Wednesday, June 2, 2021

Mises Wire

Mises Wire

The Abuse of Public Debt—and How It Sets the Stage for Economic Disaster

Posted: 02 Jun 2021 04:00 AM PDT

The 2020–21 recession has been devastating for the global economy. It has been ninety years since the global economy last suffered through a recession of this magnitude (in the Great Depression). Nonetheless, it seems that the social effects of the current recession have not yet come about. The reason for this disparity between cold macroeconomic data and popular sentiment can be found in the enormous public spending by practically all of the countries in the world.1

This article argues that exorbitant increases in public debt, such as those seen in 2020, are not free. It examines the potential economic effects of accumulating vast quantities of public debt.

The First Problem: Less Economic Growth

The countries with the greatest amount of public debt saw per capita income grow the least, as seen in chart 1.

Chart 1: GDP Growth per Capita

df
Source: Kumar and Woo. Created with Datawrapper

The economic mechanism that explains this statistical relationship is relatively simple. An excessive public debt causes the so-called expulsion effect, in which credit is redirected from the private sector to the public sector. The growth of public debt deprives the private sector of loanable funds, reducing the generation of wealth. (It is the private sector that generates economic activity. The most the public sector can aspire to do is to establish a framework that favors private endeavors.)

The Second Problem: Disincentivizing Investment and Reducing Productivity

This second problem is an extension of the first. One of the best indicators of an economy's future growth is its investment rate. When investment increases, so too does productivity, which is accompanied by economic growth.

Thus, if countries with less debt grow faster, it is very possible that these countries will see more investment and greater productivity growth. Chart 2 shows how countries with less debt see greater investment (notably, this detracts from the common argument that public debt can be used to increase investment).2

Chart 2: Investment/GDP

df

As a result of the greater investment in places with little debt, production per worker accelerates. Chart 3 shows this relationship.

Chart 3: Growth of Production per Worker

df

The Third Problem: Deteriorating Solvency

The most obvious problem of all is that an individual or a company that continually spends more than their income ends up going bankrupt and having to make dramatic adjustments to their level of expenditure. A state, as an economic agent, has the exact same problem. If its expenditures regularly exceed its income, it will go bankrupt.3

There is a point at which accumulated public debt becomes unpayable. It is very difficult to estimate this point, which is why recommendations tend to be vague.4 The International Monetary Fund, for example, places the critical point at the moment when a country accumulates a public debt equal to 2.2 times its tax income. The requirement for the eurozone countries is to maintain public debt below 60 percent of GDP and an annual public deficit below 3 percent of GDP. However, none of the eurozone countries comply.

Although there is no unequivocal level of debt beyond which the risk of default arises, studying historical episodes of sovereign bankruptcy can provide an idea of where this limit may be.

Chart 4 analyzes eighty-seven historical episodes of bankruptcy (over 175 years).5 The chart shows that African countries have gone bankrupt once their debt was greater than 2.89 times their tax revenue. Asian countries have gone bankrupt once their debt exceeded 4.83 times their tax revenue.6 At the beginning of 2021, global debt was around 3.12 times global public revenue (3.3 times in developed countries and 2.9 times in developing countries). Accordingly, it appears we are very near the maximum acceptable debt level. If the public sector continues to spend more than it earns, debt nonpayment will become a theme in the coming years.

Chart 4: Public Debt/Tax Revenue at the Moment of Default

df

The Fourth Problem: The Relationship between Inflation and Debt Default

The link between inflation and the accumulation of public debt (and sovereign bankruptcy) is relatively recent. It was not present prior to the twentieth century. The reason can be found in the evolution of the monetary system from a metallic system to a system based exclusively on credit and on large central banks that make monetary policy.

As can be seen in chart 5, countries that find themselves defaulting on public debt experience a much higher inflation rate (more than triple) than countries that honor their commitments. In the twentieth century, as a result of the change in the monetary system, it became possible to pay off public debt through inflation.7

Chart 5: Inflation and Sovereign Debt Default
df

Conclusion

Economics is plagued by nonlinearities that, in many cases, obscure cause-and-effect relationships. The economic effect of an increase in public debt is one of the areas in which the lack of linear relationships is most evident. The substantial increase in public debt over the years, and its apparent lack of effect on other macroeconomic variables, has caused an entire profession (economists), and the politicians who follow its advice, to fall into complacency. Nonlinearity in economics means that cause-and-effect relationships can remain dormant for a long time, only to manifest themselves with unusual force later on.

I would like to conclude this article on a pessimistic note and an optimistic note. The pessimistic note (better addressed first since it is always best to end on a high note) is that the disastrous economic effects discussed in this article will become evident at a future time that is very difficult to pinpoint. We cannot escape the principles of economics any more than we can escape the principles of physics. The optimistic note is that the nonlinearities give us time to correct imbalances and alleviate their harms. Accordingly, if you are reading this article in time, demand that your government practice fiscal discipline (or punish it if it does not do so), do not vote for candidates who advocate fiscally irresponsible policies, and protect yourself from inflation by avoiding keeping large sums of money or very liquid assets.8

Legal notice: the analysis contained in this article is the exclusive work of its author, the assertions made are not necessarily shared nor are they the official position of the Francisco Marroquín University.

[This article was originally published by Trends at the Universidad Francisco Marroquín.]

  • 1. Additionally, social dynamics tend to be slightly delayed compared with economic dynamics for a variety of reasons (for example, financial cushions, the existence of family networks, aid from the state).
  • 2. Most economists are convinced that public spending is a kind of investment that generates economic benefits. I could not disagree more strongly. Investment, in order to be classified as such, must have an economic goal. At all times, for spending to qualify as investment, the expected discounted inflows must be greater than the expected discounted outflows. For this to happen, it is essential to have market prices. But the majority of public projects estimate shadow prices that have nothing to do with market prices and that tend to rely on unrealistic assumptions in order to make the projects appear viable. A public project whose criteria are political rather than economic is, simply put, an expenditure, not an investment.
  • 3. The big difference between when the public sector goes bankrupt versus when a private agent does is that the latter can be forced to sell its assets to pay its debts. A state, in contrast, can be subjected to a similar process by other states but, unfortunately, not by its citizens. (Accordingly, a payment guarantee is less meaningful when the debtor is a state.)
  • 4. Sometimes these recommendations take the form of tax regulations that are (supposedly) mandatory for the tax authority.
  • 5. The original analysis was by Reinhart and Rogoff (2009).
  • 6. The limits indicated here are averages of the historical episodes of sovereign debt defaults.
  • 7. In general, inflation was much higher in the twentieth century than it was in the nineteenth century. Considering that the main goal of the central banks is to maintain stable prices, there is little question that this fact is proof that central banks are incapable of reaching their goal.
  • 8. There are many more ways to protect oneself against the fiscal irresponsibility of governments and those indicated here are not an exhaustive list.

This posting includes an audio/video/photo media file: Download Now

"What Did Bob Learn?" Part 2 of 3

Posted: 01 Jun 2021 03:00 PM PDT

In response to a listener request, Bob continues a 3-part series explaining areas where his views have changed. In this episode, he covers government debt and future generations, accuracy in polemical writing, the Fed being a private corporation, whether nice guys finish last, and mainstream utility theory.

Mentioned in the Episode and Other Links of Interest:

​For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on Apple Podcasts, Google Podcasts, Stitcher, Spotify, and via RSS.

 

Myths of the Mixed Economy

Posted: 01 Jun 2021 12:00 PM PDT

The planned economy was all the rage in 1937, when Prentice-Hall published a 1,000- page tome on The Planned Society: Yesterday, Today, Tomorrow: A Symposium by Thirty-Five Economists, Sociologists, and Statesmen. The "question that confronts us today is not if we shall plan, but how we shall plan," wrote Lewis Mumford in the Foreword. All the contributors – Keynesian, socialist, communist, and fascist – agreed with that point, including such luminaries as Sidney Hook, Benito Mussolini, and Joseph Stalin.

But the book was honest. It linked Stalin and Keynes, fascism and the New Deal. The plans were not identical, of course, but all agreed on government "rationality" as versus the "chaos" of the free market.

Most of the authors advocated the "mixed economy," Mises's name for an admixture of capitalism and socialism. Such a combination, he showed, is necessarily unstable, and our own mixed economy is tilting towards statism, with such regulatory disasters in the last few years as the Clean Air Act, the Americans With Disabilities Act, and the Civil Rights Act.

Today, no part of the economy is left untouched by the President's budget and the swarm of regulatory agencies. Buttressed by most of the economics profession, the regulatory state today rules and ruins America. Communism lost, but social democracy won.

In the American mixed economy, it is the job of the planner to: ensure "full employment" (as federal policies create joblessness); encourage technological innovation (not through markets, but through subsidies); ensure a "fair" distribution of wealth (rewarding parasites and punishing the productive); manage international trade (though it needs no more management than domestic trade); and keep "public goods" out of private hands (even though public ownership must always be less efficient than private).

The planner has taboos as well. He must never mention private property, praise the coordinative function of prices, criticize pressure groups unless they're anti big-government, be cynical about the uses of power, call for a tax cut, or identify the real source of prosperity as the free market.

Charles Schultze, President Carter's chairman of the Council of Economic Advisers, adheres to these rules and taboos in his book and "guide to macroeconomics" Memos to the President. He sets out these rules for every policymaker to follow in the future.

In the entire work, he has not one good word to say about the market, private property, or the price system. His central assumption is that the government must manage the economy to prosperity. According to Schultze, we should believe that: the Federal Reserve protects the dollar, when our money has lost 94% of its value since the Fed was established; the Fed can cure business cycles, when every decade or so, it causes a serious economic setback; the government can create full employment, even as it causes unemployment with such welfare measures as the minimum wage and civil rights; the government can develop new technologies, even though bureaucracy is a proven technology killer; we can trust the government to improve our standard of living, though our standard of living has fallen for nearly twenty years; the government protects us from monopolistic capitalists, even while government creates and sustains destructive monopolies from the post office to the schools; regulatory agencies do protect us from dirty air, unsafe drugs, and lead poisoning, while everywhere government is biggest, from Moscow to D .C., life is dirty and unsafe.

Naturally, mainstream economists – the useful idiots of the interventionist state – advise presidents on economic policy. Today, these economic planners see their primary task as "keeping supply and demand in balance." That doesn't mean allowing the market to work, of course, but rather pushing and releasing buttons on the planning machine.

There are two views on how to do this, one mainstream and one rival. The mainstream view says that a decrease in overall demand causes economic downturns, and so demand should be increased by government spending and money creation. This is supposed to make up for the deficiencies of the private sector.

The rival view says declines are caused by a fall in overall supply, caused by any number of factors, including an irrational fear of investment. So, boosting overall demand through spending or inflation only exacerbates the troubles.

The second view has better policy implications, but both are misguided. They assumed that there is something called overall demand conglomerating the values of consumers and producers alike. This obscures the real economy.

The obscurantist aggregations don't stop with "supply" and "demand." The planners also discuss such categories as capital and investment as if they were homogeneous, representing these very diverse groupings as single letters in their macroeconomic models.

Both views also assume that government managers are smarter than the market. Imagine that you had to plan the household finances of your next-door neighbor, with little or no information about their income, tastes, and talents, all of which can and do change. Yet the planners have been trying to do this for decades, to the entire economy.

To explain their way out of this problem, the planners separate the "micro" economy from the "macro" and claim the decisions of individuals have nothing to do with the overall picture. It's true that no one individual can, for example, change the net rate of savings in the economy, but there would be no net rate of savings without individual decisions.

It is out of the millions of decisions of real people that the economy is created, and it is the job of the economist to understand and explain how that happens, not to encumber it.

The planners of the mixed economy like to talk about supply and demand as if they needed the government to coordinate them. Yet supply and demand describe the natural pattern of economic behavior in the absence of government interference.

If there is a chicken plague, the price of eggs will soar. The consumer doesn't have to read the "Chicken Health Update" to know that he should economize on eggs. The price tells him that, and he can then look for substitutes.

Conversely, if Frank Perdue genetically engineers a superchicken that lays many more eggs than the normal bird, the price of eggs will plummet. But the consumer doesn't need to read "Techno-Poultry Weekly" to know that. He need only look at the price.

In a free market, there is no need for planners to bring supply and demand into line. The daily transactions of millions of consumers do so, leavened by the risk-bearing entrepreneurs. It is the mixed economy itself that creates the demand for economic planners to run it. Massive deficits destabilize the economy, leading to calls for government to stabilize it.

The "entitlement" programs are interventions as well. Government spending may increase the demand for some goods and services, but it drains resources from the private economy just as surely as taxes. Yet the "opportunity costs" of confiscating these resources never factor into the planners' models.

How much does the mixed economy cost us? We can't know. Despite the well-intentioned attempts of some economists to figure it out, no one can know the effects of technologies never created; firms never started; people never hired; others hired by government fiat; central bank-created recessions; and higher prices from taxes, regulations, and government-generated demand. We can only know that the effect is gigantic, harmful, and growing.

Government intervention can be criticized on a number of other grounds that the mixed-economy planners do not mention:

First, politicians and bureaucrats are self-interested. In the private sector, self- interest works to the common good. In the public sector, it means expansion of the government's budget and power, which attacks the common good.

Second, the market can sometimes anticipate the planners, negating the effects of government action. If the Federal Reserve increases the money supply, the market can take account of the likely inflationary effects and prices will rise sooner and higher than the managers thought.

Third, intervention increases the incentive to evade the law, thereby enlarging the less-efficient and societally unfortunate underground economy.

Fourth, intervention distorts the price system and the interest rate, which work to coordinate the use of resources. Price controls and regulations cause misallocation, and Fed-lowered interest rates cause businessmen to make bad investments.

Fifth, intervention undermines the division of labor, preventing people from doing the tasks they are most suited for because regulation prevents employers from hiring on merit.

If the mixed economy is such a disaster, why do we have one? Because it enables the well-connected to loot the rest of us in a social democracy disguised as "democratic capitalism." To get away with the looting, the mixed-economy state attacks all countervailing institutions: families, neighborhoods, businesses, private schools, and charitable and religious organizations. The result is the barbarism and increasing poverty we see all around us.

The Planned Society didn't mention that, but it is the inevitable outcome of what it recommended, and what the U.S. government practiced in 1937, and today.

[Originally published September 14, 2006]

The Case of Joe Rogan: Vaccine Policy and Freedom of Speech

Posted: 01 Jun 2021 09:00 AM PDT

Recently, Joe Rogan, one of the largest podcast hosts in the United States (10.6 million YouTube subscribers), expressed the following opinion about the vaccination of young adults:

If you are 21 and ask me if you should get the vaccine, I would say "no". If you are a healthy person and exercise all the time, and are young and eat well, I don't think you have to worry about this.

This comment created a furor in the United States, where the government's target is vaccination of the entire adult population. For these few sentences he received a sharp reprimand from the White House and Dr. Fauci, who accused Rogan of being selfish and endangering vulnerable members of society. 

Given the very low covid risk for this age group, Rogan's comments seem to make some sense. Wouldn't it be more altruistic, rather than selfish, to let a vaccine dose first go to someone who needs it more? Either way, such criticism is ludicrous when it comes from a government that so often acts contrary to the interests of society.

Additionally, considering the way in which the covid vaccines were launched, some skepticism on the part of Joe Rogan, and the general population, seems warranted. Indeed, these vaccines have become available so quickly that their Phase II and the Phase III development has been conducted in parallel and is not yet completed. In the US, the covid vaccines are currently approved only as emergency measures by the FDA, though nearly 260 million Americans have already been vaccinated.

In the case of AstraZeneca, the pressure to get a vaccine out as quickly as possible caused an issue in the dosage during the first distributions. In many European countries this vaccine has not been recommended to young people because of a perceived risk of blood clots. In Russia, an antibody test is recommended before vaccination to ensure that the patient is not already immune, in order to avoid wasting doses and to avoid overloading the body with antibodies.

In this context, it does not certainly seem shocking to suggest, like Joe Rogan, that healthy young adults may not really need to get vaccinated.

Government Agents Attacking the Opinions of Private Citizens

In reality, the real question is not whether Joe Rogan was right or wrong in saying what he said. Criticism of a citizen by the US government is disturbing regardless of the comments that were made. What about freedom of speech when the state criticizes an individual's speech? 

The protection of freedom of speech and of the press in the USA is among the strongest that exists. The First Amendment to the Constitution in theory offers extremely robust protection with its famous words: "Congress will not make any law curtailing freedom of speech, or of the press."

But this implies that it is not unconstitutional for the authorities to publicly judge the speech of its citizens, such as Rogan. As reported by Glenn Greenwald, this represents in practice a government control of speech. He quotes a Federal Communications Commission (FCC) commissioner who notes that:

Politicians have realized that they can silence the speech of those with different political viewpoints by public bullying.

For politically "sensitive" subjects, authorities do not accept deviations from their official story. This deleterious situation has existed since long before the pandemic. Today, it is about vaccine policy, but yesterday, about the war on terrorism, about Russiagate, about the corruption of Joe Biden, and many other topics. Greenwald explains:

When it comes to censorship of politically adverse content, sometimes explicit censorship demands are unnecessary. Where a climate of censorship prevails, companies anticipate what those in power want them to do by anticipatorily self-censoring to avoid official retaliation. Speech is chilled without direct censorship orders being required.

Concretely, this means that when Joe Rogan is publicly criticized by the authorities, countless other content is never published. This process of media self-censorship, without open and direct coercion from the state, is of course part of the propaganda system that Edward S. Herman and Noam Chomsky famously called "manufacturing consent."

For intrepid journalists who still take the risk of publicly challenging the official consensus, the lucrative and prestigious positions in mainstream media are no longer accessible. As shown by Greenwald, the risk to their reputation that they incur is real, because they are also then systematically victims of unscrupulous practices, such as being accused of being a conspiracy theorist or of inciting terrorism. These accusations, usually completely unfounded, can destroy careers in the toxic politically correct environment that exists in the United States. 

Unfortunately, it doesn't end there. The authorities go much further than these mafia methods of intimidation. The main social networks in the US are now filled with reliable servants of the state, who filter and censor persons or publications at the request of various state institutions, the same way that mainstream media has behaved for ages.

With respect to covid vaccine policy, for example, Facebook and YouTube today systematically censor comments and videos that are not in line with the official version of governments, the Centers for Disease Control and Prevention (CDC), and the World Health Organization (WHO). The fact that these institutions have often changed their opinion about which health policy to recommend does not seem to be a problem.

A Constitution Is Not Sufficient Protection

This situation with Joe Rogan should remind everyone that the fight for individual freedoms, including freedom of speech and of the press, is a permanent struggle. No document, be it the US Constitution or the Declaration of Human Rights, gives an absolute guarantee against the violations of these freedoms by the state, as shown by many historical examples.

The authoritarian tendencies of nominally democratic governments are nothing new. Indeed, these governments have a natural interest in trying to influence—not to say shape—public opinion. Recent history shows that in collaboration with traditional mainstream media and now social networks, the government is willing to do almost anything to prevent the electorate from understanding its real behavior. The fame of Joe Rogan will at least have contributed a little to exposing this truth.

This posting includes an audio/video/photo media file: Download Now

Mark Schaefer on Cumulative Advantage

Posted: 01 Jun 2021 07:30 AM PDT

Economists recognize the phenomenon of increasing returns. Knowledge markets such as those for software, operating systems and platforms, tend to tilt in favor of a product or service or brand that gets ahead, even to the point of lock-in. There is a growing body of theory — often under the heading of complexity theory, and supported by computational simulation — underpinning the concept of increasing returns.

Mark Schaefer is expert at bringing economic theories of this kind into vibrant contemporary life. He coined the term Cumulative Advantage, and wants all entrepreneurs to know how to harness it (see Mises.org/E4B_120_PDF).

First of all, it's not new. It's in the Bible: For whoever has will be given more. Sociologist Robert K. Merton therefore called it The Matthew Effect.

How can entrepreneurs and their firms take advantage of increasing returns to achieve cumulative advantage? Consistent with the processual approach to value of Austrian economics, Mark has a five-step process.

Key Takeaways And Actionable Insights

Identify an initial advantage.

How do entrepreneurs identify a small initial advantage that sets momentum in motion? There are unlimited sources within complex economic systems. Mark tells us to look for collisions of events, ideas, people and circumstances from which entrepreneurs can derive their unique advantage. He calls them "click moments". They are happy, random, emergent phenomena. He gives the example of Bill Bowerman's experiment with latex in a waffle iron to create a new type of running shoe — the click moment for Nike.

Importantly, these random outcomes are spurred by action — acting on curiosity, and pursuing an energetic quest to establish how ideas and imagination can be exploited to solve customers' problems.

Discover a seam of timely opportunity.

Mark rejects the concepts of strategy and planning. Business success can't result from 50-page documents and elaborate spreadsheets. Momentum is a consequence of action. Entrepreneurs replace strategy with their own subjectively defined opportunity to exploit speed, time and space. A seam is a fracture in the status quo through which the entrepreneur sprints. Relentless searching for an open seam is the core activity of entrepreneurship. Seams are always opening as a result of the continuing, ongoing change of business and the economy, best understood through the dynamic lens provided by Austrian economics. Often the timing of the opening is the key factor in the success of an entrepreneurial initiative. Timing cannot be predicted, and so continuous experimentation is the best approach, to create the maximum possibility for "click moments".

Create significant awareness through a "sonic boom" of social proof.

Once a business has entered a seam, it's the occasion to search for amplification. Mark Schaefer proposes the leverage available through influence and influencers, those who can provide social proof to a broader audience that a new entrepreneurial offering is sufficiently worthy to command widespread demand. The customer is the marketer in this construct of social proof — which is a development, of course, of the Austrian theory of consumer sovereignty. People believe each other more than they believe advertising, promotion or PR.

Gain access to a higher orbit by reaching out and up to powerful partners and allies.

Once awareness and social proof of the entrepreneurial offering begin to build, the next process step is to seek partners and allies who can provide access to higher-level resources: powerful connections, better channels, financial capital, value-multiplying alliances. Network theory applies: denser and more active connections through bigger and more strategic network nodes can result in accelerated business expansion.

Maybe it's distribution in Walmart or Target, or endorsement by a celebrity athlete, or presence on a FinTech trading platform, or access to new resources. Reaching up is an exercise in finding partners to expand an entrepreneur's market potential.

Build momentum through constancy of purpose.

Ultimately, says Mark, the killer app is constancy of purpose. Discipline, resilience, purpose and persistence accompany entrepreneurs on the path to achievement. There's flexibility and adaptiveness and agility of course, and these can bring changes in direction, but the goal and the purpose always retain their primary role in the narrative of success.

Additional Resources

"Cumulative Advantage — The Theory of Increasing Returns" (PDF): Mises.org/E4B_120_PDF

Cumulative Advantage: How to Build Momentum for your Ideas, Business and Life Against All Odds by Mark Schaefer: Mises.org/E4B_120_Book

Mark Schaefer's website: BusinessesGrow.com

B Squared Media: BSquared.media

The Bogus January 6 Commission Poses a Real Threat to Freedom

Posted: 01 Jun 2021 06:45 AM PDT

Biden and congressional Democrats are seeking to turbocharge their push for a new domestic terrorism law to permit widespread federal crackdowns on their opponents. Any rigged commission would likely pour gasoline on a fire that could singe far more American rights and liberties.

Original Article: "The Bogus January 6 Commission Poses a Real Threat to Freedom"

This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
at

No comments:

Post a Comment

Subscribe to: Post Comments (Atom)

End of Summer Sale ☀️😎

20% OFF Inside!🤯 ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏  ͏...