Power & Market
Returning today to Mises University 2018, it’s difficult and even a little scary for me to accept that thirty summers have gone by since my first Mises University in 1988 on the Stanford campus. And it's been twenty five years since I graduated from the University of Nevada Las Vegas (UNLV) with a master's degree in economics, earned under Dr. Murray Rothbard and Dr. Hans-Hermann Hoppe.
My "informal" instruction at UNLV is what I remember most. In the early 1990s we had an incredible group of Rothbardian and proto-Rothbardian graduate students, all gathered at one of the few Austrian-friendly economics programs in the country. Sadly, Rothbard died and Hoppe left UNLV before a PhD in economics was established. But for those few brief years the Nevada desert was home to an outstanding cadre of Austrian thinkers.
Both Rothbard and Hoppe were incredibly accessible, friendly, and willing to engage ideas. Office hours were opportunities to learn and grapple with issues, not the kind of rote meetings most students have with professors. Our ideas were considered important, and even debated, despite the tremendous disparity in knowledge between us and our interlocutors. We were never made to feel like stenographers receiving one-directional knowledge from authority figures.
Best of all, Professor Hoppe frequently joined our gang at the "Stake-Out," a downscale burger and video poker joint well off the Las Vegas strip (still in business!). Those evening sessions remain among my best memories of those years.
Rothbard's affability, however, did not mean he held low expectations for us or demanded little academic rigor. Just the opposite was true. Both as an instructor and thesis chair, he turned out to be as academically demanding as he was generous with his time.
I still recall the unanticipated sting of long hours spent charting out the timeline of such thinkers as the Spanish Scholastics and Turgot on large poster boards, attempting to fully synthesize each theorist’s contribution and the chronology of their work for an upcoming exam in Rothbard's History of Economic Thought class. Clearly (and fortunately), this was not a class wedded to Heilbroner’s Worldly Philosophers, the text foisted upon most students by most departments. We quickly set it aside, ready for return to the university bookstore. No, our instruction came from a stack of handwritten notes scribbled on unbound and disheveled pages torn seemingly eons ago from a yellow legal pad, yet magically transcribed in perfect order by Rothbard onto the chalkboard before us.
Despite his physical stature, Murray was an intellectual giant, a bigger than life character, and huge icon for certain writers with the Las Vegas Review Journal newspaper. One of the few big city newspapers with a slight libertarian bent, the Review Journal ran a front page caricature of him as a dragon slayer. His labeling of Clintonomics as “sort of psychotic” in that that same paper is forever etched in my mind.
Not surprisingly, Murray went greatly underappreciated by his UNLV economics department “peers.” It may have been envy on his colleague’s part (no students were flocking to UNLV from anywhere to study under them), or his colleagues’ devotion to mathematical modeling. But it's safe to say they didn't much appreciate the genius in their midst.
In many ways Rothbard was the prototypical eccentric university professor. Murray, a night owl who eschewed early mornings, would awaken just in time to teach his night classes. As a Manhattanite he had never bothered to drive a car, making him dependent on one particular student to drive him to campus in his early-model-yet-still-somehow-running-vehicle (an experiment in hyphenation that perhaps only Murray would truly appreciate). After being returned home, Murray would commence writing all night long on a manual typewriter before turning in at sunup.
One of my task as a graduate assistant was serving as an unassuming communications conduit between the Austrians and the rest of the professors in the department, who despite working together in a relatively small office space seldom spoke to one another (and especially not about economics). Luckily for me, when I would bring an empiricist’s refutation of something “Austrian” to Murray he always patiently explained their error-- and taught me a lesson in the process.
Twenty five years later I still treasure Murray's devotion of his time to improve my understanding of economics.
The term “deep state” has been so over-used in the past few years that it may seem meaningless. It has become standard practice to label one’s political adversaries as representing the “deep state” as a way of avoiding the defense of one’s positions. President Trump has often blamed the “deep state” for his political troubles. Trump supporters have created big conspiracies involving the “deep state” to explain why the president places neocons in key positions or fails to fulfill his campaign promises.
But the “deep state” is no vast and secret conspiracy theory. The deep state is real, it operates out in the open, and it is far from monolithic. The deep state is simply the permanent, unelected government that continues to expand its power regardless of how Americans vote.
There are factions of the deep state that are pleased with President Trump’s policies, and in fact we might say that President Trump represents some factions of the deep state.
Other factions of the deep state are determined to undermine any of President Trump’s actions they perceive as threatening. Any move toward peace with Russia is surely something they feel to be threatening. There are hundreds of billions of reasons – otherwise known as dollars – why the Beltway military-industrial complex is terrified of peace breaking out with Russia and will do whatever it takes to prevent that from happening.
That is why Deputy Attorney General Rod Rosenstein’s indictment on Friday of 12 Russian military intelligence officers for allegedly interfering in the 2016 US presidential election should immediately raise some very serious questions.
First the obvious: after more than a year of investigations which have publicly revealed zero collusion between the Trump campaign and Russia, why drop this bombshell of an allegation at the end of the news cycle on the last business day before the historic Trump/Putin meeting in Helsinki? The indictment could not have been announced a month ago or in two weeks? Is it not suspicious that now no one is talking about reducing tensions with Russia but is all of a sudden – thanks to Special Counsel Robert Mueller – talking about increasing tensions?
Unfortunately most Americans don't seem to understand that indictments are not evidence. In fact they are often evidence-free, as is this indictment.
Did the Russian government seek to interfere in the 2016 US presidential elections? It’s certainly possible, however we don’t know. None of the Justice Department’s assertions have been tested in a court of law, as is thankfully required by our legal system. It is not enough to make an allegation, as Mueller has done. You have to prove it.
That is why we should be very suspicious of these new indictments. Mueller knows he will never have to defend his assertions in a court of law so he can make any allegation he wants.
It is interesting that one of the Russian companies indicted by Mueller earlier this year surprised the world by actually entering a “not guilty” plea and demanding to see Mueller’s evidence. The Special Counsel proceeded to file several motions to delay the hand-over of his evidence. What does Mueller have to hide?
Meanwhile, why is no one talking about the estimated 100 elections the US government has meddled in since World War II? Maybe we need to get our own house in order?
Any Brazilian libertarian gets the same questions: What the heck is happening there? How come you have people with “Menos Marx, Mais Mises” signs down the streets? Aren’t you some kind of left-libs? Isn’t Lula, now jailed for corruption, ‘Obama’s man’?
Every time people ask me about it, I tend to respond in a somewhat different manner, and I tend to forget stuff. So here I want to tell you what I think about the whole thing.
Usually I divide my explanation into three parts:
1. Eight years of hard interventionism (2008-2016 under Lula da Silva and Roussef) pushed the country to the limits. There was no way out, either more libertarian ideas would enter in the common discussion or we would be heading to full blown real-life communism, Venezuela style;
2. Internet, social networks, and bottom up organization via ‘apolitical’ movements; and
3. A weak but vigorous intellectual environment is slowly forming for libertarian (or what Americans might call "conservative") ideas. (See, for example, Olavo de Carvalho.
#1: There are more than 30 political parties down here. Only one, the NOVO labels itself as "classical liberal/libertarian." There are more than ten communist/socialist parties. The so called ‘conservative’ candidate for the forthcoming presidential election had to strike an agreement with a lib-left party to get his way into the candidacy.
Since redemocratization in the late 1980’s/early 1990’s, Brazil has had five presidents, two of them communists. Lula da Silva and Roussef. There was one social-democrat: Cardoso. These presidents served 22 years in total. The current president, Temer, belongs to a center party that has never been anti-establishment in the last 35 years. Our system gives way too much power to the executive branch, which lead to growing interventionism. The government represents 40% of the GDP and has been growing in the last 20 years.
On the practical side, the last relevant libertarian politician in Brazil, Roberto Campos, passed away 30 years ago. There was nobody defending libertarian ideas in the political world, which was a reflection of the cultural and academic environment. Statism, empirically represented by the expenditures with the soccer stadiums for the 2014 World Cup, lead the country to the biggest economic crisis in its history. The GDP decreased by more than 3% in two consecutive years, 2015 and 2016. In 2017, there was no growth.
#2. Another new development was the Brazilian Mises Institute (Instituto Mises Brasil - IMB), inspired by the MI. It emerged in the mid 2000’s, and was founded by Hélio Beltrão with the academic support of Prof. Ubiratã Iorio. From the beginning, the institute distributed a lot of free material online and used social media to spread the ideas, some facts on that:
There was no libertarian movement in Brazil in 2010 (I’m writing that in 2018!), people had started talking about it, but there was nothing organized. Nowadays, there are around 40 thousand visits to mises.org.br every day, in 2008 the number was 13 times lower. There are 300,000 likes on Facebook. The Institute has a podcast running for 5+ years with more than 300 episodes. 1 million books have been downloaded. Since 2013, "Mises" has more Google searches than "Keynes."
Well, here is where the story gets complicated and this is where we get to #3.
In my view there are two complementary responsible for the intellectual change: Olavo de Carvalho and Instituto Mises Brasil.
Olavo is a Brazilian philosopher, he became known in the late 1990’s, but gained traction in the mid 2000’s with a weekly web-radio show where he presented his conservative positions and waged cultural war on widespread communist ideology in Brazilian culture, universities, and the media. With his attack on the centralization of power, he always mentioned the calculation debate and has used methodological individualism in his political analysis.
Meanwhile, the IMB provided materials and events on economics and political science and spread the ideas to a wider and more libertarian, less conservative, audience.
So, what is ahead?
In October there will be national elections in Brazil, including races for congress and the senate, new governors and houses in the states, and a new national president.
There is likely to be be somewhere between 20-25 libertarian representatives, a huge jump from the zero of the last 30 years. Maybe some senators and numerous state representatives.
But, we have got to keep fighting the ideological war.
The Brazilian experience can be an inspiration to other movements elsewhere in the globe, and those lessons could be a starting point to those that want to do something about it.
The June 29th edition of Grant’s Interest Rate Observer led with, “Time Warner, Inc. was put on this earth not to produce Game of Thrones but to punctuate the cycles of investment enthusiasm.” Grant’s reminds the forgetful that a few bubbles ago Time Warner and AOL merged and that “announcement in 2000 rang down the curtain on the dot-com era.”
The Time Warner — American Online (AOL) merger was a colossal $111 billion deal. A blink in time later, May 2009, the CEO of Time Warner, Jeff Bewkes, announced the two companies were separating, the merger was but a brief hookup instead of a marriage.
Now Time-Warner is making merger with AT&T, and Grant’s wonders if the deal “may epitomize the post-2008 corporate-credit boom.”
“The new AT&T is a kind of triptych,” writes Grant’s, “one-third wireless, one-third wireline and one-third entertainment.”
Of course, anything can work on paper if the guys and gals in the corner office want it to. In a 2011 piece for mises.org , I wrote,
A former director of Coopers & Lybrand told author Mark Sirower, "Lotus is the culprit in failed acquisitions. It is too easy to assume anything you want in perpetuity without any understanding of the economics of an industry, and package it in a beautiful report."
In his book The Synergy Trap , Sirower says valuation models turn on three things: free-cash-flow forecasts, residual value, and a discount rate.
The cost of capital is integral to making these assumptions. The lower the assumed interest rate or cost of capital, the higher the price for the acquisition that the models will justify.
And if anyone is assuming today's Fed-induced microscopic interests rates will last forever, well, now would be the time to be selling instead of buying. Once interest rates go up, these valuation models will be blown up along with the government-employee pension-plan assumptions.
It's hard to make something work out economically if you overpay in the first place. And that is most often what happens. Companies overpay for the firms they acquire.
It’s the rare business combination that works out. I mentioned,
according to Max Landsberg and Dr. Thomas Kell at the consulting firm Heidrick & Struggles, 74 percent of mergers fail. "Two-thirds of the newly formed companies perform well below the industry average," according to the Harvard Management Update. Although "up to 70 percent [of mergers] failed to create value, it seems clear that the end is not yet in sight," claims Financial Executive. And the Journal of Property Management says "60 percent to 80 percent of all business combinations undergo a slow, painful demise."
In the AT&T/Time Warner merger there is the additional problem of the debt load. “If pro forma AT&T were a country,” Craig Moffett tells Grant’s, “it would place 32nd on the list of highest total debt burdens, between Indonesia (at $335 billion) and the UAB ($220 billion). Pro forma leverage, on an adjusted basis, will now be 3.9 times EBITDA,”
“M&A is now — arguably, always has been — a leap in the dark,” Grant’s writes. The primary problem is size itself. Ludwig von Mises explained that socialism doesn’t work because there was no market to determine prices and thus calculate how resources should be used. Behemoth companies are no more immune than government bureaucracies.
Murray Rothbard explained,
Economic calculation becomes ever more important as the market economy develops and progresses, as the stages and the complexities of type and variety of capital goods increase. Ever more important for the maintenance of an advanced economy, then, is the preservation of markets for all the capital and other producers' goods.
Professor Peter Klein furthers the point in his book The Capitalist and the Entrepreneur,
as soon as the firm expands to the point where at least one external market has disappeared, however, the calculation problem exists. The difficulties become worse and worse as more and more external markets disappear, as [quoting Rothbard] "islands of non calculable chaos swell to the proportions of masses and continents. As the area of incalculability increases, the degrees of irrationality, misallocation, loss, impoverishment, etc, become greater.
Grant’s closed the AT&T analysis with, “There is nothing certain about the new Time Warner corporate marriage, only the time-honored tendencies of governments to inflate, investment bankers to promote, corporate CEOs to deal — and ground-hugging interest rates to addle the brain.”
In the end, this latest corporate knot-tying will crumble and destroy capital.
Medicare Part D is a relatively new "entitlement" program that provides a subsidy to retirees for prescription drugs. It is supposedly designed to help seniors, but is the drug companies that benefit most. Started in 2006, it was expected to cover 11 million, but that figure was 24 million after just one year! Not surprisingly the costs of the program have escalated far beyond original projections and are expected to continue to rise in the future.
One recent development intersects the opioid crisis. Seniors are receiving vast amounts of opioid prescriptions using this subsidy. Almost 5 million received three or more months of pills and nearly 60,000 received "extreme amounts" in 2017. Many seniors are receiving multiple prescriptions and using multiple prescribers and pharmacies. Surely, some of these extreme users are diverting pills to increase their income, but many are at risk from overdosing and dying.
Just as sure, this would not be a problem if they had to pay the regular retain price.
Here we go again. A fed official is once again going to the media to repeat the age-old myth that the Fed is totally independent of political influence.
The last time we heard about this from someone at Powell's level what last year, when Steve Mnuchin reminded everyone of the Fed's alleged independence in January:
Responding in writing to questions from Senator Bill Nelson , Steve Mnuchin described the Fed as “organized with sufficient independence to conduct monetary policy and open market operations.” He also praised “the increased transparency we have seen from the Federal Reserve Board over recent years.”
This time, it's Fed chair Jerome Powell himself, who granted an interview to NPR's Marketplace . Most of the interview was devoted to making this point about independence. Here's some of it:
Ryssdal: There is a question that has to be asked — actually a couple of them — about the political environment in which this economy operates right now. Granting that the Fed has always been a source of political frustration for many in the executive branch, it's worth pointing out here that Larry Kudlow, the chairman of the president's National Economic Council, and the president himself have said they are low-interest rate guys. Larry Kudlow encourages the Fed to move very slowly on interest rates on the theory that rising interest rates would be a tricky thing for the president politically. Do you think it's appropriate for the White House to be not telling the Fed what to do, but saying these things in public?
Powell: Let me just say I'm not concerned about it, and I'll tell you why. We have a long tradition here of conducting policy in a particular way, and that way is independent of all political concerns. We do our work in a strictly nonpolitical way, based on detailed analysis, which we put on the record transparently, and we don't consider political considerat — we don’t take political considerations into account.
I would add though that no one in the administration has said anything to me that really gives me concern on this front. But this is deep in our DNA. For a long, long time the Fed has felt it important to conduct our business that way. I'm deeply committed to that approach. And so are all of my colleagues here.
Ryssdal: Which I understand, but you're also humans. And when the White House leans on you, you must feel it.
Powell: Again, nothing has been said to me publicly or privately that gives me any concern about our independence.
Ryssdal makes a point that anyone not trained to believe Washington, DC sound bytes would see. Powell, like everyone else involved in the Fed's governance is a human being and brings with him his own biases.
We saw some of this in 2016 when it came to light that Fed employers donated far more money to the Hillary Clinton campaign, than to any other campaign:
Bloomberg had an interesting report this week looking at the political contributions of Federal Reserve employees this election season. Unsurprisingly, Hillary Clinton is dominating the field, receiving $18,747 in contributions — over four times more than all other candidates combined. While most of the donations came from lower level Fed officials, Federal Reserve Governor Lael Brainard came under fire for making several donations to Clinton’s campaign.
When people like Powell say "non-political," though, they don't mean non-ideological or unbiased. They mean they aren't making decisions in a way so as to benefit certain candidates or certain political parties.
Even if this were true — which it's not (see below) — it would be of little comfort. The Fed can still act to benefit certain groups over others. Its policies can be employed to keep interest rates low for governments, so as to keep the cost of the national debt low. The Fed can adopt policies that benefit Wall Street more than Main Street. The Fed can act to benefit spenders rather than savers.
These acts of picking winners and losers, and influencing public policy, would be considered "political" by a normal person — as indeed they are political. They're just not directly connected to any political campaign.
Besides, the fact the Fed behaves as a political institution has been documented for years by political scientists. ( Whole classes are taught on the subject .) Only economists and media talking heads are so naive or so willfully ignorant as to believe a policymaking institution can be "non-political."
But even on the matter of straight-up efforts to influence elections, the Fed is guilty. In 2010, when Fed Chairman Arthur Burns's diary was published, Doug French noted:
Burns's diary is page after page of political dirty dealing, lying, and backstabbing. Nixon went so far as to plant negative press about Burns and threatened to expand the Fed's Board of Governors to dilute the chairman's influence, all to bring Burns in line with the president's economic meddling. None of that seems necessary; Burns's diary would indicate that the president had him at hello.
No doubt a well-worn path still exists between the Eccles Building and the White House. But the myth continues. Economist Mark Zandi told CNBC's Lori Ann LaRocco recently,
I think the worst thing that could happen is if the Fed was politicized. An a-political Federal Reserve is a cornerstone of our financial system and broader economy. So nothing is more important than maintaining the Fed's independence. And the fact that its wrapped in the political process is just disturbing and disconcerting.
Ultimately, though, we need to ask ourselves if "independence" is even something that is desirable. After all, the flipside of "independence" is a lack of accountability. The only way for the Fed to be truly independent would be if it was totally unaccountable. Murray Rothbard wondered if that would be a good thing:
“Independent of politics” has a nice, neat ring to it, and has been a staple of proposals for bureaucratic intervention and power ever since the Progressive Era...But it is one thing to say that private, or market, activities should be free of government control, and “independent of politics” in that sense. But these are government agencies and operations we are talking about, and to say that government should be “independent of politics” conveys very different implications. For government, unlike private industry on the market, is not accountable either to stockholders or consumers. Government can only be accountable to the public and to its representatives in the legislature; and if government becomes “independent of politics” it can only mean that that sphere of government becomes an absolute self-perpetuating oligarchy, accountable to no one and never subject to the public’s ability to change its personnel or to “throw the rascals out.”
It's easy to find income inequality in the United States when we compared the super-rich with the middle class. But when we compare the middle class to the "poor" there's a surprising amount of income equality.
But how can the middle class have incomes similar to the poor? Isn't that logically impossible?
Well, this sort of income equality is made possible by the existence of government social benefit programs. When we account for income transfers to low-wage workers — or to people who don't work at all — we find that the incomes of middle class people — in spite of often working far longer hours — are similar to the poor.
The political implications of this are significant.
The authors note:
The most surprising finding is the astonishing degree of equality among the bottom 60% of American earners, generated in part by the explosion of social-welfare spending and the economic and wage stagnation during the Obama era. Hardworking middle-income and lower-middle-income families must have recognized that their efforts left them little better off than the growing number of recipients of government transfers. The perceived injustice of this equality helped drive the political shift among blue-collar workers, many of whom supported the pro-growth candidacy of Donald Trump in 2016 despite having voted for Mr. Obama in the two previous presidential elections.
The bottom quintile earned 2.2% of all earned income in 2013, but after adjusting for taxes and transfer payments, its share of spendable income rose to 12.9%—six times its proportion of earnings. The second quintile’s share more than doubled, rising from 7% of earned income to 13.9% of spendable income. For the third quintile, middle-income Americans, the increase was much smaller, from 12.6% to 15.4%.
Not surprisingly, high earners lost a considerable share of their earnings after taxes and transfers are taken into account. The fourth quintile’s share fell from 20.5% to 18.6%, while the top quintile dropped from 57.7% of earnings to 39.3% of consumable income. In other words, the top quintile’s share of earnings was 26 times that of the bottom quintile, but after taxes and transfer payments its share of spendable income was only three times as much.
Even more startling is the near equality among the bottom three quintiles. The bottom quintile, which earned only 2.2% of all earned income, had virtually the same share of spendable income as the second quintile, lower-middle-income Americans. This equality is despite the fact that lower-middle-income workers earned more than three times the share of income and worked 21/2 times as much, measured by comparing each group’s number of full-time workers relative to its working-age population. Middle-income workers earned almost six times the share of income and worked almost four times as much compared with the bottom quintile, but they enjoyed only about 20% more spendable income.
This equality in income endured in spite of the fact that many middle-income families worked far harder for what income they did have:
And even these numbers understate the huge difference in work effort. Compared with the bottom quintile, the lower-middle-income quintile had almost four times as many working-age families whose members worked two or more jobs, and the middle-income quintile had more than seven times as many families with members working two or more jobs.
As Gramm and Ekelund explain, middle class people know that the wealthy make a lot more than the middle class does. But the middle classes can also see they've benefited from the goods and services brought to the market by the wealthy.
Meanwhile, a middle-class worker who has two jobs, or a 55-per hour work week looks around and sees relatives or neighbors who never seem to work, but who also have a similar standard of living. They might know perpetually unemployed acquaintances who rely on CHIP or Medicaid, free school lunches, food stamps, and a myriad of other programs, all available to many. Meanwhile, the middle class worker is putting in long hours to obtain the same amount of food and health care.
The middle class workers then realizes he's working to pay for his own needs, and also those of the neighbor.
It's easy to see why this might breed resentment.
Not surprisingly, Judge Napolitano sees the Kavanaugh appointment for what it is — a nod to the DC establishment. On Fox and Friends this morning, Napolitano said:
“The Washington establishment, sometimes known as the swamp, wanted Judge Kavanaugh,” said Napolitano. “I am disappointed in the president because this is not the type of person he said he would pick. Justice [Neil] Gorsuch was. This person is at the heart and soul of the D.C. establishment against whom the president railed.”
See the video:
.@Judgenap: “I am disappointed in the president because this is not the type of person that he said he would pick… this person is at the heart and soul of the DC establishment.” pic.twitter.com/Dygeg4zywi— Fox News (@FoxNews) July 10, 2018
During research for my book The Skyscraper Curse I started using the phrase "Advanced technology." It means a means of production that is currently beyond the capability of society or at least something that is "cutting edge." I would argue that is also useful in terms of the Austrian Business Cycle Theory (ABCT) because when artificially low interest rates impact an economy's structure of production, it typically induces the production and introduction of new "premature" technology that typically would only occur in the future, if at all.
We might be witnessing one such advanced technology on the campus of Auburn University--a robot bricklayer. The reason for this speculation is that low interest rates have increased the amount of construction and driven up costs so that new technology in the form of the robot bricklayer have been rush in to alleviate the high cost and lack of labor. Two masons and the robot can lay rough four times the number of bricks that two masons can lay.