Power & Market

I recently dug into our government’s convoluted unemployment insurance system. As is typically true with most government policy, any stone one decides to unturn is ripe with waste, fraud, and mismanagement.

In 1935, FDR (of course) created the first federal unemployment insurance program via the Social Security Act. The program created a national lending pool for states with insolvent unemployment relief accounts. It began by ‘incentivizing’ states to join the program and of course is now a required federal tax on all employers. 

Called the FUTA tax, it’s levied on business owners directly for each employee they have. The IRS makes clear on its website, “Only the employer pays FUTA tax; it is not deducted from the employee's wages.” Leaving aside the naive assumption that employees and customers will not share the burden of this tax, I can’t help but laugh at the rationale here: Private employers are, by definition, the greatest force combating unemployment. So, let’s punish them with a tax - reducing their ability to hire - and use it to incentivize not working!

During COVID, with unprecedented levels of layoffs amid government lockdowns and commensurate increases in unemployment stimulus, many state unemployment relief funds became deeply indebted to the national fund. Though none come close to California’s negative $19 billion balance. 

In a world where trillion-dollar spending packages are commonplace and each week another billion is sent to Ukraine, it’s hard to grasp what is actually a big number. To put it into perspective, the second most indebted state is New York at negative $9 billion. Look at how CA compares to its peers:

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Yet another example of how your federal taxes are being used to bail out California.

According to the Congressional Research Service, if these debts are not repaid “states may face interest charges and the states’ employers may face increased net FUTA rates until the loans are repaid.” In other words, California business owners (who are already fleeing the state en mass) will soon face even higher taxes. The reality is, however, that CA will never be able to pay back this debt. It will likely come down to higher taxes for ALL business owners and some help from the Federal Reserve.

California has seen a substantially slower jobs recovery than most of the country (see LA below).

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Maybe… just maybe… massive welfare programs that encourage people not to work and excessive taxes and regulatory headaches for business owners do not actually solve the problem.

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The war in Ukraine has brought back the debate on international security among European countries, especially in the countries of the former Soviet bloc in Central and Eastern Europe. Most of these countries, such as Poland, the Czech Republic, Slovakia, Lithuania, Latvia and Estonia, broke free from the communist regime with the end of the Cold War and the collapse of the Soviet Union at the end of the 1980s. These countries began to build democratic structures with a relatively free market economy.

The shift from central planning economy to capitalist enrichment mechanisms and privatization has become a reality. In some countries that transformation unfortunately was done not in peace but in accordance with Jefferson's famous sentence that „the tree of liberty must be refreshed from time to time with the blood of patriots and tyrants.”

A few years ago, before the war was started, Polish organization „Stowarzyszenie Libertariańskie” (Libertarian Association) wrote an optimistic statement about Ukraine:

We are witnessing a repeat from Lithuania, but on a larger scale. In the elections, Volodymyr Zelensky was elected president, whose political staff openly admits to libertarian ideas. (..) it is worth keeping your fingers crossed for the initiative and potential implementation of several libertarian postulates in the beautiful Ukrainian lands. 

After February 24, 2022, the discussion on security flared up again, also on the websites of European libertarians and supporters of the Austrian school of economics. In an interview with Dr. Michał Stępień from the Department of International and European Law at the University of Wrocław, published on the website of the Polish Mises Institute we read that:

The scale of armed aggression by Russia with the participation of Belarus against Ukraine since February 24, 2022 and the related scale of crimes against humanity, which is being committed by the Russian army, has meant that the previously used arguments of Russia, assuming that it is a defense of the Russian minority living in Ukraine and Georgia, is completely inconsistent with the actual situation witnessed by the international community. In the event of the occupation of Crimea, the Russian armed forces pretended not to be the armed forces of Russia. What the armed forces were, today is absolutely beyond dispute, so this trick is legally insignificant. In the case of the military operations undertaken on February 24, 2022, the armed forces conducting the military operations against Ukraine have been officially announced by the Russian authorities.

Support for Ukraine and words of encouragement come from libertarians for obvious reasons. However, the fundamental question that arises is whether, in such a situation, the libertarian can compromise using ideological pragmatism. Can we accept the fact, for the needs of the moment, that the domination of the United States within Pax Americana as a hegemon and gendarme of the world was and is necessary in this part of Europe to maintain civil liberties, free market, and to expand these aspects within the self-determination of newly liberated countries?

The European freedom perspective is closely correlated with the analysis of the imperial activity and policy of the United States, to which the former Soviet bloc states owe their freedom. So, does a European libertarian, e.g., a Polish libertarian, can and has to adopt the view that the involvement of the United States can serve to extend freedom? Paradoxically, this thesis is not as obvious as it might seem. After all, as a political movement, libertarianism believing in small government, is opposed to imperialism, unfounded aggression, and the destructive role of violence in human relations. Maybe some societes can take advantage of US hegemony, according to geopolitical rules, to expand their sphere of freedom, democracy and free market? The conflict in Ukraine, despite the obvious reasons on the side of the attacked Ukraine, seems to divide many libertarians. Libertarians, as we read in the principles of Libertarian Party:

...believe that war is justified only in defense. We are opposed to a draft. If a war is just and necessary, Americans of all backgrounds will volunteer to fight it. We believe that a draft enforced by law is no different from slavery.

Much has been written about international relations from a libertarian perspective (including classics of thought like Murray N. Rothbard and H.-H. Hoppe). But the European perspective of the libertarian movement seems to be a little different. This is probably because many European libertarians know historical aspects and realize that without the involvement of the United States, especially in their culminating moment, i.e., the presidency of Ronald Reagan, the countries of Central and Eastern Europe might still be in captivity and Russian dependence, like in Belarus or Chechnya for other example. 

Fear of the Russian Federation seems to be a natural determinant of the European libertarians' view of the collective involvement of Western forces in helping Ukraine. By the way of example; Polish libertarians expressed their indignation at the words of the famous psychologist Jordan B. Peterson speaking on the war in Ukraine. Peterson declared that he saw the conflict (war) as a clash of values. As we said libertarians' support for Ukraine seems obvious.

Various supporters of freedom seem to recognize this problem and support Ukraine by sending money and basic necessities. But is it enough? Does the role of commitment end there? Many freedom activists says that the case of Hong Kong should be a warning to the free world. The prospect of a libertarian Ukrainian state that breaks out of the gloomy Kremlin despot seems very tempting and possible. For example, Rainer Zitelmann sees opportunities for Ukraine, which may become an economically liberal state in which political currents of freedom thought can and develop.

Conclusion

This short and provocative reflection maybe open the great debate. The problem outlined here requires a broader attention to this issue throughout the Austro-libertarian community. If we have two or more agressive imperialist Leviathans, should we choose the lesser evil among them? What strategies of freedom should be adopted in the face of that kind of crisis? Are there any alternatives to imperial military alliances? What criteria for collective self-defense of states should be adopted from a libertarian perspective? The answers still remain open and we should not avoid them.

Call for Papers: Essays in Austro-Libertarian Literary and Media Criticism for a volume in memory of Paul A. Cantor

The groundbreaking research of the late Paul A. Cantor (1945-2022), Clifton Waller Barrett Professor of English at the University of Virginia, ranged from canonical English authors the likes of Shakespeare and Shelley to popular American television series such as Gilligan’s Island and South Park. His scholarship was so prolific and all-embracing that it led some to question whether the same person could have authored such a breadth of work. “Yes,” replies Peter Hufnagel, creator of the website prof.Cantor, “the Paul A. Cantor who writes about Averroism in Dante's Divine Comedy is the same Paul A. Cantor who writes about Walter White as a tragic hero in Breaking Bad.”

Yet it is not simply the scope and copiousness of Cantor’s scholarly output to which the proposed volume intends to pay tribute, but also, and especially, to his pioneering interdisciplinary method which turned to the Austrian School of economics and libertarian philosophy in the interpretation of literature and media. As Alberto Mingardi has recently commented, “Such an interest in Austrian economics brought him to be that rare thing: an intellectual in the humanities—even more, a literary critic—who had some sympathy for capitalism. At one level, this sympathy emerged in the very fact that he was not a snob: together with his Shakespeare studies, he cultivated an interest in popular culture that he understood as a living thing, and sometimes a beautiful thing too” (“Paul Cantor RIP”).

When I was corresponding with Paul about a volume I planned to co-edit with Carlo Lottieri, eventually titled Speaking Truth to Power from Medieval to Modern Italy, he reflected on the difficulties he had faced when trying to track down libertarian literary scholars in the early 2000s: “When I first planned what became LITERATURE AND THE ECONOMICS OF LIBERTY I hoped to micro-manage the volume and get just the essays I wanted. But I found that I couldn’t get people to write exactly the essays I wanted them to. In the end, I settled for the best people I could find and letting them write about anything they wanted, and that pretty much involved the whole range of literature, across the world and across the centuries. And I had so few people to draw from that in the end I had to write half the essays in the volume myself” (email, March 29, 2013).

The volume in question, Literature and the Economics of Liberty: Spontaneous Order in Culture(Mises Institute, 2009), contained ten essays by five contributors, including two by co-editor Stephen Cox and five by Cantor himself. Consisting of a whopping 510 pages despite the small number of contributors, the volume indeed spanned the globe and encompassed various time periods, with studies on canonical European and American authors (including Cervantes, Jonson, Shelley, Whitman, H. G. Wells, and Cather) and the contemporary Nigerian novelist Ben Okri. Beyond the insights found within the individual chapters, what is of special importance, as the co-editors explain, is the fact that this is “the first collection of essays that accepts the idea that economics is relevant to the study of literature, but offers free market principles, rather than Marxist, as the means of relating the two fields” (x). The introduction to the volume, which could be read as a manifesto, argues that Austrian economics, “which focuses on the freedom of the individual actor and the subjectivity of values, is more suited to the study of literature and artistic creativity than a materialist, determinist, and collectivist doctrine such as Marxism” (12). As Matthew McCaffrey notes in “The Importance of Literary Criticism from a Free-Market Perspective” (2014), that volume “helped lay the foundation of a libertarian literary criticism.”

Although Austro-libertarian literary and media scholarship may still be off the radar of most English Departments, since the early 2000s it has engaged increasing numbers of scholars whose interests have ranged from ancient Chinese writers (Roderick T. Long, Rituals of Freedom: Libertarian Themes in Early Confucianism, 2016) to modern American cowboy movies (Ryan McMaken, Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre, 2012). Matt Spivey’s recent Re-Reading Economics in Literature: A Capitalist Critical Perspective (2020) and the forthcoming Show and Biz: The Market Economy in TV Series and Popular Culture edited by María Blanco and Alberto Mingardi attest to the field’s current vibrancy and future possibilities. The growing body of libertarian-leaning scholarship is listed in the bibliography “Austrian Economics, Libertarianism, and Academic Writing in the Humanities” (2022).

In short, literary and media criticism grounded in the Austrian School of economics and libertarian philosophy opens up largely uncharted paths for researchers to recognize and investigate the form, nature, and effect of economic systems and political power structures in creative works across media during any time period and at any point on the globe. This volume aims, therefore, to present cutting-edge research that will contribute to the continued development of this exciting new field.

If you are interested in submitting an essay that analyzes literature or media from the perspective of the Austrian School of Economics and/or libertarian philosophy, please send an abstract of 150-200 words, together with a bio of 75-100 words, to me at jac3@columbia.edu by January 15, 2023. You will be notified of acceptance of the abstract by January 30, 2023. The abstracts and bios will be used in securing the interest of a suitable publisher, and completed essays will be due one year from that time. Please feel free to contact me in advance of sending an abstract if you have queries or would like to discuss any aspect of a potential submission.

If you’re into finance, you may have seen this chart:

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Fed hiking cycles end in crisis - every time. The chart also illustrates that, since the 1980s, the Fed has been unable to achieve a Fed Funds Rate (FFR) at or above the peak of the preceding tightening cycle. 

It’s not a mystery why this happens: lower-for-longer rates allow for greater debt accumulation and create an ever-increasing dependency on cheap rollover costs.

While the above chart isn’t a very large data set, it appears that crises manifest when FFR reaches 50 percent to 80 percent of the immediately preceding FFR peak. Given today’s effective FFR has been jacked up from nearly 0 to 66 percent of the 2018 peak in a matter of four months (for reference it took over 3 years for the previous cycle to cover the same relative ground), the likelihood of “something breaking” seems high.

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Before gobbling up VIX futures, it’s important to check the thesis.

Many are pointing to the huge sums parked the Fed’s Reverse Repo (RRP) facility, excess cash earning overnight yield from the Fed, as one reason why “things may be different this time”. Translation: there’s too much cash for a liquidity crisis. 

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First, the majority (88 percent) of RRP participants are Money Mutual Funds. This is A LOT of cash that would otherwise be chasing T bills, commercial paper, or lent in the repo market. This means an inter-bank lending crisis is unlikely.

That is not to say we will not see “something break”' in the private sector - in the form of margin calls, mass layoffs, or bankruptcies - due to the rapid uptick in costs of capital. Ironically, the high RRP balance may be giving false confidence to FOMC members that further tightening can be sustained.

Let’s look more broadly at money supply:

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The interesting thing to note here is the vastly greater increase in money supply (both nominal and percentage wise) post-GFC as compared to post-Dot Com. When comparing the “success” of each hiking cycle that concluded these two eras (see below), it appears that money supply and economic robustness are inversely correlated. This is especially odd given that post-GFC was supposedly when regulators cleaned up the financial system with stricter collateral and lending criteria.

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So, the suggestion that excessive liquidity will save us from a crisis is not supported by the data (and in fact the opposite may be true).

I know the recession-will-force-a-Fed-pivot trade is becoming popular now, but I would be careful. The pace of this tightening cycle dwarfs those of the last three bubble bursts shown above, and our economy is more dependent on cheap debt than ever before. Short duration debt (< 1 year) has also seen an unprecedented surge during the COVID era - meaning our countdown-to-crisis could be much shorter than previous cycles. Something may break before the Fed even has time to pivot. 

Or, let’s say the Fed cautiously pauses hikes. The markets would undoubtedly smell blood and rally on Fed capitulation. But we’re forgetting that our economy has been nursing at the test of 0 percent rates for roughly a decade - we can’t even handle 2 percent! Maybe David Hunter will finally be right and such a scenario will be the catalyst for his melt-up and subsequent crash.