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Venezuela Is Facing Runaway Financial Catastrophe – Article by Emily Skarbek

Venezuela Is Facing Runaway Financial Catastrophe – Article by Emily Skarbek

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The New Renaissance HatEmily Skarbek
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Debt, capital flight, food shortages, and hyperinflation take hold

Often, economists want to isolate questions of public debt and analyse these issues as if public choice considerations weren’t at play. Perhaps less studied are the ways in which debt practices can systematically exert pressure on formal political institutions.

But if you want to understand what is going on in Venezuela today, you can’t do so without looking at this political-economy nexus.

For regular people living in Venezuela, the situation is bleak. As the Economist reports, food queues start at 3 am, with the real possibility there won’t be anything for those at the end of the line. And the queues are growing longer and violent.

Real wages fell by 35% last year, 76% of Venezuelans are now poor, supplies of medicines have fallen to 1/5 of their normal level.

The government has admitted that in the 12 months to September 2015 the economy contracted by 7.1% and inflation was 141.5%. Even Nicolás Maduro, Chávez’s hapless heir and successor, called these numbers “catastrophic”.

The IMF thinks worse is in store: it reckons inflation will surge to 720% this year and that the economy will shrink by 8%, after contracting by 10% in 2015. The Central Bank is printing money to cover much of a fiscal deficit of around 20% of GDP.

In a case study of Venezuela from 1984 to 2013, Reinhart and Santos examine the relationship among domestic debt, financial repression, and external vulnerability. The paper begins with a narrative of the evolution of domestic and external debt in Venezuela over the period.

Despite soaring oil prices from 2006 to 2013, net consolidated external debt of Venezuela rose from US $26.9 to US $104.3 billion. The central government, however, only accounted for roughly a fifth of that increment.

The difference, US $60.9 billion (78%), owed to standard practices of the Bolivarian revolution, and was issued by state owned enterprises and the relatively new Fondo Comun China-Venezuela (FCCV). The FCCV is a special-purpose vehicle that allows Venezuela to withdraw from a rolling line of credit at the Chinese Development Bank in exchange for future shipments of oil.

Domestic debt in local currency also climbed, rising from 36.298 million bolivares (VEF) in 2006 to 420.502 million in 2013. The nominal increase of 1,060% (an average annual rate of 42%) was partially offset by an accumulated price increase of 528% (or an average annual rate of 30%), reducing the cumulative increase in real domestic debt to about 85% (or 9% per annum).

During much of this period, the combination of exchange controls and interest ceilings created a captive domestic audience for domestic government debt despite markedly negative real ex post interest rates. The significant losses imposed on domestic bondholders escalated over time, owing to accelerating inflation.

Unlike foreign currency-denominated debt, debt in domestic currency may be reduced through financial repression (i.e., taxes on bondholders and savers producing negative real interest rates). Reinhart and Santos find the financial repression “tax rate” is significantly higher in years of exchange controls and legislated interest rate ceilings. In Venezuela, the “haircut” on depositors and bondholders via negative ex post real interest has exceeded 30% per annum on several occasions.

Confiscating the wealth of those responsible for capital savings can partially ameliorate the existing stock of domestic debt in the short run, but at the expense of encouraging capital flight and undermining any semblance of trust in crucial economic institutions.

The paper documents that capital flight has been a chronic feature in the Venezuelan economy, “representing on average of 4.7% of GDP at the official exchange rate and 7.1% of GDP at the parallel market exchange rate, while siphoning away 17.2% of total exports.”

By all measures, exchange controls proved ineffective at reducing capital flight. In fact, “when measured as percent of GDP at the average parallel market, rate capital flight turned out to be significantly higher in years of controls (8.0% vs 5.2%).

Hayek would not be surprised. Over his professional career he argued disastrous monetary policy commits the state to taking measures that weaken the proper functioning of the market. In order to combat inflation, states will attempt to impose further controls that “would not only make the price mechanism wholly ineffective, but also make inevitable an ever-increasing central direction of all economic activity.”

In Venezuela, Chávez turned the would-be checks and balances of the state — the Supreme Court and the electoral authority — into extensions of executive power. He packed the court and they then threw out those legislators necessary for the opposition to get the two-thirds majority needed to change the constitution.

President Nicolás Maduro seems prepared to continue the repression and price controls, calling the owner of Venezuela’s largest privately-held company a thief and publicly blaming him for the country’s dire economic condition.

It is perhaps fitting that it was at a Mont Pèlerin Conference in Caracas where Hayek famously quipped:

We now have a tiger by the tail: how long can this inflation continue? If the tiger (of inflation) is freed he will eat us up; yet if he runs faster and faster while we desperately hold on, we are still finished!

I’m glad I won’t be here to see the final outcome…

Emily Skarbek is Lecturer in Political Economy at King’s College London and guest blogs on EconLog. Her website is EmilySkarbek.com. Follow her on Twitter @EmilySkarbek.​

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

IJ and Small Business Owner Beat IRS on Civil Asset Forfeiture – Article by Adam Bates

IJ and Small Business Owner Beat IRS on Civil Asset Forfeiture – Article by Adam Bates

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The New Renaissance HatAdam Bates
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The court struck a blow for property rights

Last year I referred readers to the abuse of civil asset forfeiture laws by the IRS in its attempt to take more than $107,000 from North Carolina small business owner Lyndon McLellan without charging him with any crime.

The IRS cleaned out Mr. McLellan’s business account because it suspected him of “structuring,” an offense whereby a person avoids legally-mandated financial reporting requirements by keeping their deposits and withdrawals under $10,000.

Because there are many perfectly legitimate reasons a business owner may deposit less than $10,000 at a time (for instance, if their insurance policy only covers $10,000 cash on hand), and because civil asset forfeiture allows the government to seize cash and property without proving any wrongdoing, IRS structuring seizures are prone to abuse.

Tacitly recognizing the abuse allowed by the law, former Attorney General Eric Holder announced changes to the use of civil forfeiture in structuring offenses last year. The policy changes should have spared innocent business owners like Lyndon McLellan, but it seems some federal prosecutors never got the memo.

In fact, the Assistant U.S. Attorney in charge of the case responded to criticism by sending veiled threats to Lyndon McLellan and his lawyers at the Institute for Justice, warning them against publicizing the case lest it “ratchet up feelings” in the IRS offices.

The publicity worked. After significant public and political pressure, the IRS relented and returned the amount they had taken from Mr. McLellan’s bank account. As I noted last year, however, the IRS refused to reimburse Mr. McLellan for the costs of fighting the seizure or to pay interest on the money it had wrongfully seized.

But this week a federal judge ruled that the IRS must do more to make Mr. McLellan whole, and awarded him legal costs totalling more than $20,000.

The court held:

Certainly, the damage inflicted upon an innocent person or business is immense when, although it has done nothing wrong, its money and property are seized. Congress, acknowledging the harsh realities of civil forfeiture practice, sought to lessen the blow to innocent citizens who have had their property stripped from them by the Government. …

This court will not discard lightly the right of a citizen to seek the relief Congress has afforded.

Fortunately, thanks to the efforts of Mr. McLellan and the Institute for Justice, the good guys won this time. Ultimately, however, the only way to ensure that civil forfeiture abuses stop happening is to abolish civil forfeiture. If the government cannot prove beyond a reasonable doubt that a person engaged in criminal activity, it should not be able to punish them as if they’re guilty.

As long as Congress and state legislatures allow this practice to continue, more innocent Americans will end up fighting for their livelihoods like Lyndon McLellan had to.

Cross-posted from Cato.org.

Adam Bates is a policy analyst with Cato’s Project on Criminal Justice. His research interests include Constitutional law, the War on Drugs, the War on Terror, police militarization, and overcriminalization.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

Who Won in Iowa? And Why? – Article by Daniel Bier

Who Won in Iowa? And Why? – Article by Daniel Bier

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The New Renaissance HatDaniel Bier
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It depends on what was really at stake

On Monday, the political world watched as the early results trickled in from the Iowa caucuses. First, Donald Trump was ahead, then Ted Cruz overtook him, then Marco Rubio started creeping up. In the final count, Cruz won convincingly with 28 percent, Trump came in second with 24 percent, and Rubio took home bronze with 23 percent.

Commentators are scrambling now to read the tea leaves of these results. A lot of the alleged meaning depends on the hopes and expectations people had before. The last (and typically best) Iowa poll, released just two days before the caucuses, had Trump at 28 percent, Cruz at 23 percent, and Rubio at 15 percent.

Trump, it was thought, had run a lazy campaign and had very little grassroots mobilization, so maybe he would get crushed by better organized rivals. And though he did lose to Cruz, and barely beat Rubio, it’s hardly the death blow some hoped. It turns out that at least a quarter of the highly motivated GOP base in Iowa really do like Trump, in spite of his lackadaisical operation, and the polls that show him in the lead aren’t skewed or exaggerated.

Cruz’s triumph, driven by evangelical voters, might seem to bode well for his nomination prospects. Rubio did better than expected, so maybe that means something. Carson, Jeb, and Rand garnered very modest support; the rest of the pack did so poorly they didn’t received any delegates at all, and some are already dropping out.

This week, pollsters will be furiously dialing potential voters. Pundits will be scribbling and shouting, all angling for some unique or authoritative or contrarian perspective on these results.

But there’s one source of information that’s a better predictor of where the wind is blowing than polls, statistical models, or expert forecasts: the market. Specifically, betting markets, where people are forced to put their money where their mouth is.

With hard cash on the line, the incentive to be right is powerful — and, it turns out, pretty effective.

Here’s what the betting odds looked like for most of this endless campaign season. Early on, there’s a lot of uncertainty, but the odds of Trump actually winning the nomination were always consistently low, despite his huge leads in the polls. Bettors didn’t believe voters would really go for him, or that the party insiders would allow him to succeed.

betting-odds-oct-dec

But in the last month, something changed. Maybe it was because the party insiders didn’t seem to be doing anything to stop Trump. Maybe it was because the mainstream never coalesced around a “establishment” candidate. Maybe it was because Trump’s long-predicted crash in the polls never materialized.

Either way, Trump’s odds started steadily improving in January, and Christie, Cruz, and Rubio started slipping. On January 13, at 7:01 AM, Trump took the lead for the first time, and after that, his odds soared. On the day of the Iowa caucuses, bettors put his probability of winning the Republican nomination at over 50 percent.

betting-odds-january

But as the results started trickling in, and it became clear that Cruz would beat Trump, the markets reacted.

In just 90 minutes, Trump’s odds of winning the nomination cratered — falling from over 50 percent to about 25 percent — and Marco Rubio’s soared, from about 30 percent to over 55 percent. As for Cruz’s big win, it barely brought him back to where he stood two weeks ago.

betting-odds-feb

According the markets, Rubio won in Iowa, and Trump lost.

If you’re concerned about the rise of Trump’s fascist, populist demagoguery — its virulent and xenophobic identity politics, economic nationalism, and lawless authoritarianism — this might seem to be good news, of a sort.

But the bad news is that Trump’s loss is probably due in large part to his rival’s embrace of Trumpism. At the Atlantic, Peter Beinart notes that Rubio “surged by borrowing Trump’s message while pledging to more effectively package it.”

In the final weeks before Iowa, Rubio grew markedly more anti-immigration. Having previously warned against using terrorism as a pretext to restrict legal immigration, the Florida senator in mid-January declared that because of the rise of ISIS, “the entire system of legal immigration must now be reexamined for security first and foremost.”

He also followed Trump’s lead on trade, suggesting that he might oppose the Trans-Pacific Partnership agreement he had once praised.

Rubio echoed Trump when it came to the rights of Muslims, too. Asked in a January debate about Trump’s call for banning Muslim immigration, Rubio praised the billionaire for having “tapped in to some of that anger that’s out there about this whole issue because this president has consistently underestimated the threat of ISIS.” … The listener who didn’t already know Rubio’s position might well have thought he supports Trump’s plan.

When asked about Trump’s call for closing mosques, Rubio did Trump one better, declaring that, “It’s not about closing down mosques. It’s about closing down any place — whether it’s a cafe, a diner, an Internet site — any place where radicals are being inspired.”

… Having once pitched himself as a bridge between the GOP and the changing face of twenty-first century America, Rubio instead began appealing to “all of us who feel out of place in our own country.”

Here is the moderate, establishment candidate calling the whole system of legal immigration into question, attacking foreign trade, fear-mongering about religious minorities, calling to shut down and censor the Internet, and blowing tribalist dog whistles.

Of course, Rubio isn’t Trump: he’s a politician. If he captures the nomination, he’ll try to pivot from identity politics and emphasize his “moderate” credentials. He’s still an establishment figure, with the credibility of being sophisticated, eloquent, and (above all) “electable” — everything Trump isn’t.

But this is the larger problem. Trump has convinced the establishment that they need to embrace his priorities and methods in order to maintain control. Worse, he might be right. This may be the most troubling development in the whole Trump saga, and not just because the establishment won’t flatly repudiate a man conjuring up religious tests, concentration camps, and mass deportation.

By rallying long-suppressed nationalist factions, Trump has shifted the margins of acceptable debate more than any other political figure in recent memory. “Trump has redefined what “moderate” means,” Beinart argues.

In 2008 and 2012, Mitt Romney and John McCain never had to praise a rival for suggesting a religious litmus test for entering the country. During their presidential bids, Romney and McCain both shifted right on illegal immigration. But they didn’t backpedal on their support for legal immigration.

Trump probably couldn’t win the general election, and if he did, he couldn’t institute his agenda effectively without the network of interest groups that make policy happen. That’s what makes him so dangerous: he’s unconstrained by the traditional network of interests, compromises, and pressures of the status quo — nobody has any idea what he might try to do.

But that’s also what makes his candidacy a long shot. The more established candidates might very well win and effectively implement their agenda — pushing the bounds of executive power that Bush and Obama softened into playdough — without triggering an open constitutional or political crisis. Their embrace of Trump’s agenda is a troubling sign both of how the political landscape has shifted and what might now come from even a “moderate” presidency.

The ballots say Cruz won. The markets say it was Rubio. But, in time, we may find that it was Trump after all.

Daniel Bier is the editor of Anything Peaceful. He writes on issues relating to science, civil liberties, and economic freedom.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

Capitalism Promotes Equality – Article by Barry Brownstein

Capitalism Promotes Equality – Article by Barry Brownstein

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The New Renaissance HatBarry Brownstein
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Equality in Consumption Is Now the Norm

Highway traffic began to slow outside of Boston as we made our way to the airport. My wife was driving, so I took out my $100 Android phone and opened Google Maps. Google Traffic instantly showed me, in real time, the best route to avoid delays and estimated the number of minutes we’d save by altering our route. Thanks to Google, there was no threat of missing our flight.

It was not too long ago that we relied on traffic reporters in helicopters, and their advice was often useless by the time we heard their updates.

Have you wondered how Google Traffic does it? The answer is crowdsourcing. If you are among the two-thirds of American adults who own a smartphone, and if the GPS locator on your phone is enabled, you are generating real-time traffic information. Google Traffic measures how fast cars are moving compared to normal speeds and generates location-specific reports.

Rich or poor, most of the drivers on the highway that day had access to the same miraculous traffic report and the same opportunity to make better driving decisions. This is just one example of how the marketplace generates equality in consumption.

The cars we drive are another indicator of consumption equality. We were driving an inexpensive Subaru Outback. There are more expensive, comfortable, and bigger cars on the market, but the Insurance Institute for Highway Safety says that there are none safer than the Outback.

Would a rich individual, on this same drive to the airport, have any noticeable advantages over me? He or she could hire a driver and use the drive time for something more productive, but even that advantage will dwindle as driverless cars become the norm.

In his Wall Street Journal commentary “The Rise of Consumption Equality,” former hedge fund manager Andy Kessler writes:

Just about every product or service that makes our lives better requires a mass market or it’s not economic to bother offering. Those who invent and produce for the mass market get rich. And the more these innovators better the rest of our lives, the richer they get but the less they can differentiate themselves from the masses whose wants they serve.

“What does Google founder Larry Page have that you don’t have?” Kessler asks pointedly.

Page’s income is unimaginably larger than most of ours. But in terms of consumption, the differences are negligible — which is remarkable, given how much Page and Google have improved our lives.

All-time football great Tom Brady earns roughly $10 million a year. His diet made the news recently. Does Brady enjoy health advantages not available to Americans with a fraction of his income? Brady hires a cook. Our family doesn’t do that, but we eat much like Brady — organic vegetables, fruits, whole grains, beans, and fish make up the bulk of our diet. From May to October, a local organic farmer provides an abundance of vegetables that are picked fresh for us based on an order we place the day before. In the summertime, our produce may be fresher than Brady’s. Compared to any of us, what real dietary advantage does Tom Brady’s income afford him? It is his commitment to a healthy lifestyle, not his income, that makes the difference.

In 1900, Americans spent approximately 50 percent of their household income on food and clothing; today, we spend closer to 20 percent. Today, fresh produce from all over the world, not even available to a king a century ago, awaits common consumers when they enter the supermarket.

In 1900, only 25 percent of households had running water; fewer still had flush toilets. It would be decades before such wonders as electricity, automobiles, and indoor plumbing were ubiquitous. The faucets in the famed Hearst Castle in California may have been gold plated, but was the water any better than what the average household received? The water running in my home comes from an artesian well over 400 feet deep. More evidence of consumption equality: my water is every bit as good, if not better, than a billionaire’s in a big city penthouse.

Wealth is not a good predictor of a rich life. Psychology professor Sonja Lyubomirsky found that only 10 percent of the variance in Americans’ happiness is due to income and other circumstances. “Happiness more than anything,” she writes in her book The How of Happiness, ”is a state-of-mind, a way of perceiving and approaching ourselves and the world in which we reside.”

And what of the elements of emotional intelligence that make life richer? In the book Big Magic, best-selling author Elizabeth Gilbert observes:

If money were the only thing people needed to live rich creative lives, then the mega-rich would be the most imaginative, generative, and original thinkers among us, and they simply are not. The essential ingredients for creativity remain exactly the same for everybody: courage, enchantment, permission, persistence, trust — and those elements are universally accessible. Which does not mean that creative living is always easy; it merely means that creative living is always possible.

The same universally accessible elements are essential ingredients for entrepreneurship. Entrepreneurs persist, driven by their vision and by the equality of opportunity that capitalism affords. The entrepreneur’s choice to be persistent and courageous is the not-so-secret engine that drives success.

The essential consumption goods we couldn’t even imagine a hundred years ago are almost universally available in the United States today. The marketplace, aided by many creative, pioneering entrepreneurs and every person who strives to put in a good day’s work, is generating consumption equality.

Barry Brownstein is professor emeritus of economics and leadership at the University of Baltimore. He is the author of The Inner-Work of Leadership. He blogs at BarryBrownstein.com, Giving up Control, and America’s Highest Purpose.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

Why Trump and Sanders See Losers Everywhere – Article by Steven Horwitz

Why Trump and Sanders See Losers Everywhere – Article by Steven Horwitz

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The New Renaissance HatSteven Horwitz
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Competition and the Zero-Sum Fallacy

Donald Trump, Bernie Sanders, many political actors, too many intellectuals, and much of the general public share a false and destructive belief about the nature of exchange: that economic activity is something akin to a battle or a full-fledged war in which the goal is for one group to “defeat” another. We see this mentality across the political spectrum.

Zero-Sum Losers

Think of the ways Trump and others on the political right talk about international trade. The basic framework is to see other countries as enemies in competition with us. The goal of trade policy is somehow to “beat” them, because if they are “winning” by selling us a lot of stuff, we must be losing. The result is mistaken policies such as Trump’s proposed 45 percent tariff on Chinese imports.

We see the same us-and-them thinking on the left, where progressives perceive a persistent battle between capital and labor, each trying to defeat the other. For leftists, capital is always the winner and labor is always the loser — unless the government intervenes. The appropriate policy response, from this perspective, is either to limit capital’s gains or, if you’re a bit more radical, to help labor vanquish capital once and for all. One of the related beliefs on the left is that the wealth of capital comes at the expense of labor. That is, capital’s gains come from labor’s losses.

Both arguments share the underlying belief that the winners’ gains must come at the losers’ expense. Economic activity, and specifically wealth creation, is at best seen as what economists would call a “zero-sum game.”

In zero-sum games, the winners’ gains do, in fact, come at the losers’ expense. Think of a poker game where each person buys $100 worth of chips. If there are five players, there is $500 to be apportioned out. If the game ends with me having $250, then the remaining $250 will be split among the other four players. My gain of $150 comes from others’ losses. Playing the game creates winners and losers because it simply reallocates fixed wealth around the group.

Positive-Sum Winners

Market economies, however, are not zero-sum games. Consider the profits of entrepreneurs like Steve Jobs or Bill Gates or Mark Zuckerberg or any of thousands of lesser-known inventors who have become fabulously wealthy by providing us with products and services that we value. Their gains are not our losses. To the contrary: markets are what we call positive-sum games. Entrepreneurs make huge profits, but they can only do so by providing us with products and services we value more than what we give up to obtain them.

Every time you get something yummy from a food truck, for example, you demonstrate the mutual benefit of trade: the truck owner gets your money and you get something delicious to eat. You both gave up something you valued less than the thing you acquired. Trade is made of win.

So when people complain that the United States is “losing to China,” presumably because we have a trade deficit with them, they are falling for the zero-sum fallacy. A trade deficit simply means that we are buying more of their goods and services than they are of ours. This doesn’t mean “they” are winning. First, there’s no “they.” The winners are individual Chinese sellers and the people they employ on one side, and individual US consumers on the other. Portraying trade as a contest between countries is deceptive: trade is always among specific individuals and groups.

Second, both sides are winning. Chinese sellers get US dollars and US consumers get products they like at low prices, which frees up income to buy other goods and services, creating jobs in other sectors of the US economy. Those US dollars, it is worth noting, make their way back to the US as Chinese firms invest in US assets, funding everything from private-sector construction to a small part of our government debt. The dollars we spend on Chinese goods do not just disappear; they come back as investments in US capital goods.

It would be more accurate to see what’s happening here as Chinese sellers arriving at the US border with boatloads of cheap goods for us to buy. Under what logic are we made worse off by the “gift” of lower priced goods?

Misunderstanding “Competition”

I suspect that much of the zero-sum thinking we see with trade is based on a misplaced application of the idea of “competition.” Competition in the market does share a number of features with the sorts of competition that people are more familiar with: sports, games, and war.

All are what F.A. Hayek called “discovery procedures.” We play games as a way to discover which individual or team is best. There’s no way to know who the best hockey team is without the discovery process of the Stanley Cup playoffs. We can’t know the answer just by looking at statistics, as every major upset in sports history demonstrates. In markets, we discover who is producing the best product at the best price by letting sellers and buyers compete. One might say the same about war.

Despite these similarities, however, there’s a critical difference: athletic competition and war are zero-sum and negative-sum games, respectively. In sports, one team wins and the other loses, or there’s a tie. Both of those outcomes are zero-sum. War destroys human and physical capital, and even when one country “wins,” everyone is worse off, making it negative-sum.

Market competition, by contrast, is positive-sum. When sellers compete with other sellers to keep prices low, it’s true that some sellers will win and others will lose, but in that process, all of the buyers win, too, not to mention the other people who will receive more income because the buyers who are paying less for the original product can now buy their products. Wealth is not redistributed, as in a poker game, and there is not an offsetting loser for each winner, as in sports. Instead, additional wealth is created. That makes it a positive-sum game.

Seeing the Bigger Picture

CEOs are used to seeing this process from the narrow perspective of their firms, which often do lose in competition with other firms, leading them to believe the same principles apply between countries, or for the economy as a whole. This may explain why Donald Trump thinks he can “defeat” China in the same way he might outcompete another firm. It also explains why Sanders can believe that we are in a competition to preserve jobs. By focusing on the growth in manufacturing jobs in China, Sanders sees trade as “stealing” US jobs rather than being part of the larger competitive process responsible for the overall growth in US jobs and wealth.

Yes, markets share much with other forms of competition, but the key difference is the one that matters. Markets are positive-sum games, and they are not about one country, one group, or one class defeating another. Competition and trade are the way we produce cooperation and mutual benefit. Failing to understand this important difference easily opens the door to demagogues on both the right and the left.

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Hayek’s Modern Family: Classical Liberalism and the Evolution of Social Institutions. He is a member of the FEE Faculty Network.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

The Good Old Days of Poverty and Filth – Article by Sarah Skwire

The Good Old Days of Poverty and Filth – Article by Sarah Skwire

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The New Renaissance HatSarah Skwire
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A Cultural Historian Decries Profit and Progress

Standing in a luxury hotel, cultural historian Luc Sante daydreams about the good old days of homeless alcoholics lighting trash fires in the streets of Manhattan’s Skid Row.

“Over there, next to the flophouse hotel,” Sante reminisced to the Guardian, “is where Nan Goldin lived and worked. Forty years ago there were still lots of vacant lofts here that had been burlesque and vaudeville theatres during the era when storefronts were saloons. There were bars solely inhabited by bums, their heads down on the counter. At night they’d be lined up outside the missions and Salvation Army hostels — veterans from World War Two, from the Korean War, from the Vietnam War. At night, trash fires would be lit in oil drums.”

The French have an elegant phrase for what Sante is doing. They call it nostalgie de la boue, “longing for the mud,” which means a romantic yearning for a primitive or degraded behavior or condition.

The phrase, which was coined by a French dramatist in 1855, has been around for a while and usefully describes the very real way in which the wealthier and healthier inhabitants of modernity look back at the past through a misty, romantic haze.

While it annoys historians when we put a soft-focus filter on history, it doesn’t generally do a lot of damage. We don’t need every medieval romance novel to remind us that the heroine’s breath didn’t smell like cool mint Listerine. It’s probably for the best that the historical re-enactors at Colonial Williamsburg don’t actually use authentic colonial medical remedies for their health problems, and visiting tourists are certainly grateful for modern plumbing and street sanitation. Even the BBC’s determinedly authentic 1900 House had a phone and modern fire protection in case of emergencies.

Any lover of history will occasionally find him or herself dreaming about attending a performance in the pit at Shakespeare’s Globe, or roughing it in the saloons and shacks of a gold rush town. Some of us may even have recently spent an entranced hour or two playing with the Victoria and Albert Museum’s “Design-a-Wig” website. But a good student of history will acknowledge that the Globe was undoubtedly loud, smelly, crowded, and occasionally even dangerous for playgoers. And the rugged romance of the gold rush town is offset by the knowledge that you were probably far more likely to die of gangrene or cholera than you were to strike it even moderately rich. And those glorious 18th-century wigs? Heavy, hot, smelly, and prone to harboring bugs.

But a real case of nostalgie de la boue goes further than the soft-focus filter that ignores the unpleasantness of the past. Rather than ignoring the historical “mud,” nostalgie de la boue actively longs for that kind of unpleasantness and insists that without it, life is less authentic, less meaningful, and altogether worse.

And that is where Luc Sante seems to be. While he is quite correct to note that the ribaldry of Paris has long been a desirable antidote to the humorless Puritanism of American cities, Sante goes entirely off the rails when he insists that his praise for the “materially poor but … imaginatively free and creatively rich” inhabitants of Paris is not a romantic vision.

According to Sante, people ask him, “How can you be promoting the life of the poor in the 19th century when so many of them didn’t eat every day?”

Sante concedes, “Well yeah, it’s bad, but is it really any worse than the situation today when everybody’s fed but you have an incredible percentage of New Yorkers who live in the shelter system – including people who have regular jobs?”

The horrors of the shelter system aside, there’s a great deal to be said for a world where more and more people are fed better every year, and my guess is that a great number of the imaginatively free Parisians that Sante dreams of would have enjoyed the occasional extra baguette. It is possible to value historical creativity and intellectual independence without also having to praise historical dietary deficits. (And it is worth noting, should Sante happen to read this, that the feeding of all those extra people is not due entirely, or even primarily, to “the shelter system.” It’s the market economy and all that goes with it that is making the world better fed every year.)

Sante continues his nostalgia for the mud when he argues, “In the Paris I write about, people ran businesses to make a living, not to make a profit. Cafes, bars: they’re no longer public institutions or part of a community. There’s no possibility for eccentric self-determination amongst the shopkeepers.”

The distinction Sante draws between “making a living” and “making a profit” is not particularly clear to me. It suggests, perhaps, an unstated assumption that there is such a thing as an agreed-upon “correct” amount of profit for a business or businessperson to make — beyond which all profit becomes filthy lucre. Possibly he is making an equally indefensible assumption that businesspeople in the past weren’t interested in being as successful as they could be and that it is only our postmodern cynicism that has unleashed the drive for profit.

Maybe Sante means to say that unlike today’s businesses, the businesses of years ago “made a living” by helping to create a community among their customers rather than just “making a profit” by selling stuff. I think that thousands of today’s small business owners and their Facebook pages, Etsy stores, and farmer’s market stands would beg to differ with his assessment of their importance to their communities.

There’s not necessarily always a problem with nostalgie de la boue. It’s how we got Peaky Blinders, the renewed interest in home canning, restaurants that serve bone marrow, and the great revival of folk music spurred by O Brother Where Art Thou?, after all.

Sante, though, has so much mud in his eyes that he is blind to the tangible and important progress that has been made in human wealth and welfare. His mucky nostalgia leads him to claim that our increasing wealth — which has given us more health, more discretionary income, more food, and more free time — is a danger more pernicious than terrorism. “Money, for me, may not immediately kill people in the way terrorism does, but it does certainly change the fabric of daily life in much deeper and more insidious ways.”

That is a statement of such offensive ignorance that it could only be made by a man standing high above the former Skid Row, looking down through glass, with room service and maid service only a phone call away. I wonder if the men and women in the photographs that Sante treasures would have said the same?

Sarah Skwire is the poetry editor of the Freeman and a senior fellow at Liberty Fund, Inc. She is a poet and author of the writing textbook Writing with a Thesis. She is a member of the FEE Faculty Network.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

What Are Your Odds of Making It to the 1%? – Article by Chelsea Follett

What Are Your Odds of Making It to the 1%? – Article by Chelsea Follett

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The New Renaissance HatChelsea Follett
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They’re better than you think

Your odds of “making it to the top” might be better than you think, although it’s tough to stay on top once you get there.

According to research from Cornell University, over 50 percent of Americans find themselves among the top 10 percent of income-earners for at least one year during their working lives. Over 11 percent of Americans will be counted among the top 1 percent of income-earners (i.e., people making at minimum $332,000) for at least one year.

How is this possible? Simple: the rate of turnover in these groups is extremely high.

Just how high? Some 94 percent of Americans who reach “top 1 percent” income status will enjoy it for only a single year. Approximately 99 percent will lose their “top 1 percent” status within a decade.

Now consider the top 400 U.S. income-earners — a far more exclusive club than the top 1 percent. Between 1992 and 2013, 72 percent of the top 400 retained that title for no more than a year. Over 97 percent retained it for no more than a decade.

HumanProgress.org advisory board member Mark Perry put it well in his recent blog post on this subject:

Whenever we hear commentary about the top or bottom income quintiles, or the top or bottom X% of Americans by income (or the Top 400 taxpayers), a common assumption is that those are static, closed, private clubs with very little dynamic turnover. …

But economic reality is very different — people move up and down the income quintiles and percentile groups throughout their careers and lives.

What if we look at economic mobility in terms of accumulated wealth, instead of just annual income (as the latter tends to fluctuate more)?

The Forbes 400 lists the wealthiest Americans by total estimated net worth, regardless of their income during any given year. Over 71 percent of Forbes 400 listees — and their heirs — lost their top 400 status between 1982 and 2014.

heirsSo, the next time you find yourself discussing the very richest Americans, whether by wealth or income, keep in mind the extraordinarily high rate of turnover among them.

And even if you never become one of the 11.1 percent of Americans who fleetingly find themselves in the “top 1 percent” of US income-earners, you’re still quite possibly part of the global top 1 percent.

Cross-posted from HumanProgress.org.

Chelsea Follett (Chelsea German) works at the Cato Institute as a Researcher and Managing Editor of HumanProgress.org.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

What’s Changed Since 2010? – Article by Daniel Bier

What’s Changed Since 2010? – Article by Daniel Bier

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The New Renaissance HatDaniel Bier
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Quite a lot, it turns out

This interesting little table from Goldman Sachs shows a few ways the world changed in the last five years.

Some highlights since 2010:

  • The UN Food Price Index fell by a third.
  • The price of oil fell by two-thirds.
  • Venture capital investments in the US doubled.
  • Global smartphone penetration increased from 19 percent to 75 percent.
  • The cell phone price index fell by over half.
  • Average wages in China rose by more than 50 percent.
  • Beijing air pollution is down by a third.
  • The cost of sequencing a genome fell by 97 percent.
  • The number of summer AirBnB guests increased from 47,000 to 17 million.
  • Bitcoin’s value increased 1,500 fold.

But, as GS points out, 2015 was not all good news:

  • Economic growth has slowed.
  • Life expectancy has not changed much.
  • Africa’s share of global trade remained near 3 percent.
  • The Patriots won the Super Bowl.
  • Japanese GDP per capita remains flat.

Still — on the whole and for most people — things are changing for the better, in more ways than we could ever anticipate.

Here’s to a better today.

(Check out the other data below — lots of amusing and intriguing items.)

chart-11Click on the image for a larger version.

Daniel Bier is the editor of Anything Peaceful. He writes on issues relating to science, civil liberties, and economic freedom.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

3 Kinds of Economic Ignorance – Article by Steven Horwitz

3 Kinds of Economic Ignorance – Article by Steven Horwitz

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The New Renaissance HatSteven Horwitz
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Do you know what you don’t know?

Nothing gets me going more than overt economic ignorance.

I know I’m not alone. Consider the justified roasting that Bernie Sanders got on social media for wondering why student loans come with interest rates of 6 or 8 or 10 percent while a mortgage can be taken out for only 3 percent. (The answer, of course, is that a mortgage has collateral in the form of a house, so it is a lower-risk loan to the lender than a student loan, which has no collateral and therefore requires a higher interest rate to cover the higher risk.)

When it comes to economic ignorance, libertarians are quick to repeat Murray Rothbard’s famous observation on the subject:

It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a “dismal science.” But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.

Economic ignorance comes in different forms, and some types of economic ignorance are less excusable than others. But the most important implication of Rothbard’s point is that the worst sort of economic ignorance is ignorance about your economic ignorance. There are varying degrees of blameworthiness for not knowing certain things about economics, but what is always unacceptable is not to recognize that you may not know enough to be speaking with authority, nor to understand the limits of economic knowledge.

Let’s explore three different types of economic ignorance before we return to the pervasive problem of not knowing what you don’t know.

1. What Isn’t Debated

Let’s start with the least excusable type of economic ignorance: not knowing agreed-upon theories or results in economics. There may not be a lot of these, but there are more than nonspecialists sometimes believe. Bernie Sanders’s inability to understand why uncollateralized loans have higher interest rates would fall into this category, as this is an agreed-upon claim in financial economics. Donald Trump’s bashing of free trade (and Sanders’s, too) would be another example, as the idea that free trade benefits the trading countries on the whole and over time is another strongly agreed-upon result in economics.

Trump and Sanders, and plenty of others, who make claims about economics, but who remain ignorant of basic teachings such as these, should be seen as highly blameworthy for that ignorance. But the deeper failing of many who make such errors is that they are ignorant of their ignorance. Often, they don’t even know that there are agreed-upon results in economics of which they are unaware.

2. Interpreting the Data

A second type of economic ignorance that is, in my view, less blameworthy is ignorance of economic data. As Rothbard observed, economics is a specialized discipline, and nonspecialists can’t be expected to know all the relevant theories and facts. There are a lot of economic data out there to be searched through, and often those data require careful statistical interpretation to be easily applied to questions of public policy. Economic data sources also require theoretical interpretation. Data do not speak for themselves — they must be integrated into a story of cause and effect through the framework of economic theory.

That said, in the world of the Internet, a lot of basic economic data are available and not that hard to find. The problem is that many people believe that certain empirical facts are true and don’t see the need to verify them by actually checking the data. For example, Bernie Sanders recently claimed that Americans are routinely working 50- and 60-hour workweeks. No doubt some Americans are, but the long-term direction of the average workweek is down, with the current average being about 34 hours per week. Longer lives and fewer working years between school and retirement have also meant a reduction in lifetime working hours and an increase in leisure time for the average American. These data are easily available at a variety of websites.

The problem of statistical interpretation can be seen with data on economic inequality, where people wrongly take static snapshots of the shares of national income held by the rich and poor to be evidence of the decline of the poor’s standard of living or their ability to move up and out of poverty.

People who wish to opine on such matters can, again, be forgiven for not knowing all the data in a specialized discipline, but if they choose to engage with the topic, they should be aware of their own limitations, including their ability to interpret the data they are discussing.

3. Different Schools of Thought

The third type of economic ignorance, and the least blameworthy, is ignorance of the multiple perspectives within the discipline of economics. There are multiple schools of thought in economics, and many empirical questions and historical facts have a variety of explanations. So a movie like The Big Short that clearly suggests that the financial crisis and Great Recession were caused by a lack of regulation might be persuasive to people who have never heard an alternative explanation that blames the combination of Federal Reserve policy and misguided government intervention in the housing market for the problems. One can make similar points about the Great Depression and the difference between Hayekian and Keynesian explanations of business cycles more generally.

These issues involving schools of thought are excellent examples of Rothbard’s point about the specialized nature of economics and what the nonspecialist can and cannot be expected to know. It is, in fact, unrealistic to expect nonexperts to know all of the arguments by the various schools of thought.

Combining Ignorance and Arrogance

What is missing from all of these types of economic ignorance — and what is often missing from knowledgeable economists themselves — is what we might call “epistemic humility,” or a willingness to admit how little we know. Noneconomists are often unable to recognize how little they know about economics, and economists are often unable to admit how little they know about the economy.

Real economic “expertise” is not just mastery of theories and facts. It is a deeper understanding of the variety of interpretations of those theories and facts and humility in the face of our limits in applying that knowledge in attempting to manage an economy. The smartest economists are the ones who know the limits of economic expertise.

Commentators with opinions on economic matters, whether presidential candidates or Facebook friends, could, at the very least, indicate that they may have biases or blind spots that lead to uses of data or interpretive frameworks with which experts might disagree.

The worst type of economic ignorance is the type of ignorance that is the worst in all fields: being ignorant of your own ignorance.

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Hayek’s Modern Family: Classical Liberalism and the Evolution of Social Institutions. He is a member of the FEE Faculty Network.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.