Power & Market
Small Businesses Are not the Key to Economic Growth
Small businesses are usually touted as the driving force behind economic growth in modern societies. Throughout the world, politicians earnestly argue that small businesses are the backbone of the economy. In America, there is even an administration dedicated to building the capabilities of small businesses known as the “Small Business Administration.” The SBA oversees a dazzling suite of services to small businesses and is strangely insulated from criticisms.
Republicans and libertarian commentators in the media have upbraided the EXIM Bank for fostering crony capitalism. Generally, right-leaning economists scrutinize subsidies and special privileges, but despite the benefits accrued to small businesses – they remain a venerated symbol of American capitalism. Few seriously question their impact on economic growth or contribution to innovation. Instead, it is automatically assumed that small businesses generate prosperity.
But how did America’s fascination with small businesses emerge? According to historian Benjamin C Waterhouse the perception that small businesses hold the keys to economic dynamism is fairly recent. Waterhouse posits that the influential position occupied by small businesses in America, coincided with the election of Jimmy Carter who by situating himself as the first “small business owner” in the white house since Harry Truman infused lobbyists with energy.
Small businesses were also given a major boost when the findings of economist David Birch submitted that they were responsible for 80% of all new employment opportunities during 1968-1996. Although Birch recanted by admitting that the figure is dubious this statistic is frequently adduced to justify support for small businesses. Luckily, today there are ample studies guiding analysts to properly dissect the efficacy of small businesses.
Based on the data furnished by researchers it is evident that the importance of small businesses has been greatly embellished. For instance, innovation charity NESTA reported that during 2002-2008 in the United Kingdom, six percent of high-growth firms generated half of employment growth. Moreover, in their piece featured in the Harvard Business Review of Tuesday, February 3, 2014, Isenberg and Ross assert: “The literature consistently shows that a very small number, from one percent to six percent, or so, of all ventures in a region account for the lion’s share of net job creation and spill overs from entrepreneurship. However, increasing the number of start-ups has not increased the number of high-growth ventures.”
In fact, it appears that the reverse is true: small businesses are adept at making jobs redundant, since by the end of a decade 30 percent of small businesses remain viable. With such a dramatic failure rate the view that small businesses are initiators of jobs is indeed untenable. Similarly, libertarians may challenge Mariano Mazzucato’s theory that the state is necessary for innovation, but at least she is accurate in her summation of small businesses. Writing for the Economist she enunciates a clear case against prioritizing small businesses in Britain: “Once you take into account the number of SME jobs lost after the first three years of their creation, there is very little net job creation by these firms. Only 1% of new enterprises have sales of more than £ 1million six years after they start.”
On closer inspection, these findings are unsurprising because entrepreneurs are unequal in potential. Opportunity-driven entrepreneurs, on average, are more educated and often start businesses to capitalize on new challenges, whereas necessity-driven entrepreneurship is motivated by economic needs and typical of low-growth economies. Specifically, Robert Atkinson, the founder and President of the Innovation and Technology Innovation Foundation revealed to this writer in an interview that the typical small business owner rarely intends to form the next superstar, in essence, he is running a lifestyle business with little aptitude for expansion.
Economic literature also suggests that since firm productivity is associated with firm age, then on average, newer firms are less efficient in the management of resources. Economist Scott Shane in a seminal paper informs readers that high rates of new business formation are indicative of economic sluggishness: “As countries become wealthier the rate at which they create start-ups goes down. Societal wealth leads average wages to go up, which encourages business owners to use machines to replace work that used to be done by hand. As a result, the increased use of capital leads companies to grow in size and hire people who would have otherwise gone into business for themselves.”
Compared to large corporations small businesses are inept at ameliorating the conditions of workers as analysts based at ITIF points out in a recent report:
- Workers in firms with more than 500 employees earn 38 percent more than workers in firms with less than 100.
- Stores with 500 plus employees pay high school educated workers 26 percent more than stores with fewer than 10 employees, and they pay workers with some college education 36 percent more.
- In 2012, workers in goods-producing industries were injured 25 percent less frequently in firms with more than 1,000 employees than they were in firms with 10- 49 employees.
Big firms even offer more lucrative benefits:
- Workers in companies with more than 500 employees receive 85 percent more overtime and bonuses, 2.5 times more paid leave and insurance and 3.9 times more retirement benefits than workers in companies with fewer than 100 employees.
Large firms are resourced to provide an incredible array of benefits due to superior productivity:
- The four largest firms in any industry have an average 37 percent higher productivity and 17 percent higher wages for production workers.
Meanwhile the notion that Americans would be better off if the economy was dominated by small businesses is refuted by data:
- If the United States had the same firm size distribution as Europe which has more small firms then average annual income in America would be $5,200 lower. Shrinking the size of large firms in the United States to match Canada’s firm structure, would decrease U.S. per capita GDP by 3.4 percent.
In short, small businesses are not the pillar of the economy and neither is their performance superior to large corporations. Although the bureaucracy designed to enrich small businesses appears untouchable, the evidence presented should convince us that welfare for small businesses is unwarranted and must be gutted. Research foundations and private incubators can fill the gap created by the exit of government welfare. Funding unsustainable businesses is too costly for taxpayers.
The Fed’s Exit Strategy (in 2009)
Over a decade ago, on July 21, 2009, then Federal Reserve Chair Ben Bernanke wrote an article in the Wall Street Journal titled The Fed’s Exit Strategy. His words are all too familiar, starting with his opening sentences:
The depth and breadth of the global recession has required a highly accommodative monetary policy. Since the onset of the financial crisis nearly two years ago, the Federal Reserve has reduced the interest-rate target for overnight lending between banks (the federal-funds rate) nearly to zero.
He follows with:
We have also greatly expanded the size of the Fed’s balance sheet through purchases of longer-term securities and through targeted lending programs aimed at restarting the flow of credit.
On July 28, 2021, as if continuing where Bernanke left off, current Fed Chair Jerome Powell explains many years later:
These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
In instances of a national housing crisis or global pandemic, money is supposedly injected into the system to prevent catastrophe. The flow of credit must have been so bad it required the Fed’s balance sheet to reach $2 trillion in July of 2009. It continued to expand ever so steadily, where it now sits at $8.3 trillion.
So, what happened to the Fed’s exit strategy?
In his letter, Bernanke wrote:
At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road.
Given the tremendous expansion in asset purchases since 2009, it’s difficult to know when exactly the exit strategy commenced.
See the Fed’s balance sheet below:
According to Bernanke, the Fed devotes:
…considerable time to issues relating to an exit strategy. We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner.
Sadly, like pulling troops out of a foreign nation, withdrawal is something which never comes easily.
He offers several ideas on how the Fed can be less accommodative, such as paying interest to banks on reserves held at the Fed or offering reverse repos, whereby the Fed sells a security to a bank with the promise to buy back the same security at a higher price. Per Bernanke, providing risk-free profits to wealthy intuitions will raise short-term interest rates and:
...limit the growth of broad measures of money and credit, thereby tightening monetary policy.
Unfortunately, the average person cannot access the Fed’s easy money programs, yet the average person is forced to accept these programs may create an “inflation problem." Beyond perusing an old speech, wondering how society got here, Bernanke’s speech serves as a reminder that there really is no such thing as a Fed Exit Strategy.
In the realm of possibility, the Fed could one day dramatically reduce its balance sheet, no longer looking to control rates no matter the cost. However, nothing indicates this would be done voluntarily. Whether Bernanke, Powell, or the Chair who follows, no matter what the Fed says about tapering, tightening or tinkering with interest rates, they will never lift their foot from the gas pedal.
The Fed sets the rules to a game we all must partake in (as long as we use their dollars), therefore they have no incentive to ever stop playing. They have no desire to slow down the money creation scheme beyond a mild transient period. Raising rates is off the table, maybe even indefinitely. It follows, they will continue using Fedspeak to make excuses, justifying their interventions and trying their best to keep the general population unaware that this monetary experiment will not end well.
Some of us may want a truly free market, but those with the most power and influence appear to be in no rush of finding this anytime soon. Price discovery will have to wait for another day…
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Dr. Robert Murphy on the Jordan Peterson Podcast
Over the last several years, as Jordan Peterson rose to international fame, many thoughtful individuals in the Mises Institute orbit have voiced an appreciation for how Peterson's work may complement the Austrian tradition. Some have written on the topic, including Jonathan Newman who noted in 2018:
Jordan Peterson is not famous for his action framework, but it is central to his Maps of Meaning book and university course. He uses it on his way to demonstrating the basis for belief systems and the superiority of a morality based on the inherent value of the individual.
The differences between his action framework and that of Mises and Rothbard may be attributed to the difference between psychology and economics. But the similarities are striking, even though, to my knowledge, Peterson has not read Mises or Rothbard.
Earlier this year, Jordan Peterson began tweeting about an interest in Austrian economics, asking for suggestions for potential guests.
What economist of the Austrian school should I interview for my YouTube channel and podcast?
— Dr Jordan B Peterson (@jordanbpeterson) March 27, 2021
Thankfully one name, in particular, got the attention of Dr. Peterson, Bob Murphy. Not only has Dr. Murphy long demonstrated himself to be one of the best educators of the Austrian tradition, but he has long been familiar with Peterson's own work. His excellent book Choice Cooperation Enterprise and Human Action also offers a great introduction to Misesian thought for a new audience.
In his most recent podcast, Jordan Peterson published his interview with Dr. Murphy, offering his audience a deep dive into the Misesian tradition.
As Dr. Peterson begins his show, "I wanted to talk to you because I wanted a two-hour lecture in Austrian economics."
Video can be found on YouTube. The podcast format is not currently published on his official website, can be found on most podcast platforms, such as Spotify.
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Compounding Shortfalls in Innovation
Curt Carlson, the world’s leading authority on innovation and how to implement it, worries that the US is under-performing on this front – badly.
On LinkedIn, he writes:
Almost all measures of innovative performance today are wanting. Only 3% of patents recoup their investment; the rest are mostly waste that costs many tens of billions of dollars a year just in maintenance fees. Only one in ten new venture-backed companies has any real success. Most venture capitalists lose money, and 5% make 95% of the gains. Only 20% of university tech-transfer programs break even, and those few are often the result of a new drug. In our workshops with almost a thousand global teams from leading companies, universities, and government agencies, typically, only 25% of the projects under development would provide any meaningful new customer value if completed.
This issue profoundly affects civilizational progress and quality of life. Innovation is value-creation and value-creation improves society for all.
Through innovation we address society’s grand challenges, create prosperity and jobs, and provide resources for social responsibility. Consequently, one of society’s most critical opportunities is to improve our value-creation capabilities. Improvements in value creation are exponential amplifiers of innovative performance.
He applies the term exponential in a carefully considered way. There is the opportunity for rapid, accelerated advance from where we are today to where we could be tomorrow. Problems can be solved quickly. Conditions we experience as disappointing or even dismal can become uplifting and exciting in a short period of time.
That is, if we are innovating and generating new value.
The opposite is also true, however. Compounding works in reverse. If we fall behind, the distance we have to go to recover becomes exponentially longer. If this year, we realize only 50% of our value creation potential, then next year or in the next relevant period, we’ll have 50% of the resources we would otherwise have had, and we’ll drop to 25% of potential, and so on and so on. The shortfall compounds and our level of performance declines exponentially.
Professor Per Bylund of Oklahoma State University has the same concern about our country’s economic under-performance. He gives a name to the gap between the value that’s actually created by entrepreneurial businesses and what could have been created: The Unrealized. In his book The Seen, The Unseen, And The Unrealized, he describes this value generation shortfall in economic terms, and attributes it to government regulation. Whether in the form of legislation or bureaucratic rule-making, regulation distorts the market, redirecting entrepreneurial creativity into channels favored by politicians and government departments, or curtailing it with enforcement rules, or prohibiting it entirely in some cases. The regulated economy simply can’t evolve and grow in the same way it would if unhampered.
The Unrealized is, similarly, a compounding problem. The number of regulations increases each year, so The Unrealized expands and grows each year. If the economy grew at only 50% of its potential in a base year, then the next year is constrained in the base from which it grows, and this negative compounding extends annually into the future, forever. Since regulation has been with us for a couple of centuries, the compounding of The Unrealized is incalculably high. We simply can’t imagine the dimensions of what could have been.
Einstein famously said about compound interest that it “is the eighth wonder of the world. He who understands it, earns it…..he who doesn’t….pays it”.
Unsurprisingly, given the source, this is a very important observation. Compounding can work for us or against us. Saving and investing and re-investing can compound in our favor. Interacting more and more with smarter and smarter people can compound in our favor. Iterating a creative idea in critical forums can compound its innovativeness and applicability until it breaks into the market. Exercising and healthy eating every day can compound for us as we age, making us relatively more and more healthy than our age cohort and standard norms.
The same is true on the negative side. As Einstein said, if we don’t earn compound interest, we pay it. If we get into debt, interest is working against us, especially if we borrow more and more. If we are not continuously engaged with other smart people and iterating our ideas with them, we are less and less likely to make a creative breakthrough. And if we permit ourselves to avoid fitness activities and if we eat an unhealthy diet every day, we are making things worse for ourselves at compounding rates. Every day we are a little less healthy and fit than we could have been – every daily sugar intake, or alcohol intake or cigarette smoke intake compounds, so that, every day, the impact of unfitness and bad diet is a little more harmful on our less-fit body than it would otherwise have been.
Curt Carlson and Per Bylund teach us to concern ourselves with the compounding of The Unrealized in value generation activities. We should bear this in mind – and, at the same time, make sure that compounding is working for us in our personal and family life.
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Powell Has Spoken
Live at the 2021 Virtual Jackson Hole symposium, Federal Chair Jerome Powell addressed the public. Beginning with a nod to COVID and appreciation for front line workers, he quickly moved to an analysis of the economy:
Booming demand for goods and the strength and speed of the reopening have led to shortages and bottlenecks, leaving the COVID-constrained supply side unable to keep up.
We’ve been hearing about these dreaded bottlenecks for quite some time. Per Powell, these bottlenecks are creating elevated inflation in durable goods. Which is to say, it’s not the money supply or the way inflation is calculated that is to blame. Yet, the Fed has not provided the public with examples of what or where these bottlenecks are occurring, nor explained how this is actually measured.
He moved on to the event’s theme: Macroeconomic Policy in an Uneven Economy, mentioning how:
The economic downturn has not fallen equally on all Americans, and those least able to shoulder the burden have been hardest hit.
This is nothing new. In fact, every unexpected downturn or recession hits those in the lowest poverty bracket hardest. They pay for the Fed’s intervention, funding corporate bailouts through taxes or currency debasement, while not having access to the new money such as the Fed’s trillion-dollar repo facilities.
Meanwhile, employment is still down. As stated:
Total employment is now 6 million below its February 2020 level, and 5 million of that shortfall is in the still-depressed service sector.
No one should be surprised this sector continues to suffer given the government’s lockdowns coupled with a concerted media effort encouraging everyone to stay indoors.
After noting the state of the economy, he moved to the ominous sub-title line of The Path Ahead: Inflation. According to the chair:
The rapid reopening of the economy has brought a sharp run-up in inflation.
It is actually quite disrespectful, both to the public and the field of economics, when the head of the Fed claims prices are rising due to the high speed of “reopening” the economy. As to the trillions of dollars added to the Fed’s balance sheet, plus other government giveaway programs, and whether these could be contributing to the rise in prices, Powell remained silent.
Powell then touched on the Fed’s future tapering of asset purchases; but there wasn’t anything earth shattering nor any specific dates given. Some media sources are reporting that it is still expected to begin this year. According to CNBC Powell indicated:
…the central bank is likely to begin tapering before the end of the year.
Fedspeak is certainly open to interpretation. Powell then somewhat addressed interest rates:
The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test.
Continuing, he says the Fed will:
...hold the target range for the federal funds rate at its current level until the economy reaches conditions consistent with maximum employment, and inflation has reached 2 percent and is on track to moderately exceed 2 percent for some time.
Clearly, the Fed has no plans to raise rates any time soon. The future tapering will not be indicative of rate raising and rates will only be lifted when the Fed’s dual mandate is achieved to a sufficient degree as measured by the Fed itself.
In his speech, he should’ve at least acknowledged the nearly $28.7 trillion government debt (and counting) but perhaps it’s best that the Fed’s objectives are met first before tackling other issues... such as an exponentially growing national debt.
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Why Trade Embargoes So Often Fail
The most recent protests in Cuba against the current regime have once again brought us to a multi-sided debate on "what should be done" about Cuba. The Left claims that we should actually be emulating Cuba, praising it as a paradise with higher literacy rates and higher, life expectancy than Americans as if either is the end of all measuring prosperity, though will also say any downsides the nation has are due to harmful sanctions and embargoes. On the other, we have the American right advocating military and economic intervention into Cuba to “save” the Cuban people from their current regime with the most popular policy recommendations being more economic sanctions and embargoes. Both approaches are fundamentally wrong and are based on a lack of understanding of how embargoes and sanctions work—or I should say, don’t work.
The standard line on sanctions and embargoes from the left, right, and even some libertarians is that these policies restrict the trade of nations by essentially banning the export or import of their goods to their nation and for those more inclined to non-interventionism deprives the nations of necessary goods and starves them till their leaders give in to the demands of the nation imposing them. This assessment seems correct from a baseline theoretical analysis, but the reality shows a failure based on one concept and further demonstrated by empirical results.
The reason these policies fail to work is the same reason a cartel—a collection of companies (or states) agreeing to not compete in a market against each other in order to exercise monopolize power—fails. Cartels rely on the trust of each member to uphold the same policies of non-competition with each other. In the case of embargos and sanctions, in order to have a strong effect, the players would be every other nation in the world has to agree to also maintain these policies, something demonstrated time after time as impossible.
To demonstrate this let’s use Cuba’s biggest supporter in the 20th century, the USSR. During the Cold War, several embargoes and sanctions were placed on the nation by the United States and its allies and while it is obvious the USSR suffered, it was not because of these policies. Despite the intended goal of blocking off trade to the USSR, the nation was able to still import a wide variety of goods. The best example was the grain embargo imposed by the U.S. by President Carter in 1980. Instead of harming the USSR’s food production we actually saw relatively no harms to the nation and actually an increase in grain production and exporting. This was due to the USSR being able to circumvent the embargo by instead engaging in trade with nations like Argentina and Australia.
What the USSR example reveals most is that even close allies to the U.S. are not willing to follow them in embargos, as it would only hurt them. The potential for harm for other potential cartel members is partly why it is very difficult to enforce embargoes and sanctions.
Cuba today is not an exception to this rule. A close, both in relations and geographically, ally of the United States currently trades and serves as a proxy for trade with the U.S. This would be Canada who has had a trade relationship with the nation since 1975 when the Organization of American States (OAS) lifted its sanctions on the nation. Almost every member of the organization, aside from the United States, engages in trade with Cuba despite the U.S.’s attempts to establish a cartel that would uphold its trade policies of sanctioning and embargo of the nation. The U.S. has in fact acted in a contrary attitude with the passage of Free Trade Agreements such as NAFTA. This again furthers the case that the United States can usually expect to encounter resistance and a lack of cooperation in forcing other nations to go along with embargos and sanctions, as they ask for others to take an economic loss for no economic gain and have the last resort of doubling down which sacrifices important economic and political relationships with our allies.
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At Jackson Hole, Don’t Forget about Rates
This Friday marks one of the most important economic events of the year. But even Jackson Hole could not escape the threat of the latest variant, as the Kansas City Fed recently announced that due to an elevated covid risk, the event is to be held virtually.
The public is welcomed to tune in this Friday, August 27, at 10 a.m. EST via the Fed’s YouTube channel. It’s encouraged to watch. We should take interest in what they have planned for us. In fact, it’s the least we can do, since tax dollars and currency debasement fund such planning activities …
Started in 1978, the Kansas City Fed explains:
The Federal Reserve Bank of Kansas City’s Economic Policy Symposium in Jackson Hole, Wyo., is one of the longest-standing central banking conferences in the world. The event brings together economists, financial market participants, academics, U.S. government representatives and news media to discuss long-term policy issues of mutual concern.
When the wealthiest people in the country meet in seclusion in one of the wealthiest counties in America, it makes sense they’ll discuss ideas of mutual concern. However, judging by their repeated free market interventions, it cannot be said this includes a concern for the public.
Jackson Hole always includes a topic or theme. This year’s theme: Macroeconomic Policy in an Uneven Economy. Details regarding the topic have yet to be released. But the word “uneven” has a false connotation: it sounds like they have the ability to intervene in a way that will make the economy a more “even” place.
Talk of the Fed’s expected tapering, or slowing down their $120 billion–a-month bond purchases persist on news headlines. Reuters explains that Tuesday’s rise in the global equities and Treasury yields are partly due to investors who became
less worried the Federal Reserve was set to announce a timetable for tapering stimulus measures.
The Fed’s rising concerns over variants and their decision to hold the economic symposium virtually seem to portend the recovery is not going as planned; therefore the Fed might not reveal a date as to when the taper will begin.
While the question over the tapering is a good one, money supply is not the Fed’s only area of control: What about interest rates?
Interestingly enough, the August 1 to September 30, 2007, Jackson Hole meeting sheds some light on the future. The title theme was Housing, Housing Finance, and Monetary Policy. This was only a few months prior to the formal recession, and Ben Bernanke said in a speech:
[I]interest rates have risen from the low levels of a couple of years ago, we have seen a marked deterioration in the performance of nonprime mortgages.
At the time, the Fed’s 2007 effective federal funds rate hovered around 5 percent, while the “low levels” Bernanke refers to were in 2003 at around 1 percent. Today’s rate is only at 0.10 percent.
Ultimately, rates rose from the 2003 rates to the high in 2007, and eventually the stock and housing markets crashed. Whether the rising rates and the market crashes are related, and whether the Fed is to be blamed is a matter of perspective.
Yet, we cannot forget interest rates will have to be addressed, one day. The difficulty is in conceptualizing this when the last significant rate increase occurred nearly twenty years ago. Since then, there was only one small rate increase to just over 2 percent, just prior to this recession in 2019, oddly enough. Today with rates approaching 0 percent, even 2 percent begins to sound extreme, and few can fathom 5 percent.
Also consider that on this day in 2004, the US national debt was only $7.3 trillion and now it’s at $28.6 trillion; yet it seems no one has calculated what the cost of debt would be if rates were multiples higher than today’s rates. As for the stock market, interest rates, valuation of companies, and investment decisions will change significantly if we see higher rates in the future.
This year at (virtual) Jackson Hole, it would be nice if Powell spoke about the sustainability of artificially low rates and what this means in the decade ahead. Of course, the Fed could never address the issue and commit to keeping low rates for an indefinite period of time. But what about the public’s concern with not living in a state of perpetual asset bubbles, boom, busts, and bailouts? Or did that not make it onto the agenda?
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Get Radical on Privatization
The benefits of privatization are well documented by empirical studies, so they will not be rehashed in this piece. Yet many still assume that some commodities are beyond privatization. Too often proponents of privatization fail to appreciate that humans are sentimental characters, and as a result, they are unwilling to commodify resources deemed to be sacred. A leading advocate of radical privatization, Walter Block in an interview with this writer expressed the view that even natural resources like forests and rivers should be privatized to induce greater levels of efficiency. Walter Block may appear unsentimental, but I doubt that even those in agreement would recommend the privatization of citizenship.
Citizenship is the next major frontier in the privatization revolution. Currently, only the American government is allowed to grant citizenship to foreigners, but why should this be the case, when the lives of ordinary Americans are impacted by immigration? And contrary to what you think, privatization will improve the quality of immigrants. There is no guarantee that the loved ones of naturalized Americans who legally migrate to the US will become productive citizens. When choosing to sponsor family members, people rarely consider their productive potential; such decisions are inspired by love and loyalty.
In contrast, if professional associations were authorized to approve citizenship, then they would have an incentive to select the best candidates and engage in thorough research to eliminate unsavory characters. For example, accountants, chefs, and educators would relocate to America after being granted citizenship. Furthermore, indirectly, privatization might stimulate entrepreneurship by creating demand for companies specializing in providing these professional associations with intelligence on prospective citizens.
By now readers are obviously wondering how standards would be maintained in the absence of government regulations. This concern is understandable, but lacking directives from the government, private associations will orchestrate their own regulations. Reprobate member agencies who grant citizenship to dubious personalities will have their privileges rescinded. Because professional bodies want to preserve the integrity of the system, they will automatically institute mandatory requirements for all parties. A case in point is that one professional body could subject its members to annual audits. If we are being objective, then clearly privatizing citizenship has merits. When the government is the sole provider of citizenship there is no onus to ensure that prospective citizens will offer a positive contribution to society.
Since privatization is divorced from sentiment, it can attenuate some of the disadvantages associated with government provision of citizenship. On the other hand, neither will privatization marginalize people interested in sponsoring loved ones based on sentiment. Such individuals can always join a professional body to assist in securing employment for family members. Under the new dispensation, except for the elderly and children, all prospective citizens would have to apply for citizenship through a professional body. So even those sponsoring sentimental applications would have to demonstrate that their relatives will work upon arrival in America.
Immigrants can either enrich or degrade the quality of society; therefore, American citizens should be positioned to determine the quality of the people who acquire citizenship. And unfortunately, the current system of allotting citizenship does not cultivate accountability. Anti-immigration activists may contend that these proposals would flood the country with new immigrants; however, they are mistaken. On the contrary, the discriminatory nature of privatization actually limits immigration by selecting competitive candidates. Moreover, privatization is not an affirmation of open immigration; mechanisms can be designed to monitor the borders in order to stem the flow of illegal immigration. Privatization may not alleviate all problems, but at least it elevates the quality of immigrants.
Similarly, a new approach to drugs is also required. Instead of lobbying for the legalization of drugs, we should suggest a framework to manage the consequences of legalization. Liberals are quick to remind us that the war on drugs has been a failure, yet few ponder how drug dealers will manage their affairs in this environment. However, the problem is not complicated, because trading drugs is just another business. Like other professionals, druggists can institute regulations to determine the rules of the games, and agents who disregard these stipulations will be excommunicated.
In general, the success of an entrepreneur is based on his reputation. Hence, agents who engage in fraudulent activities or sell inferior drugs will be driven out of the market. Further, legalization will remove the stigma of drug dealing and consequently could discourage druggists from financing illicit activities, since the costs of penetrating legitimate financial systems will have been minimized. Presently, the proceeds of drugs are perceived as dark money, and as such, drug dealers are isolated in the financial community. But the normalization of drugs will unleash numerous opportunities for dealers to engage in legitimate commerce. By minimizing the cost of participating in the economy for dealers, legalization makes illicit transactions expensive. Clearly, if the proceeds of drugs are not seen as tainted, then a druggist will be motivated to engage the financial system, instead of aiming to increase his wealth through illegal means.
Although these suggestions will elicit criticism, the truth is that we cannot comment on the efficacy of policies without testing their utility. We have been relying on stale approaches to effect positive change to no avail. So, at this stage, policymakers must shed old biases and invest in innovative alternatives to yield new insights.
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Voting, Interest Groups, and the State
The implementation of voter ID laws to prevent fraud has led some to argue that voting rights are under assault by the state. But this mistaken assumption is predicated on a false premise, because voting is not a right. Rights exist independent of the political regime, so even though communist states abrogate human rights, this does not alter the fact that people still have a right to own property and express religious beliefs. Essentially, voting is a mechanism implemented by the state for political purposes.
Voting permits citizens to participate in governance by declaring support for various policies. But failing to entertain some opinions could enhance living standards, as economist Bryan Caplan intuits in his provocative book The Myth of the Rational Voter. Caplan rightly argues that politicians fixate on delivering the goods of democracy instead of enabling markets to facilitate the long-term development of society. The average voter rarely appreciates the intricacies of governance, and as a result, succumbing to his demands may prove to be disastrous. After all, it is not unusual for voters to espouse support for economically harmful policies like trade protectionism and occupational licensing.
Moreover, voting offers an opportunity to undermine rights, because individuals are given the prerogative to determine benefits for other people. In 2013, for example, Swiss voters rejected a proposal to cap executive pay. Despite the logic of their choice, Swiss voters really had no business influencing the compensation of executives. Politicians and citizens alike should direct their focus toward elevating the caliber of governance rather than expanding democracy. But ultimately doing so requires a recalibration of our perception of the state.
Like the corporation, the state is a legal fiction entitled to select the criteria for participating in governance. For instance, in a company, board members are not obliged to act on the recommendations of junior employees. Yet this stance does not deter directors from advancing the interests of workers. Hence the fear that voting restrictions ensure that the concerns of some groups are avoided is unwarranted. A case in point is that though children are unable to vote, politicians still champion their cause. Their devotion to children is illustrated by laws against child labor and abuse. Likewise, people suffering from serious cognitive deficits are unable to vote, yet this has not discouraged politicians from lobbying for the mentally disabled. Neither did the exclusion of women from the political arena prevented politicians from privileging their concerns, as Ernest Bax noted in his 1896 publication The Legal Subjection of Men.
At some point, we must confront reality by admitting that prioritizing development by limiting voting is a feasible strategy to promote progress. As such, we should discuss groups that must be barred from voting. Undoubtedly, disallowing lobbyists from voting would protect democracy from becoming enslaved to special interest groups. Such groups exert enormous influence on the political system at the expense of other citizens. When these groups obtain subsidies and political privileges, taxpayers feel the brunt. One estimate suggests renewable energy subsidies will cost taxpayers more than $40 billion from 2018 to 2027.
Another disadvantage of interest groups is that public-sector unions make it costly to dismiss reprobate employees. Richard Berman in the Washington Times details the daunting task of sacking sexual predators due to the rigidity of union protection rules:
Longtime teacher John Vigna was recently sentenced to 48 years in prison for repeated sexual abuse of his students. Cases of teacher-student sexual abuse are all too common. Hundreds occur nationwide each year. What’s worse is that teachers often demonstrate warning signs of perversion before they offend—or before their offenses amplify—but cannot be fired because of union protection rules. In Vigna’s case, sexual abuse complaints were lodged against him as far back as 2008. In 2013, a top district official called his conduct “indefensible, inappropriate, and intolerable.” But he was allowed to stay in the classroom.
Teachers' unions wield phenomenal power, and according to Education Next, since 1990, the American Federation of Teachers and the National Education Association have usually been among the top ten contributors to federal electoral campaigns. Even more striking is that union members regularly constitute at least 10 percent of the delegates at the Democratic National Convention, making them the single largest organizational bloc of Democratic Party activists.
Therefore, if members of these bodies are unable to vote, then politicians will no longer be inspired to indulge their demands. So, consequently elected representatives will have a stronger incentive to govern in the interest of citizens. Similarly, the privilege of government employees to vote should also be rescinded. Officials in the public sector depend on state resources, so by exerting political clout, they can obstruct the course of democracy.
The power of bureaucrats to corrupt governance is artfully captured by Ludwig von Mises in his book Bureaucracy: “Representative democracy cannot subsist if a great part of voters are on the government payroll. If the members of parliament no longer consider themselves mandatories of the taxpayers but deputies of those receiving salaries, wages, subsidies, doles, and other benefits from the treasury then democracy is done for.” Likewise, beneficiaries of welfare should equally be prohibited from voting to deter politicians from becoming susceptible to requests requiring the distribution of wealth. Resultantly, when fewer people are permitted to vote, the political system will be better insulated from the costs of populism.
To foster development, we must recast the state as a corporation preserving society’s resources for the future benefit of the unborn. Hence its long-term outlook will favor development to democracy. The truth is that universal voting is not a positive feature of democracy, but rather an impediment to progress.
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From the Nixon Shock to Biden-flation
This month marks fifty years since President Richard Nixon closed the “gold window” that had allowed foreign governments to exchange US dollars for gold. Nixon’s action severed the last link between the dollar and gold, transforming the dollar into pure fiat currency.
Since the “Nixon shock” of 1971, the dollar’s value — and the average American’s living standard — has continuously declined, while income inequality and the size, scope, and cost of government have risen.
Since the beginning of this year, price inflation has increased much, and it could continue onward to exceed the 1970s-era price spikes. Understandably, Republicans are trying to blame President Joe Biden for the price increases. However, a major cause of the current price inflation is the unprecedented money creation the Federal Reserve has engaged in since the 2008 market meltdown. This, though, does not mean Biden and most US politicians of both parties do not bear some responsibility for rising prices. Their support for the Fed and massive government spending contributes to the problem.
The main way the Fed pumps money into the economy is by monthly purchases of 120 billion dollars of Treasury and mortgage-backed securities. Even many Keynesian economists agree that rising price inflation means the Fed should stop pumping money into the economy. Yet, this year the Fed is likely, at most, to only slightly reduce its purchases of Treasury securities. It will almost certainly keep interest rates at near-zero levels.
A reason the Fed will not stop or significantly reduce its purchases of Treasuries and allow interest rates to increase is that doing so would increase federal debt payments to unsustainable levels. Even with interest rates at historic lows, interest payments remain a significant portion of federal spending, and recent indications are that the US government is not about to start being frugal. Consider, for example, Congress' six trillion dollars “Covid relief and economic stimulus” spending spree and the Senate passage of the trillion dollars “traditional infrastructure” bill and a budget “outline” of a 3.5 trillion dollars “human infrastructure” bill.
The “human infrastructure” bill represents an expansion of government along the lines of the Great Society. Among its initiatives are universal pre-kindergarten; two “free” years of community college; increased government control of health care via expansions of Obamacare, Medicare, and Medicaid; and a raft of new government mandates and spending aimed at reshaping the US economy to fight “climate change.”
The need to gain support of “moderate” Democrats will likely mean the final “human infrastructure” bill will costs less than 3.5 trillion dollars. However, no Democrat is objecting to the bill's programs; the objectors just want cheaper tolls on the road to serfdom. While progressives will likely accept reduced spending levels in order to get their wish list into law, they will then work to increase funding and expand the programs. As the programs become more entrenched, even many “conservatives” will support increasing their funding.
The expansion of government will increase pressure on the Fed to keep the money spigots open. This will lead to a major economic crisis. The good news is the crisis may mark the beginning of the end of the fiat monetary system and the welfare-warfare state, along with the dawn of a new era of free markets, sound money, and limited government.
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