Power & Market

In spite of the fact that real wages are going down, the cost of living is soaring, and new jobless claims are heading up at a rapid pace, and the savings rate has collapsed, what really matters to the White House, it seems, is the "technical definition" of recession. 

Never mind the fact that the US economy has contracted for the past two quarters, according to the federal government's own numbers. Apparently, as long as the NBER has not yet issued its opinion on whether or not the US economy is in recession, the White House is going to double down on the assertion that the economy is in fine shape and people should really stop complaining. After all, as one White House spokesman put it, it's not like there's a famine or anything. So quiet down, rubes. 

FACEPALM: White House economic adviser Brian Deese says that things are great because America isn’t experiencing famine like other countries.

pic.twitter.com/sFFnSpWaoL

— Margolis & Cox (@MargolisandCox) July 27, 2022

Although the White House seems to believe that things are pretty OK, the US's misery index suggests they're not. 

June's misery index (a composite of unemployment and CPI inflation) has risen to 12.5. That's the highest since September 2011 when the US economy was experiencing a time of very weak job growth and economic growth following the Great Recession. At the time, the yield curve almost inverted, and there were fears of a new recession. 

June's misery index is also above the index from the 2007-2009 recession when the index peaked at 11.4 percent. The index is also about equal to where it was in the run-up the 1990-91 recession:

So while the NBER may not have yet opined on whether to apply the word "recession" to the current economy, the economy is clearly not in good shape. Call it a recession, or don't. 

While the White House may be trying to convince the voters that all is well, consumer sentiment suggests ordinary people aren't buying it. Moreover, if we're looking for an indication as to whether or not unemployment and inflation affect consumer sentiment, we need look no further than the fact the misery index tracks rather closely with consumer sentiment. If we invert the Michigan Consumer Sentiment trend and match it up with the misery index, we get this: 

Consumer sentiment has plummeted alongside the increasing misery index, and this has often been the case in recent decades. Of course, economists and White House spokesmen could always just come back and claim that consumer sentiment is "wrong" and that people don't understand how good things are. It's worth noting that politicians, central bankers, and economists have done exactly that during months preceding previous recession. Ben Bernanke, for example, repeatedly noted in 2008 that the Federal Reserve was not predicting recession at all—this was after the recession had already begun (according to the NBER.) Of course, as Bernanke was insisting "all is well," both consumer sentiment and the misery index were trending in recessionary directions. 

Now we may be in a similar situation with Fed chair Jerome Powell talking up the economy's alleged strengths while consumer sentiment goes into a nosedive, and the misery index repeatedly rises. 

Yet, the bad news continues to pile up. The Fed has long clung to the job openings data in the JOLTS report, claiming that the economy must be find because employment (a lagging indicator) suggests strength. Well, this morning's JOLTS report shows a clear downward turn from its upward thrust with job openings falling month-over-month by the most since the 2020 recession. Job openings have fallen 9.8 percent from the March peak. 

But hey, at least there's no famine! 

There already exists literature dealing with common objections to anarcho-capitalism (a society with private ownership of everything) such as who will build the roads, how security and national defense would be produced, etc. (see specially the works of Hans-Hermann Hoppe on security/defense and Walter Block on privatization of everything).

In my view, however, what hasn’t been emphasized enough are the errors of minarchists (people who believe in a minimal state with only security and national defense) when defending their minimal state position. Since the state is clearly an organization different than other enterprises, minarchists, classical liberals and regular libertarians should have the burden of proof of explaining their positions.

Many of those errors are also shared with more prominent state worshippers such as socialists and communists. Minarchists share many of those errors in small scale which they probably don’t realize. In this essay I will point out some of those errors and defend the free society from some objections.

Redistribution and knowledge

Most classical liberals, libertarians and minarchists declare that they’re against redistribution of wealth, yet they still offer redistribution, in a reduced form, in a night-watch state wealth is still being redistributed from the private sector to the public sector. This means that wealth is being taken from their optimal destination (that means what people want to do with that) to uses decided by government bureaucrats.

What if a minarchist state is providing more national defense or courts than necessary? How would they possibly know what’s the right amount of any of those that has to be provided? That takes us to the second point, which is knowledge. The right amount and form of anything is discovered by the function of profit and loss, not from bureaucratic plans.

Superiority

This point is similar to the last one. Classical liberals and minarchists although believing otherwise, think themselves as above society, in the sense that they think they can decide better than people doing voluntary transactions, what to do with their money. Again, what if people don’t want a road where the classical liberal government has decided to construct it, what if a neighborhood needs more security than other? Markets provide the optimal amount of everything through the process of profit and loss.

In defense of that state of affairs, proponents of a small state will spin out an arrange of arguments (public goods for example), all with the basic premise that regular people could not possibly manage any of those services or plan ahead of time. What makes them think that government officials could? Aren’t they just regular people too? The only answer proponents can give is that bureaucrats are special, above society. Frederic Bastiat in The Law already pointed out this problem when refuting socialism:

If the natural tendencies of mankind are so bad that it is not safe to permit people to be free, how is it that the tendencies of these organizers are always good? Do not the legislators and their appointed agents also belong to the human race? Or do they believe that they themselves are made of a finer clay than the rest of mankind?

The non-problem of evil

Many proponents of the state apparatus claim that in a private security society, people that do not commit crimes but who are capable of wrongdoing, necessitate regulations to stop them. This is a misunderstanding of libertarian theory; first, libertarianism is a political theory, not a mechanism to discover what is morally good or bad. Thus, it does not apply good or evil to social choices when judging them from a libertarian point of view.

In a free society people, that are “evil” would suffer losses if people regard their activities as such, but what if the “evil” people don’t care about losses? If that is the situation, they will have the living standard that such valuations confer.

Again, knowledge

As Jesus Huerta de Soto has pointed out, economic science has already proven that the state is not necessary for a functioning and prosperous society. For those who believe otherwise, I refer them to the scholarship of Ludwig Von Mises, Murray Rothbard, Hans Hermann Hoppe, Walter Block and the entire of works of the Austrian School of economics. (Even some mainstream economists such as David Friedman agree that the state is not necessary.)

Secession

To embrace secession is to accept anarcho-capitalism, since secession helps to bring about a free society. Minarchists and classical liberals reject secession or simply ignore it as a talking point. Secession is a right, since people own their bodies and property, and they are able to exercise to full extent their use of them as long as they don’t infringe on anyone else’s property. Secession does not infringe on anybody; therefore, it should be permitted.

Even from a consequentialist (a philosophy that regards good consequences as ultimate goals) point of view, it should be legal since it would lead to less government bureaucracy. The common objection to this is that if it is highly impractical to secede, what if then? It is highly impractical to do many things but still these things are done and accomplished, and in any case, it is a problem of the person or region who secedes.

No, ancaps (anarcho-capitalists) are not communists

This point should be obvious but there are still libertarians that anarcho-capitalists are one step below communists. People that think so fundamentally misunderstand or simply don’t know what anarcho-capitalism or what communism is. I will just say that communists are proponents of government ownership of everything, while ancaps offer private ownership of everything – a total contrast to communism. Communists worship the state, ancaps reject it entirely.

The Market vs the State

It is a matter of who decides what, either the market or the state, even though many believe that it actually is the state vs chaos. However, they forget that the market is an institution that can and does manage and protect itself. That’s why the state uses coercion to seize private assets in order to exist. Böhm-Bawerk’s essay could not have had a better name to describe this issue “Control or economic law.” We must never forget is that there is an underlying order in human cooperation, which we discover by studying economics and through understanding economic laws.

It might sound radical, but within the libertarian movement there is a struggle of capitalism vs socialism. A free society is a world of capitalism, while a minarchist or classical liberal one is world of minimal socialism. We have to decide whether we defend capitalism or socialism in a small scale? In any case we must not forget that liberty (or private property) is what orders society. The state, on the other hand, creates disorder.

On June 22, President Joe Biden called for a tax holiday for the next three months. As of this writing, it still has to be approved by congress. Many critics have come out in response to this. Among them, Nancy Pelosi has called it nothing more than “showbiz” as she doesn’t expect the 18 cents per gallon savings to be meaningful, Reason magazine has argued that it is taking away a tax for roads that was levied somewhat proportionally on individuals based on how much they drove, but perhaps most interestingly of all - at least from an economics standpoint - was this criticism brought by NPR:

Biden also called on state governments to take similar actions with their gas taxes. He wants oil refiners to boost their capacity so there’s more gasoline on the market - another way to bring down prices. But there’s no way to force those tax cuts to be passed through to the consumers.

In October 2021, I wrote almost the exact inverse of this point: Why Business Owners Can’t Just “Pass on'' Tax Costs to Consumers. Then White House press secretary Jen Psaki had claimed that American consumers would not stand for large companies passing on tax costs to consumers. I claimed that - while probably for the wrong reasons - she was right. The logic stemmed from Murray Rothbard’s Power and Market:

The most popular example of a tax supposedly shifted forward is the general sales tax. Surely, for example, if the government imposes a uniform 20-percent tax on all retail sales, and if we can make the simplifying assumption that the taxes can be equally well enforced everywhere, then business will simply “pass on” the 20 percent increase in all prices to consumers. In fact, however, there is no way for prices to increase at all! As in the case of one particular industry, prices were previously set, or approximately so, at the points of maximum net revenue for the firms. Stocks of goods or factors have not yet changed, and neither have demand schedules. How then could prices rise?

We now find ourselves in the opposite position. Can the removal of a tax drive down a price? The answer is a little more complicated. Rothbard explains above that taxes cannot be shifted forward to the consumer and goes on to explain that instead taxes are shifted backwards to the original factors of production. Less can be spent on them and thus - as Per Bylund has explained:

Entrepreneurs are forced to abandon some of their efforts to generate new value by satisfying customers, or to redirect their efforts into less value-producing channels. The potential output of their creativity goes Unrealized.

It is here that a tax holiday is able to help. Because less cost will be shifted backwards to original factors, original factors will be able to be better allocated to projects that will actually generate new value by satisfying customers.

As a result, to a very large extent, this specific criticism of the gas holiday is right. There is no guarantee that the savings from the holiday will be passed on to the consumers. This, however, does not ultimately discredit the tax holiday itself as the savings will still benefit consumers. Original factors could be better allocated in such a way that does in fact make gas prices cheaper as market competition drives prices down in the absence of these taxes in a very happy go lucky solution that ties this all up in a nice little bow as we look back on it.

But even if that is not the case, the original factors would still be put to a preferable use on the market when they are not hampered by the restrictions on their prices by the government. So, while it is correct that we may or may not see these savings passed on to the consumer, it is also undoubtedly correct that the removal of this tax would in face benefit the people.

Last week Biden sat down with Powell in a rare, but not uncommon, meeting between the Commander-in-chief and the head of America’s central bank.

Per Whitehouse transcript, Biden says:

It starts with a simple proposition: Respect the Fed and respect the Fed’s independence, which I have done and will continue to do.

The problem is that the Fed’s independence was compromised a long time ago. Both the Fed and Congress worked together during the pandemic to incorporate new companies for the purpose of skirting legislation, forming inflationary lending programs, as well as direct stimulus programs, spending trillions of dollars in the last two years.

The primary reason prices have drastically risen, or the dollar weakened, is due to the expansion of the money supply created by these programs, exacerbated by forcing businesses across the country to shut down. Of course, they will never rightfully acknowledge the current inflation problem being the result of government and central bank intervention.

After the proposition, he talks about the plan on tackling inflation:

Chair Powell and other leaders of the Fed have noted, at this moment, they have a laser-focus on addressing inflation, just like I am. 

Since both Biden and Powell fail to understand the nature of inflation, they create narratives for the public, hence sometimes inflation is caused by Putin, sometimes it's bottlenecks, and sometimes just a transitory phenomenon. We can't believe they have a “laser-focus on addressing inflation” now considering they’ve never shown this before. The public hears narratives and finger pointing rather than credible discussion over why our currency is debasing.

In time, each new narrative is proven false. Just this week on CNN, Treasury Secretary Janet Yellen admitted:

I think I was wrong then about the path that inflation would take.

Consider the gross negligence perpetrated by one of the most decorated economists of our generation when Janet Yellen weaved a tale about “transitory inflation,” which really did turn out to be just a story more than economic theory.

The theme of failure continues. It’s important for the public to realize how central planning an economy ends; and it always ends the same, with mistakes, errors, oversight, falling behind the curve, et cetera, et cetera. When their follies, or worse, flat out lies are eventually exposed, the burden of failures by the planners falls on society to pay the cost.

It’s important to understand the system as a whole, how it’s designed for failure and how we allow this to happen. Rather than ask the same officials to do a better job of planning the economy, we must somehow rid ourselves of these planners entirely; especially considering “we the people” don’t need the planners. The planners need us.

Perhaps it was their recent failures in understanding inflation, coupled with month after month of high inflation readings that prompted the Biden-Powell meeting?

The day before the meeting, Biden had an op-ed statement in the Wall Street Journal, where he wrote:

First, the Federal Reserve has a primary responsibility to control inflation. My predecessor demeaned the Fed, and past presidents have sought to influence its decisions inappropriately during periods of elevated inflation.  I won’t do this.

His message says nothing regarding the path forward and instills no confidence that the future looks promising. If they're trying to convince us that all will be well, or that they’ve somehow learned from the past, they’re not doing a very good job. We should be concerned with Biden’s message to trust the process since it appears their short-run goal is to bring on a recession, crash the stock, bond, and housing market, and in the long run destroy the purchasing power of the US dollar. Should they accomplish this, the current system ensures none of the people who brought us to economic ruin will ever face any form of recourse.