Power & Market

How the US Wages War to Prop up the Dollar

01/08/2020Ryan McMaken

At Counterpunch, Michael Hudson has penned an important article that outlines the important connections between US foreign policy, oil, and the US dollar.

In short, US foreign policy is geared very much toward controlling oil resources as part of a larger strategy to prop up the US dollar. Hudson writes:

The assassination was intended to escalate America’s presence in Iraq to keep control of the region’s oil reserves, and to back Saudi Arabia’s Wahabi troops (Isis, Al Quaeda in Iraq, Al Nusra and other divisions of what are actually America’s foreign legion) to support U.S. control of Near Eastern oil as a buttress of the U.S. dollar. That remains the key to understanding this policy, and why it is in the process of escalating, not dying down.

The actual context for the neocon’s action was the balance of payments, and the role of oil and energy as a long-term lever of American diplomacy.

Basically, the US's propensity for driving up massive budget deficits has created a need for immense amounts of deficit spending. This can be handled through selling lots of government debt, or through monetizing the debt. But what if there isn't enough global demand for US debt? That would mean the US would have to pay more interest on its debt. Or, the US could monetize the debt through the central bank. But that might cause the value of the dollar to crash. So, the US regime realized that it must find ways to prevent the glut of dollars and debt from actually destroying the value of the dollar. Fortunately for the regime, this can be partly managed, it turns out, through foreign policy. Hudson continues:

The solution [to the problem of maintaining the demand for dollars] turned out to be to replace gold with U.S. Treasury securities (IOUs) as the basis of foreign central bank reserves. After 1971, foreign central banks had little option for what to do with their continuing dollar inflows except to recycle them to the U.S. economy by buying U.S. Treasury securities. The effect of U.S. foreign military spending thus did not undercut the dollar’s exchange rate, and did not even force the Treasury and Federal Reserve to raise interest rates to attract foreign exchange to offset the dollar outflows on military account. In fact, U.S. foreign military spending helped finance the domestic U.S. federal budget deficit.

An important piece of this strategy has been a continued alliance with Saudi Arabia. Saudi Arabia maintains the world's largest capacity for oil production, and it was the largest single producer of crude for most of the period from the mid-1970s to 2018, when the US surpassed both Saudi Arabia and Russia.

But Saudi Arabia remains under the US thumb:

what Saudi Arabia does not save in dollarized assets with its oil-export earnings is spent on buying hundreds of billion of dollars of U.S. arms exports. This locks them into dependence on U.S. supply [of] replacement parts and repairs, and enables the United States to turn off Saudi military hardware at any point of time, in the event that the Saudis may try to act independently of U.S. foreign policy.

So maintaining the dollar as the world’s reserve currency became a mainstay of U.S. military spending. Foreign countries do not have to pay the Pentagon directly for this spending. They simply finance the U.S. Treasury and U.S. banking system.

However, any move away from this status quo tends to be met with paranoia and intervention from the US:

Fear of this development was a major reason why the United States moved against Libya, whose foreign reserves were held in gold, not dollars, and which was urging other African countries to follow suit in order to free themselves from “Dollar Diplomacy.” Hillary and Obama invaded, grabbed their gold supplies (we still have no idea who ended up with these billions of dollars' worth of gold) and destroyed Libya's government, its public education system, its public infrastructure …

But the role of oil-producing states goes beyond merely churning dollars and US debt to keep the dollar afloat. These countries also provide the foot soldiers for many US interventions in terms of terrorists and guerrilla fighters who can be used against US enemies. Hudson declares:

The Vietnam War showed that modern democracies cannot field armies for any major military conflict, because this would require a draft of its citizens. That would lead any government attempting such a draft to be voted out of power. And without troops, it is not possible to invade a country to take it over.

The corollary of this perception is that democracies have only two choices when it comes to military strategy: They can only wage airpower, bombing opponents; or they can create a foreign legion, that is, hire mercenaries or back foreign governments that provide this military service.

That is, the US regime can certainly get away with lots of bombing operations and other low-manpower operations. But anything that might require conscription is a political nonstarter. Hudson notes that Saudi Arabia, with its particularly rabid and extreme strain of Islam is quite useful:

Here once again Saudi Arabia plays a critical role, through its control of Wahabi Sunnis turned into terrorist jihadis willing to sabotage, bomb, assassinate, blow up and otherwise fight any target designated as an enemy of “Islam,” the euphemism for Saudi Arabia acting as U.S. client state. (Religion really is not the key; I know of no ISIS or similar Wahabi attack on Israeli targets.) The United States needs the Saudis to supply or finance Wahabi crazies. So in addition to playing a key role in the U.S. balance of payments by recycling its oil-export earnings into U.S. stocks, bonds and other investments, Saudi Arabia provides manpower by supporting the Wahabi members of America’s foreign legion, ISIS and Al-Nusra/Al-Qaeda. Terrorism has become the “democratic” mode of today's U.S. military policy.

Hudson also notes that the term "democracy," when used in the context of foreign policy, has very little to do with what a normal person would regard as democracy. Rather,

From the U.S. vantage point, what is a “democracy”? In today’s Orwellian vocabulary, it means any country supporting U.S. foreign policy. … The antonym to “democracy” is “terrorist.” That simply means a nation willing to fight to become independent from U.S. neoliberal democracy.

And this leads us to Iran. Hudson explains:

America’s hatred of Iran starts with its attempt to control its own oil production, exports and earnings. It goes back to 1953, when Mossadegh was overthrown because he wanted domestic sovereignty over Anglo-Persian oil. The CIA-MI6 coup replaced him with the pliant Shah, who imposed a police state to prevent Iranian independence from U.S. policy. The only physical places free from the police were the mosques. That made the Islamic Republic the path of least resistance to overthrowing the Shah and re-asserting Iranian sovereignty.

Thus, we got the Islamic revolution of 1979 which has led to forty years of Iran refusing to play ball in the US dollar maintenance regime that is demanded of other oil-producing nations in the Middle East.

The US is unlikely to let up on this effort so long as Iran continues to refuse to take orders from DC on these matters. It's true that the US can't do much about China and Russia. But Iran — unlike North Korea, which wisely secured nuclear arms for itself — remains an easy target because of its lack of nuclear capability.

Being a leftist, Hudson includes some unfortunate stuff about "neoliberalism," as if low taxes and freedom to trade were somehow driving global war. Hudson also concocts a theory about how this oil-dollar policy is driving global warming. That's a bit of a stretch, but the connection between foreign policy and the US dollar that he identifies is a key factor that tends to be almost universally ignored by the mainstream media. As China and Russia work ever harder to undermine the dollar and its geopolitical position, small countries like Iran will become even more important in the US's drive to maintain the dollar's status quo. But it remains to be seen how long the US can keep it going.

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How the Soviets Replaced Christmas with a Socialist Winter Holiday

12/10/2019Ryan McMaken

Leftist revolutionaries have long been in the habit of reworking the calendar so as it make it easier to force the population into new habits and new ways of life better suited to the revolutionaries themselves.

The French revolutionaries famously abolished the usual calendar, replacing it with a ten-day week system with three weeks in each month. The months were all renamed. Christian feast days and holidays were replaced with commemorations of plants like turnips and cauliflower.

The Soviet communists attempted major reforms to the calendar themselves. Among these was the abolition of the traditional week with its Sundays off and predictable seven-day cycles.

RELATED: "When the Communists Abolished the Weekend" by Ryan McMaken]

That experiment ultimately failed, but the Soviets did succeed in eradicating many Christian traditional holidays in a country that had been for centuries influenced by popular adherence to the Eastern Orthodox Christian religion.

Once the communists took control of the Russian state, the usual calendar of religious holidays was naturally abolished. Easter was outlawed, and during the years when weekends were removed, Easter was especially difficult to celebrate, even privately.

But perhaps the most difficult religious holiday to suppress was Christmas, and much of this is evidenced in the fact that Christmas wasn't so much abolished as replaced by a secular version with similar rituals.

Emily Tamkin writes at Foreign Policy:

Initially, the Soviets tried to replace Christmas with a more appropriate komsomol (youth communist league) related holiday, but, shockingly, this did not take. And by 1928 they had banned Christmas entirely, and Dec. 25 was a normal working day.

Then, in 1935, Josef Stalin decided, between the great famine and the Great Terror, to return a celebratory tree to Soviet children. But Soviet leaders linked the tree not to religious Christmas celebrations, but to a secular new year, which, future-oriented as it was, matched up nicely with Soviet ideology.

Ded Moroz [a Santa Claus-like figure] was brought back. He found a snow maid from folktales to provide his lovely assistant, Snegurochka. The blue, seven-pointed star that sat atop the imperial trees was replaced with a red, five-pointed star, like the one on Soviet insignia. It became a civic, celebratory holiday, one that was ritually emphasized by the ticking of the clock, champagne, the hymn of the Soviet Union, the exchange of gifts, and big parties.

In the context of these celebrations, the word "Christmas" was replaced by "winter." According to a Congressional report from 1965,

The fight against the Christian religion, which is regarded as a remnant of the bourgeois past, is one of the main aspects of the struggle to mold the new "Communist man." … the Christmas Tree has been officially abolished, Father Christmas has become Father Frost, the Christmas Tree has become the Winter Tree, the Christmas Holiday the Winter Holiday. Civil-naming ceremonies are substituted for christening and confirmation, so far without much success.

It is perhaps significant that Stalin found the Santa Claus aspect of Christmas worth preserving, and Stalin apparently calculated that a father figure bearing gifts might be useful after all.

According to a 1949 article in The Virginia Advocate,

at children’s gatherings in the holiday season … grandfather frost lectures on good Communist behavior. He customarily ends his talk with the question “to whom do we owe all the good things in our socialist society?” To which, it is said, the children chorus the reply, ‘Stalin.’

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How Austrian Economics Helps Entrepreneurs Understand The Mind Of The Customer

11/14/2019Hunter Hastings

On the Mises Institute’s Economics For Entrepreneurs podcast, Dr. Per Bylund has stated more than once that entrepreneurs who can develop an understanding of both the laws of economics and the mind of the customer can thereby create a competitive advantage and a successful business.

The laws of economics he refers to are the principles of Austrian economics, including customer sovereignty, subjective value, and dynamic flexibility in resource allocation. Our podcast has covered these and many more from the entrepreneurial perspective. We pursue a value-dominant logic: that the role of the entrepreneur is to facilitate valued customer experiences; that value is in the mind of the customer; and that the tools of value facilitation for the entrepreneur are empathic diagnosis and imaginative innovation.

In other words, entrepreneurs need to understand the mind of the customer. Does this mean that we are crossing over some demarcation line between economics and psychology? Not at all. Economics seeks to explain why economic actors behave in the ways we observe them behaving. What motivates them? What incentives are at work? How do they make choices? The answers to these questions can form the building blocks of entrepreneurial success.

The analytical tools for the construction of an understanding of the mind of the customer are all freely available from the Austrian economics canon. In a new e-book, Understanding The Mind Of The Customer, a publication of the Mises Institute’s Mises For Business project, we offer an ordered presentation of some of the most important of these tools for entrepreneurs.

The Means-Ends Ladder

People select the means that they judge will best help them achieve their self-selected ends. It’s helpful for entrepreneurs to visualize the means-ends progression as a ladder or a pyramid. At the top are the ultimate ends that people pursue. Those ends are always values that they hold dear — values such as “a life of comfort” or “family security”. They are not material. People buy material things because they make a judgment about how those things will contribute to a feeling or an experience they value.

Just below the highest values on the means-ends ladder for consumers are the emotional benefits experience as a result of consuming an offering from an entrepreneur. These benefits are feelings, and it is through feelings that consumers experience economic value. For a consumer of a cola beverage, the emotional benefit might be feeling refreshed or energized or even joyful. If the beverage is consumed in a group setting, there might be a feeling of bonding or shared fun. Feeling better is a benefit that consumers seek from all their economic transactions. Feeling better is a means towards the achievement of higher values.

Supporting the emotional benefits, in the sense of occurring before them on the means-end ladder, are functional benefits. To continue with the cola beverage analogy, these might be good taste, and a distinctively enjoyable carbonated mouthfeel. The beverage container might be particularly convenient, and it may cool quickly in a refrigerator. The functional benefits are the means for the consumer to experience the associated emotional benefits.

The functional benefits result from features and attributes of the product or service itself. The consumer experiences these via sense perception, and they enable — are the means to — the experience of the higher-level benefits.

The base of the means-end ladder is the assortment of contact points at which the entrepreneur can make the consumer aware of the offering that will eventually escalate them through all these rungs of the means-end ladder. Contact points might include a retail store, or online advertising, or a coupon in the mail or word of mouth recommendation.

The means-end ladder is a business tool built on Austrian causal-realist logic. Stripping away the academic terminology, we can provide entrepreneurs with a useful tool with which to analyze the mind of the consumer when they contemplate, choose, consume and experience an economic good.

The Subjective Value Cycle

Subjective value is an important subject in economics. It’s even more important in entrepreneurship, where it is fundamental to what entrepreneurs do. It’s the critical factor in entrepreneurial success. Business schools talk about “creating value” and “value added” as if value creation were an objective process. But it’s not. And businesses can fail if they misunderstand subjective value, because they can easily produce something for which there is no market.

Value lies entirely in the mind of the consumer or customer. Therefore, the task of the entrepreneur is to try to understand consumers’ feelings and preferences, and to design a value experience — an experience in which the consumer will achieve desired ends by utilizing means made available by the entrepreneur. Ends are individually selected, and the entrepreneur can not forecast the ends for which a value proposition might be utilized. Value is uncertain.

Utilizing empathic diagnosis to give dimension to (some) customers’ ends, the entrepreneur designs a potential consumer experience — a good or service that is unique — for validation. Using economic calculation and resource assembly, the entrepreneur advances the design to the marketplace at a cost that he or she believes will yield a profit because the value it represents to the customer is greater than the price the consumer will pay, which is, in turn, higher than the production cost.

If the consumer does, indeed, experience value, the entrepreneur is encouraged to produce more and spread the word to additional consumers of the opportunity to experience value. Advertising and marketing are fundamental to the value formation system. More consumers experience the value, and spread the word even further. Some make suggestions about further improvements to the experience, which the entrepreneur can attempt to incorporate in future iterations. The process continues endlessly and the entrepreneur and the consumer practice continuous dynamism.

The subjective value cycle is a system of value formation. Our free e-book provides a map of the system for entrepreneurs to follow.

Values As A Basis for Brand-Building

People adopt values as ends in themselves, and as a signpost for prioritizing their preferences and choices. Entrepreneurs who fully understand and embrace consumers’ system of values can create strong brands — forms of advantaged intellectual property — and build strong relationships of loyalty and preference for their offerings.

What are the values that consumers hold so dear? Milton Rokeach was an American sociologist who wrote The Nature Of Human Values, reporting on his extensive research. There are 18 values that are classified as the “highest” that people strive for — they define people’s lives. They include Freedom, Family Security, A Sense Of Achievement, Wisdom, Pleasure, and 13 more.

In addition, Rokeach also identified 18 instrumental values: guides to their behavior when they are pursuing their ends, and a signpost for prioritizing their preferences and choices.

Entrepreneurs who can identify the values that guide customers’ choices can be more accurate in designing and communicating the ways that their offerings fit into people’s lives. When consumers recognize their own values embedded in brands and branded communications, a strong bond is created.

Empathy For Entrepreneurs

Empathy is the most important skill in entrepreneurship, and it is critical to achieving the uniqueness that characterizes successful entrepreneurial offerings. Uniqueness is a characteristic of customer perception, and empathy helps entrepreneurs to define and understand others’ perception.

Empathy is a human action: the action of understanding and even experiencing the feelings, thoughts and experience of another. Entrepreneurs employ it to understand subjective needs, dissatisfaction and unease among target customers — with a view to meeting the need, resolving the dissatisfaction and ending the unease. Entrepreneurs begin the value design process with an empathic diagnosis.

The new e-book provides a detailed description of the use of an empathic diagnosis tool called a Contextual In-Depth Interview. Understanding consumer feelings in the consumer’s own context is the key to diagnostic accuracy. Processing the results from the diagnosis will help the entrepreneur to improve consumer experience functionally, cognitively and emotionally. Consumers can be confident of a future feeling of betterment because of the empathy

the entrepreneur has exercised in developing an understanding of them, their dissatisfactions and their unique individual preferences. The entrepreneurial system is best for everyone because it’s based on empathy.

The Customer’s Opportunity Cost

Entrepreneurs are not in competition with other entrepreneurs. Rather, they compete with the customer’s opportunity cost. Opportunity cost is what the customer gives up in order to purchase your offering. Is that a direct substitute? An indirect substitute? Or a different use of the same dollars? (“Does she buy the dress or buy the handbag?”) Or, quite possibly, non-purchase or savings. Understanding the customer’s opportunity cost is an important part of making a sale.

Successful entrepreneurs train themselves to see opportunity costs in the way the consumer sees them. To do so, entrepreneurs can employ an opportunity cost calculator. It solves an equation: consumer value = the value of what the entrepreneur is offering minus

the customer’s perceived opportunity cost of acquiring it. The consumer’s cost is not only in dollars (and their alternative uses for these dollars) but also in the time and effort and convenience and fun of making the transaction.

The entrepreneur applies the discipline of the opportunity cost calculator for every potential consumer transaction.

Customer Journey Mapping

There is a technique to compress all of this Austrian entrepreneurship thinking into a single analytical tool: the customer journey map. This technique decomposes a customer’s purchase and usage of a service into a series of stages, and asks the question, “What is the customer doing, thinking, experiencing and feeling at each stage?”

This technique is a sound application of Austrian economics. It starts with human action — what is the observed behavior? Then, it asks about motivation (why did they act?). Finally, it examines the consequences of the action — customer experience — and tries to probe the emotional benefit, defined as feeling.

Customer journey mapping enables the kind of negative feedback that is most useful in the service improvement process. Does the customer’s experience fall short? When? At what stage? Why? Under what circumstances? All of these negative feedback hooks can be pointed towards opportunities to improve, further enabling the dynamic entrepreneurial system of betterment.

A Valuable Bundle of Tools and Techniques

Our Understanding The Mind Of The Customer e-book describes these six techniques, with accompanying tools, either in the text or via e-links. You can preview one chapter , and, if you would like to receive more, we’ll send it via e-mail to a valid address.

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Hustlers' High Time Preference Does Them In

10/16/2019Doug French

The movie “Hustlers” is generating Oscar buzz and box office cash.  Words like “empowering” and “so much effing fun” are describing the JLo vehicle, based on the 2015 New York Magazine article “The Hustlers at Scores,” penned by Jessica Pressler.  Ramona (Lopez) and Destiny (Constance Wu) have been described as entrepreneurial for their client fishing, drugging, and stealing exploits.    

The critics are koo koo for JLo, with Nigel Smith writing in People, “In a tweet following the premiere, Vulture‘s Hunter Harris praised the film as ‘perfect’ while predicting that Lopez will be nominated for her first Oscar for her performance.”   

“Hustlers” cost $20 million to make and is closing in on $100 million in box office receipts world-wide after only a couple weeks of showings.  There was a healthy Friday night crowd at a local theater when I saw the film, with the audience 80-90 percent female. It was a girls' night out to see JLo and company drain the credit cards of Wall Street A-holes--pre and post 2008 financial meltdown.  

While much of the movie is set in a strip club, there is little nudity.  The film, at 110 minutes is larded up with scenes of high-end shopping and champagne corks popping. The screenplay directly lifts passages from Ms. Pressler’s article, but filler was needed to make it a full-length feature.  Multiple entrances, Magnificent 7-style, are provided by JLo and co-stars, along with celebrations of big scores. Eventually, hearing Ramona call someone (everyone) “BaayyBee!” might touch your last nerve.  

The story does connect with the 2008 financial crash, but you won’t mistake it for “The Big Short” or “Margin Call.”  Ramona takes Destiny under her wing and explains the three levels of Wall Street guys--low level, honest, but no money; mid-level, somewhat dishonest, some money; those at the top who cheat people all day and have lots of money to spend at strip clubs.      

After the crash and Wall Street layoffs, strip clubs go dead in the city and the enterprising, let’s call them performers, work their old money contacts to get guys into the club.  After Ramona has a customer pass out drunk and she swipes his credit card for five grand, she has a Hayekian discovery inspiration, believing she can perfect the process. Pressler writes, 

Of course, it didn’t always work. Sometimes they’d go through the whole performance and the guy would be too tired to go out; they would offer him drugs for extra energy, but he would be too lame to take them. In the face of such situations, Samantha had come up with the innovation that was making her rich: a special drink spiked with MDMA and ketamine.

Samantha is the real life Ramona.  

This is where the entrepreneurship turned to fraud.  While these women showed some entrepreneurial can-do spirit, their high time preferences did them in.  They spent everything they made and when Ramona learns a certain customer has $50,000 available credit on his card, instead of drawing only some of it as Destiny suggests, Ramona takes all 50k.  “That’s the problem with these girls,” Rosie (the real Destiny) told (Pressler) of her cohort (Ramona/Samantha), shaking her head. “I see the forest. They just wanted a $50,000 tree.”  

The movie portrays most men as stupid or worse.  Ramona tells Destiny, while doing a lap dance, “Drain the clock, not the c--k.” The occasional good guy is viewed as a hopeless sap, who can be strung along for money as needed.  

JLo is, no doubt, extraordinary at age 50.  However, her performance is not anymore Oscar Worthy than the acting of any aging stripper hustling at any club in America.  In fact, after seeing “Hustlers” you will leave feeling the same as leaving any strip joint--cheap and sleazy.    

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Henry Hazlitt's Forgotten Book on Willpower

09/26/2019Jeff Deist

Self-help is largely a disreputable genre, in main because most answers to life are found internally, through trial and error. Digital charlatans, many of whom lack any real success in life beyond their dubious roles as "life coaches," litter our social media feeds. The fundamental question goes unasked and unanswered: "Why should anyone listen to you?" 

The old wisdom of truly self-made men like Dale Carnegie and Og Mandino, rooted in common sense and discipline rather than unwarranted self-regard, is largely gone now. But another unlikely source exists in the man of Henry Hazlitt, the great economics journalist who made himself into a financially successful writer and aristocratic figure—despite the modest circumstances of his birth.

Early in his career, just a few years following his Air Force stint during the Great War, he wrote a curious short book titled The Way to Will Power. It reads as you might expect from a young writer still finding his voice and style. But it is absolutely fascinating, and can be read (free here!) in just an evening. So put aside your Jordan Peterson or Gary Vaynerchuk1 videos and spend some worthwhile time inside the mind of the great Henry Hazlitt!

As a taste, here is Hazlitt's conception of willpower as the maintenance of a dominant, sustained desire. It is time preference applied to life's goals:

Will-Power, then, may be defined as the ability to keep a remote desire so vividly in mind that immediate desires which interfere with it are not gratified.

Understand me, I pass no moral judgment on the will per se. I do not condemn it, neither do I praise. It may be evil as well as good. A man may devote years to avenging himself upon another. He may put up with inconveniences; endure privation; submit to insults, humiliation, and risks of exposure, all of which he could avoid if he would consent to give up his aim. Napoleon consecrated his colossal will to the once glorious and now discredited occupation of trying to conquer the world.

But will does imply thought of the future. It is ready, if need be, to sacrifice the present to the future. And that is one of the great distinguishing marks between the civilized man and the savage. The savage did not save; he did not plant crops; he did not provide for old age. He did not even set aside food for the next day. When he got a piece of meat, he gorged himself, until he slept. He died young.

  • 1. I am not implying Messrs. Peterson or Vaynerchuk are charlatans, but merely that old wisdom should be sought out.
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How Entrepreneurs Can Survive the Next Recession

09/20/2019Per Bylund

There has been increasing talk of a burgeoning recession, whether because of a historically rare decade-long economic expansion or recent reports of an inverted yield curve, which is traditionally an indication of a downturn. Any recession is hard on all Americans, but it can be particularly devastating for entrepreneurs, who often have more to lose. Not only does an economic ebb add to the uncertainty of owning and running a business, but it also means opportunities become scarcer, with fewer potential partners willing to invest, consume and otherwise enter into deals.

Recessions, of course, are famously hard to predict, but even when there's mounting evidence of a looming crisis, it can be hard to anticipate timing and how it will affect your industry. Simply closing shop is no solution. It might not even be an option. A better strategy is to prepare for the worst and make your business downturn-proof. But how does one do that? Here are four things to think about that can help make your business recession-ready ... just in case.

Full article at Entrepreneur

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Happy Birthday Hans!

09/02/2019David Gordon

Today is  Hans Hoppe's birthday. He is an outstanding libertarian theorist, in the tradition of Murray Rothbard, and his strikingly original work ranges widely over philosophy, history, and economics. Among his many contributions are a defense of self-ownership and property rights through argumentation ethics and a trenchant criticism of democracy.  He is a scholar of the highest integrity and courage, and all lovers of liberty are in his debt.

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Hanke: Business Roundtable Suffers from Economic Illiteracy

08/29/2019Steve H. Hanke

Last week, the Business Roundtable launched a major attack on property rights, the bedrock of capitalism.

In a stunning new mission statement, the Roundtable, which represents nearly 200 of America’s blue-chip companies, downgraded shareholders. According to the Roundtable, the purpose of a corporation will no longer be to conduct business with the sole objective of generating profits for shareholders. Owners of corporations (read: shareholders) will now just be one of five “stakeholders”— alongside customers, workers, suppliers and communities — that will call the tune for corporations.

The Roundtable’s new anti-capitalist mission statement promises to dilute and muffle shareholders’ voices and further politicize corporate governance.

Read the full article at USA Today
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Harvard Economics is Changing

06/26/2019Mark Thornton

Harvard has been a leader in the economics profession for better or worse. In recent years the economics department has been viewed as relatively free market oriented where human action is seen as rational, research is guided by economic theory, and where markets work most of the time. Symbolically, the introductory undergraduate course was taught for many years by conservative economist Martin Feldstein and since 2005 by Gregory Mankiw, who could be described as a middle of the road Republican. Mankiw is also the author of the leading textbook for principles of economics, a sign of Harvard's broader influence. The faculty has several noteworthy free-market-leaning members, including libertarian Jeffrey Miron.

However, there have been big signs that things are changing for Harvard economics and not for the better. In March, Markiw wrote that he would be stepping down from teaching the principles of economics course. There has been no official replacement announced, but Raj Chetty teaches a popular alternative course called Economics 1152: Using Big Data to Solve Economic and Social Problems.

This course provides an introduction to modern applied economics in a manner that does not require any prior background in economics or statistics. It is intended to complement traditional Principles of Economics (Econ 101) courses. Topics include equality of opportunity, education, health, the environment, and criminal justice. In the context of these topics, the course provides an introduction to basic statistical methods and data analysis techniques, including regression analysis, causal inference, quasi-experimental methods, and machine learning.

This data driven approach should rightly scare traditional economists because "data driven" often results in "personal viewpoint driven" conclusions, even by professional economists. In the hands of undergraduate students there is no telling how many more crackpot progressives might graduate from Harvard or how many economics departments might be influenced in this direction. 

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How Not To Use Percentages In a News Story

06/18/2019Joakim Book

Using numbers to describe the world is fraught with peril. The problem is not that you can prove anything with statistics (you can’t) or the Mark Twain quip equating statistics with lies, but rather that numbers unaccompanied by correct reference points tend to be very misleading. Hayek’s famous quote where aggregates conceal is merely a subsection of this larger mistake; to report one number (an average, a percentage, a growth statistics) when the correct or more fully elaborated story includes that number in combination with other numbers, is the major concern.

In politics (and the media tasked with covering it), the stakes to portraying numbers in one’s own favor are very high and so we see this mistake all the time. Let me address what may be the most common one: failing to divide by the correct denominator – disguised by the frequent and careless use of percentages.

Normally, claims expressed in percent such as “87.2% of American households have a computer” have straightforward meanings; the word ‘percent’ literally means “by the hundred.” If there were 100 American households, we would know that about 87 of them have a computer. Our brains correctly read “almost all American households”, since 87.2 is the vast majority of 100. If we have some additional information about the number of households (119 million) we can quickly establish that some 104 million households have a computer; the remaining 12.8% (around 15 million or so) don’t, which we know since the groups are mutually exclusive (either your household has a computer or it doesn’t) and that percentages sum to a hundred (87.2+12.8=100). Easy.

Dealing with non-negative numbers such as car-owners, votes, revenues or incomes like this is rarely a problem, and percentages are ideally suited to perform that task; they don’t require the reader to have detailed information about the number of households in order to gauge the meaning of the 87.2% digit. Numbers reported in percent give us a natural reference point: households with computers divided by all households.

This quickly changes when the subset of numbers you’re describing may include negative numbers, such as net job creation or income growth. Since those numbers can occasionally turn negative for even large subsections of a population, the meaning of “percent” is completely lost. The intuition is this: when you include negative numbers in a sample, and take a percentage based on some remaining (positive) number, individual percentages easily sum to more than a hundred.

Here’s an illustration of a hypothetical economy of three people (A, B, and C), whose combined earnings in the first year is $300 (distributed as $50 for A, $100 for B, and $150 for C). In year two, A increased his income to $70 (a 40% increase), B only earned $80 (a 20% reduction) and C’s income went from $150 to $180 (a 20% increase). The total growth of income in our economy was 10% (A+B+C equaled $300 in year one, A+B+C equaled $330 in year two), for a total income gain of $30. If we divide A’s income gain ($20) with the total income gain ($30) we find that two-thirds, or 66.7% of the income gain went to A. If we similarly divide C’s income gain ($30) by the total income gain ($30) we find that a 100% of the year’s income gain went to C. How in the world can C have gotten the entire income gain when we just said that A received two-thirds of it?

 

Year 1

Year 2

Income gain
(%)

Income gain
(dollars)

Income gain
% of total

A

50

70

40%

+20

+66.7%

B

100

80

-20%

-20

-66.7%

C

150

180

20%

+30

+100%

Sum

$300

$330

10%

+30

100%

 

Any data presented this way would quickly raise questions: clearly, there’s something wrong with the statement that A and C together received 166.7% of total income gain. Because B’s negative income gain distorts the picture, the percentages reflecting A’s and C’s share of income gains no longer mean what they usually mean.

What Has Gone Wrong Here?

As made evident in the table, we can quickly see that because A’s income gains in absolute numbers cancel out B’s income gain, any discussion including somebody’s share of income growth is seriously misleading. The shares of income growths only sum to a hundred when we include B’s negative income gain, but if we only care about the top earners – in this case C – we could easily (and erroneously) conclude that all the income gain was captured by the rich.

Let’s use another example to make the mistake even more blatantly obvious. If you remember Mitt Romney’s job creation debate in the run-up to the 2012 election, this is a great illustration of using incorrect denominators. The RNC and the Romney Campaign calculated that the net job loss from January 2009 to March 2012 was 740,000 , but that the net job loss for women during the same period was 683,000. Quick calculations show that women accounted for 92.3% (683,000/740,000=0.923). Of course, we can make this even more absurd by comparing February 2009 to March 2012 instead, where the net job loss was 16,000 jobs. On net, women lost almost half a million jobs during that period, which yields a result of around 3100% of all job losses! The straightforward meaning of “percent” as fraction of a hundred has entirely disappeared.

Because “net job losses” involve jobs created minus jobs lost, dividing the number of jobs lost by women by net job losses is entirely the wrong denominator to use. “Percent” no longer carries the straightforward meanings it usually does, but it still conveys that message to the uninformed reader.

Percentage-Flingers Abound

Sure, anybody with even rudimentary understanding of statistics knows not to use selected percentages when underlying set of numbers can be negative. But the skilled deceiver or the careless fool can still say things like “100% of the income gain between year one and year two went to earner C”, and the reader will interpret “100%” with its usual meaning (“all”). But whenever the full set includes negative numbers, the relevant denominator is no longer 100.

Either through malice or ignorance, economists and media pundits fall into this trap all the time. CNBC reported last year that “in nine states, the income growth of the top 1 percent was half or more of all income growth in that time period.” A few years ago, the inequality Joseph Stiglitz wrote that “all the growth in recent decades — and more — has gone to those at the top”. A recent working paper by Emmanuel Saez — a U.C. Berkeley economist who really should know better — summarized his findings that the “top 1% families captured 49% of total real income growth per family from 2009-2017”. Coming out of the Great Recession, the British Magazine The Economist remarked that “around 95% of the increase in American income since 2009 has gone to the top 1%”. Of course, leftist politicians make these kinds of claims on a regular basis, but they are statistically unsound.

In his successful How Not To Be Wrong, Maths professor Jordan Ellenberg concluded that “the combination of positive and negative allows you, if you’re not careful, to tell a fake story, in which the whole work of job creation in the tradeable sector was done by [a single] industry.”

Reporting percentages when the underlying dataset include negative numbers removes the standard meaning of percent. 90% of something that includes negative numbers no longer means "almost all" or "a very large majority."

Numbers presented alone indeed conceal or mislead the reader; “Always Be Comparing Thy Number” ought to be a statistical commandment. While numbers reported in percentages do provide a useful reference for the reader, dividing by the wrong denominator or involving negative numbers, seriously distorts the story. Be aware when statistical deceivers or careless fools fling percentages around. Sometimes they really shouldn’t.

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