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Contra Robert Shiller on Cryptocurrencies – Article by Adam Alonzi

Contra Robert Shiller on Cryptocurrencies – Article by Adam Alonzi

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Adam Alonzi

While warnings of caution can be condoned without much guilt, my concern is critiques like Dr. Shiller’s (which he has since considerably softened) will cause some value-oriented investors to completely exclude cryptocurrencies and related assets from their portfolios. I will not wax poetically about the myriad of forms money has assumed across the ages, because it is already well-covered by more than one rarely read treatise. It should be said, though it may not need to be, that a community’s preferred medium of exchange is not arbitrary. The immovable wheels of Micronesia met the needs of their makers just as digital stores of value like Bitcoin will serve the sprawling financial archipelagos of tomorrow. This role will be facilitated by the ability of blockchains not just to store transactions, but to enforce the governing charter agreed upon by their participants.

Tokens are abstractions, a convenient means of allotting ownership. Bradley Rivetz, a venture capitalist, puts it like this: “everything that can be tokenized will be tokenized the Empire State Building will someday be tokenized, I’ll buy 1% of the Empire State Building, I’ll get every day credited to my wallet 1% of the rents minus expenses, I can borrow against my Empire State Building holding and if I want to sell the Empire State Building I hit a button and I instantly have the money.” Bitcoin and its unmodified copycats do not derive their value from anything tangible. However, this is not the case for all crypto projects. Supporters tout its deflationary design (which isn’t much of an advantage when there is no value to deflate), its modest transaction fees, the fact it is not treated as a currency by most tax codes (this is changing and liable to continue changing), and the relative anonymity it offers.

The fact that Bitcoin is still considered an asset in most jurisdictions is a strength. This means that since Bitcoin is de facto intermediary on most exchanges (most pairs are expressed in terms of BTC or a major fiat, many solely in BTC), one can buy and sell other tokens freely without worrying about capital gains taxes, which turn what should be wholly pleasurable into something akin to an ice cream sundae followed by a root canal. This applies to sales and corporate income taxes as well. A company like Walmart, despite its gross income, relies on a slender profit margin to appease its shareholders. While I’m not asking you to weep for the Waltons, I am asking you to think about the incentives for a company to begin experimenting with its own tax-free tokens as a means of improving customer spending power and building brand loyalty.

How many coins will be needed and, for that matter, how many niches they will be summoned to fill, remains unknown.  In his lecture on real estate Dr. Shiller mentions the Peruvian economist Hernando De Soto’s observation about the lack of accounting for most of the land in the world.  Needless to say, for these areas to advance economically, or any way for that matter, it is important to establish who owns what. Drafting deeds, transferring ownership of properties or other goods, and managing the laws of districts where local authorities are unreliable or otherwise impotent are services that are best provided by an inviolable ledger. In the absence of a central body, this responsibility will be assumed by blockchain. Projects like BitNation are bringing the idea of decentralized governance to the masses; efforts like Octaneum are beginning to integrate blockchain technology with multi-trillion dollar commodities markets.

As more than one author has contended, information is arguably the most precious resource of the twenty first century. It it is hardly scarce, but analysis is as vital to making sound decisions. Augur and Gnosis provide decentralized prediction markets. The latter, Kristin Houser describes it, is a platform used “to create a prediction market for any event, such as the Super Bowl or an art auction.” Philip Tetlock’s book on superforecasting covers the key advantages of crowdsourcing economic and geopolitical forecasting, namely accuracy and cost-effectiveness. Blockchains will not only generate data, but also assist in making sense of it.  While it is just a historical aside, it is good to remember that money, as Tymoigne and Wray (2006) note, was originally devised as a means of recording debt. Hazel sticks with notches preceded the first coins by hundreds of years. Money began as a unit of accounting, not a store of value.

MelonPort and Iconomi both allow anyone to start their own investment funds. Given that it is “just” software is the beauty of it: these programs can continue to be improved upon  indefinitely. If the old team loses its vim, the project can easily be forked. Where is crypto right now and why does it matter? There is a tendency for academics (and ordinary people) to think of things in the real world as static objects existing in some kind of Platonic heaven. This is a monumental mistake when dealing with an adaptive system, or in this case, a series of immature, interlocking, and rapidly evolving ecosystems. We have seen the first bloom – some pruning too – and as clever people find new uses for the underlying technology, particularly in the area of IoT and other emerging fields, we will see another bloom. The crypto bubble has come and gone, but the tsunami, replete with mature products with explicit functions, is just starting to take shape.

In the long run Warren Buffett, Shiller, and the rest will likely be right about Bitcoin itself, which has far fewer features than more recent arrivals. Its persisting relevance comes from brand recognition and the fact that most of the crypto infrastructure was built with it in mind. As the first comer it will remain the reserve currency of the crypto world.  It is nowhere near reaching any sort of hard cap. The total amount invested in crypto is still minuscule compared to older markets. Newcomers, unaware or wary of even well-established projects like Ethereum and Litecoin, will at first invest in what they recognize. Given that the barriers to entry (access to an Internet connection and a halfway-decent computer or phone) are set to continue diminishing, including in countries in which the fiat currency is unstable, demand should only be expected to climb.

Adam Alonzi is a writer, biotechnologist, documentary maker, futurist, inventor, programmer, and author of the novels A Plank in Reason and Praying for Death: A Zombie Apocalypse. He is an analyst for the Millennium Project, the Head Media Director for BioViva Sciences, and Editor-in-Chief of Radical Science News. Listen to his podcasts here. Read his blog here.

Review of Frank Pasquale’s “A Rule of Persons, Not Machines: The Limits of Legal Automation” – Article by Adam Alonzi

Review of Frank Pasquale’s “A Rule of Persons, Not Machines: The Limits of Legal Automation” – Article by Adam Alonzi

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Adam Alonzi

From the beginning Frank Pasquale, author of The Black Box Society: The Secret Algorithms That Control Money and Information, contends in his new paper “A Rule of Persons, Not Machines: The Limits of Legal Automation” that software, given its brittleness, is not designed to deal with the complexities of taking a case through court and establishing a verdict. As he understands it, an AI cannot deviate far from the rules laid down by its creator. This assumption, which is not even quite right at the present time, only slightly tinges an otherwise erudite, sincere, and balanced coverage of the topic. He does not show much faith in the use of past cases to create datasets for the next generation of paralegals, automated legal services, and, in the more distant future, lawyers and jurists.

Lawrence Zelanik has noted that when taxes were filed entirely on paper, provisions were limited to avoid unreasonably imposing irksome nuances on the average person. Tax-return software has eliminated this “complexity constraint.” He goes on to state that without this the laws, and the software that interprets it, are akin to a “black box” for those who must abide by them. William Gale has said taxes could be easily computed for “non-itemizers.” In other words, the government could use information it already has to present a “bill” to this class of taxpayers, saving time and money for all parties involved. However, simplification does not always align with everyone’s interests. TurboTax’s business, which is built entirely on helping ordinary people navigate the labyrinth is the American federal income tax, noticed a threat to its business model. This prompted it to put together a grassroots campaign to fight such measures. More than just another example of a business protecting its interests, it is an ominous foreshadowing of an escalation scenario that will transpire in many areas if and when legal AI becomes sufficiently advanced.

Pasquale writes: “Technologists cannot assume that computational solutions to one problem will not affect the scope and nature of that problem. Instead, as technology enters fields, problems change, as various parties seek to either entrench or disrupt aspects of the present situation for their own advantage.”

What he is referring to here, in everything but name, is an arms race. The vastly superior computational powers of robot lawyers may make the already perverse incentive to make ever more Byzantine rules ever more attractive to bureaucracies and lawyers. The concern is that the clauses and dependencies hidden within contracts will quickly explode, making them far too detailed even for professionals to make sense of in a reasonable amount of time. Given that this sort of software may become a necessary accoutrement in most or all legal matters means that the demand for it, or for professionals with access to it, will expand greatly at the expense of those who are unwilling or unable to adopt it. This, though Pasquale only hints at it, may lead to greater imbalances in socioeconomic power. On the other hand, he does not consider the possibility of bottom-up open-source (or state-led) efforts to create synthetic public defenders. While this may seem idealistic, it is fairly clear that the open-source model can compete with and, in some areas, outperform proprietary competitors.

It is not unlikely that within subdomains of law that an array of arms races can and will arise between synthetic intelligences. If a lawyer knows its client is guilty, should it squeal? This will change the way jurisprudence works in many countries, but it would seem unwise to program any robot to knowingly lie about whether a crime, particularly a serious one, has been committed – including by omission. If it is fighting against a punishment it deems overly harsh for a given crime, for trespassing to get a closer look at a rabid raccoon or unintentional jaywalking, should it maintain its client’s innocence as a means to an end? A moral consequentialist, seeing no harm was done (or in some instances, could possibly have been done), may persist in pleading innocent. A synthetic lawyer may be more pragmatic than deontological, but it is not entirely correct, and certainly shortsighted, to (mis)characterize AI as only capable of blindly following a set of instructions, like a Fortran program made to compute the nth member of the Fibonacci series.

Human courts are rife with biases: judges give more lenient sentences after taking a lunch break (65% more likely to grant parole – nothing to spit at), attractive defendants are viewed favorably by unwashed juries and trained jurists alike, and the prejudices of all kinds exist against various “out” groups, which can tip the scales in favor of a guilty verdict or to harsher sentences. Why then would someone have an aversion to the introduction of AI into a system that is clearly ruled, in part, by the quirks of human psychology?

DoNotPay is an an app that helps drivers fight parking tickets. It allows drivers with legitimate medical emergencies to gain exemptions. So, as Pasquale says, not only will traffic management be automated, but so will appeals. However, as he cautions, a flesh-and-blood lawyer takes responsibility for bad advice. The DoNotPay not only fails to take responsibility, but “holds its client responsible for when its proprietor is harmed by the interaction.” There is little reason to think machines would do a worse job of adhering to privacy guidelines than human beings unless, as mentioned in the example of a machine ratting on its client, there is some overriding principle that would compel them to divulge the information to protect several people from harm if their diagnosis in some way makes them as a danger in their personal or professional life. Is the client responsible for the mistakes of the robot it has hired? Should the blame not fall upon the firm who has provided the service?

Making a blockchain that could handle the demands of processing purchases and sales, one that takes into account all the relevant variables to make expert judgements on a matter, is no small task. As the infamous disagreement over the meaning of the word “chicken” in Frigaliment v. B.N.S International Sales Group illustrates, the definitions of what anything is can be a bit puzzling. The need to maintain a decent reputation to maintain sales is a strong incentive against knowingly cheating customers, but although cheating tends to be the exception for this reason, it is still necessary to protect against it. As one official on the  Commodity Futures Trading Commission put it, “where a smart contract’s conditions depend upon real-world data (e.g., the price of a commodity future at a given time), agreed-upon outside systems, called oracles, can be developed to monitor and verify prices, performance, or other real-world events.”

Pasquale cites the SEC’s decision to force providers of asset-backed securities to file “downloadable source code in Python.” AmeriCredit responded by saying it  “should not be forced to predict and therefore program every possible slight iteration of all waterfall payments” because its business is “automobile loans, not software development.” AmeriTrade does not seem to be familiar with machine learning. There is a case for making all financial transactions and agreements explicit on an immutable platform like blockchain. There is also a case for making all such code open source, ready to be scrutinized by those with the talents to do so or, in the near future, by those with access to software that can quickly turn it into plain English, Spanish, Mandarin, Bantu, Etruscan, etc.

During the fallout of the 2008 crisis, some homeowners noticed the entities on their foreclosure paperwork did not match the paperwork they received when their mortgages were sold to a trust. According to Dayen (2010) many banks did not fill out the paperwork at all. This seems to be a rather forceful argument in favor of the incorporation of synthetic agents into law practices. Like many futurists Pasquale foresees an increase in “complementary automation.” The cooperation of chess engines with humans can still trounce the best AI out there. This is a commonly cited example of how two (very different) heads are better than one.  Yet going to a lawyer is not like visiting a tailor. People, including fairly delusional ones, know if their clothes fit. Yet they do not know whether they’ve received expert counsel or not – although, the outcome of the case might give them a hint.

Pasquale concludes his paper by asserting that “the rule of law entails a system of social relationships and legitimate governance, not simply the transfer and evaluation of information about behavior.” This is closely related to the doubts expressed at the beginning of the piece about the usefulness of data sets in training legal AI. He then states that those in the legal profession must handle “intractable conflicts of values that repeatedly require thoughtful discretion and negotiation.” This appears to be the legal equivalent of epistemological mysterianism. It stands on still shakier ground than its analogue because it is clear that laws are, or should be, rooted in some set of criteria agreed upon by the members of a given jurisdiction. Shouldn’t the rulings of law makers and the values that inform them be at least partially quantifiable? There are efforts, like EthicsNet, which are trying to prepare datasets and criteria to feed machines in the future (because they will certainly have to be fed by someone!).  There is no doubt that the human touch in law will not be supplanted soon, but the question is whether our intuition should be exalted as guarantee of fairness or a hindrance to moving beyond a legal system bogged down by the baggage of human foibles.

Adam Alonzi is a writer, biotechnologist, documentary maker, futurist, inventor, programmer, and author of the novels A Plank in Reason and Praying for Death: A Zombie Apocalypse. He is an analyst for the Millennium Project, the Head Media Director for BioViva Sciences, and Editor-in-Chief of Radical Science News. Listen to his podcasts here. Read his blog here.

What the Atlanta Highway Collapse Signals about American Infrastructure – Article by Lili Carneglia

What the Atlanta Highway Collapse Signals about American Infrastructure – Article by Lili Carneglia

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The New Renaissance Hat
Lili Carneglia
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Atlanta is already known for having some of the worst traffic in the world, and the recent collapse along a major interstate will only make congestion worse. On March 30, in the middle of rush hour traffic, a fire began under the I-85 Northbound that quickly erupted into a massive blaze, eventually causing a section of the bridge to collapse.

Less than 24 hours later, with the rubble still smoldering, the US Department of Transportation announced a $10 million award to begin emergency repairs. Despite the quick response from the DOT, it will take millions more dollars before I-85 can resume carrying 400,000 vehicles daily.

With the nation’s Highway Trust Fund rapidly approaching insolvency, the I-85 collapse and the subsequent Atlanta traffic chaos exemplify the overwhelming cost and inefficiency of public infrastructure in America.

Why So Expensive?

In the United States, transit projects are chronically expensive and time-consuming. The country’s outdated method of allowing most highways to fall under federal care, and cumbersome regulatory obstacles, is part of the reason that we continue to lag behind when it comes to international standards. Regulatory burdens also contribute to other countries’ outranking the US when it comes to securing construction permits, making new projects and maintenance even more complicated.

Policy relics of the Obama administration weigh particularly heavy on this type of progress. Specifically, Executive Order 13502, which encourages labor agreements for federal construction projects. Because these agreements require union labor, this E.O. severely limits the number of firms that can accept a federal contract, since only 13.9 percent of the construction workforce is unionized. Additionally, many researchers have found that this practice is estimated to increase the costs of projects anywhere from 13-18 percent.

As the small fraction of construction firms that benefit from this order continue to lobby for similar policies that land them more federal projects at the expense of taxpayers and industry innovation, we can expect the cost of infrastructure projects to continuously rise.

This issue is nothing new, with politicians from both sides of the aisle eager to point fingers and  offer their own solutions. President Trump is no exception. He has made a repeated pledge to invest $1 trillion in the nation’s infrastructure. While the Trump administration has announced that those plans will be revealed later in the year, the details, including the amount of federal funding available for the project, remain a mystery. In part due to this opacity, most people remain skeptical of promises, released alongside a proposed budget, that would cut DOT spending by 13 percent.

However, even if the Trump administration were to pump $1 trillion of pure federal funds into infrastructure projects, it would do little to fix the country’s severely broken system. The best chance of improving America’s infrastructure lies in removing the red tape standing in the way of private firms when it comes to federal projects – or better yet, ending the government monopoly on transit altogether.

Corporate Welfare

One of the most promising international trends in infrastructure development involves moving away from public transportation and towards private transit systems. The Organisation for Economic Co-operation and Development (OECD) reports that in many countries, private investment in infrastructure is on the rise as government investment declines due to “constraints on public finance and recognized limitations on the public sector’s effectiveness in managing projects.” The US should take note of the global trend.

Transitioning to privatization is quickly becoming a necessity in the face of rapidly-expanding maintenance costs and Trump budget cuts. Even without the option of public funding, privatization offers massive benefits for taxpayers.

Some of the biggest users of public roads, like logistics companies, create billions more dollars in transportation expenses than the average car-owner. However, road costs are passed on to taxpayers en masse, subsidizing companies that use public roads the most. The current system effectively results in corporate welfare. Private toll roads help mitigate the unfair cost burden and appropriately account for maintenance.

American infrastructure is on the brink of complete disaster. While the I-85 collapse was an unpredictable event, prior to last month, the road was not even listed among the 56,000 structurally deficient bridges in the country. Infrastructure expenses will continue to drain federal and state budgets until public funds can no longer keep up. Sudden highway collapses are a disquieting reminder of what is at stake if we fail to change the way the US approaches transportation.

Lili Carneglia is a student at the University of Alabama where she is getting a joint bachelor’s and master’s degree in Economics. She is a Young Voices advocate.

This article was originally published on FEE.org. Read the original article.

For the Separation of Stadium and State – Article by David R. Henderson

For the Separation of Stadium and State – Article by David R. Henderson

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The New Renaissance HatDavid R. Henderson
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The title of this post is the same as the title of an article by Jonah Goldberg about the Colin Kaepernick incident. (If you haven’t been paying attention to the NFL lately, here’s the summary: Kaepernick is a San Francisco 49er who refused, and still refuses, to stand for the U.S. national anthem.)

I had been pondering writing a similar piece myself. And then I saw his title. Darn, I thought, Goldberg has beat me to it.

Except that he didn’t.

Goldberg’s article is all about his narrow way of keeping politics out of sports: players should stand for the national anthem. Some people would see this as a way of inserting politics into sports.

That means that people who don’t like what Kaepernick did are being forced to pay for the very property on which he did it.

But how would you keep politics out of sports in a fundamental way? It would be by not forcing people to pay for sports.

You don’t have to know a lot about the 49ers or the NFL to know that local governments tax their residents and others heavily to pay for luxurious stadiums.

That means that people who don’t like what Kaepernick did are being forced to pay for the very property on which he did it. On the other hand, it also means that people who don’t like the flag-waving that goes on at NFL games are also forced to pay for the property on which that occurs.

There’s a simple solution here: actually separate sports and state. That is, quit forcing taxpayers to pay for sports.

Now that’s a solution that I will salute.

 

david-r-henderson
David R. Henderson

David Henderson is a research fellow with the Hoover Institution and an economics professor at the Graduate School of Business and Public Policy, Naval Postgraduate School, Monterey, California. He is editor of The Concise Encyclopedia of Economics (Liberty Fund) and blogs at econlib.org.

This article was originally published on FEE.org. Read the original article.

Government by Contract – Article by Kyrel Zantonavitch

Government by Contract – Article by Kyrel Zantonavitch

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The New Renaissance Hat
Kyrel Zantonavitch
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Government should be by contract only. The citizen and the state should come to a mutual, official, legal agreement. All adults, upon turning 18 or 21 or so, should sign a formal, written, binding, social compact in which they agree to abide by the constitution and the laws of a given country in exchange for government services. This means in exchange for the defense of their liberty and the protection of their rights.

This essentially means the systematic, careful, full-time safeguarding of their person and property by professionally trained and armed government agents or civil servants. The would-be citizen or resident should freely agree to pay a certain fee – say 3% per year of his local income or .5% per year of his local net worth – in trade for expert police and military defense, plus court and jail services, plus the government administration thereof.

In theory the contractee of the state might be commanded to surrender some of his rights — such as serving one year of military duty, or a lifetime of no slander or defamation in speech, or being subjected to subpoena coercion at any time. But the potential citizen or resident is always perfectly free to quit, or to refuse to join, such a slightly despotic state.

It’s understood that at any time, for any reason, the citizen is free to immediately, unilaterally cancel his contractual agreement by giving brief, official, public or written notice. Thus he renounces his citizenship — and consequent legal obedience and political loyalty — to his former country and government. It’s also understood that the government can strip him of his citizenship or political rights — also by providing official, public notification slightly in advance — for major violations of the constitution or law.

In both cases the person involved can either join another government or become a temporarily or permanently stateless person. But no fines, jail terms, or other civil penalties are allowed due to his “treason,” especially not any property or wealth confiscation. If the former citizen owns land, and so chooses, he can theoretically become a one-man country. Or the previously-signed government contract may require him to sell his land for a fair price and then leave.

Because the former citizen or resident is no longer bound under political contract to some social group, and thus is no longer paying his service fees or “taxes”, the old government will now stay off his private real estate, and will no longer necessarily protect his person or property from criminals and invaders, i.e. from any attackers or rights-violators. He must defend himself.

Moreover the newly independent person can no longer visit his former country without government permission, such as a visa of some kind. When such a person does visit he must temporarily subject himself to the local laws of the foreign government, and perhaps also pay some sort of visitor’s fee.

Government by contract ensures that any given state is fully legitimate and proper in that it clearly and openly enjoys 100% of the consent of the governed, from its voluntary members. Convicted criminals may dispute this, but they freely chose to become citizens or residents prior to conviction. Their arrest, trial, and punishment should be entirely open, and a matter of public record, as well as completely based upon the principles of justice and individual rights, and a product of laws that the convicted criminal previously freely agreed to.

Any given government should follow the legitimate and proper course of attaining a formal, serious, contractual assent from the totality of its adult citizenry, and all free, sovereign individuals therein. A government not founded on the consent of the governed is a type of criminal syndicate or imposed tyranny which desperately needs to be avoided.

Kyrel Zantonavitch is the founder of The Liberal Institute  (http://www.liberalinstitute.com/) and author of Pure Liberal Fire: Brief Essays on the New, General, and Perfected Philosophy of Western Liberalism.

This TRA feature has been edited in accordance with TRA’s Statement of Policy.

The Need for a “Buy Human” Program – Article by Bradley Doucet

The Need for a “Buy Human” Program – Article by Bradley Doucet

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The New Renaissance HatBradley Doucet
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The Canadian government is apparently facing growing pressure to graft a Buy Canadian program onto its billions of dollars of planned infrastructure spending. That way, all those taxpayer dollars would help support employment and economic growth here at home instead of shipping it across the border and overseas. Who could object to such a well-meaning policy to prop up good, Canadian jobs?

Well, for starters, someone concerned with cost-effectiveness could raise an objection. Such a person might argue that our representatives in government have a responsibility to see that we taxpayers get our money’s worth when they, for example, decide from whom to buy the steel that will be used to build our bridges. Before raising our taxes even higher than they already are, or sinking us further into debt and saddling our kids with the bill, they should try to stretch each tax dollar as far as it’ll go. And if getting the best value for our money means buying steel from China, then that’s what they should do.

Someone who understands the general benefits of trade and specialization could also easily object to a Buy Canadian program. When we engage in voluntary exchange with other people, we do so because we expect to benefit—and the people we trade with do the same. By specializing in some form of production, we can get better at it, becoming more skilled and even finding better ways of doing things. Then, through trade, we benefit not only from our own skills and innovations, but from other people’s as well. Importantly, this dynamic holds whether our trading partners are across the street or on the other side of the planet.

On the flipside, someone who understands how harmful a trade war is to everyone concerned would have good reason to object to measures like a Buy Canadian program. All parties are losers in a trade war, as protectionist barriers beget more protectionist barriers. It’s like two imbeciles in a gunfight: one shoots himself in the foot, and his rival retaliates by shooting himself in his foot. As our economies limp along with these self-inflicted wounds, we are also in increased danger of seeing our strained relations deteriorate into actual wars, since instead of at least valuing foreigners for what we can get from them through trade, we find it easier to denigrate them as something less than human, the better to justify dropping bombs on them. If this seems farfetched, just think of how certain media outlets portray the people who are currently having bombs dropped on them.

And speaking of foreigners, someone whose concern for the well-being of his or her fellow humans doesn’t stop at an imaginary line on a map could also find a Buy Canadian program objectionable. It’s true that some people’s lives here at home are disrupted when businesses close, or when certain kinds of jobs disappear altogether from the local landscape. But the people we trade with in other countries? They’re people too, and trade benefits them just as it benefits someone in this country. Why their well-being should matter less to me because they live in a different country, I’ve never understood.

If we want to lend a hand to our neighbours who lose their jobs, we can help them transition to some other kind of work. But “we” shouldn’t keep making steel if “we” can’t make it at a competitive price anymore; instead, we should switch to doing something else, and buy our steel from people willing and able to produce it and sell it at a lower price. They in turn will buy from us the things that we are comparatively good at. And if other governments want to subsidize their steel industries—and therefore our purchases of steel—then our own governments shouldn’t compound the mistake by following suit.

Think about it: If it makes sense to Buy Canadian, then why not Buy Quebecois? Buy Montreal? Buy Mile-End? Buy Fairmount-between-St-Laurent-and-Clark? The simple fact is that global trade has made the globe richer, helping to bring us closer than we’ve ever been to eradicating extreme poverty, and allowing everyone not living under the boot heel of authoritarianism the opportunity to live a decent life. Parochialism will only make us poorer and less connected with other people around the world. Instead of Buy Canadian or Buy American programs, what we really need is a Buy Human policy, trading with whichever of our fellow human beings are offering us the best value for our money in their efforts to improve their own lives.

Bradley Doucet is a writer living in Montreal. He has studied philosophy and economics, and is currently completing a novel on the pursuit of happiness. He also is QL’s English Editor.
A Conversation with My Neighbor “Sam” – Article by Mark Brandly

A Conversation with My Neighbor “Sam” – Article by Mark Brandly

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The New Renaissance HatMark Brandly
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Lately, I’ve wondered how my neighbor, Sam, affords to buy so much stuff. He appears to have an unlimited budget. When I asked him about this, Sam asked, “Do you think I’m spending too much?”

“That depends,” I said, “How much money do you make?”

“I take home $100,000 a year.”

That surprised me. I would guess that he’s spending more than that. But I tried to be encouraging, “That sounds like plenty of income. With a little planning, you should be able to budget your spending and be financially stable.”

“But my finances are a mess,” Sam replied. “I spend more than I take home. Last year I had to borrow $12,000 just to cover my spending.”

“Well maybe things will be better this year,” I said, hoping that Sam’s spending issues was a one year problem.

“No,” Sam replied. “Actually, in the first three months of this year, I’ve already spent $19,000 more than I’ve made. It looks like my budget deficit this year will be much worse than it was last year.”

Now I was starting to worry. “Have you been borrowing money to cover your spending for a long time?”

“Oh yes. I have a lot of debt. Part of the problem is that I owe myself $150,000.”

I wondered if Sam misspoke, “Wait, wait, wait, you owe yourself $150,000? Why do you think that you’re in debt to yourself?”

“Well you see, over the years I promised myself that I was going to use my paychecks to pay for a fund for my children’s education, but instead of spending $150,000 on colleges, I spent the money on other expenses. So I figure that I owe myself this money so that I can pay for my children’s college tuitions.”

Obviously Sam doesn’t understand the definition of the word “debt.”

I tried to be polite in my response: “That doesn’t make any sense. It’s true that you’ve made some horrible decisions regarding your spending, but it’s ridiculous to claim that you owe yourself money. A debt occurs when one person owes another person money. Just because you changed your mind about how to spend your paychecks doesn’t mean that you’ve borrowed money from yourself.

“So the first thing you need to do is to think clearly about the amount of debt you have. You don’t owe yourself any money. Now, forgetting about this ridiculous notion of self-debt, how much do you owe?”

“Alright, I think I see your point. Let’s just talk about the rest of my debt. I owe various banks about $420,000. This debt is more than four times my take-home income.”

Sam often lies about his income and spending issues, but he always understates his budget problem. If he’s lying now, then I can be sure that the problem is even greater than he says. I wanted more information.

“That a pretty high debt to income ratio. But that might be somewhat manageable, although unwise, if you’ve borrowed that money at low interest rates.”

“I have some good news and some bad news,” Sam said. “Interest rates are low. In fact, in the last fourteen years, my debt has more than quadrupled, but my interest payments have increased less than 50 percent. That’s because interest rates have collapsed during that time. Isn’t that good news?”

“I suppose, but do you know that interest rates are going to increase over the next several years?”

“Yes, that’s the bad news. In the past year, I only paid $7,000 of interest, but within ten years my debt will increase over 50 percent, and possibly much more, and with higher interest rates I expect to be paying at least four to five times that much in interest annually.”

“That’s a huge problem. So to be able to make your loan payments, I assume that you’ve taken out some long-term loans.”

“No, no, no. In order to take advantage of the low interest rates, most of my borrowing is short term. I rollover my loans quickly. In the past year my principal payments on these loans totaled $207,000.”

“Let me get this straight. Your loan payments, including principal and interest, are well over twice your take home pay?”

“Yes, I take home a little over $8,000 per month and my loan payments are over $17,000 per month. But it’s no problem. In the past year I borrowed $223,000 to cover everything.”

Shocked, I said “How can you say borrowing more than twice your income is not a problem?”

“I simply borrow all the money I need to make all of my loan payments. I never pay any of the loans down. I’ve been doing this for years, ever since I started spending more than I make.”

“Okay. Most of your borrowing goes to cover your increasingly large principal and interest payments. And as interest rates rise, interest payments will become a bigger percentage of your spending. When that happens, your total debt will increase faster than your income. What is your plan, say in the next ten years, to correct this situation?”

“Well I don’t have a plan for correcting anything, because I don’t see how I can cut my spending.”

“What if the banks stop loaning you money to make your payments on your loans? What happens then?”

“I guess I’m assuming that won’t happen.”

Sam’s Budget Situation in Real Numbers
If one of our neighbors budgeted in this manner, we would obviously conclude that the guy is crazy. No such plan could work. Eventually lenders would refuse to fund Sam’s spending.

However, Sam’s situation looks a lot like the federal government budget plan. Take a look at some recent federal budget information and some Congressional Budget Office projections:

  • In FY (fiscal year) 2015, the feds had a budget deficit, counting only debt held by the public, of $339 billion, which is about 10 percent of their tax revenues of $3,248 billion. The deficit has been declining the last few years, but that is now changing.
  • In fact, in the first three months of FY 2016, according to the Treasury Department, federal debt held by the public increased $548 billion. Admittedly, some of this debt was due to the fact that the feds were cooking the books in FY 2015 when they hit the debt ceiling limit. Nonetheless, the first quarter 2016 deficit is already 60 percent larger than the overall 2015 deficit.
  • The federal government claims to owe itself over $5 trillion (they call it intragovernmental debt here). This $5 trillion represents tax revenues that were earmarked for specific spending programs, such as Social Security, but were spent on other programs. Since the feds collected taxes to pay for Social Security, but spent the money on something else, they conclude that they owe it to themselves to collect those tax revenues again. That’s the essence of intragovernmental debt. We should not count this as debt. Give the Treasury Department credit for ignoring this type of “debt” in their Daily Treasury Statements and in their end of the year debt reports.
  • As of September 30, 2015, the feds had $13.1 trillion of debt owed to the public. FY 2015 tax revenues totaled $3.248 trillion. So just like Sam the government has a 4-to-1 debt-to-tax-revenue ratio.
  • In the past fourteen years, from September 30, 2001 (the start of George Bush’s first budget) to September 30, 2015 (the end of Barack Obama’s sixth budget), debt owed to the public increased from $3,339.3 billion to $13,123.8 billion. That’s an increase of 293 percent.
  • According to the Daily Treasury Statements, in the past fourteen years, interest on treasury securities increased from $162.5 billion in fiscal year 2001 to $233.1 billion in fiscal year 2015. That’s a 44 percent increase during the same period when federal debt owed to the public almost quadrupled.
  • In FY 2015, again according to the Daily Treasury Statements, the feds borrowed $7,251.4 billion (see the Public Debt Cash Issues for September 30, 2015), an average of almost $20 billion per day. They spent $6,740.3 billion of this borrowing rolling over their debt. So, Federal principal and interest payments are more than double federal tax revenues.
  • According to the Congressional Budget Office’s baseline projections, debt held by the public in 2025 should exceed $21 trillion and during that time interest rates are expected to increase. Interest rates have been kept artificially low for years. If interest rates return to a more normal level, say to the rates they were paying when George Bush took office fifteen years ago, then interest payments in 2025 will exceed $1.2 trillion. That’s over a 400 percent increase compared to the FY 2015 interest payments. I should note here that the baseline budget projections are optimistic. We should expect the debt situation in 2025 to be significantly worse than these projections.

The federal government’s debt has exploded under the Bush and Obama administrations. Low interest payments due to the low interest rates have masked their budget problems. As interest rates and the spending gap on entitlement programs such as Social Security both increase, the budget problem will compound.

The federal government’s plan is to borrow all of the money they need to pay all of their principal and interest payments and to also pay for the budget deficits in their spending programs. The question we should ask is: what’s going to happen when the world’s lenders refuse to bankroll DC’s spending schemes?

Mark Brandly is a professor of economics at Ferris State University and an adjunct scholar of the Ludwig von Mises Institute.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

CBO: Tangled Web of Welfare Programs Creates High Tax Rates on Participants – Article by Charles Hughes

CBO: Tangled Web of Welfare Programs Creates High Tax Rates on Participants – Article by Charles Hughes

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The New Renaissance HatCharles Hughes
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The dozens of different programs that form our tangled welfare system often impose high effective marginal tax rates that make it harder for low-income people to transition out of these programs and lift of those programs and into the middle class. As the people in these programs enter the workforce, get a promotion, or work more hours, they can lose a significant portion of those earnings through reduced benefits and increased taxes. A new report from the Congressional Budget Office (CBO) illustrates this predicament: many households hovering around the poverty level face steeper effective marginal tax rates than even the highest earners. These prohibitively high tax rates can discourage work and limit their prospects, ultimately making them less likely to escape poverty.

Marginal Tax Rates at the Median and 90th Percentiles by Earnings Group, 2016

cbo_tableau_marginal

Source: Congressional Budget Office, “Effective Marginal Tax Rates for Low- and Moderate-Income Workers in 2016,” November 19, 2015.

Note: Figure created using Tableau. 

CBO’s analysis looks at the range of effective marginal tax rates households face at different levels of income. The median marginal tax rate for households just above the poverty level is almost 34 percent, the highest for any income level. Some households that receive larger benefits or higher state taxes have even higher effective rates: 10 percent of households just above the poverty line face a marginal rate higher than 65 percent. For each additional dollar earned in this range, these households would lose almost two-thirds to taxes or lost benefits. The comparable rate for the highest earners, households above 400 percent of the poverty level, is only 43.4 percent. If anything this analysis might understate how steep the effective marginal rates are for some households. CBO only considers the combined effect of income taxes, payroll taxes, SNAP and ACA exchange subsidies, so households that participate in other programs like TANF or housing assistance could face even higher rates. These results mirror some of Cato’s past work investigating the issues and trade-offs involved with these welfare programs.

The nature of the welfare system contributes to the prevalence of these poverty traps. A House and Ways Human Resources Subcommittee recently held a hearing on issue and released a chart illustrating the complex, labyrinthine nature of the welfare system.

WM-Welfare-Chart-AR-amendment-110215-jpegClick on the image for a full-sized view.

New programs were grafted onto the existing system over time, each intended to address a perceived problem afflicting people in poverty, but they can interact in ways that can deter people from striving to create a better life for their families. That’s part of the reason the status quo system, which the Government Accountability Office estimates spends $742 billion at the federal level each year, has achieved such lackluster results to date.

While these shortcomings would seem to indicate that the welfare system is in need of reform, this tangled web has proved resistant to change. One of the last major reforms happened in 1996, when Temporary Assistance for Needy Families (TANF) replaced Aid to Families with Dependent Children (AFDC). Even that reform only addressed one strand of the dozens that make up our tangled system, so while it might have improved that one aspect the larger flaws with the welfare system as a whole have to some extent continued unabated. Even within this one strand there has been little discussion of reform in the past two decades, TANF hasn’t even been properly reauthorized since the Deficit Reduction Act of 2005, it is usually thrown into short-term continuing resolutions or broader omnibus appropriations acts that do not incorporate any meaningful attempts to address the program’s problems. Absent comprehensive, the flawed current system will continue to fall short even as the government funnels hundreds of billions of dollars into it each year.

If the federal government is going to finance a welfare system, it should foster an environment that encourages work and makes it easier for participants to transition out of these programs as they strive to create a better life. The current system falls far short in that regard and needs comprehensive reforms.

Charles Hughes is a research associate at the Cato Institute, where he focuses on federal budget policy, poverty, entitlement reform, and general economics.  Originally from Texas, Hughes joined Cato in 2011 after graduating from the University of Chicago with degrees in Economics and Public Policy.

This work by Cato Institute is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License.

On Soda Taxes and Purported Health Benefits – Article by Peter Van Doren

On Soda Taxes and Purported Health Benefits – Article by Peter Van Doren

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The New Renaissance HatPeter Van Doren
October 27, 2015
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This week, the New York Times editorial board wrote in support of greater taxes on sweetened drinks, citing new research from a team Mexican and American researchers. They praise the novel design of the tax, which is levied on drink distributors rather than consumers. This caused the tax to be included in shelf prices, making the increase in total cost clear to consumers. The research found that soda consumption fell 12 percent in a year, and 17 percent among the poorest Mexicans.

The Times admits that we do not know whether any health benefits will actually result from soda taxes.  In this article in Regulation, the University of Pennsylvania’s Jonathan Klick and Claremont McKenna’s Eric Helland examined the effects of soda taxes. They conclude that a one percent increase in soda taxes led to a five percent reduction in soda consumption among young people.  But consumers substituted to other beverages.  A 6-calorie reduction in soda consumption was accompanied by an 8-calorie increase in milk consumption and a 2-calorie increase in juice consumption. Thus, the tax on soda led to an increase in overall calorie consumption, which offset the benefits of falling soda consumption. Moreover, there was “no statistically significant effect of soda taxes on body weight or the likelihood of being obese or overweight”.

Peter Van Doren is editor of the quarterly journal Regulation and an expert in the regulation of housing, land, energy, the environment, transportation, and labor. He has taught at the Woodrow Wilson School of Public and International Affairs (Princeton University), the School of Organization and Management (Yale University), and the University of North Carolina at Chapel Hill. From 1987 to 1988 he was the postdoctoral fellow in political economy at Carnegie Mellon University. His writing has been published in the Wall Street Journal, the Washington Post, Journal of Commerce, and the New York Post. Van Doren has also appeared on CNN, CNBC, Fox News Channel, and Voice of America.

He received his bachelor’s degree from the Massachusetts Institute of Technology and his master’s degree and doctorate from Yale University.

This work by Cato Institute is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License.

The Bait-and-Switch Behind Economic Populism – Article by Nicolás Cachanosky

The Bait-and-Switch Behind Economic Populism – Article by Nicolás Cachanosky

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The New Renaissance Hat
Nicolás Cachanosky
May 26, 2015
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Argentina will hold elections this year, and a number of provinces will be electing governors. Buenos Aires, the capital city, is holding elections for mayor, and Mauricio Macri, who is stepping down as mayor, is a favorite to become the next president. Toward the end of the year, a presidential election will be held and Cristina Kirchner, after two consecutive mandates, will have to step down because she cannot be re-elected.

Like Chávez and Maduro in Venezuela, Argentina can be described as a country that fell victim to extreme populism during the Nestor and Cristina Kirchner administrations, which began in 2003. Twelve years later, this populist political project is about to end.

The economic policy of populism is characterized by massive intervention, high consumption (and low investment), and government deficits. This is unsustainable and we can identify several stages as it moves toward its inevitable economic failure. The last decade of extreme populism in Argentina can be described as following just such a pattern.

After observing the populist experience in several Latin American countries, Rudiger Dornbusch and Sebastián Edwards identified four universal stages inherent in populism in their article “Macroeconomic Populism” (1990). Even though populism can present a wide array of policies, certain characteristics seem to be present in most of the cases.

Populism usually fosters social mobilization, political propaganda, and the use of symbols and marketing practices designed to appeal to voter’s sentiments. Populism is especially aimed at those with low income, even if the ruling party cannot explain the source of its leaders’ high income. Populist rulers find it easy to use scapegoats and conspiracy theories to explain why the country is going through a hard time, while at the same time present themselves as the saviors of the nation. It is not surprising that for some, populism is associated with the left and socialist movements, and by others with the right and fascist policies.

The four stages of populism identified by Dornbusch and Edwards are:

Stage I

The populist diagnosis of what is wrong with an economy is confirmed during the first years of the new government. Macroeconomic policy shows good results like growing GDP, a reduction in unemployment, increase in real wages, etc. Because of output gaps, imports paid with central bank reserves, and regulations (maximum prices coupled with subsidies to the firms), inflation is mostly under control.

Stage II

Bottleneck effects start to appear because the populist policies have emphasized consumption over investment, the use of reserves to pay for imports, and the consumption of capital stock. Changes in sensitive relative prices start to become necessary, and this often leads to a devaluation of the exchange rate, price changes in utilities (usually through regulation), and the imposition of capital controls. Government tries, but fails, to control government spending and budget deficits.

The underground economy starts to increase as the fiscal deficit worsens because the cost of the promised subsidies need to keep up with a now-rising inflation. Fiscal reforms are necessary, but avoided by the populist government because they go against the government’s own rhetoric and core base of support.

Stage III

Shortage problems become significant, inflation accelerates, and because the nominal exchange rate did not keep pace with inflation, there is an outflow of capital (reserves). High inflation pushes the economy to a de-monetization. The local currency is used only for domestic transactions, but people save in US dollars.

The fall in economic activity negatively affects tax receipts increasing the deficit even more. The government needs to cut subsidies and increases the rate of the exchange rate, depreciation. Real income starts to fall and signs of political and social instability start to appear. At this point the failure of the populist project becomes apparent.

Stage IV

A new government is swept into office and is forced to engage in “orthodox” adjustments, possibly under the supervision of the IMF or an international organization that provides the funds required to go through policy reforms. Because capital has been consumed and destroyed, real wages fall to levels even lower than those that existed at the beginning of the populist government’s election. The “orthodox” government is then responsible for picking up the pieces and covering the costs of failed policies left from the previous populist regime. The populists are gone, but the ravages of their policies continue to manifest themselves. In Argentina the expression “economic bomb” is used to describe the economic imbalances that government leaves for the next one.

Economic Populism is Alive and Well

Even though Dornbusch and Edwards wrote their article in 1990, the similarities to the situation in countries like Venezuela, Bolivia, and Argentina is notable. In recent years, to keep populist ideas going in the minds of voters, Venezuela created the Ministry of Happiness, and Argentina created a new Secretary of National Thought.

These four stages are actually cyclical. The populist movement uses the fourth stage to criticize the orthodox party, and argues that during the populists’ tenure, things were better. The public opinion discontent with stage IV allows the populist movement to win new elections, receive an economy in a crisis or recession and the cycle starts over again from stage I. It is not surprising that populist governments usually appear following the hard times caused by economic crisis. A more bold populist government could avoid stage IV by finding a way to remain in office, calling off elections, or creating fake election results (as was the case in Venezuela). At such a point, the populist government succeeds in turning the country into a fully authoritarian nation.

Nicolás Cachanosky, a native of Argentina, is assistant professor of economics at Metropolitan State University of Denver.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.