Power & Market
Sometimes terrible things happen without any human malfeasance, and the novel Wuhan coronavirus may in fact be one of those things. It is entirely plausible the virus emerged from "wet markets" in the Hubei Province of China rather than as a fumbled (or worse, intentionally released) bioweapon cooked up by the Xi Jinping government.
We may never know, of course. But easy or readily apparent answers to the question of how this could have been avoided should be viewed with the skepticism appropriate to any state propaganda. Crises of all kinds, whether economic, political, military, or health, send ideologues scrambling to explain how such events fit neatly into their worldview. In fact, political partisans often attempt to paint any crisis as having occurred in the first place precisely because their policies and preferences have not been adopted.
The Wuhan coronavirus seems tailor-made for this. Alarmists who argue for (i) much more robust and comprehensive "public health" measures by national governments and (ii) greater supranational coordination inevitably point to infectious diseases as justification for increased state power over personal medical decisions. Scary and fast-spreading viruses are perfect fodder for their busybody argument that people cannot simply be left to their own devices.
Cross-border outbreaks of illnesses are particularly well suited to the preexisting bureaucratic desire for power over populations: they make the public much more willing to accept forced quarantines and arrests for noncompliance; forced immunizations; involuntary commitments to state facilities; curfews; restrictions on business operations and travel; and import controls. They also allow public health officials to commandeer and manage efforts to find "the cure," who then take credit when the virus eventually relents.
These are the sorts of things that authoritarian politicians want all the time. Crises simply provide an opportunity to ratchet up their power and also to accustom the public to being ordered around and taking cues from centralized government sources.
Antistate libertarians are not immune to this phenomenon of attempting to place square events into round holes. We tend to explain crises as the result of state (or central bank) interference, either created or made worse by the lack of market discipline, incentives, and property rights lacking due to state action or state regulation. Libertarians think the Food and Drug Administration, for example, kills more people than it saves by approving bad drugs and delaying regulatory approvals for promising treatments.
Moreover, an individualist libertarian perspective on bodily sovereignty poses an obvious challenge to public health. No individual should be forced to accept quarantine or immunization against his will, and in fact no individual should be forced to consider herd immunity or other collectivist notions when making medical decisions. Just as most libertarians don't think Doritos and Mountain Dew should be banned because their consumption imposes "public" healthcare costs in a statist/fascist system of mandatory insurance and tax-funded Medicaid, most don't think that individual health decisions should be overridden by politicians—even in an "emergency" outbreak situation.
So how do we reconcile public health with individual rights? Should the latter be sacrificed to protect the former?
Three observations present themselves.
First, even the highly authoritarian Chinese national state has been unable to contain the virus, though it can cordon off whole cities by dictatorial fiat and impose wholesale house arrest over cities in a manner unthinkable in Western countries. Chinese state police literally drag people suspected of carrying the virus out of their cars, forcibly put them handcuffed in hazmat vehicles, and haul them off to what amount to prison hospitals. Chinese citizens who speak out publicly against the Xi government's handling of the crisis are arrested. So, if the Chinese government can't contain it, even with martial law and control over media, how in the world do Western countries expect to do so? Imagine trying to quarantine, say, Dallas and Fort Worth!
Second, poor countries (and China is quite poor per capita compared to the West, ranking around sixty-fifth internationally) almost invariably suffer from worse public health conditions. Sanitation, nutrition, and access to drugs, facilities, and competent doctors matter a great deal when it comes to incubating infectious diseases. Richer countries are healthier countries, and the West benefits when conditions improve and modernize in the Third World.
Third, we already have de facto supranational bodies such as World Health Organization tasked with preventing and lessening the spread of diseases like the coronavirus. The WHO has been around since 1948 and hasn't prevented a host of modern epidemics like SARS and Zika; excatly what new international agency or organization will do better?
If anything, pandemics call for decentralization of treatment. After all, the best approach is to isolate infected people rather than bringing them into large hospital populations in crowded city centers. What doctor or nurse wants to work in a hospital full of coronavirus cases?
We might wish for a utopian libertarian answer to public health crises like the coronovirus, along the lines of a Rothbardian externality argument for airborne pollution. But sometimes bad things simply happen. The best hope is market incentives, the rapid application of individual human ingenuity and self-interest to the situation. Liberty is better, not perfect. And governments, including the Chinese government, are clueless as always.
In my previous article, I looked at how government regulations have created an an uneven playing field that favors natural gas and oil over coal. This time, we'll look at how regulators favor some types of "renewable" energy over others while biasing the system against nuclear energy.
Wind and Solar Favored Over Bioenergy
Renewable energy accounts for 11 percent of US energy use. The country has gone from preferring bioenergy for all three energy applications of renewable energy development to favoring wind and solar energy:
(a) In transportation, a now stagnant 5 percent of fuels are biofuels and the sector is seeing a small but growing number of heavily subsidized electric vehicles targeted for fueling with wind and solar.
(b) Heating includes a now stagnant 7 percent biomass and a small percentage (but also growing) of solar and geothermal.
(c) Electricity consumption includes a now stagnant hydro and biomass at 7 percent and 1.5 percent, respectively, while wind and solar are rapidly growing at 7 and 1.5 percent, respectively.
Again, changes have occurred mainly in the electricity sector. Germany uses only 13 percent renewable energy but has among the world’s highest levels for electricity at 38 percent of consumption, albeit at relatively high prices, compared to 17 percent in the US. Germany is continuing to use all three renewable energy sources for power generation: wind, solar, and biomass (renewable energy crops, e.g., grass biomass). The US is adding mostly wind, recently more solar, and little, if any, renewable energy crops. Germany favors all renewable energy generators with cost-based electricity prices (or so-called feed-in tariffs) in contrast to US bidding and subsidies favoring wind and solar.
US politicians, especially Democrats, favor wind and solar while hiding the true costs. Wind and solar have been favored by subsidies offered through complicated tax credits or shelters that are not even based on environmental externalities. The biggest of the two major wind subsidies expired at the end of 2019, but it has expired and later been extended in the past. Electricity monopolies absorb higher costs for transmission and load following required by the intermittent output from wind and solar in increasing consumer electricity rates. Regulators and utility monopolies won’t even disclose the economics and environmental impacts of load following.
At the CNN Climate Crisis Town Hall with presidential candidate Elizabeth Warren, moderator Chris Cuomo cited Germany as a model when asking: “When it's bright and sunny, they generate so much wind and solar that it can flood the market and puts the wholesale price almost to zero. When it's dark in the wintertime, when they need the power, they have to use nuclear, they have to look for other sources. Can the ambition meet the reality of phasing out fossil fuels?” Senator Warren replied that she would “put a lot of money into” the research and development of storage technologies.
The US will likely be able to continue expanding wind and solar, since the intermittent loads can be exported throughout regions and national levels are still low compared to Germany. However, the Democrats’ plan to rely solely on wind and solar for electricity and transportation needs will fail without significantly more breakthroughs in storage technology.
Meanwhile, US politicians are suppressing bioenergy. Since the 1990s, electricity mandates and subsidies favoring wind have made biomass power uncompetitive, and some states such as Minnesota have even mandated that renewable electricity be supplied by only wind and solar. After US ethanol mandates drove up production and grain prices too quickly from 2005 to 2008, the nation enacted mandates requiring production from the cellulose in biomass fiber, even though it costs too much to process.
Brazil has shown that it is possible to grow high-yielding renewable energy crops such as sugar cane for the production of low-cost vehicle biofuel when the biomass waste is used to cogenerate electricity and the waste heat is used for process heat. Only when utility monopolies in Brazil have blocked the sale of excess electricity have the abundant wastes become a disposal problem and made costs less competitive.
Meanwhile, the US has not been adding nuclear power plants while Germany has mothballed about half of its plants. Nuclear power isn’t growing due to the higher costs created by safety regulations. However, the US Price-Anderson Act favors the industry with a cap against liability claims arising from nuclear incidents.
US policymakers are spurning free competitive markets for government-created energy monopolies and oligopolies, and the picking of winners and losers among fuel types. The preference for monopolies that block innovation, along with favoritism for oil and natural gas, as well as wind and solar, increases the risks of economic and environmental crises, and even war.
Monopolies Favored Over Competition
US politicians favor the Organization of the Petroleum Exporting Countries (OPEC) with immunity from antitrust law. OPEC comprises fourteen member nations, mostly located in the unstable Middle East and having authoritarian governments with nationalized oil monopolies. The oil cartel has the world’s lowest-cost oil reserves and provides 60 percent of global oil exports. OPEC has caused volatility in oil prices by limiting production for price gouging and overproducing (by increasing or maintaining production) to lower prices and wipe out competitors with predatory pricing.
US politicians also favor domestic big oil and gas oligopolies, such as Exxon Mobil and Chevron. Their costs have been reduced by preferential access to government-owned natural resources, land at no charge or below fair market rate, tax shelters, and environmental exemptions. In 2005, President and former oil man George W. Bush favored fracking for oil and by-product natural gas by leading legislation granting immunity from key provisions of the Safe Drinking Water Act. Regardless of whether or not one supports the Safe Drinking Water Act, the fact remains that by granting exemptions to some firms regulators are granting them monopolistic advantages. Half of US oil and two-thirds of natural gas is now produced using fracking.
US politicians have granted monopoly franchises to natural gas and electricity distribution utilities controlling gas pipelines and electricity grids, respectively. In regulated states, others are not even allowed to use the pipelines and grids for sales to customers unless permitted by the utility and regulators. Even in the few states where potential competitors are now allowed to use utility pipelines and grids, so-called deregulation rules first strengthened monopolies and then allowed manipulation by market participants. Monopolies were strengthened by allowing the utilities to spin off their power plants to affiliates and cronies for pennies on the dollar. Markets were manipulated with preferential and complicated rules and regulations. In addition, states allow utility monopolies to block direct sales of heat and electricity to large customers by lowering their rates while raising prices on smaller customers. Some states require the monopolies to conduct so-called competitive bidding for natural gas and electricity, but they commonly just select bids from themselves and cronies.
Oil and Natural Gas Favored Over Coal
Oil and gas account for 67 percent of total US energy use, compared to 13 percent from coal, the next highest source. US energy policies favor the use of oil and natural gas for all three major energy applications:
(a) Over 90 percent of transportation fuels are made from oil.
(b) Nearly 90 percent of heating comes from fossil fuels, mostly natural gas.
(c) Over 60 percent of electricity comes from fossil fuels, mostly natural gas, followed by declining coal use.
Each of these uses accounts for nearly a third of greenhouse gas emissions. Yet, recent environmental regulations have mainly affected the electricity sector and increased the market share of natural gas at the expense of coal. The US fuel mix is often compared to that of Germany, which has used renewable energy to reduce the use of fossil fuels to less than half of electricity consumption. However, Germany prefers coal to natural gas, as fracking is banned for environmental reasons.
US politicians, especially Republicans, favor oil and gas, even though the US is among the world’s highest-cost oil producers. Since 2015, fracking for oil and natural gas has failed to attract much investment even at oil prices of about $60 a barrel. World markets appear to be headed again toward increased reliance on oil exports from OPEC. This will increase the possibility of oil and natural gas price spikes, especially if global demand continues to increase. This could change with economic recession, however, as oil price spikes have preceded ten of the last eleven recessions. Moreover, the Middle East continues to host the world’s major war zones, and even more risk is posed by Trump’s baiting of Iran and abandonment of Syria to Russia.
Meanwhile, US politicians disfavor coal burning. Coal was often a more economic fuel than natural gas for power generation before the US passed new environmental regulations against it and, unlike with fracking, strictly enforced them. The US is also disfavoring coal by favoring wind and solar energy, since natural gas power plants can more economically provide complementary power (load following) for the fluctuating output from the renewables. The loss of coal markets has impoverished many local mining communities.
It has become something of a tradition in the free market corners of social media to express shock and dismay over the possibility that New York congresswoman Alexandria Ocasio-Cortez (AOC)—an avowed "democratic socialist"—has an economics degree from Boston University.
This is how it works: AOC makes a statement that is notably antimarket, prosocialist, or generally clueless about general concepts from the field of economics.
Her critics then post responses questioning whether she actually has a degree, or saying that she must have not been paying attention in class, etc.
Here are a few examples:
But why is it so hard to believe that she has a degree in economics? It seems that far too many people have rather inaccurate ideas about what is taught in economics programs nowadays.
The truth is that there is little emphasis on understanding markets in economics programs, and little emphasis on the value of markets. The emphasis is now on using economics to justify state action in the economy. And any bias that may have once existed in favor of unhampered markets in these departments is vanishing.
The idea that economics is the dispassionate study of understanding how hiring is affected by an imposed price floor (i.e., a minimum wage) or how opportunity cost affects consumer choices is rapidly becoming hopelessly outdated.
Sure, twenty years ago that sort of thing could still often be observed. But microeconomics of that sort is now about as fashionable as other relics of that time, such as the Backstreet Boys.
Basic principles that were once a given—i.e., the notion that making labor more expensive means that employers buy less of it—are now out the window.
But this trend didn't start yesterday. For decades now, economics has been moving further and further away from teaching microeconomics and how firms and households work. Instead, by the late 1990s economics was well down the road of constructing elaborate and purely hypothetical mathematical models that had little bearing on everyday life. These model builders claimed they could predict the future, but of course, they completely missed the huge financial crisis of 2008.
Another trend in recent decades has been toward conducting an enormous number of studies that produce statistical correlations. But as the correlations can be interpreted any number of ways, they often end up being used to support whatever policy the researchers prefer. Out of this has come the drive to make economics into a discipline that depends on tinkering and trial and error. Some now insist we can't really guess what the results of a policy might be until we "test" it using methods from the physical sciences.
This is now what's fashionable, and a December article at Quartz tells us, "the new era of big data…has led economists to revisit the wisdom of some long held assumptions."
Those old "assumptions" are what many people wrongly think is a focus of economics instruction. Last year, for example, Vox happily reported that in a new introductory economics course at Harvard "[t]here’s little discussion of supply and demand curves, of producer or consumer surplus, or other elementary concepts." Moreover, it's getting easier to get through an economics program without any knowledge of economics because economists are increasingly less interested in economics proper.
As I noted here at mises.org last year, economists nowadays seem to spend a lot of time ripping off the insights of historians, sociologists, psychologists, and political scientists. They then slap some new labels on the research and give it names like "behavioral economics."
In the sorts of "economics" classes that focus on such topics, one learns that government planning is what gets a poor country out of poverty. They learn that people can't be trusted to make decisions for themselves. They learn that bailing out billionaires in the financial sector again and again has no real downside, morally or otherwise.
There's no reason to believe that a student with an economics degree is going to graduate with a deep understanding of how government intervention distorts markets or impoverishes consumers. The theoretical foundations behind such things are mentioned, of course, but at many institutions they are most certainly not emphasized.
Far more likely, one learns in these programs that central banks can be relied upon to fix almost any economic problem faced in the course of a business cycle. And if a certain problem becomes especially difficult, the answer surely lies in giving the central bank even more power.
Moreover, economics students believe all sorts of fantasies that most normal people would easily identify as obvious nonsense were they not told otherwise by "wise" economists. Only economics students, for example, are naive enough to think that central banks are "independent" and nonpolitical institutions. This is why the most revealing research on the Fed as a political institution is conducted primarily by political scientists. (For example, see John T. Woolley's "The U.S. Federal Reserve and the Politics of Monetary and Financial Regulatory Policy.")
So, it's entirely plausible that AOC took any number of economics courses and came out with good grades after learning virtually nothing accurate about entrepreneurship, wages, money, or consumer choice. What she did learn on these topics was likely built on the premise that the state ought to be intervening in and tinkering with all these things.
AOC appears to have the same beliefs that many economics grads do.
Meanwhile, AOC's critics make fun of her for being a bartender. But they're getting things backward. Being a bartender is possibly the best thing on her CV. These snide remarks about "the bartender AOC" seem to assume that bartending is some sort of disreputable line of work that only idiots pursue. It's not. "Serving" in Congress is much less impressive. Besides, tending bar is likely one of the more instructive things AOC has done as far as understanding markets goes. There's certainly no reason to assume that the economics faculty at BU was any help in this regard.
Listening to the howls from Democrats and the applause from Republicans, one would think President Trump’s proposed fiscal year 2021 budget is a radical assault on the welfare state. The truth is that the budget contains some minor spending cuts, most of which are not even real cuts. Instead they are reductions in the “projected rate of growth.” This is the equivalent of saying you are sticking to your diet because you ate five chocolate chip cookies when you wanted to eat ten.
President Trump’s plan reduces the Department of Education’s budget by nearly 8 percent, leaving the department with “only” $66.6 billion. Cuts to other departments are similarly small, while reductions in entitlement spending consist mostly of reforms that will not affect most of those dependent on these programs.
President Trump deserves credit for proposing an $11.6 billion cut in funding for the Department of State and the US Agency for International Development (USAID). Foreign aid does little to help impoverished people overseas. Instead, it benefits foreign government officials willing to do the US government’s bidding. The State Department and USAID are extensively involved in US intervention abroad, including efforts to overthrow governments.
President Trump’s budget proposes a number of increases in spending. For example, his budget spends around 900 million additional dollars on vocational education. It also includes additional spending on items including infrastructure and childcare.
Few in DC have expressed concern over the fact that President Trump’s $4.8 trillion budget proposal is the largest budget in American history. There is also little outcry from supposedly antiwar progressive Democrats over Trump’s proposal to spend hundreds of billions of dollars on militarism. This is not surprising, as many progressives are happy to support increased warfare spending as long as conservatives go along with increased welfare spending. Similarly, many conservatives are happy to support increased welfare spending as long as it means that progressives will vote for increased warfare spending. So, Congress is unlikely to approve any of President Trump’s spending cuts, but Congress will gleefully agree to all of his spending increases.
Even if Congress agrees to all of President Trump’s cuts, federal deficits will still be over $1 trillion for the next several years. However, President Trump claims that the budget will balance in fifteen years. In order to show a balanced budget by 2035, the administration assumes 3 percent economic growth for most of the next decade. This level of growth is unlikely to come to pass. Instead, the current boom will likely end soon, and the economy will experience another major recession. Signs that we are on the verge of a downturn include rising homelessness and the Federal Reserve’s bailout of the repurchasing market.
The current economic boom is built on debt, and the debt-based economy is facilitated by the Federal Reserve’s easy money policies. The massive amount of debt held by consumers, businesses, and especially government is the main reason the Fed feels compelled to maintain historically low interest rates. If rates were to increase to market levels, government interest payments would be unstable. This would cause the government debt bubble to burst, leading to a major crisis. However, continuing on the current path of low interest rates will inevitably lead to a dollar crisis and the collapse of the welfare-warfare Keynesian system.
Continuing to waste billions on wars abroad and failed programs at home while pretending that we can avoid a crisis via phony cuts and Fed-fueled growth will only make the inevitable collapse more painful. The only way to avoid economic disaster is to cut spending and audit, then end, the Federal Reserve.
Reprinted with permission.
President Trump's pardon of Michael Milken would have delighted Murray Rothbard. Milken, who was famous for his "junk-bond" takeovers of various companies, served twenty-two months in prison for federal crimes that involved market trading. Murray Rothbard thought that Milken was a hero. As he explained in an article written in 1989:
During the 1960s, the existing corporate power elite, often running their corporations inefficiently—an elite virtually headed by David Rockefeller—saw their positions threatened by takeover bids, in which outside financial interests bid for stockholder support against their own inept managerial elites. The exiting corporate elites turned—as usual—for aid and bailout from the federal government, which obligingly passed the Williams Act [named for the New Jersey Senator who was later sent to jail in the Abscam affair] in 1967. Before the Williams Act, takeover bids could occur quickly and silently, with little hassle. The 1967 Act, however, gravely crippled takeover bids by decreeing that if a financial group amassed more than 5% of the stock of a corporation, it would have to stop, publicly announce its intent to arrange a takeover bid, and then wait for a certain time period before it could proceed on its plans. What Milken did was to resurrect and make flourish the takeover bid concept through the issue of high-yield bonds (the "leveraged buyout").
The new takeover process enraged the Rockefeller-type corporate elite, and enriched both Mr. Milken and his employers, who had the sound business sense to hire Milken on commission, and to keep the commission going despite the wrath of the establishment. In the process Drexel Burnham grew from a small, third-tier investment firm to one of the giants of Wall Street.
The establishment was bitter for many reasons. The big banks who were tied in with the existing, inefficient corporate elites, found that the upstart takeover groups could make an end run around the banks by floating high-yield bonds on the open market. The competition also proved inconvenient for firms who issue and trade in blue-chip, but low-yield, bonds; these firms soon persuaded their allies in the establishment media to sneeringly refer to their high-yield competition as "junk" bonds, which is equivalent to the makers of Porsches persuading the press to refer to Volvos as "junk" cars.
People like Michael Milken perform a vitally important economic function for the economy and for consumers, in addition to profiting themselves. One would think that economists and writers allegedly in favor of the free market would readily grasp this fact. In this case, they aid the process of shifting the ownership and control of capital from inefficient to more efficient and productive hands—a process which is great for everyone, except, of course, for the inefficient Old Guard elites whose proclaimed devotion to the free markets does not stop them from using the coercion of the federal government to try to restrict or crush their efficient competitors.
Former Mises Fellow Peter St. Onge, senior economist at the Montreal Economic Institute cowrote an op-ed in the Globe and Mail (Toronto) that highlights the increasing importance of part-time workers and the benefits they provide customers over traditional lines of work.
Casual or “gig” work has been around a very long time, but the sharing economy has put freelancers in the spotlight. It’s especially important for workers who can only work part-time: single parents, college students, the elderly, and seasonal workers. These groups have long counted on the ability to work flexible hours when they really need to, be they waiters, nannies, deliverymen, or translators.
So far, labour laws have helped by sheltering casual workers from the hassle of paperwork, and employers from the risks inherent in hiring permanent employees. Unfortunately, regulators are becoming hostile to this new job creation. California Assembly Bill 5 (AB 5), which took effect on Jan. 1, effectively turns freelancers into employees. The goal was to improve conditions for gig workers, but, in practice, it has meant the disappearance of their jobs. Mass layoffs of part-time and full-time freelance workers have occurred in the media and the film industry, with fears of more to come.
The experience of California illustrates why governments should avoid interfering in the sharing economy. Despite good intentions, forcing employers to provide benefits to contract workers risks pricing low-wage workers out of employment altogether. Studies have also shown that even when the company is paying for the benefits, the costs get directly passed along to the employees. So even workers who don’t lose their jobs end up paying for the mandated benefits through reduced wages.
Empirically, job losses from mandatory benefits disproportionately target low-income workers. A similar phenomenon occurred in Ontario where an Montreal Economic Institute study estimated that 50,000 young workers lost their job[s] in the wake of a hike in the minimum wage from $11.49 to $14 on Jan. 1, 2018.
Thank to Thorvaldur Gylfason for pointing out his 2009 article examining the economic implications of Iceland's small population of only about three hundred thousand people.
Gylfason noted how Icelandic politicians have claimed that the country's small population was "our most serious social evil," and that the critical mass for a well-functioning society must be much larger than was currently available.
But Gylfason notes:
Yet, medieval Florence and Venice flourished with 70,000 and 115,000 inhabitants. They were better situated in Europe and better served by sea lanes than Iceland was and could, therefore, easily make up for their small size through trade. Economic integration is vital to small countries. The population of ancient Athens was 200,000. Too small? Hardly.
Or take modern Barbados (pop. 300,000), independent since 1966, a prosperous and stable democracy where virtually every child completes primary and secondary school and life expectancy matches that of the US. Is Barbados too small? No. Barbados has not even felt it necessary to pool its currency with its eight neighbours comprising the East Caribbean Currency Union (ECCU, pop. 600,000). Since 1975, the exchange rate of the Barbados dollar has been kept fixed vis-à-vis the US dollar at a rate of 2 to 1 (and the ECCU, meanwhile, pegged the East Caribbean dollar to the US dollar at a rate of 3 to 1).
Is there a lower bound on population below which countries cannot stand on their own feet? Yes, but it seems to lie far below 300,000.
The answer lies in free trade. Gylfason writes:
Fuelled by free trade, small nations have increased in number. Without external trade, many small nations would be inefficient on account of their small size and would seem, on economic grounds, to need to merge with larger nations. Foreign trade relieves small nations of this need by enabling them to reap the benefits of scale and scope through trade.
This is how trade has helped increase the number of sovereign states over the years. Without vivacious trade, the costs of small size to many countries would almost surely outweigh the gains. The inability of a small country to benefit from specialisation by exploiting its comparative advantages would by itself be disastrous.
Not that everything is fine when a society is small:
Even if small countries can succeed by being open and peaceful, their small size presents challenges. Strong checks and balances are imperative in small, heavily politicised, clan-based societies to prevent relations between politics, banking, and business from becoming too cosy, not to say incestuous. Here Iceland failed. High-quality recruitment into political service and careful selection of key public officials, from abroad if needed, are also important in a small country with a small pool of appropriate local talent. Here, too, Iceland missed the boat.
But the benefits do outweigh the costs, Gylfason concludes:
Some observers at the time thought Belgium and Portugal were too small to be viable as independent countries. The tables were turned in the twentieth century when centrifugal forces prevailed, facilitated by the worldwide liberalisation of trade after World War II. Iceland attained home rule in 1904 and transformed itself from economic parity with today‘s Ghana in 1900 to parity with Scandinavia in 1980 (Gylfason 2008a). Gradual liberalisation of trade from 1960 onward played an important role in Iceland’s transformation.
One consequence of the social accord that tends to go along with small size may be a shared interest in education, as children in cohesive societies are less likely to be deprived of schooling. Countries with 300,000 or fewer inhabitants keep their young people in school a year longer on average than larger countries, in the sense that the small countries have an average school life expectancy—i.e., the expected number of years of schooling that will be completed as measured by UNESCO—of 13 years compared with 12 years elsewhere.
Another consequence of small country size, especially in a strategic location, may be that neighbours may be willing to share the costs of national defence. France spends 2.4% of its GDP on national defence compared with 1.1% in Belgium and 0.8% in Luxembourg. This tendency may offset some of the higher per capita cost of public services in small countries. Moreover, and this may surprise you, small countries tend to have less corruption than large countries as measured by Transparency International. In 2008, the Corruption Perceptions Index—which ranges from 1.4 in Somalia to 9.4 in Denmark—was 4.6 on average in countries with 300,000 or fewer inhabitants compared with 4.0 in larger countries.
As I noted in this article, both the empirical and theoretical evidence suggests that smallness is no impediment to growth and economic success. Smallness means more openness to trade, less aggressiveness militarily, and studies have shown that small countries have better growth rates in many cases.
In his book Human Scale, Kirkpatrick Sale covers this topic of the "ideal" size for a political entity. Sale suggests that an independent city or city-state probably reaches its ideal size for self-rule around fifty thousand people. He also notes that medieval cities that were larger than this tended to break themselves up into smaller, adjacent independent pieces, with the idea being that large scale breeds alienation, crime, and political dysfunction.
Today the Senate Banking Committee held a hearing for President Trump’s two most recent Federal Reserve nominees. In one chair sat Christopher Waller, vice president and director of research at the Federal Reserve Bank of St. Louis, whose dreadfully dull answers could have been the product of a bot forced to watch one thousand hours of central bank testimony. Luckily for those watching, most of the questions were directed towards the far more intriguing—and controversial—Judy Shelton.
Although by no means an Austrian, Judy Shelton’s record includes public support for a modern gold standard, criticism of the Fed’s response to the financial crisis, and even a comparison of America’s central bank to Soviet central planners. On the topic of competing currencies, Ms. Shelton once referred to Bernard von NotHaus, a man arrested by the US government for the production of silver “Liberty Dollars,” as the “Rosa Parks of monetary policy” for his willingness to challenge the Fed. Beyond monetary policy, she cited government deposit insurance as a program that risks creating moral hazard, suggested that the US could pay off its public debts by selling off assets such as the US Postal Service and federally held public lands, and even publicly questioned the accuracy of government inflation measures.
The recounting of the greatest hits of Judy Shelton offered a glimpse of what it would look like to actually drain the swamp of central bankers.
Of course, all of this was sharply—and at times uncivilly—criticized by duly elected economic midwits who sought to lecture to Shelton while desperately relying upon the prepared questions of legislative aides.
Senator Richard Shelby, at one point the chairman of the banking committee, was particularly appalled at the notion of nominating a Federal Reserve candidate so outside the mainstream. His grilling of Ms. Shelton included sagely pointing out that the amount of gold in the world is worth less than the American GDP and suggesting that the gold standard was a product of the days when the US was a “barter economy.”
Of course, it is a reflection of the dilapidated state of modern economics that Shelby’s ignorance would make him a safer choice for the Federal Reserve than either Shelton or her friend James Grant.
It is also sad to see Shelton, obviously a very intelligent woman, take the strategy of trying to sing from a more traditional script rather than take the opportunity of the hearing to defend the ideas she has long supported. Although there were times when she offered clever outs to her testimony, such as declaring that she would never want to “go back” to any previously existing monetary system (which is not the same thing as seeing a potential use for a newly priced gold backing in the future), for the most part Shelton attempted to try to present herself as a more status quo figure.
In one of the more entertaining exchanges, Senator John Kennedy of Louisiana pushed Ms. Shelton on what she would recommend if faced with an abrupt financial crisis. Her response, unfortunately, was more of the same—taking interest rates to 0, more QE. It was an answer so uninspired that it was basically repeated by Mr. Waller.
Shelton was also attacked for apparent changes in her policy prescriptions during the Trump regime.
Although she once (accurately) blasted the Obama administration for monetary and fiscal recklessness, she has advocated for more accommodative policy in recent years. One could perhaps forgive Shelton for the sin of identifying the Federal Reserve for what it really is—a political institution—but her nomination is likely to be killed by senators who prefer to maintain that the illusion it is anything but.
In fact, shortly after the hearing, Washington was already filled with whispers about her nomination already being dead.
If true, Congress will miss the opportunity to actually act on the goal that is so often given lip service on the Hill—increasing diversity on the Fed. Beyond the irrelevant point of her gender, Judy Shelton would have brought a heterodox economic perspective from well beyond the echo chamber of modern central banking. Having received her PhD in business administration from Utah State University, she is far removed from the elite institutions that are quite effective at wiping out common sense.
At least the Fed will have the addition of Mr. Waller, who can offer such pearls of wisdom as:
The fiat monetary system we have around the world works well as long as it is managed well by the central bank.
Where would America be without such invaluable insight!
Last summer when we were both at Mises University, Peter Quiñones and I sat down in the studio and talked about immigration for a full hour. I think we've provided enough to annoy both open borders people and hard-core restrictionists. I cover the horribleness of border guards, the unconvincing nature of economic arguments against immigration, Ludwig von Mises's highly practical views of immigration policy, and the real political and sociological issues potentially raised by large-scale migration.