Power & Market
I have recently been reading Helen Zia’s Last Boat out of Shanghai, which presents a narrative history of a handful of refugees who fled Shanghai as the Communist Party took control of China in the late 1940s. In framing this flight from the city, Zia details the experiences of the refugees during the Japanese occupation during the Sino-Japanese War, as well as just after the Chinese Civil War. Naturally, there is a lot of heart-wrenching suffering documented in these pages, from people of various backgrounds, but I found the experience of hyperinflation during the late 1940s to be particularly interesting as something I had not heard of before.
Zia first describes the experience of that hyperinflation from the view of the people trying to pay for what they need:
Everyone in Shanghai had had the unsettling experience of looking in a shopwindow as a clerk reached in to cross out one price and scrawl a new, much higher price, often x-ing out prices several times in a single day. Not even the belt-tightening inflation during the war had prepared them for costs that seemed to multiply by the minute. In June 1948, a sack of rice had cost 6.7 million yuan; within a few weeks the price had reached 63 million.
In response to the out-of-control inflation, the Nationalist government of Chiang Kai-shek did what most governments in history have done. Chiang Kai-shek appointed his son, Chiang Ching-kuo, finance minister and had him go after “hoarders” and “speculators.” Most egregiously, the younger Chiang ordered Chinese citizens to hand over all gold, silver, and foreign currency to the government, as well as outstanding yuan, for a new version of the yuan supposedly backed by gold. Zia quotes Chiang Ching-kuo as threatening, “Those who damage the new gold-based currency will have their heads chopped off!”
This policy did not last long, however. Chiang Ching-kuo made the mistake of arresting the wrong person for “speculation”:
Chiang Ching-kuo also arrested David Kung, the nephew of his stepmother, Madame Chiang. Upon learning that her favorite nephew was in jail, Madame Chiang stormed into her stepson’s office and slapped his face. Then she wired her husband, the generalissimo…
This severe loss of face put an end to Chiang Ching-kuo’s attempted currency reform process. Forced to abandon it, he released the “hoarders” and “speculators” from prison. The new version of the yuan failed spectacularly:
The newly issued currency collapsed, becoming instantly worth less than the paper it was printed on. Everyone who had obeyed the government’s orders to use the new currency lost everything; their assets of gold, silver, and foreign currency were now locked in Chiang Kai-shek’s treasury.
It is important to note that Zia is not an economist, and takes essentially for granted that the inflation was due to hoarding and speculation rather than the printing of money by the Nationalist government to fund their war efforts (though she does not explain why, if that is the case, foreign currency was still “better than gold against the collapsing new Chinese yuan”). There is, however, still a lot of value to be gleaned from this narrative history and it is worth examining in detail. I highly encourage the reader to consider purchasing this book for that alone.
Owen Holzbach recently wrote in Power and Market "How Public Schools Teach Economics." I had a similar experience in my high school macroeconomics class. As taught, Keynesian economics provides a "toolkit" for wannabe central planners.
After high school I attended Grove City College, where I am learning real economics. What my Austrian school professors do differently from their mainstream cousins is demonstrate the truth of their conclusions from the first principles of human action and the empirical reality of the world.
Every economics student, and many other GCC students, take Dr. Shawn Ritenour's class Foundations of Economics. This is the class that got me interested in economics. Following Mises, the class covers basic epistemology before starting with the action axiom, that is, purposeful behavior, and proceeding to carefully derive economics.
With a firm understanding of economic method, subjective preferences, cooperative vs. aggressive interaction, division of labor, the emergence of money, time preference, and entrepreneurship students receive a firm foundation in economic law.
Sprinkled in the class is discussion of ethics, consequences of policy, and the view of man. Students, for example, are introduced to (and shown the error in) the ideas of Gustav Schmoller on historicism, Milton Friedman on positivism, Marx on labor exploitation, and Malthus on population.
Some of my favorite advanced classes thus far are intermediate micro and intermediate macroeconomics. In both classes differing views are presented on their own terms. Students appreciate this level of intellectual honesty.
In intermediate macro, for example, Dr. Ritenour explains the capital structure and derives Austrian business cycle theory. But we also learn the Keynesian simple system, the IS-LM (investment-savings, liquidity preference–money supply) model, Friedman's plucking model, Real business cycle theory, and more.
In intermediate microeconomics, Dr. Caleb Fuller teaches the mainstream calculus-based approach to utility and welfare analysis. We learn and critique the perfect competition model as well as neoclassical consumer theory and cost-based producer theory.
Understanding the roots of ideas provides a grounding that many economists lack. This past spring, I took History of Economic Thought since 1870, where we concentrate on the Marginal Revolution as well as the economic thought of Keynes, Marshall, Friedman, Hayek, Mises, Böhm-Bawerk, Veblen, and much more. Both of the History of Economic Thought courses are now required for economics majors at the college.
For example, it is easy to take the Marginal Revolution for granted. However, there is a lot more to the story than three economists independently discovering the same idea. It turns out that the marginalism of Carl Menger is a bit different from that of William Stanley Jevons and that of Léon Walras.
For Walras, marginal utility is the key to complete his model for general equilibrium. Rather than moving from first principles, he starts with an idea of perfect competition and climbs down to marginal utility. This model is rigorously static and devoid of action. Instead, a timeless Walrasian auctioneer equilibrizes markets.
Jevons bases his marginal utility analysis on Jeremy Bentham's utilitarian calculus of pain and pleasure. This use of cardinal utility functions and assumption of infinitely divisible goods, as opposed to ordinal demonstrated preference, has led to neglect of qualitative aspects of human choice that are irreducible to a mathematical function.
Menger also takes the subjective value approach, but it is embedded in the structure of means and ends rather than a calculus of pain and pleasure. In his book Principles of Economics, Menger emphasizes the real-world process of action, as opposed to an equilibrium model that abstracts from action.
These differences, minor at the time, have borne out over the last 150 years to where mainstream economists, fixated on their perfect competition models, have advocated for government intervention in markets in to ensure competition. The reality is the opposite, that antitrust action to break up large firms harms consumers. It is not the number of firms itself, but the threat of both actual and potential competition that incentivizes firms to act competitively.
This is a microcosm of what I have learned from my "heterodox" Austrian school professors. The Austrians bring a lot more to the table in terms of intellectual honesty and curiosity, real-world relevance, depth of understanding, and solid first principles. I am graduating this December, and in spite of everything going on in the world right now, I must consider my education in causal-realist Austrian economics a success.
Somewhere there exists a list of ostentatious, unapologetic behavior exhibited by the Federal Reserve. On that list there must be a spot for the three-week delay on publishing the board minutes, as seen by the June 9–10 Federal Open Market Committee (FOMC) meeting minutes. We can only wonder if the minutes have been significantly edited or instances of great dissent among central bankers omitted entirely. Among the many issues with the Fed is a lack of accountability. We only know whatever information they provide.
Chair Powell began with a mention of the current civil unrest facing the country. In an attempt to address inequality, or at least appear to, he added:
Everyone deserves the opportunity to participate fully in our society and in our economy.
The hypocrisy, of course, is in how this can be achieved when the Fed takes action such as buying bonds from billion- (to trillion-) dollar corporations or focuses on managing price increases in consumer goods while neglecting the rise in asset prices. The Fed’s own actions harm the most vulnerable members of society first while claiming to serve the entire nation!
They quickly move on to financial modeling, noting:
The simulations suggested that the Committee would have to maintain highly accommodative financial conditions for many years to quicken meaningfully the recovery from the current severe downturn.
We could argue the Fed has been “highly accommodative” to financial markets since the Great Recession, keeping rates at historic lows, and only shrinking the balance sheet briefly from 2008 to mid-2019 until finally capitulating after the stock market neared the verge of collapse. Perhaps, we shouldn’t fear low rates or an end to the stimulus any time soon, if ever.
The yield curve control or target (YCT) was briefly discussed. This seems to remain in the discussion phase, as the Fed noted some pros and cons. While deciphering Fedspeak is not an easy task, it seems they are not completely behind the idea just yet, especially as:
the staff also highlighted the potential for YCT policies to require the central bank to purchase very sizable amounts of government debt under certain circumstances.
Wouldn’t it be grand if making sizable government debts in order to control interest rates was something the Fed wanted to shy away from?
They continued with favorable views on large-scale asset purchases, since they were “effective” during the Great Recession and are now “key parts of the monetary policy toolkit”:
as a result, they have important roles to play in supporting the attainment of the Committee’s maximum-employment and price-stability goals.
It would be interesting to see them try to justify how central bank asset purchases lead to “maximum employment” and “price stability.” Price “inflation” also received an honorable mention:
Prices fell in March and April in many categories that were affected the most by social-distancing measures, such as the prices for air travel and hotel accommodations.
Surely economists calculated the inflation numbers correctly and accounted for the decrease in prices while considering the change in relative importance of each item used to arrive at their inflation number. Can anyone imagine what would happen if the actual “inflation rate” was much higher, such as 5 percent? What would that mean for the stock market, bond market, risk ratings, Treasury prices, pension plans, long-dated contracts, and a whole host of other calculations that factor in inflation?
There was much deliberation and many economic projections made, each piece of data used to help plan our future, ensuring the Fed gets closer to reaching its mandate of maximum employment and stable prices, ostensibly to the benefit of society. Ultimately, for all the pomp and circumstance surrounding the Fed, there really isn’t much to be revealed. Congress granted them a monopoly on the US dollar allowing them to create and destroy money (credit) as they see fit, all while manipulating interest rates. Tragically, they won’t even deny this. It’s policy and all explained on their website.
According to new jobs data released today by the US Labor Department, total nonfarm employment grew by 4.8 million in June (seasonally adjusted). The gain was even larger (5.1 million) in non–seasonally adjusted totals.
June's unemployment rate was 11.1 percent, a drop of 2.2 percent.
This means total employment is now "only" 14.6 million below the November peak, meaning the US is now back to where total employment was in 2015.
As we can see in the first graph, so far a "V-shaped recovery" looks possible. In April, employment crashed by the largest amount seen since the Great Depression. The economy recovered more than 3 million jobs in May in addition to June's 4.8 million jobs.
But it remains unclear if the current job recovery will continue at the same rate. In June it looked like government-imposed business closures might be disappearing, but by late June state governors and other policymakers had begun announcing or threatening new business closures and lockdowns. This will no doubt have an effect on employment in July, but the extent of the effect is impossible to predict at this time.
If the recovery continues at its current rate, then total employment could recover within a few months, making the 2020 recession (at least in terms of jobs) considerably shorter than the Great Recession. Here is total employment (by recession and final month in each cycle before job losses began) indexed to peak month, and the number of months that passed before employment returned to peak levels:
In recent weeks, however, unemployment claims have remained stubbornly flat. For the week ending June 27, new unemployment claims increased by 1.43 million. This was only down slightly from the previous week, when there were 1.48 million new claims. Since March, new unemployment claims have totaled over 48 million.
That 1.43 million number for last week remains very large. During the Great Recession, new unemployment claims peaked at around 660,000 in late 2009. So long as unemployment claims continue to number above a million, we're looking at job losses well above what would be considered "normal" even in a recession.
Moreover, continuing unemployment claims actually increased slightly from the week ending June 13 to the week ending June 20, climbing to 17.9 million.
If unemployment claims continue to move sideways, there's good reason to suspect employment in July may do the same.
At the same time, the unemployment rate could continue to fall if workforce participation continues to fall. As people leave the workforce, the unemployment rate could theoretically fall even without any job growth.
And workforce participation is indeed falling. In April of this year, participation (for all ages) fell to about a 43-year low, coming in around where it was in April 1976. Participation climbed again in May and June, but remains near a forty-year low for June.
The weak jobs market appears to be most impactful on young workers and old workers, as workforce participation in prime earnings years has not been as affected. For workers in the 25–54 category, workforce participation is back to where it was in 2015.
Unless we start to see a more rapid drop-off in unemployment claims, it's difficult to see how a V-shaped recovery will continue. Moreover, much will depend on how harsh ongoing business closures and partial "lockdowns" are in the US. Since these policies are set at the state level, employment numbers will likely be very uneven from state to state. As we saw in the state-to-state data for May, many states with particularly harsh lockdowns, such as New York and Michigan, were among the states with the highest unemployment rates.
Of all the problems 2020 has given the world, perhaps one of the greatest has been granted by the Fed to a handful of CEOs across the country, that is, if their corporation has a credit rating of junk bond or higher.
On Monday the Fed announced the opening of its much-anticipated Primary Market Corporate Credit Facility (PMCCF), the $500 billion program whereby the Fed will create money out of thin air and lend directly to “large employers” in America. The term sheet says the pricing will be “issuer-specific.” But we can assume that it will be below market, otherwise no one would borrow directly from a central bank.
The justification behind this has been provided by the New York Fed. This time it's:
In general, the availability of credit has contracted for corporations and other issuers of debt while, at the same time, the disruptions to economic activity have heightened the need for companies to obtain financing.
Times may be rough indeed, especially for large employers such as Microsoft, a company currently valued at $1.5 trillion and that has fallen on tough times of late. Just last week it announced the permanent closure of all of its eighty-three retail locations according to CNBC:
Microsoft said the closing of its physical locations will “result in a pre-tax charge of approximately $450 million, or $0.05 per share.”
We won’t know whether or not Microsoft decides to take up the Fed’s offer to buy debt until the end of the month, when the Fed provides its monthly lending facility reports to Congress.
Other than using the money to pay severance packages, a large employer could refinance existing debt. Per the PMCCF term sheet:
Issuers may approach the Facility to refinance outstanding debt, from the period of three months ahead of the maturity date of such outstanding debt.
This would be great, especially since Congress is funding the PMCCF with $50 billion. The taxpayers can help fund interest savings for their employers!
Of course, if refinancing isn’t an issue, share buybacks could be a solution. In 2019, many large employers and some companies on the verge of bankruptcy spent $730 billion on buying back their own shares, while in 2018, that number was $1.1 trillion as reported by Fox News, citing the S&P DOW indices. Maybe this liquidity will help corporations restore their spending habits to match pre-COVID levels?
In a time when physical store locations may prove both undesirable and problematic, and where existing debt levels are through the roof, what can the largest corporations in America do with this money other than restructure, replace old debt with new cheaper debt, or buy back their own shares? Sadly, we live in a time where a few billion dollars can only go so far.
With the venerable Dr. Thomas Sowell turning ninety this week, a question arises in the fintwit (financial Twitter) world: Who is the greatest living economist?
This question is more difficult than it appears. First, determining the "greatest" individual in any human field is always a highly subjective endeavor, whether we're talking about economists or basketball players. Do we mean the most brilliant economist, in terms of sheer mental horsepower, or the most influential? The most prolific? Most "correct"? Most respected? Most listened to, either by policymakers or the public? The economist with the most significant impact today? The most famous? Someone who is most popular among their academic peers, or best known to lay audiences? A wonkish technician, or a pop editorialist like Paul Krugman? Someone with a strong political orientation, like Thomas Piketty, or an ideologically inscrutable professor type? And should lay audiences have a vote, or only professional and academic economists equipped to judge the technical prowess and substance of a peer?
Again, this question is highly subjective and unlikely to produce a broad consensus answer. But let me offer three seemingly obvious criteria for greatness: (i) the individual has made significant original contributions to the existing economics literature, and not only in a very narrow area or subdiscipline; (ii) the individual has produced a significant treatise (not just a book or articles) synthesizing and expanding the existing body of knowledge in at least one important area of economics (e.g., money and banking); and (iii) the individual will continue to be widely read and cited after their death.
With all this in mind, I asked several economists to nominate the greatest living economist. Admittedly everyone I canvassed is Austrian or free market in their orientation, but all were asked to consider the profession as a whole in their answers. And I insisted they limit themselves to one name (but caved to the pressure and made an exception for Bob Murphy).
Here are some of the answers, to be updated as I receive more (some asked to sleep on it!):
Professor Walter Block, Loyola University New Orleans: Bill Barnett. "I vote for Bill Barnett. He’s been my mentor in econ for the last 20 years or so, particularly in money macro. He's brilliant, creative."
Professor Per Bylund, Oklahoma State University: Hernando de Soto. "I agree with the names that have already been mentioned. If I were to add a name with a different type of impact and importance, I might pick Hernando de Soto. For his uncovering of how poor people in poor countries have capital but lack the institutional support to use it. Had this been a couple of years ago I would have added Harold Demsetz to the list."
Professor Thomas DiLorenzo, Loyola University Maryland: Thomas Sowell. "Good Chicago-trained economist whose work has educated millions, everything from his Economics in One Lesson–style textbook to books on race and everything else."
Professor Carmen Elena Dorobăț, Manchester Business School: Jagdish Bhagwati. "Interesting question, difficult to answer because economics is so fragmented these days; no one is writing treatises and thus discussing economics as a whole. That said, my view is (probably biased) that work on monetary theory and/or international trade, by the nature of the subjects, comes closest to doing economics in its original sense (a unified explanation of how markets work). With that in mind, Jagdish Bhagwati and Douglas Irwin on the international trade side, and Robert Mundell on the monetary side are possible candidates. They all also do quite a bit of history of economic thought, and history of economic policy, which is becoming a lost art in the mainstream these days. If I had to rank them, it'd probably be Bhagwati, Mundell, Irwin. I hope this helps! And just to be clear, Joe Salerno is better than all of them."
Peter Earle, American Institute for Economic Research: Israel Kirzner. "I would choose Israel Kirzner. He bridged the gap between Austrian and neoclassical theory in a way which didn't compromise the methodological basis of the Austrian school and put the entrepreneur at the center of the market process: coordinating consumption demands with plans of production though constant relative movements of price and the interplay between profit (reward) and loss (sanction). A process whereby alertness within market systems leads to discovery and creation is vastly more nuanced than the prefiguring Walrasian model."
Professor Richard Ebeling, The Citadel: Israel Kirzner. "In my view, the greatest living economist is Israel M. Kirzner. Why? First, he is the last living giant of the modern Austrian school who has successfully helped to preserve and restore the 'Austrian' tradition (along with the late Murray N. Rothbard), and, second, due to his own unique and important contributions (building on Ludwig von Mises and Friedrich A. Hayek) to the theory of the entrepreneur and the market process."
Gene Epstein, Barron's (retired) and the Soho Forum: George Reisman. "Ironically, not because of what George happens to think is his major contribution (to the theory of profit) but for all the energetic and imaginative insights I find in his massive tome Capitalism. For example, I often cite his lucid explanation of why wages rise under free market capitalism, despite 'worker need & employer greed'; his recognition that, while land acquisition has historically unjust roots, the 'stain' gets wiped away under free market capitalism; or his balanced critique of Adam Smith as having written some of the best and worst stuff on free markets."
Dr. David Gordon, Mises Institute: Joseph Salerno. "Joe Salerno is the economist I would rely on for understanding Austrian economics."
Professor Steve H. Hanke, Johns Hopkins University: PENDING.
Professor Emeritus Hans-Hermann Hoppe, University of Nevada Las Vegas: PENDING.
Professor Peter Klein, Baylor University: Robert Lucas. "I'm going to interpret your question to refer not to economists I personally like, but to those who are universally recognized in the field for accomplishment, influence, etc. The way 'greatest economist' might have been interpreted in Menger's or Mises's day. That would rule out people like Krugman and Stiglitz who are widely regarded as politically motivated public intellectuals, not serious economists, along with highly cited, but younger scholars like Daron Acemoglu."
Professor Matthew McCaffrey, University of Manchester: Amartya Sen. "Sen's work on development marks a break from the narrow, technical accounts of development that treat it purely as a matter of increasing economic indicators like GDP. Although Austrians can find much to criticize in his broader approach to economics, his work raises interesting questions and challenges that are usually absent from mainstream research."
Dr. Robert Murphy, Mises Institute and Independent Institute: Robert Lucas, hedged with Dr. Joe Salerno. "The problem is that my personal views are so far removed from the profession that I will cheat and answer two related questions, rather than what Jeff asked. 1) Who is the most important economist among living Nobel laureates? I would say Robert Lucas. His critique of old-school Keynesian macroeconometric models was an amazing achievement in science, the way intellectuals conceive of the advancement of science. Then his work on rational expectations laid the foundation for RBC and a lot of the modern Chicago school approach to financial markets. Furthermore, he is quite simply a super smart guy; e.g., in grad school we used his textbook on recursive mathematical methods. Even his critics agree that the models in the literature he spawned were elegant and rigorous; they were just wrong. 2) The reason I don't say Lucas is the greatest living economist is that he's missing out on the importance of economic calculation as developed in the Misesian tradition. So, who is the single best living economist to exemplify what the rest of the profession is missing? Joe Salerno."
Professor Emeritus George Reisman, Pepperdine University: George Reisman. "The reasons why I name myself will become apparent to any knowledgeable reader who takes the trouble to read my Capitalism: A Treatise on Economics. The book contains a number of major original contributions any one of which is worthy of a Nobel Prize. As one example, my demonstration in Chapter 15 that, contrary to contemporary “macroeconomics,” most spending in the economic system is not consumption but rather is concealed under the heading of net investment."
Professor Mark Thornton, Auburn University and the Mises Institute: Robert Higgs. "I nominate Bob Higgs for his reinterpretation of modern American history. He transitioned from a mainstream economist to a radical Austrian."
Of course no single opinion is dispositive. But it's important to consider economists in the broader context of truth and human advancement, and assess their relative contributions. At the moment the discipline is at great risk of losing its place as a meaningful science thanks to an orgy of mathematical methods and politicized demands for a "new" economics. We need to build a generation of young economists who actually understand history and theory, and we need to build it fast.
It has long been said that the financial and economic education in the public school system is far from perfect. I, as a current high school student, can vouch for that claim. From promoting crazed statist ideologies to nonsensical Keynesian beliefs, the public school system is nothing short of a tool for the state to harness power.
In school, I was taught that the Federal Reserve was created in 1913 to manage prices and employment. Never once were we taught that the Fed’s mandate did not include anything about prices and employment until the Federal Reserve Act of 1977. It is likely that this was left out of the curriculum so that it would seem that the Federal Reserve has over one hundred years of experience in these matters, thus making them the so-called experts. However, the Federal Reserve’s mandate change was nowhere close to one hundred years ago and its experience has been far from perfect. Of course, its negative track record was left out of the teaching. Never once were we shown the drastic increase in prices and inequality since the mandate change.
In fact, we were told that the free market is the cause of inequality and that government intervention is the only way to fix it. Of course, we never learned about how perverse incentives, quantitative easing, and a fiat system are the forces that cause artificial inequality. It was for the promotion of the same idea—that government is the only answer—that we never learned about the vast inequality that blossomed after the dissolution of the Bretton Woods system.
The reality is that much inequality is the result of artificially high stock market prices due to easy money policies. Speaking of the stock market, I was taught in school that a stock market on the rise depicts a strong economy. Of course, this is not necessarily true. The stock markets of the Weimar Republic and Zimbabwe skyrocketed in their respective currencies as a result of their reckless counterfeiting policies, but surely you could not argue that hyperinflation is a sign of a strong economy. In fact, you do not even need to leave the United States for evidence. Recently, the stock market was at record highs before plunging into a recession and a sovereign debt crisis. COVID-19 was merely the catalyst, for the recession was coming anyway. It is hard to argue that a grossly overextended economy is somehow a strong economy simply because stocks were going up. But it was this type of thinking that made my fellow classmates think that since stocks had started to go back up after the mid-March sell-off that everything would be fine and there would be no recession. Sure, stocks may go up in nominal terms, but certainly not in real terms for the foreseeable future. This, of course, was never mentioned by any of my economics teachers. And it is this type of thinking that keeps the state in control. If the younger generation thinks that bailouts and intervention worked, why would they not vote for it in the future?
We were told that quantitative easing was a successful policy. But how is that we then needed multiple QEs after the one following the 2008 recession? If QE1 worked so well, why are we now on QE4? Surely, the dogmatic love of quantitative easing is a sign of insanity in its very essence. In addition to quantitative easing, we also learned about tightening policies and how the government attempts to limit its debt during economic booms. However, that is simply not true. The artificial market boom that took place during the Obama presidency and the first term of the Trump administration happened as the national debt ballooned up to catastrophic heights. Where exactly was the policy of quantitative tightening? Nonexistent. These unfortunate facts for the statists and their failed doctrines were completely left out of the curriculum.
It should be clear by now that the state-run schools cannot be trusted with teaching economics. To be sure, many of the teachers are simply teaching the curriculum mandated by the state and do not want to risk losing their jobs by teaching true economics. But the reality is that the only way to fix the problem is to abolish public schooling and state-mandated standards in exchange for private education—a cheaper and more efficient solution that eliminates the monopoly on schooling. Only then will the ideals of Ludwig von Mises and Rothbard be well understood and manifest into actual policies.
The first time governments imposed business closures in the name of fighting the spread of COVID-19, the job market imploded.
Forty million Americans lost their jobs, and at least 20 million of those are still unemployed. Income in America fell to such low levels that federal tax revenues fell by more than 50 percent year over year in April and remained down more than 25 percent in May. These are losses of historic proportions.
It remains to be seen if the country even began anything that could realistically be called a "recovery" in June. After all, new unemployment claims were still at over a million new applicants according to the most recent data. That's still off-the-charts bad. Nonetheless, we continue to hear about how, any day now, we'll see evidence of a "V-shaped recovery" in which jobs and economic growth will come roaring back.
But now we're already seeing governments—by which I mean a small cadre of governors and unelected bureaucrats who currently rule by decree—announcing another round of business closures and ongoing government regulations that micromanage every aspect of a business's daily interactions with customers.
This is likely to greatly slow any V-shapred recovery that might have been forming, and it will give businesses reason to further put off plans for implementing efforts at recovering from the economic crash experienced in April and May.
This is due to businesses being physically barred from hiring in many cases, but it's also due to "regime uncertainty."
Regime uncertainty is a wealth-killing, job-killing phenomenon in which business and property owners cannot plan for the future because of capricious, unpredictable, and incoherent government interventions.
This has happened a number of times in the past in the United States, an in each case, it prolonged economic depressions.
As shown by economic historian Robert Higgs, regime uncertainty was a significant factor in the long duration of the Great Depression. It again became a factor during the so-called Great Recession, when the US government began implementing a veritable smorgasbord of new regulations and bailouts.
During these periods, there were few limits on government action and the legal environment was prone to be substantially changed on short notice and in a succession of fits and starts.
Not surprisingly, under these conditions, businesses became reluctant to engage in new plans for expansion, employment, or investment.
Now, thanks to the coming "second round" of state lockdowns, businesses are once again in a similar position.
For example, yesterday Colorado governor Jared Polis announced that the governor's office was once again shutting down bars and nightclubs, after only a few weeks of being allowed to remain open. This comes after a tiny uptick in new cases in the state.
What was the legal process for dictating to these businesses that they must now remain closed? There was none. For all we know, Polis just decided in the shower yesterday morning that it "felt right" to close down bars again. There is no debate, no checks and balances, no period for public comment. We live in a world where a politician can simply decide to shut down businesses whenever the mood strikes him.
Polis certainly isn't the only politician of this type.
Governors in a number of states have taken similar actions, from California to New York to Texas and Florida. Bars, and other businesses, are again being closed by government edict. Or as in New York, they are not being allowed to open at all.
Some observers might shrug and say "well, it's only bars and a small minority of businesses. It's no big deal!" This might be true to some extent were other businesses able to obtain any useful information on the likelihood that they too will be shut down. After all, just because it's "only" bars being closed now doesn't mean it won't be all restaurants, barbershops, and offices later.
And how might businesses get this information for planning purposes? It's not as if any objective standards or guidance are offered by the secretive junta of bureaucrats that decides a business's fate.
A business could ask, "At what number of new cases/hospitalizations will you extend new business closures?" But the business is unlikely to receive any answer, because it is clear that governments have established no objective standards of any kind. These government planners apparently decide business closures based on personal whims or on political pressure. What's worse, these changes can occur without any warning at all. Even after months of talk about plans for dealing with COVID-19, governments have yet to announce or establish any standard at all by which to judge whether business closures or lockdowns are necessary. Exactly how many COVID-19 deaths or hospitalizations are necessary to "trigger business closures"? Virtually no government is willing to say. The only governor who appears to have even suggested an actual numerical standard is Greg Abbott of Texas who claims:
As I said from the start, if the positivity rate rose above 10%, the State of Texas would take further action to mitigate the spread of COVID-19.
But even in this case, government action is vaguely defined only as "further action." That could mean virtually anything. So business owners are left just guessing what governments might do next without anything we might call "due process" or even a "legislative process." It's just a matter of a single man or woman issuing diktats about whether or not a business owner is allowed to use his or her property. Moreover, just because it's someone else's business today, doesn't mean it won't be your business tomorrow. That's the nature of regime uncertainty. One round of regulations now doesn't mean there won't be something quite different and far worse coming down the line soon.
Under these conditions, there is little reason to assume there will be a V-shaped recovery. After a period of only one month of "reopening," governments are already enacting new business shutdowns and claiming the authority to engage in these shutdowns indefinitely. It's as if the system were designed to maximize regime uncertainty and destroy employment and income. For business owners, there's no end in sight.
June 30 is Frederic Bastiat’s birthday. That is noteworthy, as his contributions on behalf of liberty were not only massively important, but have stood the test of time.
As Julian Adorney and Matt Palumbo wrote for the Mises Institute, he used "taut logic and compelling prose to bring the dry field of economics to hundreds of thousands of laymen."
Murray Rothbard wrote that he was "a lucid and superb writer, whose brilliant and witty essays and fables to this day are remarkable and devastating demolitions of protectionism and of all forms of government subsidy and control. He was a truly scintillating advocate of an unrestricted free market."
The introduction to The Bastiat Collection, which incorporates his greatest works, summarizes his importance by saying that "If we were to take the greatest economists from all ages and judge them on the basis of their theoretical rigor, their influence on economic education, and their impact in support of the free-market economy, then Frédéric Bastiat would be at the top of the list."
For all the praise Bastiat has deservedly received, however, his greatest works don’t exhaust his wisdom, and people are far less aware of some of those other words of wisdom. In particular, in Frederic Bastiat: The Man and the Statesman, Liberty Fund has published a collection of 207 letters he wrote (including many to Richard Cobden, "the father of free trade"), but they have not gotten the same attention as his major works.
That is why it is worth celebrating Bastiat’s 1801 birth by looking to his letters for added words of wisdom, following his recognition that "Truth has power only when it is defused." Here are some that I found particularly striking:
- "As long as our deputies want to further their own business and not that of the general public, the public will remain just the tail end of the people in power."
- "Although there are a few souls who instinctively would like freedom to a certain extent, there are none who understand it in principle."
- "Let us raise the flag of absolute freedom and absolute principle, and let us wait for those with the same faith to join us."
- "We would not even be able to mention the word justice if we accepted the shadow of protection."
- "The liberation of trade will lead to political liberation…invasive politics will have ceased to exist."
- "I want not so much free trade itself as the spirit of free trade for my country. Free trade means a little more wealth; the spirit of free trade is a reform of the mind itself…the source of all reform."
- "The cause we serve is not bounded by the borders of a nation. It is universal and will find its solution only in its acceptance by all peoples."
- "[Many] have the same goal, tyranny. They differ only on the question of…in whose hands the despotism will be placed. This is why the thing they fear most is a spirit of true freedom."
- "The plentiful bounty of the state…the whole mechanism consists in taking away ten to give it back eight, not to mention the true freedom that will be destroyed in the operation!"
- "Anything that can, directly or indirectly, damage property, undermine confidence, or weaken security is an obstacle to the accumulation of capital and has an unfavorable effect on the working classes. This is also true for all taxes and irritating governmental interference."
- "How can industry revive when it is accepted in principle that the scope for regulation is unlimited? When every minute a decree on earnings, working hours, the cost of things, etc., can upset all economic decision making?"
- "The dominant notion…that has permeated every class of society, is that the state is responsible for providing a living for everyone….The real cause of the evil is certainly the false ideas of socialism."
- "The state has been required to provide for the welfare of its citizens directly. But….This means that the state or the public treasury has been plundered."
- "Every class has demanded from the state the means of subsistence, as of right. The efforts made by the state to provide this have led only to taxes and restrictions and an increase in deprivation, with the result that the demands of the people have become more pressing….[All] have called upon the law to intervene to increase their share of wealth. The law has been able to satisfy them only by creating distress in the other classes, especially the working classes. These therefore raised a clamor, and instead of demanding that this plundering should cease, they demanded that the law should allow them to take part in the plundering as well. It has become general and universal."
- "Each person should call upon his own forces to provide his means of existence and expect the state to provide only justice and security."
- "You need to be uncommonly absurd and foolish to believe that it is an act of courage to vote in favor of might…the majority, the passions of the moment, and the government."
- "Protectionism [is] the negation of the right of property."
- "Protectionism is a plague."
- "As long as the state is regarded…as a source of favors, our history will be seen as having only two phases, the periods of conflict as to who will take control of the state and the periods of truce, which will be the transitory reign of a triumphant oppression, the harbinger of a fresh conflict."
- "The legitimate functions of the government…once these functions have been understood and these limits set, the people governed will no longer expect prosperity, well-being, and absolute good fortune but equal justice for all from their governments….governments will have their ordinary action circumscribed, will no longer repress individual energy, will no longer dissipate public assets…and will themselves be freed from the illusionary hopes pinned on them by their peoples."
- "[Even] the best assembly is good only for preventing evil."
- "What I ask of the law is that it should be neutral between us and that it should guarantee my property in the same way as that of the blacksmith."
- "The government should guarantee security to each person and…should not concern itself with anything else."
"A keen wit and a clear pithy writing style," as Adorney and Palumbo described it, is clearly on display in Bastiat’s letters as well as his other, better-known writing. That is why his letters are worth our consideration as well. They even provide us with a toast worthy of emulating:
Allow me, in closing…this toast: To free trade among peoples! To the free circulation of men, things, and ideas! To universal free trade and all its economic, political, and moral consequences!