Eric Mack on Libertarianism

Eric Mack on Libertarianism

04/22/2019David Gordon

Libertarianism. By Eric Mack. Polity Press, 2018.  Vi + 167 pages. + online bonus chapter http://politybooks.com/wp-content/uploads/2018/07/Mack-Libertarian-FINAL-Online-Chapter-pdf.pdf

Eric Mack, for many years a philosophy professor at Tulane University, has a well-deserved reputation as a critic of philosophical arguments, and that talent is on abundant display in Libertarianism. In what follows, I shall comment on only a very few of Mack’s penetrating discussions.

The book is intended as an introductory guide to libertarianism, which Mack characterizes as “advocacy of individual liberty as the fundamental political norm. An individual’s liberty is understood as that individual not being subject to interference by other agents in her doing as she deems fit with her own person and legitimate holdings.” (p.1) The position may be defended with varying degrees of strictness, ranging from hardcore libertarians, who confine coercion to the protection of individual liberty, to soft-core libertarians, who allow coercion for a few additional reasons, such as aid when people are in “dire straits.” As the extent of permissible coercion grows, libertarianism shades into classical liberalism.

What is the justification for libertarianism? Mack distinguishes three principal answers, though noting that libertarianism can be defended in other ways as well. “There is the natural rights theme, according to which certain deep truths about human beings and their prospective interaction allow us to infer that each person has certain basic (‘natural’) moral rights that must be respected by all other persons, groups, and institutions.” (p.40)

Here I wonder whether one should make a distinction. Sometimes people use the term “natural rights” to mean basic rights, but sometimes people have in mind a narrower usage. In this understanding, it follows from human nature that human beings have certain rights. For example, in the Objectivist philosophy, because you need freedom in order to survive as a rational being, you have a right to freedom. There is no “is-ought” gap.  Philosophers like Nozick, who accept the is-ought gap, would in this usage count as supporters of basic rights but not of natural rights.

The second justification for libertarianism “is the cooperation to mutual advantage theme, according to which general compliance with certain principles of justice engenders a cooperative social and economic order that is advantageous to all its members.”(pp.4-5) These two justifications vie in popularity among libertarians, but there is a third justification as well, though this has been less influential. “A third possible approach. . .is a form of utilitarianism that maintains that the greatest happiness must be pursued indirectly through steadfast compliance with certain constraining moral norms—as it turns out, pretty much the same constraining norms that are celebrated by the natural rights and mutual advantage approaches.” (p.5)

Mack takes Locke to be an example of the first approach, Hume of the second, and John Stuart Mill and Herbert Spencer of the third. Among twentieth-century figures, he concentrates on Robert Nozick as a representative of the natural rights approach and Friedrich Hayek as a representative of the mutual advantage approach. Mack devotes most of the book to a close analysis of these two great thinkers. He mentions Murray Rothbard, who exerted a profound influence on Nozick, several times, but I wish he had devoted more space to him. Mack in the bonus online chapter subjects to critical scrutiny a number of contemporary libertarians: Hillel Steiner, Doug Rasmussen and Doug Den Uyl, Loren Lomasky, and David Schmidtz.

In what follows, I shall comment on only a few points. These concern Robert Nozick though some of the issues are relevant to others as well. This makes for an idiosyncratic review, but Nozick’s thought has fascinated me since I first encountered it some forty-five years ago, and that is why I have chosen this path.  Despite the narrow scope of my review, I hope that readers will gain some idea of Mack’s concerns and his style of argument.

Mack gives an excellent account of the argument, given by both John Rawls and Nozick, that utilitarianism does not take seriously the separateness of persons. The greatest happiness principle may require that you sacrifice yourself for the benefit of society. But, so the objection goes, this wrongly assimilates an individual’s sacrifice of part of himself for his overall good to the sacrifice of a person for the good of society. You may need to have your leg amputated to save your life, but there is no social entity having persons as its parts.

Mack considers a utilitarian response to the point raised by Rawls and Nozick, which does not rely “on the conflation of persons into a social entity.” (p.45) This response is that “what makes it rational for an individual to incur a lesser cost within her own life in order to attain a greater benefit within her own life is simply that the benefit is greater than the cost. The fact that the cost and the benefits are hers---that they both occur with her life---plays no role in making rational the production of the greater benefit at the lesser cost. Therefore, no contentious inference is needed to get from the so-called principle of individual choice to the principle of social choice.” (p.45, emphasis in original)

Mack responds on behalf of Rawls and Nozick to this rejoinder. They might reply that the rationality of prudential sacrifices within the life of one individual is “far less contentious” than the utilitarian’s balancing of costs and benefits across lives. (p.46) Can one show that utilitarian balancing is rational, without assuming the existence of a social entity with persons as parts? It seems doubtful that one can.

Mack’s response is excellent, but another answer is also worth considering. James Buchanan maintains that if one takes adequate account of the subjectivity of costs and benefits, a cost or benefit exists only relative to a single person. Your cost or benefit may be a cost or benefit to me, but only if I view it as one. I do not say that this view is correct, but it is at least worth considering. (Amartya Sen, like Buchanan a Nobel laureate in economics, thought there was a great deal to be said in favor of Buchanan’s view) If it is correct, benefits and costs cannot be added up across persons.

After a careful discussion of Nozick’s condemnation of using others as means, Mack says, “Nozick is concerned that his unqualified condemnation of using others as means will support anti-libertarian prohibitions, , for example, taking pleasure in another person’s appearance or trading with another person to one’s advantage. He then rules out such implications by declaring that, for the purposes of political philosophy, we need only be concerned ‘with certain ways that persons may not use others: primarily, physically aggressing against them. [quoting Nozick, Anarchy, State, and Utopia]However, this restriction is ad hoc because no reason is given for why political philosophy should only be concerned with this subset of usings.” (p.49, emphasis in original)

I do not think this objection altogether fair to Nozick, though it would be no doubt desirable to show how this view of political philosophy can be deduced from moral theory, as Nozick acknowledges. Confining political philosophy to the topic of when force is permissible (or obligatory) is not idiosyncratic to Nozick but a commonly used approach, especially among libertarians. He might respond to Mack, applying a strategy he often used on critics, ---much to their frustration, I might add---- that the problem of why political philosophy is thus confined is no more a problem for him than for anyone else. As such, it should not be taken as a decisive criticism of him.

Mack makes an excellent criticism of Nozick’s argument that if one starts with a network of competing protective agencies, as free market anarchists like Rothbard wish, “one of the protective agencies or the cooperative network as a whole seems to attain a natural ( non-coerced) monopoly in the provision of protective services.” (p.117), Nozick contends that if an agency or group of agencies attracts more clients than its rival agencies, there will be a cascade of new clients to it, because people will find it less costly to settle disputes if they are in the same agency. This will enable the largest agency to become a de facto monopoly. Mack is skeptical: “The fact that it may be less complicated and costly to resolve automobile collision claims when both parties are customers of the same insurance company has not led to one company having a virtual monopoly within the automobile insurance business. In addition, Nozick’s argument seems to overestimate the homogeneity of the services that competing protective agencies would offer.” (p.117)

There is an additional point here that seems worth making. Suppose that the process Nozick describes results in everyone’s joining the same agency. In that case, we would not have a state as Nozick characterizes it, because one of his requirements for a state is that it offers free or low-cost protective services to disadvantaged independents who are not its clients.  Thus, Nozick requires for his argument to the minimal state to succeed that the very process by which the derivation starts will come to an end before it completes itself, but he offers no reason for this.

Mack raises against Nozick the specter of public goods. “For our purposes here, we can think of a public good as a good which, if it is produced and enjoyed by some members of a given public, cannot readily be withheld from other members of that public. . .The standard and useful example of a public good is national-scale defense. . . The conventional economic wisdom. . .is that the total value of the orders that the state or firm [ that offers defense services]will receive will be markedly less than it naively expects.”(p.122) People will prefer to free ride, hoping that others will pay for the good; but if everyone reasons this way, the good will not be purchased.

Mack is certainly right that if anarchist protective agencies or a Nozickian minimal state, lacking the power of taxation, proved unable to supply effective defense, that would be a serious objection indeed. But I think his argument has moved too fast. According to the customary neoclassical analysis, public goods will not be supplied efficiently. It does not follow from that, though, that the good will not be supplied at all, or in a quantity insufficient to “do the job.” The extent of the supply is an empirical matter. It is not a requirement for a theory of libertarian rights that it never requires efficiency losses, as neoclassical theory defines these.[1] (The same difficulty also applies to Mack’s argument for a “dire straits fund” on pp.39-40 of the online bonus chapter.)

Suppose, though, that the free market turns out to be unable to supply defense. Would Mack then be correct when he says that a taxation minimal state may be justifiable on Nozickian grounds? He says, “Persons’ rights indicate what must not be done to them---or more specifically, what must not be done to them without their consent. But what about cases in which consent is not feasible?. . .A person’s right over her own body entails that she has a right not to be cut open without her consent even by an expert surgeon seeking to save her life. However, what if the person who needs that surgery to save her life is already unconscious and, hence, unable to give consent? If it is permissible for the surgeon to proceed with the needed surgery on the already unconscious individual, this seems to be true  because the requirement that the subject consent to the physical intervention is really a requirement that she consent if and only if consent is feasible.” (pp.123-124)

If this is right, then, “the libertarian advocate of the TMS may argue that, precisely because of the non-feasibility of attaining consent from individuals to make payments in exchange for the public good of rights-protection, it is permissible to impose those payments without actual consent.” (p.124, emphasis in original)

I do not think this argument succeeds. In the first case, it is permissible to proceed with the life-saving operation because there is reason to believe that is what the patient would want. Most people would. Had she given instructions beforehand not to operate, then the operation would not be permissible. In the taxation case, the reason consent is not feasible is that people refuse to consent. It is hardly plausible to say that I may force you to pay me for my services, because, owing to your refusal of my services, getting your consent is not feasible.

Mack himself raises an important problem for the argument for the taxation minimal state. ”Recall. . . . .that this defense of the TMS turns on a striking assumption about information. It assumes that the state’s tax assessors would know, for each assessed party, what magnitude of taxation would leave that party net better off in light of the value for that party of her receipt of the tax-funded public good of protective services.” (p.124)

In Libertarianism, Mack does not, for the most part, discuss his own views but confines himself to the exposition and criticism of others. An exception is his brilliant presentation of Mises’s calculation argument against socialism (pp.58 ff.), one of the best known to me, where it is clear that he endorses the argument. Readers should be aware though, that Mack has written a large number of papers setting forward his own views in great depth and detail. Readers of Mack’s work will encounter a very fine philosophical intelligence. Few can approach his power of critical analysis. Libertarianism is must reading for anyone interested in libertarian theory.


[1] For challenges to the neoclassical analysis of public goods, see Ludwig von Mises, Human Action, Chapter 23, pp.650 ff; and Anthony de Jasay, Social Contract, Free Ride. See also the discussion in David Schmidtz, The Limits of Government.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

"Free" College Won't Improve Education

05/17/2019Paul Boyce

You're a twenty-something student and have recently graduated. You're excited to go and take on the world. However, you owe over $50,000. All you wanted to do is gain an education. This massive debt now looms over you. How can the world be so unfair? Why shouldn't this education be free like the other forms are? Shouldn't education be a right? Step in, Democratic Presidential nominee, Elizabeth Warren. She recently set out her plan to cancel student debt and abolish tuition fees. Her plan offers free tuition, as well as eliminating existing debt of up to $50,000. Each household with income below $100,000 would have up to $50,000 of debt wiped out.

What's There Not To Like?

Surely free higher-education, is beneficial to society as a whole? If smarter people are coming out of colleges, greater value will be created in the economy. The trouble with this is that far too many degrees are not aligned to market demand. Religious Studies may be of interest to the student, but there aren’t many businesses or jobs that require such degrees. There is a case for creating a well-educated workforce, but this has turned into educating for educating's sake.

The System Is Not Aligned With The Market

Too many students are coming out of the educational system and not utilising their degree. Whilst unemployment rates are low among graduates, many find themselves in jobs that don't require a degree. From Starbucks baristas to Wal-Mart assistants — many now have a degree.

Some majors are more prone to underemployment than others. Performing arts graduates for example have an underemployment rate of 65.7% . Graduates in Leisure and Hospitality don't favour much better, with an underemployment rate of 63%. By contrast, engineering and educational graduates score favourably on underemployment measures. The difference is that there is demand for engineers and educators, but not so much for performing arts.

There is a clear disconnect between the market and the educational system. Whilst the market demands graduates in science and engineering, the educational system provides graduates in arts and media.

"Free" College Wont Re-align The Market

Making college education free is not going to resolve the disconnect between the market and colleges. If college education is free, there is no downside of coming out underemployed. The risk associated is almost eradicated. One of the crucial parts of college education is determining whether it's of value. It's an investment. An investment that future earnings will be enhanced as a result. Will the enhanced earnings be worth more than the $50,000+ spent on education? By removing the cost, Warren's proposal changes the incentives. The cost-benefit is changed. There is a significant benefit, but little cost. This incentivises greater participation. When the price of any good is removed, the demand for it will increase. College will be no exception.

More students going to college may seem like a good thing. However, what will they be going to study and what value will that degree have? Based on existing statistics, many will continue to come out underemployed. If we are educating millions of individuals that are not utilising that education, resources are wasted. Those same resources could be used to invest in capital equipment and increase productivity.

The Mess that Is American Public Secondary and Primary Education

Elizabeth Warren justifies her plan as part of an effort to help racial and ethnic minorities get into college. However, given how little government schools at the primary and secondary levels do for students who are low-income or non-white, it’s hard to have confidence in just another government education scheme. After all, at lower levels of public education, instruction and outcomes are notoriously poor for just the sorts of students Warren says she can help. What reason do we have to believe that universal government education at the college level will finally get it right?

If Warren wants to expand college access, she’s be more worried about ensuring schools provide the skills necessary to enter and thrive at higher education institutions. Right now, that simply isn’t happening.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Thomas DiLorenzo Discusses Socialism and CEO Salaries on Fox Business

Thomas DiLorenzo Discusses Socialism and CEO Salaries on Fox Business

Thomas DiLorenzo on CEO Salaries (Fox Business Network, 5.15.19)

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Social Security is Broke, Any "Fix" is a Joke

05/16/2019Alice Salles

Social Security is going bust, a report released by trustees of the federal government’s entitlement programs claims. And without more money being poured into the system, the report argues, tens of millions of Americans will receive only three-quarters of their Social Security benefits in the near future. But even if trustees hadn’t figured that out by now, you would have known this was bound to happen. Unless you never heard any Austrian economist explain why Social Security is nothing but a Ponzi scheme.

According to the trustees, Social Security’s funds will be tapped out by 2035, meaning that this generation of working men and women may never see a dollar from what they “invested,” forcefully, over the years. In order to fix this problem and make Social Security solvent again, the report urges lawmakers to act.

“Lawmakers have a broad continuum of policy options that would close or reduce the long-term financing shortfall of” Social Security and Medicare, Treasury Secretary Steven Mnuchin, Health and Human Services Secretary Alex Azar, and other trustees wrote in their report to Congress.

Options include hiking up taxes and slashing benefits, two policies that seldom find any support from elected officials on both sides of the aisle. As such, it’s clearly impossible to work on any Social Security “reform” that will actually help to prevent it from falling apart.

But is there any way that Social Security can be actually saved?

Abolish Social Security

President Trump thought he wouldn’t have to do anything to the entitlement program. As a matter of fact, he claimed that his plans were going to boost the economy enough that Social Security’s problems would be easily solved.

But the U.S. government has long been in debt. Quite deeply, as a matter of fact. As a result, money is not being put aside in some special fund for Social Security. What the government runs on is borrowed and printed cash, as the Federal Reserve keeps postponing its plan to slow down on the expansion of its balance sheets. But as the number of Americans who are 65 or older is expected to grow by a third between now and 2040, the cost of Social Security will continue to rise.

Considering that the program both undermines economic prosperity and damages the average American’s relationship with money by giving beneficiaries incentives to remain dependent on the government, ending it shouldn’t be a tough call. Especially knowing it will no longer be capable of fulfilling its obligations in the coming future.

But Social Security still has friends in high places.

It is thanks to big businesses and their connection with the government that we have the program in the first place. After all, if President Franklin D. Roosevelt hadn’t listened to hot shots at the time, who were upset smaller businesses were not giving employees retiree pensions, the federal government may have not been used to force everyone to pay for similar programs.

As Murray Rothbard put it, Social Security didn’t hurt big, established firms but their competitors, as the program “penalizes the lower cost, ‘unprogressive’ employer and cripples him by artificially raising his costs compared by the larger employer.” Unfortunately, not many Americans see the program this way.

With generations relying on the failed system over the years, it is certain we won’t see any politicians doing much to gut it. But hopefully, Americans will finally refuse the system once they learn it is both ineffective and based on policies that benefit big corporations on the expense of the little guy.

What’s not to hate about such a dysfunctional scheme?

Originally published at theadvocates.org.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

The Fallacy of Identity Economics

05/15/2019David Gordon

The economist Alex Tabarrok in a post today criticizes what he calls ”identity economics”. Tabarrok says: “Identity economics is bad economics”. By “identity economics,” he means a theory that jumps from an accounting identity to a claim about causation. Keynesian economics is a prime example of this fallacy, as Tabarrok’s quotation from Nick Rowe illustrates:

1. Y = C + I + G + X – M. Therefore an increase in Government spending will increase GDP.

2. Y = C + S + T. Therefore an increase in Taxes will increase GDP.

Takarrok  summarizes:

My guess is that you are much more uncomfortable with the second of those two examples than the first. You have probably seen the first argument before, but have probably not seen the second. But they are both equally correct accounting identities and are both equally rubbish arguments.

Murray Rothbard long ago in Man, Economy, and State made the same point. He offered a reductio ad absurdum of the Keynesian multiplier

"Social Income =Income of (insert name of any person, say the reader) + Income of everyone else, Let us use symbols:

Social income =Y

Income of the Reader=R

Income of everyone else =V

We find that V is a completely stable function of Y. . . .Let us say the equation arrived at is: V =.99999 Y Then, Y =.99999Y +R

.00001Y =R

Y=100,000 R.

This is the reader’s own personal multiplier, a far more powerful one than the investment multiplier. To increase social income and thereby cure depression and unemployment, it is only necessary for the government to print a certain number of dollars and give them to the reader of these lines.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

A Study in Willful Blindness

05/13/2019David Gordon

Herbert Aptheker: Studies in Willful Blindness. By Anthony Flood. Independently published, 2019. I +93 pages.

Anthony Flood tells that in “the early 1970s, I was an acolyte of Herbert Aptheker(1915-2003). Known mainly for his writings on African-American history he was also, during the Cold War and even after, a theoretician of the Communist Party USA (CP).” (p.1) Flood became Aptheker’s research assistant and friend, but he eventually turned in disgust from his mentor, repulsed by Communist tyranny and atrocities.

Flood has documented a striking example of the way Aptheker’s rigid adherence to the Stalinist line corrupted his historical writing. Aptheker is best known as a historian for his American Negro Slave Revolts, his doctoral dissertation, published in 1943. In that book, he never cites the West Indian Marxist C.L.R. James’s Black Jacobins (1938), a study of the San Domingo Revolution of 1791 that overthrew the slave regime and established the Haitian Republic. Aptheker fully recognized the significance of the event; why then does he ignore James’s book? “What scholars virtually never even mention. . .is Aptheker’s life-long practice of rendering James invisible.”(p.15)

The answer, Flood suggests, is that James was a follower of Leon Trotsky. “Aptheker could not have missed the reviews it garnered in scholarly journals and the mainstream press. And yet in the few pages he devoted to that revolt in American Negro Slave Revolts, he neither cited Black Jacobins nor even listed it in his bibliography. For a card-carrying Stalinist like Aptheker, however, there was no lower form of life than a Trotskyist. “(p.80)

By no means did James ignore Aptheker. To the contrary, he attacked Aptheker for downplaying the role of blacks in abolitionist organizations. The Stalinists, James claimed, viewed blacks as subordinate shock troops of a prospective revolution rather than independent actors, and this  Stalinist line Aptheker faithfully followed. True to his policy of treating James as an invisible man, Aptheker never responded to James’s criticism.

Flood discusses a number of other examples  of the corrupting effects of Aptheker’s Communist bias, such as his tendentious The Truth about Hungary, approving the Soviet suppression of the Hungarian Revolution of 1956, and his claim in a newspaper article written in 1950 that the lack of revolts in North Korea showed that the Communist regime in power had popular approval.

Flood’s book is enlivened by stories of his conversations with Aptheker and Aptheker’s bitter enemy, the philosopher Sidney Hook, who was one of Flood’s professors. His careful account of the “invisible man” in Aptheker’s historiography is a valuable contribution.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Canada's Export Guarantee Program: More Risk for the Taxpayer

05/11/2019Eddie Fizor

The CBC (Canadian Broadcasting Corporation) broadcasts select NHL games on Hockey Night in Canada. These are "free” to watch on TV or stream online. "Free" is placed in quotations because the CBC’s advertises that their content services can be streamed for “free” by the public. It is worth noting that the CBC's annual share of revenue for 2018 was roughly 1.2 billion. Hockey fans may attempt to recuperate their tax dollars by watching as much hockey as possible.

The aforementioned gives context, but it is not the CBC which is the main focus of this article, but a commercial advertisement which is played during CBC’s Hockey Night in Canada.

The advertisement is for Export Development Canada (which is also funded by tax dollars).

A quote from the EDC website:

Our Export Guarantee Program can help your bank provide you with additional access to financing. We share the risk with your bank by providing a guarantee on the money you borrow, encouraging them to increase your access to working capital.

export.PNG

The Future is Uncertain

When an entrepreneur identifies a market in which they believe a profitable enterprise can be undertaken, the entrepreneur will invest their available funds. If the entrepreneur possesses insufficient funds, then a bank may choose to act as lender and direct additional funds toward what they may also believe to be a profitable endeavour.

[RELATED: "Mises Explains The Aggravating Role of Export Credit Agencies" by

In this instance, it is both the entrepreneur and the bank who will bear the risk. If the risk is too high, then the bank may choose not to loan funds to the entrepreneur.

What happens when Export Development Canada steps in to "de-risk" the project? EDC is funded by taxpayers. This means that projects will be undertaken with someone else’s money (the tax payer). Neither the entrepreneur nor the bank will fully bear the risk involved. What if the venture turns sour? EDC explains, "we share the risk with your bank by providing a guarantee on the money you borrow."

In the end, someone must bear the risk. So, who will it be?

If the entrepreneur utilizes his own funds, then he has a vested interest. This also would apply to a bank acting as lender. The claim that “risk doesn’t stop you,” identifies the  EDC not as “ risk experts,” but as “experts” in promoting risky ventures, underwritten with tax dollars.

Here's the advertisement which is aired during Hockey Night in Canada:

Risk Doesn’t Stop You When You’re With EDC

None of the entrepreneurs in this commercial appear to be concerned with risk. This should be a reason for concern on the part of the viewer. Such ads are misleading and promote a false of reality. The bearing of risk is unavoidable in any entrepreneurial endeavor. Future is uncertain. Resources are scarce.

Man shrugs his shoulders, "30,000 brake pads NO DEPOSIT. I said, why put the brakes on now?"

Indeed, why not? Why demand a deposit for surety? If the deal goes sour, someone else is left paying for your losses. It is easy to make risky decisions when the error of your way does not return upon your own head.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Bernie and Ocasio-Cortez Declare War on the Poor With Anti-Credit-Card Law

05/09/2019Ryan McMaken

Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez unveiled sweeping new legislation on Thursday that would impose a federal cap of 15% on credit-card interest rates.

The bill would also allow state governments to set interest-rate ceilings even lower than the federal mandate.

Naturally, Sanders and Ocasio-Cortez are framing the bill as something designed to help "ordinary people." But in reality, the legislation will only act as to reduce access to credit for low-income and other high-risk borrowers.

Credit card companies don't attach high interest rates to credit cards because they are mean and cruel. Credit cards with especially high interest are that way because the borrowers have been determined to be an especially high credit risk. Credit card companies want people to borrow money from them, so if they can make loans at lower rates, they will, in order to undercut the competition. But these companies also must make sure they're likely to cover their costs. Thus, the high interest rate exists to ensure the lender can make consumer loans while still accounting for the high risk of default by borrowers based on a risk profile.

Given that interest rates are similar to a "price of money," if Sanders and Ocasio-Cortez manage to slap a new limit on credit card interest rates, they will be essentially imposing a price ceiling on credit cards.

And price ceilings are sure to lead to shortages.

That is, they'll lead to shortages in consumer credit for high risk borrowers — many of whom will be low-income borrowers.

If lenders cannot price their product in a way that allows them to recover costs, they'll simply stop providing that service. Rather than face lower interest rates on credit cards — as Sanders and Ocasio-Cortez imagine will happen — high-risk borrowers are more likely to not be able to borrow using credit cards at all. Given that default rates are generally higher for low-income borrowers, the cost of collecting payments is higher. Lending to high-risk groups then is only possible if the price of those loans is higher. Without the higher price, the service will go away.

Cutting Poor People Off — "For Their Own Good"

On the other hand, maybe this is exactly what Sanders and Ocasio-Cortez want. One way to claim to have "done something" about high levels of debt is to simply cut off potential borrowers from credit.

After all, there is an implicit paternalism in efforts to place roadblocks between low-income/high-risk consumers and the products those consumers may wish to purchase. In the minds of a government planner, the solution to the problem of people borrowing "too much" money is to pass a law preventing them from doing so.

This, of course, is inherently unfair to those people who are — for now — in the high risk category, but who do pay their bills most of the time. (They might simply be in their category because they are young and have never established much of a credit history.) Moreover, many people who missed payment in the past may now be much more reliable and less prone to default. As people who fit a certain high-risk profile at first, they're likely to face high rates. One of the best ways these people can build good credit, though, is to first gain access to credit at high interest rates. Over time, they will increasingly gain more access to credit on better terms. Should these people then be punished and cut off from credit because they can't qualify for more moderate interest rates right away? The effect of the Sanders and Ocasio-Cortez legislation would be to do exactly that.

Meanwhile, lenders who offer loans to high-risk groups are themselves being blamed for the proliferation of credit card debt among American consumers of all types.

In his essay on payday lending — an issue very similar to that of high-interest credit cards — Tom Lehman analyzes the accuracy of these sorts of claims:

Finally, the allegation that payday lending "causes" chronic or habitual borrowing may ignore the old adage that "correlation does not equal causation." As indicated above, it is a well-known fact that payday loans appeal to a clientele that face numerous financial difficulties (many of them self-induced), quite independent of the payday lending industry itself. Most of these households have failed to establish good credit, have poor credit histories, are not known for their timely bill-paying habits, frequently bounce checks, frequently change jobs, and may relocate often. In short, they are the type of people who are going to be frequently short of cash and who will borrow "chronically" when given the opportunity. Because payday lending institutions provide them with this opportunity to borrow when other institutions will not does not mean that payday lenders cause this behavior. They simply provide an opportunity for this behavior to be exhibited more often than otherwise.

As is so typical of politicians, the answer offered by this new legislation is to limit the options available to the most at-risk populations.

A better approach is to allow freedom for both borrowers and lenders, to treat borrowers like adults, and to not assume they are incapable of managing their own money.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

As Fed Founders, Get Ready for More Radical Monetary Policy

05/09/2019Ryan McMaken

Last week, the the Federal Reserve left unchanged its benchmark federal funds rate, with Fed Chairman Jerome Powell declaring the US economy to be "on a good path."

In a unanimous vote, the Fed kept the rate in a range of 2.25% to 2.5%.

ffr1_0.png
 

The Fed's reluctance to allow interest rates to return to what would be considered a more normal rate historically continues to spur speculation about what the Fed should do in case of a recession.

The media narratives from "experts" and policymakers we're now hearing suggests three takeaways from last weeks' developments from both the Fed board and at the Stanford monetary policy conference last Friday.

1. The Fed Fears the Economy Remains Fragile

For eight years, the federal funds rate remained near zero, and all the while, we were told the Fed was "cautiously optimistic" about the economy, and that economy growth was "solid" and moderately strong. Yet, the Fed could not bring itself to allow the target rate to rise above QE-level near-zero rates. Then, It wasn't until 2017 that the rate was allowed to rise about one percent. By then, we were told that the Fed was just about to get aggressive with rates, taking the supposed strength of the economy as an opportunity to allow rates to rise to something resembling the four or five percent rate that might at least be in the same ballpark with what we saw during the past two expansions. That, however, now appears unlikely, even in the medium term. Fed policy has never approached anything we might call hawkish, and now Chairman Powell has already signaled 2.5 percent is quite high enough.

In spite of all the talk about "solid" growth, the Fed still sees the current economy as too fragile to deal with interest rates that would have been quite ordinary during the past 30 years.

The Trump administration, of course, points to the jobs data as "proof" of a strong economy, but outside that one group of data points, we find quite lackluster data otherwise, and the Fed knows it. Hence, it remains unenthusiastic about doing anything that would take it beyond its decade-long stance of embracing stimulus through low rates and a huge balance sheet.

2. Just Stay the Course

The Trump administration, of course, points to the jobs data as "proof" of a strong economy, but outside that one group of data points, we find quite lackluster data otherwise, and the Fed knows it. Hence, it remains unenthusiastic about doing anything that would take it beyond its decade-long stance of embracing stimulus through low rates and a huge balance sheet.

And this is why the Fed appears content to just stand as still as possible in hopes it won't break any of the fragile and easily-broken stuff around it.

This is especially important when we consider the political importance of keeping interest rates low for the sake of keeping government debt payments low. If rates go up, Congress will face ever-harder choices about what spending to cut back in order to keep up with a growing debt-service load. No one in Congress wants to even think about that, and they want the Fed to keep it that way.

By adopting a policy of standing still, though, the Fed is pretty much guaranteeing that it will begin the next recession from a position in which it has already used up many of it's stimulus tools. If interest rates are already low, and the Fed's balance sheet is already nearly at $4 trillion. What tools are left?

3. Get Ready for Radical New Monetary Policy

Since the fed knows it will likely start from a very fragile position in the next recession, it is now "reviewing" its policy options. New York Fed President John Williams says now is the time to "rethink" how it has been doing things. But not in a good way. As Yahoo! Finance reports :

For its part, the Fed has acknowledged the concern and has launched a review of its monetary policy framework and communication practices. In focus: how it publicly explains and achieves its dual mandate of maximum employment and stable prices (through its 2% inflation target).

As part of this revising of policy, many proponents of dovish monetary policy are suggesting that much higher inflation targets should be in order, and that everyone should stop worrying about pushing prices well above the old targets.

This leads to the idea that what the fed needs is a "bazooka," as noted by

Brian Cheung at AOL News:

“The central bank needs a ‘bazooka’ at the zero bound that makes credible its commitment to achieving its policy rule, and raising inflation if required,” Harvard economics professor Kenneth Rogoff said.

Rogoff’s recommendation : negative interest rate policy. The thesis: allowing interest rates to go negative, in which customers would be charged to keep money parked at their bank, would be a quicker way of spurring consumption and recovering jobs in a downturn.

Negative interest rates, of course, are an inflationist's dream. Banks would penalize people for saving money (which is really just the same as investing money) so as to incentivize them to spend their money on consumer goods instead.

The idea, then, is that it would easier to hit high new inflation targets because negative-rate policy would impel people to spend as much money as possible as quickly as possible. Prices would then increase, further encouraging spending.

It's basically just an old-fashioned inflationary spiral, but it's all necessary, we're told, to keep the economy going — at least until individuals want to retire or get into financial trouble. And then, suddenly, having no savings might be a problem.

But the experts at Harvard and the fed never let that sort of street-level household economics both them. What matters is macro policy, and the dream of a perfectly malleable economy that does what we tell it to do. And of course the economy will comply. We'll have a bazooka!

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Hayekian Insights from The Road to Serfdom

05/08/2019Gary Galles

Friedrich Hayek’s The Road to Serfdom reached its 75th anniversary this year. This classic, published near the end of the World War II, was incredibly influential. In fact, Milton Friedman wrote that he had made it a practice to ask believers in individualism how they got there in the face of the “collectivist orthodoxy,” and reported that the most frequent answer involved The Road.

As it is one of my favorite books and I have long been an avid collector of some of the finest words in defense of liberty (See my Lines of Liberty), I thought I would use the occasion to collect some of The Road ’s most insightful passages, hoping to stimulate reflection. However, I quickly discovered that despite being a short book, The Road had too much material for one short article. As a consequence, I decided to organize the material by breaking it into three parts. Below is Part 1—Freedom or Coercion.

  • We are fighting for freedom to shape our life according to our own ideas.
  • We have progressively abandoned that freedom in economic affairs without which personal and political freedom has never existed in the past.
  • Wherever the barriers to the free exercise of human ingenuity were removed, man became rapidly able to satisfy ever widening ranges of desire.
  • The fundamental principle is that in the ordering of our affairs we should make as much use as possible of the spontaneous forces of society, and resort as little as possible to coercion.
  • To the great apostles of political freedom the word had meant freedom from coercion, freedom from the arbitrary power of other men.
  • People still believe that socialism and freedom can be combined…the realization of their program would mean the destruction of freedom.
  • The argument for freedom is precisely that we ought to leave room for the unforeseeable free growth.
  • While there is nothing in modern technological developments which forces us toward comprehensive economic planning, there is a great deal in them which makes infinitely more dangerous the power a planning authority would possess.
  • The very men who are most anxious to plan society [are] the most intolerant of the planning of others.
  • Under the Rule of Law, the government is prevented from stultifying individual efforts by ad hoc action. Within the known rules of the game the individual is free to pursue his personal ends and desires, certain that the powers of government will not be used deliberately to frustrate his efforts.
  • That people should wish to be relieved of the bitter choice which hard facts often impose upon them is not surprising. But few want to be relieved through having the choice made for them by others.
  • The economic freedom which is the prerequisite of any other freedom…must be the freedom of our economic activity which, with the right of choice, inevitably also carries the risk and responsibility of that right.
  • The system of private property is the most important guaranty of freedom, not only for those who own property, but scarcely less for those who do not. It is only because the control of the means of production is divided…that nobody has complete power over us…If all the means of production were vested in a single hand…whoever exercises this control has complete power over us.
  • Those who are willing to surrender their freedom for security have always demanded that if they give up their full freedom it should also be taken from those not prepared to do so.
  • The more we try to provide full security by interfering with the market system, the greater the insecurity becomes; and …the greater becomes the contrast between the security of those to whom it is granted as a privilege and the ever increasing insecurity of the under-privileged.
  • In order to achieve their end, collectivists must create…power over men wielded by other men—of a magnitude never before known…There is, in a competitive society, nobody who can exercise even a fraction of the power which a socialist planning board would possess.
  • The competitive system is the only system designed to minimize by decentralization the power exercised by man over man…an essential guaranty of individual freedom.
  • The “substitution of political for economic power” now so often demanded means necessarily a substitution of power from which there is no escape for a power which is always limited…centralized as an instrument of political power it creates a degree of dependence scarcely distinguishable from slavery.
  • It could almost be said…that wherever liberty as we understand it has been destroyed, this has almost always been done in the name of some new freedom promised to the people.
  • Collective freedom…is not the freedom of the members of society but the unlimited freedom of the planner to do with society what he pleases.
  • Contempt for intellectual liberty…can be found everywhere among intellectuals who have embraced a collectivist faith.
  • There is no other possibility than either the order governed by the impersonal discipline of the market or that directed by the will of a few individuals.
  • Individual freedom cannot be reconciled with the supremacy of one single purpose to which he whole society must be entirely and permanently subordinated.
  • The conflict between planning and freedom cannot but become more serious…as the scale increases.
  • A community of free men must be our goal.
  • The guiding principle that a policy of freedom for the individual is the only truly progressive policy remains as true today as it was in the nineteenth century.

Friedrich Hayek ability to lay out the striking contrast between freedom and coercion is a central reason for the impact The Road to Serfdom makes on thoughtful readers. And that is just as true 75 years after its publication as when he wrote it. And as we have chosen to move along the wrong road in many ways since, Hayek’s insights into freedom remain central to our ability to defend it from the many centralizing efforts that would eviscerate it.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

End Federal Prohibitions of Hallucinogenic Mushrooms

05/08/2019Ryan McMaken

UPDATE: As of late Wednesday, the de-criminalization measure managed to close the gap of what had earlier been a 55 to 45 percent loss. It looks like the measure has now narrowly passed, and voters' laissez-faire attitudes toward mushroom consumption apparently (barely) overcame other concerns. The article has been modified to reflect this outcome.

Denver's municipal election this year featured a ballot measure to decriminalize psilocybin mushrooms — or as the Phish groupies called them back in high school — "shrooms." The measure was narrowly approved by 50.5 percent to 49.5 percent.

Denver, of course, is a place that voted in the majority for the legalization of marijuana in 2012's successful statewide ballot measure — with 65 percent voting for legalization in Denver. Denver voters also voted in 2016 in favor of a city-wide ordinance allowing businesses to have designated areas for public consumption of marijuana.

So why did the decriminalization of psilocybin mushrooms barely pass this year?

Well, based on my thoroughly un-scientific survey of Denver voters, part of it may have been fear over the risk of mushroom enthusiasts flocking do Denver to enjoy local mushroom freedom.  In other words, given the lack of any other jurisdictions de-criminalizing psilocybin, some voters may have been less concerned about increased ease of access to mushrooms, and more concerned about attracting the sorts of people who use them.

This sort of thing was a relatively common complaint after marijuana legalization. Local residents rarely complained about the legality of marijuana, and few believed the hysteria of federal government agents — such as this guy — who maintained marijuana legalization would lead to a public health disaster.

On the other hand, many local residents were less than thrilled at the idea that potheads from across the nation would flock to the city primarily in to sit in their newly rented basements and smoke up all day.

Few had a problem with letting the existing local potheads be potheads, and few ever believed the propaganda that people otherwise uninterested in marijuana use would suddenly become addicts because of legalization. And there's still no evidence that has ever happened.

The problem stemmed from the perception that the proportion of potheads in the general population would increase substantially through in-migration from other states.

In the first few years following legalization, many local pundits and politicians asserted population growth and real estate prices were being driven quickly up by marijuana enthusiasts who were relocating solely to hit the bong, legally. The image this was intended to conjure up was one of scores of potheads pulling up in moving vans and moving in permanently.

It's unclear to what extent that was ever really true, though. And now that Massachusetts, Nevada, and the entire West Coast (including Alaska) have similarly overturned prohibition, few share this concern anymore.

However, when it came to de-criminalizing psilocybin mushrooms, fewer Denver voters may have been unenthusiastic about being pioneers this time around. Of course, even if the measure had passed, the situation would not have been very comparable to marijuana legalization. The city's DA noted "only 11 of more than 9,000 drug cases referred for possible prosecution between 2016 and 2018 involved psilocybin." Moreover, as a de-criminalization measure — as opposed to legalization — there wouldn't be any dispensaries popping up at the local strip mall.

Nevertheless, the prospect of local liberalization attracting more drug users is an unrecognized ace in the hole used by federal agents and regulators. Psilocybin remains a Schedule 1 drug  under federal law. By using nationwide federal policy to both mandate illegality — and to encourage similar state and local ordinances — federal agents can more easily isolate and fear-monger within communities considering legalization or de-criminalization within what is otherwise a uniform landscape of prohibition. Were state and local authorities truly left on their own when it comes to prohibitions of psilocybin mushrooms and similar substances, we'd likely see far more regional variation, and at least a notable minority of communities with varying degrees of laissez-faire.

As it is, federal policy sets the tone in favor of nationwide prohibition, and this makes it harder for any single community to break away from established federal policy, even if the voters don't fear the direct effects of the prohibited substance itself.

When commenting, please post a concise, civil, and informative comment. Full comment policy here
Shield icon power-market-v2