Power & Market
On the heels of what might be heralded as one of the most important Fed meetings in over a decade, all we can do is speculate about what our central planners have in store. Meanwhile, consider the anticapitalist mentality running rampant in the world around us: the global pandemic, civil unrest across the USA, sky-high world central bank balance sheets, nearly $26 trillion in US debt, the highest unemployment rate since the Great Depression, the Bank of England calling for the worst economic slump in the last three hundred years, the Fed still having potentially trillions of dollars more in unused liquidity facilities at its disposal, and the stock exchange on the verge of reaching all-time highs once again. Then The Economist has the audacity to publish an encouraging article that suggests "Don’t Worry About Inflation—Yet" with the headline quote:
Monetary stimulus is unlikely to spark sustained price rises while labour markets remain depressed.
Because, according to The Economist, money creation, combined with less goods and services produced, doesn’t lead to a rise in prices. Nor does it cause a rise in the prices of assets such as stocks and contribute to the overall unaffordability of life for the average family. Don't forget to factor in a $14.3 trillion household debt level which has now surpassed the debt level during the Great Recession. Yet we’re supposed to think that this is acceptable since interest rates are low and "inflation" appears to be "feeble" according to mainstream news sources.
As for the Fed, they remain under media blackout. No comments have been made publicly this week or last. However, billionaire hedge fund manager Steve Druckenmiller highlighted the disconnect between the stock market and reality best on CNBC:
What is clearly happening is the excitement of reopening is allowing a lot of these companies that have been casualties of Covid to come back and come back in force.
Surely, the several trillions of dollars that were literally created out of thin air by central banks had something to do with the rally in the stock market. Or, explained differently, if the Fed had not taken extensive measures to support the economy by purchasing trillions of dollars in debt, would the stock market have rallied as it has?
As we watch the market continue to rise, the disconnect with reality becomes even more pronounced. The National Bureau of Economic Research (NBER) press release on Monday declared the obvious:
The committee has determined that a peak in monthly economic activity occurred in the U.S. economy in February 2020. The peak marks the end of the expansion that began in June 2009 and the beginning of a recession. The expansion lasted 128 months, the longest in the history of U.S. business cycles dating back to 1854.
The good news is that the NBER offered a faint source of optimism at the conclusion of the statement, noting:
The unprecedented magnitude of the decline in employment and production, and its broad reach across the entire economy, warrants the designation of this episode as a recession, even if it turns out to be briefer than earlier contractions.
With countless challenges ahead, it will sadly be up to a handful of wealthy elites to steer the economy in the direction they see fit. Although the FOMC statements are normally templated and lackluster, it’s the Q&A that provides valuable insight into the mind of a planner. We can only hope someone will ask questions such as “How does a central bank unwind a $7 trillion balance sheet?” or “What does a $750 billion bond/exchange-traded fund program have to do with the Fed’s mandate?” But if not, at least we’ll get to hear about their invaluable economic projections!
Listen to the Audio Mises Wire version of this article.
Donald Trump's executive order issued earlier this week purports to prevent online censorship by effectively instructing federal agencies to reinterpret the Communications Decency Act of 1996 (CDA). In particular, Trump has a well-founded complaint with the infamous section 230 of the CDA, which grants tech companies a certain level of immunity from various civil lawsuits, including defamation lawsuits. By doing so, section 230 not only attempts to preempt state law to the contrary—federal preemption is almost always bad— but also creates a class of actors that enjoys the status of a neutral platform or common carrier but exercises editorial discretion.
Remember, in 1996 social media did not exist. Search engines like Alta Vista and Netscape were rudimentary; most people still typed site addresses into their browsers. The CDA was aimed primarily at internet service providers such as AOL, which Congress ostensibly wanted to shield from any liability for the actions, communications, or content of users. After all, when two individuals engage in a criminal conspiracy by phone prosecutors don't indict the cellular network provider. The CDA made sense in an era when the internet was in its infancy.
But fast-forward twenty-five years, and social media companies have been thrust into the role of "community standards" police. Search engines, particularly Google, are the gatekeepers and curators of the information we consume. These tech companies now appoint themselves arbiters of truth and propriety, and not only with regard to politics and campaigns. Hate speech and harassment, both ambiguous and ever shifting, are grounds for removal or suspension from platforms. Unorthodox or politically incorrect views on scientific issues surrounding global warming, vaccines, and COVID-19 are regulated by invisible algorithms or unaccountable employees of tech companies. "Bad" websites and blogs disappear from search results, or are buried so deep as to become invisible.
By any measure, these actions by technology companies—banning, suspending, shadow banning, and demonetizing—are based on the content involved or the identity of the user. In both cases, editorial judgment is applied. This is inescapable. So to the extent that the CDA immunizes editorial decision-makers or their tech company employers against liability for damages from lawsuits otherwise recognized by state law or common law, libertarians have every reason to object. But as with most cases of favoritism in law, the answer is repeal of special privileges rather than more legislation.
A few additional summary comments:
- Executive orders are inherently suspect and generally bad, not simply because of (at this point laughable) constitutional concerns, but because they establish another layer of de facto "laws" for which you and I have little legal recourse. If the CDA needs amending, let Congress do it. Better yet, scrap it.
- Yes, Facebook, Google, Twitter, Amazon et al. are private companies, despite their deep entanglements (including contracts) with the federal government. Virtually every industry and every large company is in bed with Uncle Sam, from subsidies and lobbying to protectionist legislation. If we allow such entanglements to justify even deeper levels of regulation, we only further erode what ought to be a bright-line distinction between private sector and state.
- Yes, these companies have deeply illiberal biases, and even outright illiberal agendas, from a libertarian perspective.
- No, private companies are not required to give you or anyone else access to their platforms.
- No, the First Amendment does not apply to private companies.
- "Fact checking" is inherently and inescapably political. Who are the disinterested angels charged with performing these checks? Which facts are checked, and whose facts are checked? What about half-truths and distortions, as opposed to outright falsehoods?
- We are all "media" in an age of instantaneous social sharing platforms and camera phones. The First Amendment did not create or contemplate a special class of institutional press that enjoys enhanced protections from government. Kids on bikes have as much right to "cover" the situation in Minneapolis as CNN, and your Facebook posts deserve the same protections as Wolf Blizter's nightly show.
What to do, then? Peter Klein lays out one path forward:
- Repeal the CDA.
- Enforce contractual agreements between platforms and users.
- Avoid all attempts at viewpoint neutrality regulation.
- Remove government-created entry barriers for new entrants (including the CDA).
- Don't treat information as property (e.g., don't act as if users "own" "their data" and enforce regulations on portability).
- Finally, Trump simply should move to Gab or a similar platform. Many of his 85 million followers would follow, and this would do more to "punish" Twitter (and encourage new competitors) than any legal action.
We received a new donation from Mr. Carl Watner entitled The Voluntaryist Collection. The highlight of the donation includes the six-volume set: The Collected Works of Lysander Spooner. Within the collection is a series of personal inscriptions that Mr. Watner collected at libertarian conferences over the years, including by Murray Rothbard, George Smith, Leonard Liggio, Joe Peden, Mike Coughlin, Charles Shively (editor of the six volumes), Daniel Siegel (publisher), Wendy McElroy, Chuck Hamilton, John Mueller (cofounder of Laissez Faire Books), and Robert LeFevre.
Mr. Watner's generous gift will be included in the Mises Institute archives, alongside the donations of great libertarian thinkers such as Rothbard, Dr. Robert Higgs, Dr. Ralph Raico, Mr. LeFevre and the Freedom School, and more.
The Mises Institute archives remain one of the world's leading research centers for Austrian economics and libertarian thought, providing a unique resource for research fellows who continue to make their own contributions to the ideas of liberty.
There are some very disturbing calls for quick-fix "solutions" following the reporting of how countries have and have not handled COVID-19. It is not about how contagious or dangerous the virus actually is, which is not my expertise, but the typical and dangerous misunderstanding of the supposed efficiency of hierarchy and, therefore, the effectiveness of control societies, authoritarian rule, and dictatorial regimes.
To put it simply, the claim is that China "handled it right," was able to do something by acting fast and forcefully, and, by implication, that open societies are impotent to threats and fundamentally fragile. But this is exactly wrong. This misconception arises out of a common but fundamental misunderstanding of social organizing (such as society, markets, etc.). And, interestingly, it is put forth by people who should definitely know better, including influential investors and entrepreneurs in Silicon Valley.
There is some limited truth to the argument that a centralized power can act faster and more forcefully (that is, brutally and without respect for individuals or groups of people), but it is based on embarrassingly ignorant assumptions. To be true, it requires that the regime, those in power, have the correct information and act in the best interest of society. Those are not simply exaggerated assumptions but are in fact never true.
I won't speculate about whether this comes from the myth that a king is an enlightened despot, even appointed by a god, that we've been told for centuries by those who benefit from such a lie. What matters is that although hierarchy can indeed act swiftly, it always acts on the wrong information. And, from the point of view of society at large, it acts with the wrong objectives, placing the will of the leadership before that of people in general. In a control hierarchy like that in China, accurate information does not flow freely and certainly not upwards to the decision-makers.
The same thing is true, albeit with lesser such pressures, in any government (and corporate) bureaucracy.
Neither are the bits and pieces of local information are put together and condensed properly. Nobody in such hierarchies has an incentive to do "the right thing," especially for common people. The incentive is to watch their own backs. As in all bureaucracies, especially political ones, the number one priority is to avoid getting caught with responsibility for something that turns out bad. Keep your head down and follow the rules; make sure the higher-ups are satisfied, on whatever ground, and keep your subjects in check. If you don't play it safe, you'll be sacrificed at the stake if something goes wrong.
Those calling for swift action and pointing to China's quarantining multimillion-people cities as a "success recipe" to stop the contagion must believe either that the hierarchy properly transmits the right information and filters out irrelevant data (which is simply impossible) or that information does not matter (the horrific "we must do something" view, which will be deadlier than the virus).
It is true, as Danielle Pletka argues, that dictatorships only make pandemics worse. Swift, forceful action on the *wrong* information, or without respect for human life and liberties, is and can be nothing but disastrous. History is littered with examples of such regimes, and their track record is without exception abhorrent.
It may seem counterintuitive, but the truth is that decentralized decision-making and market-style systems always beat centralization and power—because they aggregate and condense information much more appropriately and because they allow for actions more appropriate to local conditions. I understand that fear, fueled by alarmism, can lead to panic and poor judgment. But the call for authoritarianism as a solution, regardless of the threat, is much worse than poor judgment.
It is not only ignorance of how hierarchies work, but a type of ignorance that has historically always ended in mass murder. If it sounds like a quick fix, stay away. It may be quick but not a fix. It is incumbent upon us to not listen to the false prophets and to resist the temptation to believe impossible promises.
Centralization is one such promise that has always been offered as a solution but has never delivered. Unless you're the one seeking and are granted the power, like the kings of old. And their common denominator was not to altruistically serve common folks. As in any time of crisis, the best course of action is to keep a cool head and not panic.
The call for authoritarianism, ignorantly presented as a quick fix, is at best irresponsible. But it could turn out to be much, much worse.
Formatted from Twitter: @PerBylund.
The Mises Institute is happy to welcome Daniella Bassi to our staff!
Ms. Bassi will act as assistant editor for mises.org, our journals, and our full slate of new books for 2020.
Ms. Bassi joins us from the College of William and Mary in Virginia, where she edited publications for the Omohundro Institute of Early American History and Culture.
She also was the senior editor for the University of Vermont History Review while earning her master's degree there.
Back when I taught political science, a phrase I used when preparing students for the tests was "he who makes distinctions well, teaches well."
That is, if we're talking about regime types, dear student, you better know the difference between a totalitarian regime, and a regime that is merely authoritarian. If we're talking about eighteenth-century American ideologies, you better know the difference between Alexander Hamilton and Thomas Jefferson. If we're talking economic policy, know the difference between fiscal policy and monetary policy.
And when it comes to different groups of Americans often considered to be homogeneous, it is often helpful to dig a little deeper to see some of the differences.
One such group is indigenous Americans. Or in the common parlance: "Indians."
Often, whenever one reads a news-media article about Indians, it usually begins with a few sentences about how poor they are, and how terrible the reservations are in terms of their standards of living. Usually, the Pine Ridge reservation in South Dakota is mentioned.
But at all reservations equally poor?
After all, some reservations have forests and ample access to water. Others are in the middle of deserts with few natural resources. Some relatively near metro areas and all the services they provide. Some reservations are hours from good healthcare and good shopping.
Well, it turns out that all reservations certainly aren't all the same.
Looking at the top-25 most populous reservations, we find that the median income among people who self-identify as Indians varies from $18,890 on the Gila River reservation (AZ) to $79,167 on the Agua Caliente reservation (CA). That's for the period from 2013 to 2017.
The overall US median income during the period was about $57,000, which means the median income for Indians on the Isabella and Tulalip reservations were about equal to everyone else.
Indeed, given that many reservations are in rural areas, it's helpful to compare incomes not to the US overall, but to the incomes of Rural Americans. The rural median income for the same period is $44,020. That means income for the median household on the Agua Caliente, Isabella, Tulalip, Uintah and Ouray, Osage, Wind River, and Puyallup reservations are all higher than the median household in rural America.A the lower end, however, we do indeed find grinding poverty and remarkably low median incomes that are less than half of the national median income.
Even on the reservations with higher median incomes, poverty rates at the lower end remain elevated. The overall US poverty rate of 14.6 percent (against, from 2013-2017) was lower than all of the 25-largest reservations. The US rural poverty rate of 17.2 percent was lower than all but two (Osage and Tulalip) of the reservations.
One aspect of reservation populations that is often ignored, however, is the fact that on many reservations, people who self-identify as Indian are in the minority.
Among the 25-most populous reservations, the portion of the resident population that was Indian ranged from 1.7 percent on the Agua Caliente reservation to 96.8 percent on the San Carlos reservation.1
Reservations with lower proportions of non-Indian residents tend to be poorer. This may reflect several factors:
- Residents on reservations that are more geographically isolated tend to encounter fewer non-Indian residents, thus leading to less intermarriage, and fewer residents who are not Indians.
- Geographically isolated reservations tend to be poorer, and poorer reservations tend to attract fewer non-Indians engaged in commerce and employment on or near a reservation.
- In many cases, reservations with more laissez-faire economic policies have more "checkerboarding," or mixing of privately owned and tribally-owned lands within this reservation. Checkerboarding may correlate with higher incomes.
In general, rural reservations are often affected by many of the same problems that rural communities in general encounter. There are fewer jobs, and the jobs that do exist often pay lower wages than in metropolitan areas. The US rural median income, for instance is approximately $44,000, while the urban median income is approximately $59,900.
Geographic isolation tends to be a clear factor in cases where the tribe owns a casino. When the casino is near a metropolitan area, it attracts large numbers of visitors to the reservation who spend freely. The most extreme case of this, perhaps, is the Mdewakanton Sioux of Minnesota (a group of under 1,000 people) which owns two casinos within the Minneapolis metro area. Members of the tribe receive nearly one million dollars per year in payments from tribal business organizations.
Another extreme case is the Agua Caliente reservation which is adjacent to Palm Springs, California. The tribe and is one of the city's largest land owners. Only a tiny percentage of residents are actually enrolled in the tribe.
Less-extreme examples of relatively prosperous reservations include the Southern Ute reservation — near the college and resort town of Durango Colorado — and the Tulalip reservation, which owns a casino and business park near I-5 in Washington State, near the Seattle-Tacoma metro area.
[A note on the data: In the first and second graphs, I've used median incomes that correspond to the group labeled "AIANa," which according to the Minneapolis Fed's report on reservation incomes, "includes only individuals who self-identify racially as American Indian or Alaska Native alone." In the third graph, the Indian population corresponds to "AIANac" which "includes AIANa individuals and also those who self-identify as American Indian or Alaska Native in combination with other races." See report here: https://www.minneapolisfed.org/indiancountry/resources/reservation-profiles/]
Photo credit: I-5 Design & Manufacture via Flickr (image cropped)
- 1. The number of residents who are members of the tribe governing the reservation is lower than the number of residents who self-identify as Indian.
Neil Schulman, who passed away August 10, was best known as a science fiction writer, and his Alongside Night and The Rainbow Cadenza are libertarian classics. He was one of several brilliant writers and thinkers associated with the great Sam Konkin’s “anarcho—village." I met Neil only a few times, but his commanding presence and vigorous defense of his ideas made an indelible impression on me. He used his immense writing talents in defense of liberty and in opposition to war and the state. Only a few days before he died, he posted on Twitter, “When compared with the typical State assault on innocent civilian populations with deaths in the thousands, hundreds of thousands, or millions, the typical private assault doesn't even register.” He admired Ron Paul greatly, and I last heard his booming voice at a conference in Arizona that featured Dr. Paul. His many friends will miss him.
In Anarchy, State, and Utopia, Robert Nozick argues that If people benefit you by their activities, you have no obligation to pay them for what you have gained. Nozick provides a well-known example to illustrate this point: “Suppose some of the people in your neighborhood (there are 364 other adults) have found a public address system and decide to institute a system of public entertainment. They post a list of names, one for each day, yours among them. On his assigned day. . .a person is to run the public address system, play records over it, give news bulletins, tell amusing stories he has heard, and so on. After 138 days on which each person has done his part, your day arrives. Are you obligated to take your turn? You have benefited from it, occasionally opening your window to listen, enjoying some music or chuckling at someone’s funny story. The other people have put themselves out. But must you answer the call when it is your turn to do so? As it stands surely not.”
Why not? In brief, you may not think that the benefits are worth the costs to you, and even if they are, you may prefer to spend your time and money on something else. Further, “You may not decide to give me something, for example a book, and then grab money from me to pay for it, even if I have nothing better to spend the money on.” You must secure my consent in advance and cannot present me with a fait accompli and demand that I pay my fair share.
So much is well known, but Nozick extends the point in a way that has not gotten the attention it deserves: “Nor can a group of persons do this. If you may not charge and collect for benefits you bestow without prior agreement, you certainly may not do so for benefits which yet others provided them, So the fact that we partially are ‘social products’ in that we benefit from current patterns and forms created by the multitudinous actions of a long string of long-forgotten people, forms which include institutions, ways of doing things, and language. . .does not create in us a general floating debt which the current society can collect and use as it will.”
In this seldom-cited passage, Nozick has demolished a principal justification for the contemporary welfare state.
Different members of the ECB state that effects of monetary policy on banks’ profitability have been “broadly neutral”. Many also refer to papers defending that banks lend more under a negative rate scenario.
Here is a paper they use frequently trying to say that negative rates are good, do not hurt banks and makes them lend more: Why Have Negative Nominal Interest Rates Had Such a Small Effect on Bank Performance? (Lopez et al).
The paper ignores the collapse in net income margin and ROE and even dismisses ROTE (return on tangible equity) to try to defend the idea that banks earnings have not suffered from negative rates.
Looking at Bloomberg earnings from the Eurozone banks (SX7E Index) between 2014 and FY 2018:
- Net Income margin is down 29% on average since Quantitative Easing started
- Earnings per share is down an average of 12.3%
- Non-Performing Loans reduction has been moderate, and the figure remains elevated, at 3.3% of total banking assets, an important difference compared to other economies (the US is 1.1%) but also because eurozone bank assets are much larger relative to GDP than in other economies.
- The main beneficiaries of the sovereign and corporate bond purchase program have been deficit-spending countries that have all but abandoned any structural reform as borrowing costs fell, the automakers in Germany and semi-state owned utility conglomerates. As such, the ECB QE has increased the crowding-out effect, disproportionately benefiting the indebted and inefficient at the expense of savers.
The worrying part is that these statements ignore the fact that one of the main reasons why banks’ bottom line has not fallen more is they have almost stopped making provisions on bad loans.
There is no critical analysis of the rising risk in these central bank comments. The ECB and the above-mentioned paper assume a direct correlation between negative deposit rates and lending, without considering the risk of endless refinancing of zombie loans and the higher risk for a lower return embedded in the credit growth. Zombie companies have risen with low rates, and the ECB itself acknowledges the connection between weak banks and walking dead firms in this paper (Breaking the shackles: Zombie firms, weak banks and depressed restructuring in Europe).
It is also worrying that the ECB finds no problem seeing “high yield” companies borrow at an all-time low of 360 basis points spread or that bubbles are forming in the infrastructure and housing segments where multiples have soared in recent years despite the weak growth and modest salary and unemployment improvement.
What I find astonishing is that the ECB does not even show concern about the rise in malinvestment, whitewashing of populism by artificially lowering yields on the sovereign debt of deficit countries, misallocation of capital, and the abomination of charging for deposits to lend to almost bankrupt governments and firms at extremely low levels.