A Note on Apple's Less Than Sinister "Tax Avoidance"

A Note on Apple's Less Than Sinister "Tax Avoidance"

11/07/2017Jeff Deist

Articles about the tax exploits of global corporations generally are short on facts and long on innuendo. This recent missive from the Associated Press about Apple is a standard example of the genre: full of breathless accounts (Bermuda! Loose rules! Shelters!) that imply sinister motives behind standard business practices. Call it whatever you like, but tax avoidance is perfectly ordinary for a public company like Apple. It owes shareholders an obligation to operate in a cost-effective manner. Taxes are a cost, not some social duty owed to the world.

It's tempting to think progressives like Apple CEO Tim Cook deserve scrutiny on grounds of hypocrisy, but we should resist this temptation. Apple has done nothing wrong, nothing illegal, and nothing immoral. Every dollar it saves in taxes goes somewhere much better than Washington DC (such as into product development or even to Apple's hedge fund in Nevada). 

"Offshore" simply means not within US tax jurisdiction. Every other sovereign country technically is offshore by this definition, so journalists should dispense with the nefarious language. Reporters and even tax professionals use lazy jargon to insinuate unregulated activity is happening somewhere, without US oversight. Yet I'm confident the AP understands that actual business activity occurs outside the US, some of which presumably is not the business of the IRS or American regulators. This maniacal insistence on taxing every US person or business on everything they do around the globe is the unfortunate result of our "worldwide" income tax system. Blame that system of government greed, not corporate greed, for complex tax structures and creative avoidance.

Moreover a "tax shelter" is any device that permits a taxpayer to reduce his/her/its tax bill. The garden variety mortgage interest deduction is as much a shelter as the most complex corporate tax structure (e.g. the "Double Irish with a Dutch Sandwich," preferred by big US tech companies until a few years ago). Living in Texas creates an income tax shelter relative to living in California. Buying and holding stocks for more than a year shelters long term investors from paying higher capital gains rates than day traders. And so forth. Shelters are a good thing.

Finally, neither Apple nor any other US multinational corporation "avoids tens of billions of dollars in taxes by using overseas havens." At most they delay paying US taxes. They do not avoid nor postpone income foreign taxes. Those  "havens" are real countries with real people who buy Apple devices, including nations across Europe and Asia. When Apple devices are made in foreign countries, then sold in foreign countries by foreign salespeople, when the money collected remains in that foreign country, and Apple pays income tax to that foreign country, why should Uncle Sam demand a cut? This is not tax evasion, this is what doing business on a global scale looks like. If and when Apple decides to repatriate wholly foreign earnings to its US parent company in the form of a dividend, then the IRS can have its way. But it's outrageous to insist on taxing income that has not been paid. It's also a form of hubris that imagines all business earnings around the world should roll up into the US government's coffers.

Apple is not the British East India Company. It need not pay tribute to Washington, DC as a surrogate Queen.

 

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Biden's Ukrainian Albatross

01/24/2022Daniel McAdams

Then-Secretary of State Colin Powell is given credit for popularizing the “Pottery Barn” rule of foreign policy. Though he denies using that exact phrase, in arguing against what became the disastrous 2003 US attack on Iraq Powell made the point that, as in Pottery Barn, “if you break it, you own it.”

Bush and his neocons—ironically with the help of Colin Powell himself—did indeed break Iraq and the American people as a result “owned” Iraq for the subsequent 22 years (and counting). It was an idiotic war and, as the late former NSA chief Gen. Bill Odom predicted, turned out to be “the greatest strategic disaster in American history.”

Attacking and destroying Iraq—and executing its leader—not only had no value in any conceivable manner to the United States, it had negative value. In taking responsibility for Iraq’s future, the US government obligated the American people to pick up the tab for a million ransacked Pottery Barns.

There was no way out. Only constant maneuvering and manipulation to desperately demonstrate the impossible –  that the move had any value or even made any sense.

So it is with Ukraine. In 2014 the Obama/Biden Administration managed to finish what Bush’s neocons started a decade before. With the US-backed overthrow of the Ukrainian government that year, the US came to “own” what no one in their right mind would ever seek: an economic basket case of a country with a political/business class whose corruption is the stuff of legend.

Rather than admit what a colossal blunder the whole thing had been, the US foreign policy establishment doubled down.

“Oh, this might be a neat tool to overthrow our own election: let’s pretend Trump is Putin’s agent!”

In fact Trump was impeached because a certain Col. Alexander Vindman—himself of Ukrainian origin and doing the bidding of a Ukrainian government installed by Washington—solemnly testified to Adam Schiff and his Democrat colleagues in charge of the House that Trump was clearly Putin’s puppet because his lack of enthusiasm for continuing to “own” Ukraine went against “the Inter-Agency Consensus.”

We “own” Ukraine and there is no way back—at least if the US foreign policy establishment has its way.

That is why our hapless State Department today continues to peddle the fiction that Russia is about to invade—and thus “own”—Ukraine. US foreign policy is one of projection: accuse your rivals of doing what you yourself are doing. No sane country would want to “own” Ukraine. Except the Beltway Think Tank class, thoroughly infused with military-industrial complex money.

That is why the US government, though its Embassy in Kiev, is bragging about the arrival of $200 million in lethal aid, all pointed directly at Russia.

That is why the US State Department is maintaining the fiction that Russia is about to launch a ground war to occupy Ukraine by dramatically announcing an “evacuation” of all “non-essential personnel” from its Embassy in Kiev.

It’s just too bad that we don’t share the opinion of who are really “non-essential” State Department personnel in Kiev: the last person out could be asked to turn off the lights.

By overthrowing an elected government in Kiev in 2014, the US government disenfranchised millions of voters in eastern Ukraine who voted for the overthrown president. Those voters unsurprisingly came to view the US-installed regime as illegitimate and sought self-rule under the concept of self-determination. As ethnic Russians, many of these successfully sought Russian passports.

Russia has been clear for a long time about Ukraine: it will not allow an armed invasion of eastern Ukraine that would result in the deaths of thousands of Russian citizens. Were the shoe on the other foot, the US—and any country—could be expected to react the same way.

The US is nearly the last country on earth that still holds to the WWII-era concept of war for territorial gain. Russia wants to “own” Ukraine like most people want to “own” a 2003 Saturn. That is why despite neocon/neo-liberal hype, magnified by the lock-step US media, Russia is not about to invade Ukraine.

This fantasy is being pushed by those who desperately need to continue to gin up enthusiasm for a thoroughly idiotic and counterproductive imperial enterprise.

Biden while vice president sowed the regime change winds in Ukraine. Now his inept Administration will reap the whirlwind of that continuing train wreck and eventual dissolution of the country. No matter what Antony Blinken peddles to the contrary.

Even the comedian Zelensky knows this is a really bad joke.

Originally published at the Ron Paul Institute.

Image source:
Flickr | https://www.flickr.com/photos/usembassykyiv/23336978410
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Fedcoin Report Issued

01/24/2022Robert Aro

Fedcoin is inevitable. Yet many issues surround it while the Federal Reserve continues engaging the public and experts on this matter. The Board of Governors recently issued a report: Money and Payments: The U.S. Dollar in the Age of Digital Information detailing various ideas without definite conclusions.

It starts with the Executive Summary:

This paper is the first step in a public discussion between the Federal Reserve and stakeholders about central bank digital currencies (CBDCs). For the purpose of this paper, a CBDC is defined as a digital liability of a central bank that is widely available to the general public.

They don’t use the word Fedcoin; perhaps CBDC sounds more official. But they’re discussing a Federal Reserve cryptocurrency, created by the Fed functioning exactly like the dollar bills in your wallet.

One hurdle is the transmission process required to get the new coins into circulation. CBDC’s could simply be exchanged for existing dollars, or can used to expand the money supply through new loan arrangements directly to the public.

The potential expansion of the money supply, and the Fed gaining new powers by stepping into the commercial banking/government transferor/collection agency role, is most concerning if not completely terrifying. In the Fed’s own words:

A widely available CBDC would serve as a close—or, in the case of an interest-bearing CBDC, near-perfect—substitute for commercial bank money.

Consider the implications of an interest bearing CBDC. The Fed could grant Fedcoin loans at favorable rates to the entire country or only to those deemed most in need of funds. Consider if someone were to default on a CBDC loan. Would the Fed not be obligated to seize that person’s assets? This is hardly a conspiracy theory as default risk would be an eventuality of issuing Fedcoin loans if repayment of principal and interest is required.

Alternatively, forgivable Fedcoin loans could be granted; much like the Paycheck Protection Program, where, as of January 9, 2022, $680 billion in loans were forgiven across America.

In what could become the ultimate error in monetary policy, next time a financial crisis hits, Fedcoins could be deployed to stimulate demand, meaning citizens could receive an instantaneous stimulus check deposited into their bank account, courtesy of their neighborhood central bank.

A faint hope of averting disaster remains. Earlier this month, legislation was introduced by Congressman Tom Emmer (MN-R), who anticipated the trajectory of Fedcoin. He issued a bill prohibiting CBDC from being issued directly to individuals, saying:

It is important to note that the Fed does not, and should not, have the authority to offer retail bank accounts.

He also had concerns over the Fed having the ability to:

…collect personally identifiable information on users, and track their transactions indefinitely…

History provides many examples showing what the Fed can do as the lender of last resort. The continual boom and bust cycle, a dollar that can only decline in purchasing power, a country never more divided economically while facing a booming stock market are just some of the implications of central banking. A significant amount of economic destruction will be avoided if the Fed is not afforded the opportunity to become the lender of first resort.

For one of the most powerful institutions on the planet, Fedcoin is an idea that Marx himself could only dream of when he asked for:

Centralisation of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.

Concerned citizens may want to alert their state representatives to the potential dangers a CBDC poses, including privacy concerns while having the Fed compete against commercial banks. Additionally, you can fill out the Fed’s feedback form on the matter here. Even if they don’t take your feedback seriously, at least your comments will be made available for public viewing!

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Do We Really Need Big Corporations?

01/23/2022Hunter Hastings

Big Tech. Big Pharma. Big food. Big banks. Big oil. We’ve got questions about all of them. Big Tech is surveilling us and stealing our privacy. Big Pharma is exploiting us and poisoning us. Big food is compromising our health and fitness. Big banks are destabilizing boom-and-bust machines. Big oil is destroying the planet.

Do we need them? In the past, they were necessary to tackle problems of scale—the accumulation and control of sufficient capital to undertake massive industrial-era projects like building railroads, oil fields, pipelines, energy grids, fleets of oceangoing ships or airplanes, and supplying every household in America with 1.88 vehicles.

These achievements—and many, many more—have delivered tremendous benefits and improvements in productivity and in the quality of life. They’ve opened up the globe to trade and eliminated most poverty. They were part of what Professor Deirdre McCloskey calls the Great Enrichment, the flowering of opportunity and economic growth since the nineteenth century that is unparalleled in human history.

But capital accumulation is not needed in the same way in the digital age as in the industrial age. To a large degree, scale can be downloaded from the internet and capital can be controlled by renting it by the minute. Amazon Web Services (AWS) is the epitome of capital rental. Companies don’t need their own server farms and specialized software to run their digital operations—they rent from AWS. Their storefronts, fulfillment, and customer service run on AWS.

According to Wikipedia, as of 2021, AWS comprises over two hundred products and services including computing, storage, networking, database, analytics, application services, deployment, management, machine learning, mobile, developer tools, RobOps, and tools for the Internet of Things.

As an even more specific example of distributed control over capital, consider AWS Ground Station. Do you need satellite capability to collect data? Check the website:

AWS Ground Station is a fully managed service that lets you control satellite communications, process data, and scale your operations without having to worry about building or managing your own ground station infrastructure. 

…. you can use Amazon S3 to store the downloaded data, Amazon Kinesis Data Streams for managing data ingestion from satellites, and Amazon SageMaker for building custom machine learning applications that apply to your data sets. You can save up to 80% on the cost of your ground station operations by paying only for the actual antenna time used, and relying on the global footprint of ground stations to download data when and where you need it. There are no long-term commitments, and you gain the ability to rapidly scale your satellite communications on-demand when your business needs it.

This is the new age: capital on demand. Who needs big corporations?

This realization frees some brain capacity to think about some of the bad things that come with big corporations. There are plenty.

Bureaucracy

We want our corporations to create value, and to improve people’s lives through innovation and service. Parts of them do. But those parts are surrounded by, and sometimes suffocated by, bureaucracy. Bureaucracy was developed by corporations not for purposes of innovation, but for the opposite. It’s an engine of control, to limit the autonomy and creativity of people who work in the corporation and to impose rules, guidelines, methods, and processes. Compliance is a big word for corporate bureaucracies. 

Loss of Speed

Big corporations are structured. They have hierarchies and layers, divisions, functional departments, regions, and subsidiaries. Structure is the enemy of speed. When any individual or team has to seek approval, ask for funding, submit for compliance, and check for authority before acting, time is used and wasted. Speed of action and speed of responsiveness to marketplace and competitive changes are imperative in the digital era. Losing speed is losing productivity. It’s a loss imposed on the firm and the economy. 

Regulation

Big corporations attract regulation, and in many cases initiate it. It’s called crony capitalism. By agreeing with government how to regulate their industry, corporations achieve three things: (1) a known environment in which to operate (the opposite of systems innovation); (2) employment for an expanding bureaucracy (big banks, for example, have huge compliance bureaucracies); and, consequently, (3) competitive insulation, since smaller entities can’t afford to divert resources into their own compliance bureaucracies. 

Regulation, of course, is a huge drain on productivity and a huge barrier to innovation. It’s one of the major ways government undermines the economy, and big corporations are complicit.

Financial Engineering

The creation, maintenance, and profitability of big corporations often have more to do with financial engineering than serving customers and innovating. Financial engineering includes all activities that appear to strengthen financial reporting on paper without improving customer value. Stock buybacks are a perfect example. There is no customer purpose in stock buybacks. The activity is purely for changing pro forma “per share” ratios. The same is often true for mergers and acquisitions—most acquisitions do not improve customer value because they are not executed with customers in mind.

Generally, the financial-engineering mentality of today’s big corporation is not customer favorable.

Defensiveness

Once corporations get big, they have something to defend: their size (investors insist they must grow), their revenues (the top line, as it is called, must slope upward), their market share (they must not “lose” share), and their influence (more lobbyists). Their focus is diverted from innovation and improved customer service to maintenance and “sustainability.” Defensiveness does not generate growth.

Contracapitalist

Big corporations are not anticapitalist. But they often get capitalism a bad name. Robert Bradley Jr. created the term contracapitalist when describing the corporate behavior of Enron (for whom he once worked). This company abandoned and subverted capitalist practices, often with the support of institutions like the Ex-Im Bank, and mostly stayed within the law. Freewheeling accounting practices, contorted debt structures, hyped projections, and hubristic imprudence all contributed to Bradley’s realization that his former employer practiced contracapitalism. 

Do we need big corporations in the interconnected digital era of distributed control over capital? Not really. We should certainly never use big corporations as good examples of capitalism and free markets; they are far too often contracapitalist.

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Twenty Facets of Freedom from Leonard Read

01/21/2022Gary Galles

In 2016, I published a book titled Lines of Liberty, which featured great quotations about liberty from those who had been active and important in promoting it. To this day, one of my favorite quotes in that book is from John Stuart Mill’s On Liberty: “The only freedom which deserves the name is that of pursuing our own good in our own way, so long as we do not attempt to deprive others of theirs, or impede their efforts to obtain it.”

For that reason, when Leonard Read opened his “Several Facets of Freedom,” Chapter 8 in his 1982 The Path of Duty—his last book—with that quote, it drew my attention instantly. And I found Read’s own opening lines an effective teaser to read more:

The quotation from Mill’s famed essay, On Liberty, published in 1859, captures the essence of freedom. But there are many facets or aspects of the subject that merit elaboration.

Since Leonard Read was always broadening our understanding of liberty, its antecedents, its implications, and its power to benefit all of society, directly and indirectly, it is worth giving his reflections some reflection of our own. So I have put together a top 20 list of my favorite passages from the chapter, dealing with liberty’s connections to knowledge, excellence, influence, merit, competition, justice and optimism.

  1. The recognition on the part of Socrates that…he knew he knew nothing--the first step toward wisdom--is, from the standpoint of human freedom and prosperity the most important recognition there is.
  1. Each of us has an infinitesimal bit of knowledge--limited expertise…When the market is free--no restrictions against production and exchange--the tiny bits of know-how possessed by millions of discrete individuals flow naturally and easily, contributing to the prosperity of each. This knowledge is in the market process itself, not in you or me or anyone else--the claims of the know-it-alls to the contrary notwithstanding.
  1. It is in freedom that one’s knowledge is put to best human use.
  1. It is not mere quantity of knowledge that counts, for even the most knowledgeable… has a mere glimpse of all that is to be known…excellence includes growth.
  1. When…the keynote…is excellence, freedom reigns!
  1. There is no action we take--good or bad--that fails to exert an influence on someone. Thus, the question: How influence others better to understand and explain the free society? The answer: Let anyone who would move mankind toward freedom first move himself!
  1. Never try to reform another; do not try to forcibly draw others toward your view. Instead, strive for that perfection of understanding and exposition which will cause them to do the reaching.
  1. He who wishes to exert a useful influence must…concentrate his energies on the creation of what is good. He must not demolish, but build.
  1. Through the better personal practice of freedom may we attract others to share its blessings.
  1. Merit, if it be genuine, cannot be concealed…those who are seeking light, the ones who really count—will find true merit. It cannot be hidden for long.
  1. History reveals that contemporaries see more the man than his merit…respect their merit.
  1. Many among us insist that man is born for cooperation, not competition—as if these were antagonistic to one another. Such people…they fail to realize that cooperation is only a dream in the absence of competition.
  1. Genuine competition implies rules, such as the rule of free entry. Free entry in any field of endeavor--the production of goods or the supplying of services or whatever--assures competition, each participant trying to excel.
  1. Free competition among suppliers results in cooperation with customers…When there is real competition among the bakers of bread, we customers decide whose bread we eat, that is, with whom we will cooperate.
  1. The goal of competition in the free market is to serve customers better, according to consumer choice. The alternative is coercion…And such a coercive society affords no incentive for self-improvement.
  1. When there is competition, there are always those out front, setting the pace, leading the way. The effect of this leadership? Others…are inspired to grow. Competition--trying to excel--is the origin of growth; it is the magnet that draws forth each man’s best in the practice of freedom!
  1. Government, the political arm or agent of society, can have no higher aim than justice for one and all alike.
  1. The Goddess of Justice is blindfolded; her concern is not with who you are but, rather, with how fairly and honestly one deals with one’s fellowmen.
  1. Justice conforms to such ideals as The Golden Rule [and] No special privilege for anyone; No violation of the right to the fruits of one’s own labor or the right to act creatively as one chooses.
  1. A person may vigorously denounce the bad while failing to see the good. This…fails to advance the good…faith that the right will prevail…advances the good.

Few people in history spent more of their lives thinking about and acting to advance liberty than Leonard Read, as befits the founder and long-time leader of the Granddaddy of libertarian think tanks. He saw liberty as vitally important to both our individual growth and our social advance, so he considered everything he could think of that had a bearing on, or relationship to, it. Those thoughts are worth thinking after Read, so that we too might grow in insight and wisdom into liberty and advance society with that growth.

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Is the "Resource" Curse Keeping Many Developing Nations Poor?

01/21/2022Lipton Matthews

The impact of resources on national development has puzzled economists and political scientists for decades. Economic literature has noted that resource-rich countries conventionally fail to transform natural advantages into material prosperity. In the field of economics, this development is known as the resource curse. It has been asserted that resource abundance degrades the quality of institutions by emboldening elites to devote resources to capturing rents. Others argue that by reducing the state’s dependence on taxes, resource windfalls erode political accountability. 

The erosion of accountability is likely because windfalls minimize the need for tax revenues thereby diminishing the impetus to be accountable to citizens and implement reforms. Reliance on resources can also preclude economic diversification by crowding out manufacturing and the service sector. Another burden of the resource curse is that incentives are engendered for politicians to distribute privileges to major players in the economy at the expense of the broader economy.

A related problem is that resource windfalls cultivate a breeding ground for autocracies by bolstering the power of political elites. Several observers have concluded that oil wealth increases the durability of autocracies and impedes the transition to democracy. Furthermore, when autocrats exert control over economic resources, they also inherit the ability to use these resources to purchase support and consolidate their rule.

Michael L Ross in a detailed 2015 review of the resource curse published in the Annual Review of Political Science shows that during 1960-2008, there was an inverse association between democratic transitions and the level of a country’s oil income. Moreover, countries that transitioned early and retained democratic institutions like the Dominican Republic, Turkey, Portugal, and Spain had marginal or no oil. Though some countries with modest oil and gas managed to transition, no country with more reliance on oil and gas income than Mexico became democratic.

However, the best case studies of the resource curse have been provided by data-sets examining African countries. South Africa is featured prominently in the literature. In the 2013 article, “The forgotten Resource Curse: South Africa’s poor experience with mineral extraction,” Ainsley D Elbra opines that South Africa’s experience not only aligns with the resource curse literature but is amplified since the country is plagued by entrenched poverty and inequalities linked to a rentier state.

Indeed, the scenario identified in South Africa is typical for African countries. In Sub-Saharan Africa resource abundance is related to rampant corruption, low economic growth, and inefficient bureaucracies, according to research. Due to avenues for pilfering, politicians have a reduced incentive to inhibit corruption by enhancing the efficiency of government.

But there is no reason to believe that resources will forestall economic growth. Addisu Lashitew and Erik Werker in a 2020 paper using the examples of Canada and the Republic of Congo illustrate that equally endowed countries can pursue divergent paths. Despite similar levels of resource endowment, the contribution of resources to GDP is substantially larger in Congo (42.3 percent), in comparison to Canada (2.3 percent). The adverse effects of resources are more pervasive in the Congo considering that its economy is dependent on resources, whereas Canada’s economy is diverse, notwithstanding resource abundance. The authors contend that the channels through which resources hinder institutional change are likely to be weaker in diverse economies. When economies are diverse there is less scope for players in resource sectors to lobby for initiatives that block institutional innovations thus diminishing opportunities for rent-seeking.

The contrasting fortunes of Canada and Congo suggest that institutions are crucial in explaining income disparities across countries. Although the evidence indicates that resources induce perverse incentives - high quality institutions can tame the resource curse. One study finds that in Africa when countries are besotted by corruption, and limited institutional capacity, resources appear to be a curse, instead of a blessing. Yet as institutions upgrade, resources transition from a curse into a blessing. Essentially, increased accountability and constraints on the political class depress conditions for the emergence of a rentier state.

For example, Naazneen H Barma in a comparative study of countries affected by the resource-curse recounts how Timor-Leste adopted new practices to combat the resource curse: “Partly due to the extensive international state-building effort there, the Timorese government decided upon petroleum sector institutions and policies explicitly intended to mitigate the resource curse…The centrepiece of Timor-Leste's institutional architecture in the petroleum sector is its Petroleum Fund, to which all petroleum revenues are directed, without exception. The Petroleum Fund Law establishes the concept of Estimated Sustainable Income (ESI), a principle intended to ensure intergenerational saving of the country's windfall income stream.”

Additionally, relating the issue to an American context Justin Callais declares that unlike Texas, Louisiana is languishing from a regional resource curse as a result of differences in institutional quality. Texas has a high EFNA score, ranks ninth on the net entrepreneurial productivity index, and demands licenses for just 34 of 102 lower-income occupations. Callais similarly avers that Louisiana’s economy is inferior because “Texas provides its citizens with alternative opportunities, while Louisiana’s environment is such that it necessarily must be dependent on oil.”

He further attributes Louisiana’s subpar economic performance to the legacy of the civil law: “Civil law tends to concentrate power to a centralized government. In France, this was chosen as a tradeoff in favor of dictatorship as a means of lowering disorder… What this means for Louisiana, and other transplant areas more generally, is that centralized control lead to ineffective governance and corruption. Through corruption, more authoritarian regimes were able to take advantage of their resource abundance. This abundance was good for those in power, yet lowered opportunities for the economy as a whole to invest and produce in alternative industries.”

Based on the data explored, we conclude that resource abundance can either result in stagnation or prosperity. However, the pertinent fact is that the potential for resources to foster growth is contingent on the right interplay of institutions and policies. Lacking an appropriate institutional framework resource-abundance will lead to dismal economic outcomes

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Is the "Resource" Curse Keeping Many Developing Nations Poor?

01/21/2022Lipton Matthews

The impact of resources on national development has puzzled economists and political scientists for decades. Economic literature has noted that resource-rich countries conventionally fail to transform natural advantages into material prosperity. In the field of economics, this development is known as the resource curse. It has been asserted that resource abundance degrades the quality of institutions by emboldening elites to devote resources to capturing rents. Others argue that by reducing the state’s dependence on taxes, resource windfalls erode political accountability. 

The erosion of accountability is likely because windfalls minimize the need for tax revenues thereby diminishing the impetus to be accountable to citizens and implement reforms. Reliance on resources can also preclude economic diversification by crowding out manufacturing and the service sector. Another burden of the resource curse is that incentives are engendered for politicians to distribute privileges to major players in the economy at the expense of the broader economy.

A related problem is that resource windfalls cultivate a breeding ground for autocracies by bolstering the power of political elites. Several observers have concluded that oil wealth increases the durability of autocracies and impedes the transition to democracy. Furthermore, when autocrats exert control over economic resources, they also inherit the ability to use these resources to purchase support and consolidate their rule.

Michael L Ross in a detailed 2015 review of the resource curse published in the Annual Review of Political Science shows that during 1960-2008, there was an inverse association between democratic transitions and the level of a country’s oil income. Moreover, countries that transitioned early and retained democratic institutions like the Dominican Republic, Turkey, Portugal, and Spain had marginal or no oil. Though some countries with modest oil and gas managed to transition, no country with more reliance on oil and gas income than Mexico became democratic.

However, the best case studies of the resource curse have been provided by data-sets examining African countries. South Africa is featured prominently in the literature. In the 2013 article, “The forgotten Resource Curse: South Africa’s poor experience with mineral extraction,” Ainsley D Elbra opines that South Africa’s experience not only aligns with the resource curse literature but is amplified since the country is plagued by entrenched poverty and inequalities linked to a rentier state.

Indeed, the scenario identified in South Africa is typical for African countries. In Sub-Saharan Africa resource abundance is related to rampant corruption, low economic growth, and inefficient bureaucracies, according to research. Due to avenues for pilfering, politicians have a reduced incentive to inhibit corruption by enhancing the efficiency of government.

But there is no reason to believe that resources will forestall economic growth. Addisu Lashitew and Erik Werker in a 2020 paper using the examples of Canada and the Republic of Congo illustrate that equally endowed countries can pursue divergent paths. Despite similar levels of resource endowment, the contribution of resources to GDP is substantially larger in Congo (42.3 percent), in comparison to Canada (2.3 percent). The adverse effects of resources are more pervasive in the Congo considering that its economy is dependent on resources, whereas Canada’s economy is diverse, notwithstanding resource abundance. The authors contend that the channels through which resources hinder institutional change are likely to be weaker in diverse economies. When economies are diverse there is less scope for players in resource sectors to lobby for initiatives that block institutional innovations thus diminishing opportunities for rent-seeking.

The contrasting fortunes of Canada and Congo suggest that institutions are crucial in explaining income disparities across countries. Although the evidence indicates that resources induce perverse incentives - high quality institutions can tame the resource curse. One study finds that in Africa when countries are besotted by corruption, and limited institutional capacity, resources appear to be a curse, instead of a blessing. Yet as institutions upgrade, resources transition from a curse into a blessing. Essentially, increased accountability and constraints on the political class depress conditions for the emergence of a rentier state.

For example, Naazneen H Barma in a comparative study of countries affected by the resource-curse recounts how Timor-Leste adopted new practices to combat the resource curse: “Partly due to the extensive international state-building effort there, the Timorese government decided upon petroleum sector institutions and policies explicitly intended to mitigate the resource curse…The centrepiece of Timor-Leste's institutional architecture in the petroleum sector is its Petroleum Fund, to which all petroleum revenues are directed, without exception. The Petroleum Fund Law establishes the concept of Estimated Sustainable Income (ESI), a principle intended to ensure intergenerational saving of the country's windfall income stream.”

Additionally, relating the issue to an American context Justin Callais declares that unlike Texas, Louisiana is languishing from a regional resource curse as a result of differences in institutional quality. Texas has a high EFNA score, ranks ninth on the net entrepreneurial productivity index, and demands licenses for just 34 of 102 lower-income occupations. Callais similarly avers that Louisiana’s economy is inferior because “Texas provides its citizens with alternative opportunities, while Louisiana’s environment is such that it necessarily must be dependent on oil.”

He further attributes Louisiana’s subpar economic performance to the legacy of the civil law: “Civil law tends to concentrate power to a centralized government. In France, this was chosen as a tradeoff in favor of dictatorship as a means of lowering disorder… What this means for Louisiana, and other transplant areas more generally, is that centralized control lead to ineffective governance and corruption. Through corruption, more authoritarian regimes were able to take advantage of their resource abundance. This abundance was good for those in power, yet lowered opportunities for the economy as a whole to invest and produce in alternative industries.”

Based on the data explored, we conclude that resource abundance can either result in stagnation or prosperity. However, the pertinent fact is that the potential for resources to foster growth is contingent on the right interplay of institutions and policies. Lacking an appropriate institutional framework resource-abundance will lead to dismal economic outcomes

When commenting, please post a concise, civil, and informative comment. Full comment policy here

The Billion Dollar Board

01/18/2022Robert Aro

The Federal Reserve currently has a board composed of five people. At $970 million spent on board expenditures in 2021, this equates to an average cost of $194 million per each Governor. Isn’t this completely incomprehensible, and something the mainstream media or Congress should inquire about next time they meet with the Fed?

Normally board expenses are allocated for coffee and donuts, maybe a luncheon; but at America’s central bank, there seems to be much more that has yet to surface. On Friday the Fed mentioned their board expenses in the press release regarding expenses and transfer to treasury for the year.

…$970 million for Board expenditures…

Audited financial statements won’t be complete for a few months. But if 2021 was anything like 2020 or 2019, the actual number will surpass $1 billion. Reason being, Board of Governors operating expenses are included with Currency Costs, as seen on the prior year’s statement. The figure was $1.78 billion.

There is a glaring problem here. Board of Governors operating expenses, like Currency Costs, have absolutely no further disclosure on the financial statements. Other than the auditor, members of the board, and whomever does the accounting, no one knows where the nearly $1 billion has been spent. It wouldn’t take much collusion if funds were allocated to buy a Ferrari or a few Bitcoins for a board member. Not to say this is what has happened, but if this did happen, the public would never know.

It really is the case of trusting the Fed. Yet nothing in the Fed’s history shows it can be trusted, with questionable trading activities being a recent example where their credibility was called into question.

Typically, important items are given notes at the back of the financial statements, where the figures are explained in greater detail. However, this is not the case with Board of Governor expenses. Anyone familiar with the audit process knows that a $970 million expense, for an entity holding assets approaching $9 trillion, likely means the board expenses are not considered a material line item. Meaning, the balance could go completely under the radar or hardly examined by the auditor.

Of course, the $970 million is just one of the various costs required to run the Federal Reserve. Other notable expenses include:

$1.0 billion for the costs related to producing, issuing, and retiring currency… and $628 million to fund the operations of the Consumer Financial Protection Bureau.

And my personal favorite, to the stockholders of the America’s Central Bank:

Statutory dividends totaled $583 million in 2021.

This was only some of the costs. More will be offered upon release of the 2021 statements. Still, given the various opportunities members of Congress, or the media have to engage in public discourse over monetary policy, it would be nice if someone were to inquire just what exactly these board expenses are. Even worse, it would take nothing more than a small change to legislation or request by Congress to force the Fed to hand over their general ledger or other disclosure. There need be no requirement for any new public audit or other rigmarole. The Fed simply needs to provide the same information they give to the auditor (i.e., a general ledger, or a list of all the transactions that comprise the $970 million in expenses), and let the public look into the matter.

If the Fed is supposed to operate for the good of the public, or in the public’s interest, there should be no qualm granting the public access to such information. It is definitely not in the public’s interest to be left in the dark over such matters, especially when the public funds the Fed. For a trillion dollar entity with a currency monopoly of the USD, more should be done to find out what exactly it is they do with all this money, specifically, what exactly has the board bought for $970 million.

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Biden’s Fed Nominations

01/15/2022Robert Aro

Should sex or race play a role in hiring decisions at the Federal Reserve?

Consider the alleged problem in which the mainstream media, economists and Congress want your focus, courtesy of Reuters:

Currently, the Fed's board has only five members, all white and three of whom are men.

In 2022, one would think there’s something inherently wrong about this. The message being that if more women or persons of color were to helm America’s central bank, things would be better for the economy. The rationale behind the diversity push is not explained. The assumption is that a more (physically) diverse Fed is best.

How heavily diversity inclusion played into Biden’s nominations cannot be measured. He nominated three people; two being women, two African-American. If his nominations are confirmed:

Biden's picks would mean the seven-member Board of Governors would include four women, also a first.

Sharing his elation, Harvard economic professor Larry Katz said “it’s clearly a changing of the guard” and:

This is a "path-breaking new set of nominees who will bring important perspectives and representation to the board."

Meeting the candidates, there is former Fed Governor Sarah Bloom Raskin:

…who spent four years as a Fed governor before being tapped as a deputy Treasury secretary from 2014 to 2017, is expected to bring tougher oversight to bear on Wall Street…

Unlike Raskin, an already high ranking member of the system, the other two candidates are not. Lisa Cook is an economics professor from Michigan State and Philip Jefferson, a professor at Davidson College in North Carolina.

Cook has written extensively about the economic consequences of racial disparities and gender inequality, and growing up lived through the violence of school desegregation in the U.S. South. Jefferson has written extensively on wages, poverty and income distribution.

Whether by happenstance or grand design, the problem with emphasizing sex or race obscures the need to fill a board based on competencies.

If the Fed was composed of 4 women and 3 men, but they were schooled in the Neoclassical tradition, one could say they are diverse in appearance, but intellectually similar. This is problematic because without diversity of opinions or challenges to ideas, improvement to monetary policy cannot be expected. The belief that the Fed should manage the money supply and interest rates would continue to go unquestioned. The economic booms and busts this causes would continue indefinitely.

Contrast this to a homogenous board. A Fed composed of 7 women or men, or 7 whites or blacks, yet 3 were Austrian and 4 Neoclassical economists, would be an astounding difference. The public would be privy to one of the most splendid economic debates of all-time, even if only witnessed through interviews and meeting minutes. Nonetheless, there at least would exist the possibility that economic change could be realized from within.

Unfortunately, the importance of intellectual diversity garners little to no attention. The idea that even one person who possesses a basic understanding of the free market, liberty or freedom could ever be welcomed into the Board of Governors remains little more than an unattainable dream. Should the Federal Reserve have a 7 member board, hailing from 7 different races, yet none understand Austrian economics, then the next 100 years of monetary policy will look a lot like the last 100… or economic collapse will occur, whichever comes first.

 

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The Uniparty Can’t Solve Inflation. Here’s How Populists Can.

01/14/2022Tho Bishop

Price inflation is the highest its been since 1982. Real wages are plummeting. Joe Biden’s approval ratings are now on par with George W. Bush’s after both the Iraq War, the financial crisis, and eight years of Jon Stewart. This is with the benefit of Kim family–level devotion from the corporate press, Big Tech, and almost every pop culture figure.

In this case, correlation is causation. Inflation has now topped covid as the greatest concern of Americans.

As history shows, this shouldn’t be surprising. While modern politicians have bought into the myth that monetary policy is something that should be left to a technocratic elite, money issues have long been a motivating issue for populist causes. There is no more “kitchen table” issue than the daily reminder that your paycheck buys less than it did last year.

The political benefactors of inflation are obvious: anyone running against Joe Biden. Twenty twenty-two will be a year where many talentless Republican political consultants will be able to ride a red wave and claim a victory they will base an entire career around. Unfortunately, the Republican Party is as culpable in America’s inflationary crisis as Joe Biden. We will see if anyone in DC catches the irony when the majority of Republican senators end up endorsing another term for Jay Powell.

This gets to the core of the problem. As we see inflation rise as America’s most pressing political issue, we have a political system completely unprepared to deal with it.

After all, few in Washington even know what the underlying cause of inflation is. It’s not port capacity, and it’s not greedy corporations. It’s not simply about progressives’ aims to price out fossil fuels or the price tag of any one specific spending bill.

No, the cause of inflation is the arrogance of modern economic PhDs. It is the consequence of rendering money into a tool of the state, a power which has been abused to plunder from the people so that politicians can spend freely. It is an era of monetary hedonism, maintained by an institution that has for over a decade now consistently failed by its own measure. The fact this system has lasted fifty years is in large part because most of the world’s central banks have engaged in similar—if not even more reckless—policies to the Fed.

Ivy League universities are just as capable of infecting the world as any Chinese laboratory.

Unfortunately, the GOP has been defined by its complete disinterest in rooting out institutional malfeasance. Abolishing a federal agency is a bumper sticker Republicans use for a campaign fundraiser, not a political goal. Any attempts to push for any meaningful reform to the Federal Reserve will be treated as a threat to the entire global financial system, and Republicans will cave—just as they voted to bail out Mexico in the ’90s, just as they voted to bail out Wall Street in ’08, just as they repeatedly cave to debt ceilings and government shutdowns.

If there is no political solution to the Fed, does it mean there are no possible remedies to help protect average Americans from the inevitable monetary crisis?

No. The answer to America’s inflation issue is to empower citizens to save in alternative currencies. Just as Republicans have found school choice easier to push than abolishing the Department of Education, monetary choice offers a policy approach that doesn’t require an all-out assault on a powerful institution with a well-paid army of propagandists.

This approach to the Fed was something promoted strongly by Ron Paul during his congressional career. The most significant component of his Free Competition in Currency Act was the elimination of taxes on gold and silver—something that could be updated to include cryptocurrency. If the only major policy wins Republicans are capable of having in DC are tax cuts, these would technically qualify.

Abolishing these taxes would eliminate one of the state’s most powerful tools for forcing the dollar on its citizens. If Americans can freely move their wealth from the control of the Fed and into nonpolitical assets, they will have real protection against the long-term consequences of inflation. Even better, this will undermine Washington’s concerted efforts to weaponize the banking system against political dissidents.

Most importantly, though, it would be a tax cut that would immediately redistribute wealth away from Wall Street and into the pockets of average Americans. As such, it is an ideal policy aim for the growing populist Right.

After all, if the goal of a political movement is to oust a powerful cabal of neoliberal globalist oligarchs, success is going to depend on achieving political victories that don’t only weaken your enemies but enrich your allies. Progressives and authoritarians are overrepresented in the halls of an increasingly woke Wall Street, while regime skeptics are overrepresented in crypto and among those who buy gold.

As in the past, there is the opportunity for the current inflation crisis to radically transform American politics. As the nation continues to lose trust in institutions, and as a new generation of populist Republicans grow their numbers in the party, there is an opportunity to deliver a major blow against the financial class that has taken over the global economy.

Is the current generation of right-wing populists prepared to listen to Ron Paul and embrace a Rothbardian Right?

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End Legal Tender Laws

01/14/2022Patrick Barron

Mention the term "legal tender" in polite company and most people will resemble a deer in the headlights. In simple terms legal tender is a kind of money a creditor cannot refuse in discharge of a debt due to him in the money issued by government. This is a legal designation for government-issued money—usually fiat money, nowadays—with special status. And although legal tender laws do not force consumers and merchants to use the “official” money, this money comes to be highly favored. Thus, here in America we buy and sell using dollars. In the United Kingdom, the British Pound is legal tender. In Japan, it is the Yen. You get the idea. It isn't impossible to use monies other than legal tender, but using something else is often more akin to private, off the books, barter. For example, perhaps I want to buy my neighbor's used lawn mower. I have some British Pounds left over from my last trip. My neighbor is planning a trip to the UK. He agrees to sell me his used lawn mower for some of my British Pounds. However, my neighbor would still legally have to pay his taxes in dollars and his credits would likely still demand dollars. So, dollars will be preferred for nearly all transactions.

Now, all this may sound perfectly reasonable, but legal tender laws present a huge opportunity for those who monopolize its production to manipulate the currency, primarily to allow for increased government spending. Governments suck resources out of the economy by bypassing the natural constraints of seeking a tax increase, always politically unpopular, or borrowing honestly in the bond market, which will drive up interest rates. Government by the people is thwarted, and the increase in the money supply causes vast harm to the economy.

Why Repeal Legal Tender Laws?

Naturally, advocates of eliminating legal tender laws have an obligation to convince the public that it's the right thing to do. Why would any nation, especially the US, want to use any medium of exchange other than the dollar? Simply put, debasing the dollar allows government to steal from the people. The government prints money out of thin air to balance its ever expanding budget. This leads to vast and dire economic consequences, such as higher prices, boom/bust credit cycles, and transfers of wealth from the early receivers of the new money to the later receivers of the new money. This is the Cantillon Effect, as described by Emile Woolf in his latest essay.

The Path to a Better Money

The next question that the public may ask is what would replace the dollar. The answer is that the dollar would not necessarily be replaced, but it would have to compete for the public's patronage in a free monetary market. It would have to compete not only with other national currencies but also with recently created media of exchange, such as bitcoin and other cryptocurrencies. In addition, we would expect that commodities such as gold and silver would regain some significant part of the market, especially since these commodities have been used as media of exchange for thousands of years until the recent experiments with fiat national currencies protected by legal tender laws.

Alasdair Macleod of Goldmoney.com has explained why crypto currencies are not suitable as alternative mediums of exchange, although the distributed ledger technology may have applications in a sound monetary regime. Rather, it is most probable that gold and silver would regain their prominence. There is a reason that the term "gold standard" is still used when describing something that is of the highest quality. There are many advantages to gold as a medium of exchange, but the most important are its universal acceptance by people of every walk of life all over the world, the fact that it cannot be counterfeited, and that it is rare. Gold specie itself could be exchanged by private individuals to satisfy major purchases, but for every day transactions the public would find it advantageous to rely upon a trusted third party to safe keep the gold and make it redeemable upon demand through any of the modern methods of money transfer, such as paper check, paper certificates, and digital means. Of course, the government itself could offer "gold dollars." After all, it claims to have over eight thousand tons of gold in its vaults. But government's track record for issuing more receipts for real money, gold and/or silver, than it has in its vaults probably would preclude it from gaining the public's acceptance. More likely, major banks would issue their own gold backed money. The banks could gain acceptance in the market because they would be subject to ordinary commercial law that describes a "bailment." A bailment is a transaction in which someone takes custody but not ownership of a good for the benefit of another. When we take a suit to the dry cleaners, we have entered a bailment agreement. The dry cleaning establishment does not own our suit. It takes temporary custody of it. Likewise when we check a coat at the theater or restaurant. If the dry cleaning establishment sells our suit or the restaurant gives our coat to another party, we can sue for damages and possibly bring criminal charges. Therefore, one's gold dollar account at a major bank must be legally redeemable in specie upon demand. If the bank does not have the gold, the customer can take it to court on a charge of fraud. Even the bank officials and owners could be charged with a crime. Try doing this with the government!

The Consequences

Just as a better mousetrap drives less effective ones out of the market, better money will drive out bad money. Privately issued money will gain more acceptance over time as the public learns that it can trust the issuers not to issue more receipts than specie held in reserve. Not so with government money. Once the public's trust has been lost, it will be impossible for government to regain it in the face of honest competition. It is most likely that bank issued fiduciary media (technically the real "money" is gold or silver in its vault) will be used first for transactions among banks, bond merchants, and large companies. But over time the public will learn that modern electronic money transfer methods are just as reliable for retail use. Then we can expect competition by the big banks to spread rather quickly. Eventually, government's fiat money will be abandoned for whatever one can get in, say, gold backed Goldmoney.comDollars, CitibankDollars, BankAmeriDollars, DeutscheMarks, BarclayPounds, or the like.

The Necessity of Financial Truth

With the government no longer able to print money to satisfy its profligate spending, the reckoning will have arrived. Let us not believe that a reckoning is avoidable. It is not. Nor should we wish it to be. To continue to print money in massive amounts, as the government does now, will lead to a financial and economic collapse. Would we want our doctor to tell us that all is well when his tests say otherwise? Would we want him to recalibrate his thermometer, blood pressure gauges, etc. so that they gave false indications in order that we could continue an unhealthy lifestyle right up to the point of collapse? Of course not. Yet this is a consequence of fiat money; i.e., the true state of the nation's financial and economic health is hidden. On the other hand, sound money reveals the true state of our financial affairs, both private and public, so that we do not unwittingly destroy capital and/or make promises that cannot be met. Furthermore, let us not give false promises that everyone will be spared real hardship in a return to sound money. Those who have relied upon the government to pay their bills will find that not all bills will be paid as in the past.

Real statesmanship will be required to cut government spending and explain the reasons to the public. The real villains will not be those who pull the world back from the financial and economic precipice but those who spent us into this mess in the first place--the Keynesian economists, the Modern Monetary Theorists, the Socialists, and especially the feckless politicians who swallowed the impossible siren songs of these charlatans and forced them on the public in order to buy votes by promising the moon. Let us have the courage to demand the truth, no matter how unpalatable it may be. Eliminating legal tender laws will set the wheels of monetary and economic reform in motion.

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