socially acceptable term escapes your mind.”

What Mr. Schiff said about “mentally retarded” people is factually incorrect, and he deserves to be criticized for it. There are many people who have mental disabilities who are capable of producing enormous labor value, such as savants.

But let us look at the term “mentally retarded.” While this term has fallen out of favor, it is the subject of a euphemism treadmill. As Nicholas Cummings and Rogers Wright note in Destructive trends in mental health: the well-intentioned path to harm, the terms “mental retardation” and “mentally retarded” were invented in the mid-20th century to replace the previous set of terms, which were deemed to have become offensive, such as “imbecile” and “feeble-minded.” Now these newer terms have come to be widely seen as disparaging and in need of replacement. At some point, it is necessary to recognize that a negative condition is going to be described by negative-sounding terms and stop viewing such things as offensive. Or, to return to Mr. Schiff’s mistake, we could stop defining people by their shortcomings and assuming that those shortcomings must necessarily diminish one’s worth.

“But let’s think about his $2 per hour comment for a moment. That would be $80 per week x 52 weeks = $4,160 per year.

Basically what this man is advocating is that businesses should be allowed to pay workers based on ‘what they’re worth.’ So if they deem a worker to be worth no more than $2 per hour, how’s that worker expected to live on that?

Oh, I know – they can rely on government programs.

Then these people will come out complaining about the millions of people on these government programs, while simultaneously supporting policies which force more people to rely on government programs.”

The worker may not have to live on $2 per hour if he or she can find another employer or become self-employed in order to earn more. But let us consider the next argument; that people will come out complaining about the millions of people on government programs, while simultaneously supporting policies which force more people to rely on government programs. The government programs are the root problem, as companies would not be able to pay such low wages without them. Over the long term, people cannot work for less than what will keep them alive, and this natural minimum would be higher without a social safety net that allows people to survive on lower wages. While this position is frequently caricatured as heartless, it is actually one of the best ways to raise wages throughout the economy.

“Not to mention that by drastically cutting the pay for millions of Americans you’ll hurt demand for products.”

This ignores the fact that lowering pay for workers lowers the operating costs for a company. This means that the company can sell goods and services cheaper, as labor costs are usually the most expensive costs of a company. So while workers would receive less currency for their labors, that currency would have more purchasing power. Note that the opposite effect will occur if the minimum wage is raised, which is why a minimum wage increase will not help the economy.

“And again, don’t give me this nonsense about ‘paying workers what they’re worth.’ The reason why we have a minimum wage in the first place is because businesses weren’t paying workers enough. If they were, there wouldn’t be a minimum wage.”

The first federal minimum wage law was passed in 1938, and they were passed not to protect workers from business owners, but to codify racism and eugenics into law. The major proponents of minimum wage laws were white union workers who did not want to be out-competed by black workers. If there is a mandated wage floor and the white union workers are paid at that level, then no one can legally undercut the racist employers and employees by hiring black workers and paying them less. But if there is no mandated wage floor, then a non-racist employer can hire previously rejected black workers for less money, thereby running a more efficient business and making a racist employer pay a substantial cost for his or her racism. The minimum wage removes the ability of the free market to punish prejudice.

Of course, some on the left who embraced eugenics policies understood how the minimum wage could destroy opportunity and create unemployment for the most vulnerable people, but they thought it to be a positive development. As Thomas Leonard writes in Eugenics and Economics in the Progressive Era, “The progressive economists believed that the job loss induced by minimum wages was a social benefit as it performed the eugenic service ridding the labor force of the unemployable.”

“It’s the same reason why we have child labor laws. If companies hadn’t tried to exploit child labor, we wouldn’t need child labor laws.”

Child labor was also outlawed in 1938, and it was also done not to protect children from exploitative business owners, but to shield established workers from competition. Defining a whole sector of the workforce out of official existence is a handy way to lower the unemployment rate, and it continues to this day in the form of manipulated numbers from the Bureau of Labor Statistics. Barring children from working was not even effectual by this time period; in 1930, only 6.4 percent of male children and 2.9 percent of female children between the ages of 10 and 15 were employed, and of those, 74.5 percent of the boys and 61.5 percent of the girls worked on farms.

Today, such laws mostly have the effect of preventing children who are knowledgeable about technology from being paid for their skills.

“But this belief that by just allowing businesses to ‘regulate themselves’ and all will be right in the world is ridiculous. These businesses operate to make profits, not jobs.”

This is a straw man. Businesses are not regulated solely from within; they are regulated externally by their customers. If the customers of a business believe that the owners and/or employees of the business are doing something reprehensible, then those customers are free to boycott the business, support a competitor, or start a competing business which does not do the reprehensible activity.

“Most employers make their employees well aware of the fact that they’re replaceable. If you don’t like working for them, quit – we can find someone who will.”

The correct response for an employee is to provide value to such a degree as to become irreplaceable.

“Even with regulations, most companies do anything and everything possible to get around them. Why do you think there’s such a big push by many of them to eliminate the minimum wage? It sure as heck isn’t to pay their workers more, it’s so they can pay them less.”

The truth about regulations is that they are written by the wealthiest players in a given industry. The wealthiest players in an industry have every incentive to bribe politicians and regulators to write and enforce regulations in a way which is favorable to them and unfavorable to their competitors. By increasing the cost of doing business through compliance costs, regulations can drive smaller companies out of business, thereby allowing larger companies to increase their market share. This is how large corporations become mega-corporations. Those who fail to understand this process, such as most left-wing statists, then call for more of what caused the problem in the first place.

“Quick question: Without regulation on offshore drilling, do you think we’d have more or fewer environmental disasters like the BP oil spill in the gulf a couple of years ago?

If you really believe we’d have fewer of these instances, you’re crazy.”

As Socrates said, “When the debate is lost, slander becomes the tool of the loser.” But let us actually address the question. While there would probably be more environmental disasters if restrictions on deep-water drilling were lifted, the choice between government regulation of offshore drilling and open access for anyone is a false dichotomy. In a free market in which private property rights are respected, polluters are made to perform restitution for damages they cause, and there are multiple mechanisms to prevent polluters from setting up shop in the first place. The area in which the Deepwater Horizon disaster occurred should have rightfully been owned by the fishermen who labored in the area, as property is justly acquired through the homesteading principle by mixing one’s labor with natural resources. Under such a system, the fishermen could simply refuse to grant permission to oil drillers, and could hire private military companies to defend the area if the oil drillers sought to trespass and build anyway.

“The same goes for the minimum wage. If we ended it, these companies would abuse a society that didn’t have protections for its workers.”

A society cannot be abused, because there is no such thing as a society. Each individual person exists; a collective is just an idea with no independent form in physical reality. The idea of the minimum wage as a protection of workers has been refuted above, and the idea that it is the only protection for workers is refuted by the presence of unions and workplace safety standards, among other measures.

“Instead of having $2 an hour sweatshops like they have all over developing Asian countries, we’d have them here.”

$2 an hour has more purchasing power in developing Asian countries than it has here, so this is comparing apples to oranges.

“This whole argument is absolutely absurd. And Mr. Schiff’s ignorance about it was appalling.”

Indeed it is. It is clear that while Mr. Schiff made a terrible argument against the minimum wage, the case against the minimum wage is solid. To claim otherwise on the basis of a bad argument is to commit the argumentum ad logicam fallacy.

Defending Panthers Ticket Scalpers

How The Salvation Army Commits The Broken Window Fallacy

Every year during the Christmas season, the Salvation Army sends out bell ringers to collect donations as part of its annual Red Kettle campaign. These bell ringers stand in public places or at entrances to large shopping centers and ring handbells loudly and incessantly, stopping only momentarily to express gratitude when someone makes a donation. This business model for charitable donations appears to work (otherwise it would be discontinued), and the funds are used for noble purposes, but there is a problem with the Red Kettle campaign. It focuses on what is seen and ignores what is unseen, which is one of the most persistent errors in economics. It was pointed out by Frédéric Bastiat in 1850, and has become known as the glazier’s fallacy or the broken window fallacy.

The broken window fallacy gets its name from the parable of the broken window, which was discussed by Frédéric Bastiat in his 1850 essay Ce qu’on voit, et ce qu’on ne voit pas (That which is seen, and that which is not seen) to illustrate why destruction, and the resources and effort required to rebuild after destruction, is not a net-benefit to society. The parable demonstrates that the modern economic concept of opportunity cost, along with unintended consequences, has an effect on economic activity that is frequently ignored.

Bastiat told a parable about a shopkeeper’s son who threw a rock through the window of the family business. The glazier then gets the business of repairing the window, and then he can buy some clothes from the tailor, who can then buy bread from the baker, and so on. This is what is seen. But if the shopkeeper did not have to fix his window, he could spend his money on something else. Perhaps he could buy some clothes from the tailor, who can then buy bread from the baker, and so on. This is what is unseen.

Bastiat, along with Austrian School economists, often used this story figuratively, with the glazier representing special interests and the boy who breaks the window representing government intervention. But this case requires a different interpretation. In this case, what is seen is that people donate when the Salvation Army workers set up a red kettle and ring their bells. What the Salvation Army workers either ignore or fail to realize is that their bells can be off-putting to people who are annoyed by ringing noises, repetitive noises, loud noises, or some combination of the aforementioned. Such people will be disincentivized from giving donations, but because there is no way to count a non-donation, this cost to their organization is hidden. To simply dismiss this effect in favor of giving attention only to the donations that are given is to commit the broken window fallacy.

The Federal Reserve Turns 100: A Timeline Of Economic Mismanagement

On Dec. 23, 1913, Congress passed the Federal Reserve Act, which created a central banking system in the United States, of which all nationally chartered banks were forced to become members. (State banks had a choice, but nonmember banks had to keep deposit accounts with member banks, and so were under control of the Federal Reserve as well.) The Federal Reserve Note, the current legal tender, was also created at this time. It has now been a full century since this institution was created, so let us reflect upon its various (mis)deeds. This a timeline of some of the major events involving the Federal Reserve over the past century:

1913: The Federal Reserve is created.

1914: Benjamin Strong becomes the first Governor of the Federal Reserve Bank of New York, which was the most powerful position in the Federal Reserve until the Banking Acts of 1933 and 1935. Charles S. Hamlin becomes the first Chairman of the Federal Reserve.

1916: Prices have increased over 10 percent since 1913. William P. G. Harding becomes Chairman of the Federal Reserve.

1918: World War I drives prices higher. Prices have increased over 50 percent since 1913.

c. 1919: The money supply has doubled since 1913. This is an inflation rate of 100 percent in a six-year period by the correct definition of inflation.

1920: Prices have doubled since 1913. This is an inflation rate of 100 percent in a seven-year period by the commonly used (but incorrect) definition of inflation. This, along with the realignment to a peacetime economy following World War I, helps to cause the Depression of 1920-21.

1921: Following the Depression of 1920-21, the Fed continues inflationary policies to pay off war debts and help the Bank of England maintain a phony gold standard. This consequences of this were partly to blame for the Great Depression.

1922: Prices fall, but have still increased 70 percent since 1913. Prices remain near this level for the rest of the decade. Daniel Crissinger becomes Chairman of the Federal Reserve.

1927: Roy A. Young becomes Chairman of the Federal Reserve.

1928: Benjamin Strong dies in office. George L. Harrison becomes President of the Federal Reserve Bank of New York.

c. 1929: The money supply has tripled since 1913.

1930: Eugene Meyer becomes Chairman of the Federal Reserve.

1930-33: Prices fall again, and continue falling until reaching a low of 31 percent above 1913 levels in 1933. Prices remain near this level for the rest of the decade.

1933: Eugene R. Black becomes Chairman of the Federal Reserve. President Franklin Roosevelt orders that gold owned by American citizens be confiscated and replaced with Federal Reserve Notes.

1933-35: The Banking Acts create the Federal Deposit Insurance Commission, insuring individual deposits and thereby creating a moral hazard for banks, which no longer needed to be as careful with their assets.

1934: Marriner S. Eccles becomes Chairman of the Federal Reserve.

1938: The Federal Reserve panics at the potential for inflation, and doubles the minimum reserve requirements. This sends the economy into a tailspin of credit liquidation.

c. 1941: The money supply has quadrupled since 1913.

1941-45: World War II drives prices higher, from 41.4 percent above 1913 levels in 1941 to 81.8 percent above 1913 levels in 1945.

c. 1943: The money supply has quintupled since 1913.

1947: Prices are again more than double those of 1913.

1948: Thomas B. McCabe becomes Chairman of the Federal Reserve.

1951: William McChesney Martin becomes Chairman of the Federal Reserve.

c. 1952: The money supply has increased ten-fold since 1913.

1960: The money supply has increased twenty-fold since 1913.

1961: Prices have tripled since 1913.

1966: The money supply has increased thirty-fold since 1913.

1970: Arthur F. Burns becomes Chairman of the Federal Reserve. The money supply has increased forty-fold since 1913.

1971: Prices have quadrupled since 1913. President Nixon ends the Bretton Woods system, closing the gold window. From this point onward, the Federal Reserve is able to create currency at a much greater pace, leading to much faster inflation and price increases.

1972: The money supply has increased fifty-fold since 1913.

1975: Prices have quintupled since 1913.

1978: G. William Miller becomes Chairman of the Federal Reserve.

1979: Paul Volcker becomes Chairman of the Federal Reserve.

1980: The Depository Institutions Deregulation and Monetary Control Act gives the Federal Reserve more control over non-member banks. The money supply has increased one hundred-fold since 1913.

1983: Prices have increased ten-fold since 1913.

1987: Alan Greenspan becomes Chairman of the Federal Reserve.

1990: The money supply has increased two hundred-fold since 1913.

1995: Prices have increased fifteen-fold since 1913.

2000: The money supply has increased three hundred-fold since 1913.

2004: The Federal Reserve lowers its interest rate target, leading to malinvestments in housing that create a bubble. The money supply has increased four hundred-fold since 1913.

2006: Ben Bernanke becomes Chairman of the Federal Reserve. Prices have increased twenty-fold since 1913. The housing bubble peaks.

2008: The money supply has increased five hundred-fold since 1913. The housing bubble bursts. The Federal Reserve begins quantitative easing in an attempt to mitigate the financial crisis of 2007-08.

2009-2011: Bloomberg L.P. sues the Board of Governors of the Federal Reserve System for disclosure of information about banks and other financial institutions that had borrowed from the Federal Reserve discount window during the United States housing bubble and ensuing financial crisis. The Fed was forced to release the information, which showed that the Fed had made as much as $1.2 trillion available to banks and other companies in the form of emergency loans between 2007 and 2010.

2013: Over the past century, the US dollar has lost 95.6 percent of its purchasing power. On average, an item that cost $100 in 1913 costs $2,354.23 at present. Also, while there were approximately $16 billion in circulation in 1913, this has expanded to $10.9718 trillion, an increase of over 68,000 percent.

Book review: It’s a Jetsons World

It’s a Jetsons World: Private Miracles and Public Crimes is a collection of essays about the wonders of the free market and the failures of statism written by Jeffrey Tucker.

Mr. Tucker begins by comparing the current world situation to that of the Jetsons cartoon, and finding that despite some differences in the available technologies, the only real difference is that we also have a leviathan state which runs counter to the advancements brought about by voluntary exchange. The rest of the first section, titled “Private Miracles,” explores the dichotomy between voluntary and coercive interactions through various situations and conundrums, from grocery store checkouts to auto-defrosting refrigerators to internet connections.

The second section of the book, “Free Association, Peace, and Plenty,” explores the benefits of voluntary interactions, some of which we overlook and/or take for granted. Several of the examples also make the point that central planning through government coercion could not produce such benefits, as Mises once proposed with the economic calculation problem.

“Work for Free,” the third section of the book, speaks mostly about the functionality of the free market and how it can adapt to various situations and problems. It is here that Tucker’s wisdom truly shows, for he is able to debunk with counterexamples the claims of anti-free market theorists that voluntary exchange has no way of dealing with heartless people, criminals, or uncertainties in the medium of exchange. He also shows through the examples of the decline of the U.S. piano industry and the relief efforts following the Haitian earthquake that economic interventions tend to hurt the very people they are supposed to help.

The next section of the book, “Can Ideas Be Owned?,” is a collection of arguments against patents, copyrights, and other forms of “intellectual property.” Tucker shows through examples of agricultural and pharmaceutical patents, as well as book, music, and movie copyrights, that monopolizing knowledge serves to restrict knowledge and hold back progress. A large part of the section is a favorable book review of Against Intellectual Monopoly by Michele Boldrin and David Levine.

Tucker concludes with a section on “Public Crimes,” which delves into the true nature of government laws and regulations and their ill effects on civilization. He also turns his attention to the difference between capitalism and corporatism, as well as the coercive nature of government-run military defense. The last subsection returns to the Jetsons theme, discussing a particular episode that presents a credible case for how even the remains of the state that may still be with us in the future will be relatively harmless and even comical compared to the monstrosities of the present day.

While the book does not go into extensive detail on free market economic theories, it presents a message of liberty in a fun, lighthearted manner that is ideal for a person curious about libertarian ideas.

Rating: 5/5

Sriracha pollution and how a free society might handle it

On Oct. 31, Judge Robert H. O’Brien denied a request made by attorneys representing the city of Irwindale, Calif. for a temporary restraining order against a Sriracha hot sauce factory. Residents of the city have been complaining that pollution from the factory in the form of garlic and chile vapors are causing coughs, sneezes, headaches, burning throats, and watering eyes.

John R. Tate, representing Huy Fong Foods, the company that manufactures Sriracha, argued that shutting down the factory now would cause severe financial harm and interrupt a delicate production cycle, as well as prevent inspectors from the South Coast Air Quality Management district from completing an analysis of the air coming from the plant.

An upcoming hearing on Nov. 22, a judge will decide whether to grant a preliminary injunction against Huy Fong Foods. If this is denied, the city has also sought a permanent injunction on factory operations, though a hearing date has not been set for this request.

Situations like this one present one of the greatest challenges to free market anarchists, as many people cannot envision how people could solve a problem like environmental pollution without a government, and will thusly support the state out of this believed necessity. It is therefore worth examining how voluntary methods can solve pollution problems.

First, we must define what pollution is. The Free Dictionary provides a useful definition: pollution is the contamination of soil, water, or the atmosphere by the discharge of harmful substances. As everything in a stateless society is privately owned, pollution results in damage to private property. Thus, dealing with pollution is properly viewed within the context of dealing with damage to private property.

The first step is to mitigate losses, which as with other forms of private property damage, such as fires and floods, is best handled through insurance. Pollution insurance would cost a property owner a certain amount to maintain a policy and pay out a certain amount if the insured property becomes polluted in a manner described in the insurance policy. This system protects property owners against losses and incentivizes the insurance company to act to maintain a clean environment, as they make a steady stream of money unless and until pollution occurs, at which point they lose money. (Note: this type of pollution insurance is not the same as the commercial pollution insurance that is used today. Commercial pollution insurance is for the purpose of making sure that victims of pollution can be compensated in the event of the bankruptcy of a corporation that has caused an environmental disaster. As corporations are legal fictions created by the state, a stateless society would have no corporations in the contemporary sense, but commercial pollution insurance policies would likely still be held by private business owners.)

As with many problems, an ounce of prevention is worth a pound of cure. Such prevention can be accomplished through a system of dispute resolution organizations (DROs). These organizations would provide dispute resolution services, contract insurance, and contract enforcement in the absence of a state, and it would be necessary to retain the services of a DRO to ensure that one’s business associates cannot repudiate contracts without penalty. It is easy to ensure that people abide by DRO rulings which they agreed to accept in advance by employing a reputation rating or contract rating that works similarly to today’s credit ratings. Not keeping one’s word reduces one’s contract rating, which leads to higher costs for DRO services (if the DROs do not ostracize the person completely) as well as a reluctance by any other person to enter into a contract of business with a person who is known to be untrustworthy. This would make it difficult to acquire even the basic necessities of life, so people would obey DRO rulings in all but the most extreme cases.

Now that the conceptual organizations of a free society have been discussed, let us see how they can deal with pollution. Whenever the owner of a potentially polluting business wants to set up shop somewhere, they must first buy land from someone. In a free society, if private landowners choose not to sell to a particular buyer, then no one can force them to do so, as eminent domain is a violation of property rights which can only occur under a coercive system, such as the current statist system. But suppose that someone is willing to sell land to a potential polluter. A pollution insurance business then has several options: it can move to outbid the potential polluter, depriving them of a place to pollute; it can engage with the seller and explain why selling to the potential polluter is bad for everyone; it can pay the potential polluter to refrain from polluting; or it can work out a non-polluting contract with the potential polluter.

Let us assume that the potential polluter is extremely rich, such that outbidding the potential polluter is impossible. Let us also assume that talking the seller out of selling to the potential polluter is unsuccessful. The pollution insurer can pay the potential polluter up to the amount of money coming in from policyholders and still be making some profit. This could go toward pollution reduction technology, a buyout of the polluting factory, or a subsidy for running the factory at less than full production. Failing all of this, the insurer can pay out the claims from the property owners in the polluted neighborhood so they can clean up their properties or move away from the pollution source.

The DRO that represents the potential polluter would also be against the pollution, as pollution results in damage to private property, which leads to damage claims against the polluter. (Such claims can be filed regardless of pollution insurance, as a violation of property rights is occurring either way.) The DRO, in its roles as dispute resolver and contract insurer, would be paying out on such damage claims. A DRO would recoup these losses by raising rates for the polluter, and may drop the polluter as a customer if the claims against the polluter become too costly. The polluter would be unable to enter into contracts if no DRO is willing to accept the cost of paying out pollution damage claims, which would cripple the polluter’s business.

In a free society, there are the DROs of the residents, the DRO of the potential polluter, and the pollution insurance company all working to minimize pollution levels. The market has not failed at solving the problem of pollution; it has been forcibly prevented from doing so by state violence.

The Truth About the History of U.S. Sovereign Default

During the ongoing US government shutdown, there have been worries that a sovereign default is looming if no deal is reached. While many people in the establishment media have been claiming that a sovereign default is unprecedented, this is false. Let us examine the depth of the historical inaccuracy being perpetuated in the establishment media.

The first event in American history that could be called a sovereign default occurred in 1779. In June 1775, the Continental Congress issued bills of credit amounting to 2 million Spanish milled dollars to be paid starting in 1779 in four annual installments. $4 million more were issued later in 1775, and $13 million were issued in 1776. Such bills continued to be issued until $241,552,780 of them were outstanding, and the British were successful in forging even more of them. The Continental Congress made each state responsible for redeeming the bills in proportion to their respective population sizes, as it had no power to levy taxes. As the Revolutionary War went on, the public realized that neither the Congress nor the states were able to redeem the bills, leading to the phrase “not worth a Continental.” Congress admitted default on the bills in November 1779 by announcing a devaluation of 38.5 to 1.

Revolutionary War debts also led to the second US default. The Continental Congress borrowed money in addition to its money printing. The domestic portion of this debt was 11,710,000 Spanish dollars. The Continental Congress began to default on these obligations on March 1, 1782. With the Funding Act of 1790, the US Congress assumed these state-held debts while offering to pay only part of the owed money. This act of federal acquisition of state debts was the first “bailout” in American history.

Another default occurred during the War of 1812, when America was on the brink of defeat. The White House and the Capitol were burned in 1814, and American soldiers were fighting without pay. In November 1814, the Treasury defaulted on some of its bonds.

The fourth default episode occurred during the Civil War. In August 1861, Congress created a new paper currency, which became known as the “greenback” due to its ink color. There were $60 million of these printed in denominations of $5, $10, and $20. They were redeemable in specie at a rate of 0.048375 troy ounces of gold per dollar, but this promise was broken on Jan. 1, 1862. More greenbacks were issued in 1862, and while these were not defaulted on, their holders did not get their promised specie until 1879.

The theme of war leading to default would continue in delayed fashion after World War I. On Apr 24, 1917, Congress began issuing “Liberty Bonds” to pay for the war effort. The fourth round of these bonds was issued on Oct. 24, 1918, and was an issue of $7 billion at 4.25 percent interest for 20 years, callable after 15 years, and payable in gold at a rate of $20.67 per troy ounce. By 1933, the interest payments on these bonds were draining the coffers of gold, with only $4.2 billion in gold remaining. There was no way to pay the principal when it matured in 1938. The total national debt at the time was $22 billion, meaning that paying the interest on the national debt would soon empty the gold reserves. Franklin Roosevelt’s solution was to refuse redemption in gold to Americans and increase the exchange rate to $35 per troy ounce of gold for foreigners.

The gold window was closed to Americans in 1933, but it was closed to everyone by Richard Nixon in 1971 in the event known as the Nixon Shock. At the end of World War II, America owned 574 million troy ounces of gold, the majority of the world’s gold reserves. As Germany and Japan recovered in the 1950s, the US share of global GDP decreased from 35 percent to 27 percent. Inflation by the Federal Reserve, a negative balance of payments, Great Society programs, and Vietnam War debts further strained the Bretton Woods system. Between 1960 and 1971, the US gold reserve was cut in half. During the year of 1970, the monetary supply inflated from $590 billion to $633 billion. Nixon responded by ending all convertibility of the dollar to gold, thereby defaulting on promises to creditors.

The most recent default occurred in 1979. Due to a debt ceiling debate in April 1979, a failure of word processing equipment used to prepare check schedules, and record high volume of participation by small investors, $122 million in bills coming due on April 26, May 3, and May 10 were not paid in full and on time. A class-action lawsuit, Claire G. Barton v. United States, was filed in the Federal court of the Central District of California over whether the Treasury should pay additional interest for the delay. The government decided to pay up to attempt to move past the incident, and no one lost any money that they were owed on the bills. Still, the end result was a permanent increase in the interest rates of Treasury bills by 60 basis points.

Whether or not a default ultimately results from the current gridlock in Congress, the truth is that such an event would be not the first of its kind in American history, but the eighth.

We are not a country of anarchists: a philosophical rebuttal

On Oct. 4, Sen. Elizabeth Warren (D-MA) made a blog post which presents a statist viewpoint of the necessity of government services as well as an incorrect association of Republicans with anarchism. Let us examine her sophistry and rebut it line-by-line. In the interest of reason, something which tends to make statists uncomfortable, we will skip around occasionally.

“If you watch the anarchist tirades coming from extremist Republicans in the House, you’d think they believe that the government that governs best is a government that doesn’t exist at all.”

Right out of the gate, there are multiple fallacies and falsehoods. Anarchism is an anti-political philosophy which holds the state to be an unnecessary, immoral, and harmful institution. Anarchists advocate for stateless societies with an absence of force, fraud, and coercion. This is not the position of any House Republican.

“Extreme” is a philosophically invalid term that is used frequently by statists, particularly those of a progressive bent, to dismiss a position without having to argue against it. As such, it is an example of argumentum ad lapidem.

No government exists; only its component parts (each person, each building, each gun, etc.) exist, because only those parts have independent forms in physical reality. To define existence in a way that does not require an independent form in physical reality allows for abstractions and universals to exist alongside concrete objects, which deprives the idea of existence of meaning, as anything can then be said to exist.

“But behind all the slogans of the Tea Party – and all the thinly veiled calls for anarchy in Washington – is a reality: The American people don’t want a future without government.”

“The American people” is a nonexistent universal, just like government. Each individual person exists; “the American people” does not. Therefore it cannot be a reality that the American people do not want a future without government. It is also not the case that each individual person wants a statist future. Some individuals within the geographical area of the United States are anarchists, this writer included.

“When was the last time the anarchy gang called for regulators to go easier on companies that put lead in children’s toys? Or for inspectors to stop checking whether the meat in our grocery stores is crawling with deadly bacteria? Or for the FDA to ignore whether morning sickness drugs will cause horrible deformities in our babies?

When? Never. In fact, whenever the anarchists make any headway in their quest and cause damage to our government, the opposite happens.

…The Food and Drug Administration makes sure that the white pills we take are antibiotics and not baking soda. The National Highway Traffic Safety Administration oversees crash tests to make sure our new cars have functioning brakes. The Consumer Product Safety Commission makes sure that babies’ car seats don’t collapse in a crash and that toasters don’t explode.”

Here, Sen. Warren is going after her straw man caricature of House Republicans, but let us take the attack upon anarchism at face value. First, we should consider the nature of regulations imposed by the state. Such regulations are written by legislators, who are routinely bribed by lobbyists hired by the most powerful people in the very industries to be regulated. Under such a system, regulations serve not the interests of the common man, but the interests of the wealthy business owners.

On the other hand, all of the above examples can be handled through private dispute resolution organizations in a free market. People who destroy life, liberty, and property with their goods would be made to either perform restitution or be economically ostracized. Economic ostracism would make it impossible for them to continue their harmful practices, as no one would buy their goods or sell them anything for fear of being ostracized themselves. All of this can be forcefully backed by individuals acting in self-defense or by private defense agencies.

“After the sequester kicked in, Republicans immediately turned around and called on us to protect funding for our national defense and to keep our air traffic controllers on the job.

And now that the House Republicans have shut down the government – holding the country hostage because of some imaginary government ‘health care boogeyman’ – Republicans almost immediately turned around and called on us to start reopening parts of our government.”

By pointing to Republican efforts to protect certain government employees and services, Sen. Warren has contradicted her previous assertion that Republicans are anarchists.

A hostage-taker is a person who threatens to harm peaceful people unless certain demands are met. Any legislator who passes a law of any kind is doing exactly that, because anyone who peacefully disobeys a law is in danger of being harmed by agents of the state. Therefore, every member of every legislature is a hostage-taker, not just House Republicans.

“Why do they do this? Because the boogeyman government in the alternate universe of their fiery political speeches isn’t real. It doesn’t exist.”

Sen. Warren says that government does not exist. Even a blind squirrel occasionally finds a nut.

“Government is real, and it has three basic functions:”

And sometimes, a blind squirrel promptly loses the nut again.

“1. Provide for the national defense.”

Like a government and the American people, a nation is yet another nonexistent collective. There is no such thing as national defense apart from the sum of individual defenses.

“2. Put rules in place, like traffic lights and bank regulations, that are fair and transparent.”

As shown above, regulations in a statist society are anything but fair, as the affluent can easily bribe those who write the regulations. A state is not necessary for there to be regulations, as the free market imposes its own regulations which arise through spontaneous order.

“3. Build the things together that none of us can build alone – roads, schools, power grids – the things that give everyone a chance to succeed.”

Here, Sen. Warren commits the great fallacy of statism, which goes like this:

1. The state provides service X. X can be anything; in this case, Sen. Warren mentions roads, schools, and power grids.
2. Without the state, service X would not be provided.
3. Therefore, those who do not want the state to provide service X do not want service X to be provided at all, and do not care about people who need service X.

The problem with such reasoning is that step 2 is a positive claim, which carries a burden of proof. This burden is never fulfilled by statists, nor can it be, as one must ultimately disprove every possible solution to a problem that does not involve the state. This is an inexhaustible proof by exhaustion. On the other hand, all that an advocate of liberty must do is to find a solitary example of such services being provided in the free market. Examples of roads and schools which are built and maintained privately are abundant. Power grids can be more tricky to open up to free market competition, but it can be done.

“These things did not appear by magic.”

This is a straw man, as no one claims that they did.

“In each instance, we made a choice as a people to come together. We made that choice because we wanted to be a country with a foundation that would allow anyone to have a chance to succeed.”

From here on out, Sen. Warren continually uses “we” to refer to “the American people,” a collective which has already been shown not to exist. It is impossible for “us” to make a choice because there is no such thing as a collective mind; there are only individual minds. For the sake of avoiding unnecessary repetition, this rebuttal should be understood to come after each bit of text by Sen. Warren from this point forward. In this excerpt, the collective pronouns render all points invalid.

“We are alive, we are healthier, we are stronger because of government. Alive, healthier, stronger because of what we did together.”

This is a post hoc ergo propter hoc fallacy. Just because individuals acted on the idea of government before people became healthier and stronger does not mean that the idea of government is the cause of such benefits. There could be any other cause for an increase in the health of individuals.

“We are not a country of anarchists. We are not a country of pessimists and ideologues whose motto is, ‘I’ve got mine, the rest of you are on your own.’ We are not a country that tolerates dangerous drugs, unsafe meat, dirty air, or toxic mortgages.”

Here, Sen. Warren proposes that one must either believe a government that regulates many aspects of the economy, or be a stereotypical bomb-throwing chaos-seeker who views selfishness as a virtue. This is a false dilemma fallacy, as it is quite possible to believe that people should form voluntary associations to solve problems without the use of force, fraud, or coercion.

“We are not that nation. We have never been that nation. And we never will be that nation.”

The future is unknown and unknowable. People once said that a constitutional republic would never work. People once said that (chattel) slavery would never end. People once said that landing on the moon was impossible. Now Sen. Warren says that the end of the state will never come. She is on the wrong side of historical precedent.

“The political minority in the House that condemns government and begged for this shutdown has its day. But like all the reckless and extremist factions that have come before it, its day will pass – and the government will get back to the work we have chosen to do together.”

There is no government shutdown; there is only a roughly 17 percent slowdown.

Sen. Warren comes full circle with the philosophically invalid terms “reckless” and “extremist.”