Power & Market
Justin Raimondo, longtime editor of AntiWar.com and a great friend of the Mises Institute, has died.
Far too young, we might add, at 67. We can only mourn the silencing of his voice, and acknowledge him as perhaps the most important libertarian foreign policy writer of the past several decades.
Yet unlike many peace advocates, Justin read and understood economics—not to mention history and political theory.
Justin was well known to many readers of mises.org. He authored two important books in the paleolibertarian genre: Reclaiming the American Right: The Lost Legacy of the Conservative Movement, where he called for a return to the noninterventionist principles of the Taft/Garrett "Old Right," and An Enemy of the State, his biography of his great friend Murray N. Rothbard. He shared a special bond and friendship with Rothbard, and the two spent countless hours together working and socializing. I had the pleasure of emailing and calling him from time to time over the years, and interviewed him here. I always came away laughing at his take-no-prisoners approach, and fortified by his relentless determination.
Justin truly hit his stride during Bill Clinton's Kosovo War, for which he criticized the former president (and his wife) mercilessly. Kosovo put Antiwar.com on the map, and made Justin a star in libertarian circles. His sharp tongue and sharp pen, translated well across a keyboard. And his acerbic style, coupled with real research and broad knowledge of world affairs, made for a new kind of online journalism. Certainly many of us fondly remember bookmarking Antiwar.com in the 1990s and 2000s, eagerly waiting for Justin's latest broadside against some deserving tyrant or war profiteer.
Here's a sample of his signature takedown of self-important pols, from just a few years ago:
Libya, Syria, Iraq, Kosovo — these countries, which lie in ruins, are grotesque monuments to the criminality of American “regime-change” operations, which have wreaked havoc everywhere they’ve been successful. With a record like this, it’s incredible that the same pack of buzzards in Washington are allowed to go on their merry way, without having to answer to anyone for their crimes. Indeed, the two leading candidates for the Democratic presidential nomination, Mrs. Clinton and Sen. Bernie Sanders, both supported this disastrous war War.
And of course he never ran out of wars to cover. We'll miss you, old friend.
World War I is the gift that just keeps on giving. Although the U.S. government’s intervention into this senseless, immoral, and destructive war occurred 100 years ago, the adverse effects of the war continue to besiege our nation. Among the most notable examples is the Espionage Act, a tyrannical law that was enacted two months after the U.S. entered the war and which, unfortunately, remained on the books after the war came to an end. In fact, it is that World War I relic that U.S. officials are now relying on to secure the criminal indictment of Julian Assange, the WikiLeaks head who released a mountain of evidence disclosing the inner workings and grave wrongdoing on the part of the U.S. national-security establishment, especially with respect to the manner in which it has waged it undeclared forever wars in the Middle East and Afghanistan.
Some news media commentators are finally coming to the realization that if the Espionage Act can be enforced against Assange for what he did, it can be enforced against anyone in the press for revealing damaging inside information about the national-security establishment — i.e., the Pentagon, the CIA, and the NSA. Therefore, they are calling on the Justice Department to cease and desist from its prosecution of Assange.
Of course, they are right, but the problem is that they don’t go far enough. Their mindsets reflect the customary acceptance of the status quo. The mindset is that we Americans simply have to accept the way things are and plead with the government to go easy on us.
That’s just plain nonsense. It is incumbent on the American people to start thinking at a high level, one that doesn’t just accept the existence of tyrannical laws and instead calls for their repeal. After all, isn’t that what our Declaration of Independence says — that when government becomes destructive of the legitimate ends for which it was formed, it is the right of the people to alter or even abolish it and form new government?
What does that mean with respect to the Espionage Act? It means that the law should simply be repealed and that Americans need to start demanding repeal rather than simply pleading with the Justice Department to enforce it in a more judicious manner.
Let’s keep in mind that the law is the fruit of a rotten foreign intervention. Hardly anyone defends the U.S. intervention into World War I. That war was, quite simply, none of the U.S. government’s business. President Wilson, however, was hell-bent on embroiling the U.S. in the conflict. Wilson believed that if the force of the U.S. government could be used to totally defeat Germany, this would be the war to finally end all wars and to make the world safe for democracy.
Wilson’s mindset, of course, was lunacy. Sure enough, the U.S. intervention resulted in Germany’s total defeat, which was then followed by the vengeful Treaty of Versailles, which Adolf Hitler would use to justify his rise to power. Nazism and World War II soon followed. So much for the war to end all wars and to make the world safe for democracy. Tens of thousands of American men were sacrificed for nothing.
Moreover, Wilson had to force American men to fight in World War I. He conscripted them. Enslaved would be a better word. When a government has to force its citizens to fight a particular war, that’s a good sign that it’s a bad war, one that shouldn’t be waged.
In fact that was one of the reasons for the Espionage Act—not to punish people for spying but rather for criticizing the draft and the war. The law converted anyone who publicly criticized the draft or attempted to persuade American men to resist the draft into felons. And make no mistake about it: U.S. officials went after such people with a vengeance, doing their best to punish Americans for doing nothing more than speaking.
One example was Charles Schenck, who was prosecuted and convicted of violating the law after circulating a flier that opposed the draft. When the case reached the U.S. Supreme Court, the Court upheld the conviction, one of the earliest examples of judicial deferment to the military, a deference that would become virtually complete after the U.S. government was officially converted to a national-security state after World War II.
Another example was Eugen Debs, who got convicted for criticizing the war and for encouraging men to resist the draft. President Wilson called Debs “a traitor to his country.”
How in the world can such prosecutions and convictions possibly be reconciled with the principles of a free society? Freedom necessarily entails the right to criticize government for anything, including its wars, its enslavement of people, its tyranny, and anything else. Perhaps it is worth nothing that both Schenk and Debs were socialists, something that today’s crop of Democrat presidential candidates might want to take note of.
Longtime supporters of FFF know that one of my favorite stories in history is the one about the White Rose, a group of college students in Germany who, in the midst of World War II, began distributing pamphlets calling on Germans to resist their own government and to oppose the troops1.When they were caught and brought to trial, the members of the White Rose were berated by the presiding judge, who accused them of being bad German citizens and traitors, just as Wilson, the Justice Department, and the U.S. Supreme Court had said of Americans who were violating the Espionage Act.
Today, any U.S. official would praise the actions of the White Rose, but that’s just because it was foreign citizens opposing an official enemy of the U.S. government. The fact is that if the White Rose members had done the same thing they did in Germany here in the United States, U.S. officials would have gone after them with the same anger and vengeance as German officials did. And they would have used the Espionage Act to do it.
It’s time to acknowledge that the horror of U.S. intervention into World War I and the horrible consequences of that intervention. It’s also time to rid our nation of the horrific relic of that intervention, the Espionage Act. We need to continue demanding the dismissal of all charges against Assange. But let’s not stop there. Let’s repeal the tyrannical World War I-era Espionage Act under which he is being charged to ensure that this cannot happen to others.
Originally published at the Future of Freedom Foundation
In the wake of the Notre Dame fire, both French politicians and private donors, including billionaires, pledged to rebuild the Church. Emmanuel Macron promised — rather unconvincingly — to have the church rebuilt within five years.
In response, some observers questioned why a government should be in the business of rebuilding churches. After all, doesn't Notre Dame have insurance?
Well, it turns out Notre Dame doesn't have insurance, and that leads us to a larger problem with the church.
Notre Dame is a government-owned building. As a spokesman for the French consulate in New York told Marketwatch :
The French State is self-insured for Notre Dame. It has no insurance. It is supposed to cover its own costs.
Notre Dame has no private insurance because Notre Dame is not a privately owned building. Like all church buildings constructed before 1905, Notre Dame is owned by the French state.
As recounted by Samuel Gregg for the Catholic Herald, the Catholic Church lost ownership of church buildings during the French Revolution. While the Church gained usage of its buildings during Napoleon's reign, state control remains:
The Revolution’s subsequent war against the Church included turning Notre-Dame into a temple for “the Cult of Reason” and “the Supreme Being” in 1793. Shortly after Robespierre’s fall in 1794, the cathedral became a storage place for weapons and food. It was seemingly forgotten to history.
A few years later, Notre-Dame’s fortunes changed when Napoleon determined that his regime’s security required reconciliation between the Revolution and the Church. Though the state continued (and continues to this day) to own the buildings, exclusive use of the cathedral was transferred to the Church following the 1801 Concordat between Paris and Rome. ...Though the Concordat provided the Church with some protection from anti-clericals, it also once again subordinated much of the Church’s life to the French state.
State ownership was again affirmed in 1905 with the "loi du 9 décembre 1905 concernant la séparation des Églises et de l'État." The law affirmed that only church buildings constructed after 1905 could be privately owned by the Church itself.
Today, the French state controls more than 32,000 churches, 6,000 chapels, and 87 cathedrals.
Moreover, any attempts to significantly change church buildings would have to be approved by government officials, and according to The Art Newspaper , this state of "dual administration" has "caused serious problems of management and conservation":
Under French law, the parish council owns the building itself and its furnishings and puts these at the disposal of the clergy for acts of worship. The parish council is responsible for the maintenance and restoration of the building but does not pay for lighting, heating or expenses connected with religious observances, which are the responsibility of the clergy. No building works can be undertaken without the agreement of the parish council, and the parish priest may not sell objects or remove them from the church without the permission of the mayor. If the church is listed, or classified as a monument of particular historical interest, the permission of the Commission on Historical Buildings must also be sought.
This led to conflicts, especially in the wake of Vatican II, when Catholic clergy enamored of the new iconoclasm in the church attempted to destroy altars, railings, light fixtures, and other church elements deemed too old-fashioned. Some secular authorities, on the other hand, valued these items as art, and prevented parish priests from selling off or destroying them.
In those days, the French state served as a bulwark against the clergy's bad taste. Mid-twentieth century clergy, after all, were notorious in their vapid and trite artistic sensibilities, which they pursued as a cloying display of their alleged devotion to the common man.
Had Notre Dame burned sometime between 1965 and 1980, French bishops probably would have insisted it be rebuilt with a brutalist spire of poured concrete.
Fortunately, most of those clerics are now dead, and few Catholics under age 50 think 1970s-style church architecture, furnishings, and art are nearly as charming as their elders seemed to think. This means the primary threat to Notre Dame now comes form the French state itself. Already, the terrible restoration ideas are pouring in, with suggestions ranging from a new glass-and-steel roof, to a spire designed to look like an Islamic minaret.
Since the French state owns Notre Dame, it's not a given the building will be actually rebuilt as a church. As I've noted before, many Frenchmen — including Macron and many of the donors — appear to regard the building's primary importance as that of a museum and community center. This could mean anything goes as far as reconstruction is concerned.
While Republicans continue to profess their opposition to socialism, their love of socialism is being demonstrated in the healthcare arena. Do you remember when they were campaigning for control over Congress and the presidency with full-throated calls to repeal Obamacare? Not anymore. According to an article in the Washington Post, Republicans have come to love and adore President Obama’s signature achievement as president. More important, of course, is their deep-seated, unwavering devotion to Medicare and Medicaid, the two socialist programs enacted during the leftist regime of President Lyndon Johnson.
The Post’s article states:
Even Republicans who furiously fought the creation of the law and won elections with the mantra of repeal and replace speak favorably of President Barack Obama’s signature domestic achievement.
“Quite obviously, more people have health insurance than would otherwise have it, so you got to look at it as positive,” Sen. Charles E. Grassley (R-Iowa) said in a recent interview….
“For the people who are in that tranche of expanded Medicaid, I think it has been very helpful,” said Sen. Shelley Moore Capito (R-W.Va.)….
The public’s increasing reliance on the ACA was reflected in the dramatic failure of congressional Republicans to roll back the law or even unify around a plan to replace it as it has grown in popularity.
Even President Trump is caving:
Bowing to pressure from some in his own party, Trump recently backed off a new pledge to take another crack at eliminating the ACA and said a vote on a GOP health plan — still unformed — would be delayed until after the 2020 election.
This is one of the horrific consequences of socialism: It creates mindsets of dependency on the government, much like going on heroin. Once people go on either heroin or socialism, they’re done. At that point, they cannot imagine life without their narcotic. And they come to love it.
President Franklin Roosevelt, who ushered in America’s welfare-state way of life, understood this phenomenon perfectly. He knew that if he could just make people dependent on governmental largess, the federal government would own them. That’s what Social Security, the crown jewel of American socialism, was all about it. FDR knew that once he got seniors on the dole, he and successor regimes would own them.
Roosevelt’s protégé, Lyndon Johnson, learned this lesson well from his mentor. Give seniors not only a welfare retirement dole but also free or heavily subsidized healthcare, and they would thereafter belong to the federal government.
That’s how we have ended up with entire generations of older people who have been scared to death of losing their Socials Security and Medicare and absolutely convinced that they would die without them. Equally important, you’ll never see any seniors, except libertarian ones, who dare to challenge the federal government at a fundamental level. They’re too scared that the government will retaliate by threatening to cut off their retirement and healthcare doles.
The Post article says that one reason why Republicans have become enamored with Obamacare is their fear of what will happen if it is repealed. This fear was expressed by former Ohio Governor John Kasich, one of the leading Republicans to embrace parts of Obamacare, who stated that ending the program would bring “total chaos.” Kasich reflects the conservative mindset — that socialism equals stability and that freedom and the free market equal chaos.
In fact though, government involvement in healthcare, including Medicare, Medicaid, Obamacare, occupational licensure, insurance regulation, and income-tax manipulation, have brought America a healthcare system that is best described as “planned chaos.” The Post article hints at the real situation: “Democrats have often acknowledged that the ACA is not a perfect law and can be improved….”
Indeed, if Obamacare was the panacea it was made out to be, there would be no reason for Democrats to now be advocating an expansion of Medicare to everyone in the country. The reason they are doing that is because despite (or because of) Obamacare, the healthcare crisis just keeps getting worse. And the reason it continues getting worse is because each new government reform makes the situation worse.
America once had the finest healthcare system in the world, one that was based on free-market principles. Healthcare costs were reasonably priced, innovations were soaring, and doctors absolutely loved what they did in life.
Medicare and Medicaid succeeded in destroying that healthcare system. That’s when healthcare costs starting soaring, healthcare quality began decreasing, and increasing numbers of doctors began opting for early retirement.
Rather than repealing Medicare and Medicaid, American socialists, including conservatives, instead began enacting reform upon reform, hoping against hope that their healthcare socialism would finally succeed. Nothing worked. Each reform only made things worse. And it’s no different with Obamacare. The healthcare crisis will only get worse.
The same holds true if Medicare for All is adopted. At that point, American socialists, both Democrats and Republicans, will be calling for a full-fledged federal takeover of healthcare, with doctors working for the government and with the government in charge of people’s medical treatment and medical records.
No one should look to Republicans to save our country from socialism. They threw in the towel and made peace with the welfare state a long time ago. The only thing they have left is empty pro-capitalist rhetoric.
The only hope for the future of American healthcare and American liberty lies with libertarianism and libertarians. It is only we who have the correct diagnosis and the right prescription for America’s healthcare woes: Repeal Medicare, Medicaid, and Obamacare and end all governmental involvement in healthcare. Separate healthcare and the state, just as our ancestors separated church and state.
Diane Swonk says the 20,000 payroll number for February was a head fake. She blamed bad weather, the government shutdown, and other gobbledygook to explain away the 160,000 job miss for the year’s shortest month.
According to Michael Snyder, in a piece posted on Zerohedge.com,
The U.S. economy is growing at a 0.3 percent annualized rate in the first quarter , based on data on domestic construction spending in December released on Monday, the Atlanta Federal Reserve’s GDPNow forecast model showed.
Mr. Snyder lists 18 data points on his blog “ The Economic Collapse ” supporting the idea that an economic winter is coming.
#1 Farm loan delinquencies just hit the highest level that we have seen in 9 years .
#2 We just learned that U.S. exports declined by 4 billion dollars during the month of December.
#3 J.C. Penney just announced that they will be closing another 24 stores .
#4 Victoria’s Secret has just announced plans to close 53 stores .
#5 On Thursday, Gap announced that it will be closing 230 stores over the next two years.
#6 Payless ShoeSource has declared bankruptcy and is closing all 2,100 stores .
#7 Tesla is also closing all of their physical sales locations and will now only sell vehicles online.
#8 PepsiCo has started laying off workers and has committed to “millions of dollars in severance pay” .
#9 The Baltic Dry Index has dropped to the lowest level in more than two years .
#10 This is the worst slump for core U.S. factory orders in three years .
#11 We just witnessed the largest decline in the Philly Fed Business Index in more than 7 years .
#12 In January, sales of existing homes fell 8.9 percent from a year earlier. That was the third month in a row that we have seen a decline of at least 8 percent. This is an absolutely catastrophic trend for the real estate industry.
#13 U.S. housing starts were down 11.2 percent in December compared to the previous month.
#14 Compared to a year earlier, home sales in southern California were down 17 percent in January.
#15 In December, home sales in Sacramento County fell a whopping 22.5 percent compared to a year earlier.
#16 Pending home sales in the United States have now fallen on a year over year basis for 13 months in a row .
#17 More than 166 billion dollars in student loan debt is now “seriously delinquent” . That is an all-time record.
#18 More than 7 million Americans are behind on their auto loan payments. That is also a new all-time record, and it is far higher than anything that we witnessed during the last recession.
None of this has kept individuals, companies and governments from ramping up debt levels. Leverage abounds, everywhere. Grant’s Interest rate Observer writes, “companies are tapping credit lines to compensate for shortfalls in cash flow.”
Defining a zombie company as one failing to generate cash flow to cover interest expense for three consecutive years, Grant’s points out that 128 companies in the S&P 1500, fit the description. The percentage of living dead has increased over the past 12 months, ending January 31st, from 12.4 percent of the broad index to 13.6 per cent.
Money manager Jeff Gundlach told Grant Williams on Real Vision ,
the economic data continues to deteriorate. And we're starting to see reversals and unemployment claims now rising on a four week moving average basis. We're starting to see earnings estimates collapsing, margin estimates collapsing, sales dropping. You see housing is negative, Surprise indices-- confidence is deteriorating. None of these things are at the alarm-bell recession, but they're getting fairly close.
Gundlach and Williams spoke about the 800 pound elephant in the room, the U.S. government’s off balance sheet obligations. “123 Trillion, six times GDP. If we wanted to fund our liabilities, the 123 trillion-- over the next 60 years, we'd have to put 10% of our GDP aside, from negative 7 today to plus 10,” Gundlach quipped.
After reflecting on investors buying AAA-rated mortgage-backed bonds back in 2005, believing they were playing it safe, Gundlach said,
Well, we have similar-- maybe not as egregious-- but it's an echo of a rating problem in the bond market right now, in the corporate bond market, where the corporate bond market has exploded in size. It's more than double where it was 10 or 12 years ago, and a lot of it is, I think, overrated. There was a report by Morgan Stanley Research that suggested that fully, fully 45% of parts of the corporate bond market would be rated junk right now, if you use leverage ratios alone. Now, they use more than leverage ratios.
There's other variables that go into rating. But the leverage ratio seems to be really important.
Right now the ratings agencies are buying what debt issuers are selling —a rosy future. But with recession clouds gathering, Gundlach figures,
there's not going to be any working towards a better place. And so all of those bonds potentially could be downgraded into a junk status. And as we all know, when a triple-B-rated corporate bond crosses the line into junk status, the price goes down. It doesn't go up. So you can find people that have poured into corporate bonds-- that includes corporate pension plans-- which thought that they had a clever idea of matching up their liabilities, which are discounted by the single-A long corporate rate, and so let's match them with assets that are corporate bonds, so they move together.
As I wrote a couple weeks ago, when debt turns to junk, ETFs and institutional holders will desperately be looking to sell at any price. “So will they sell?” Gundlach wonders rhetorically. “I think the answer is yes. And so if you have a misrated market, and it goes into a downgrade problem, you get tremendous forced selling. And that's what happened in '08 with the securitized market, and this time, I think it's the corporate bond market's turn.”
MacroMavens Stephanie Pomboy echos Gundlach’s view,
In 2007, the lie was that you could take a cornucopia of crap, package it together, & somehow make it AAA. This time, the lie is that you can take a bunch of bonds that trade by appointment, lump them together in an ETF, & magically make them liquid.
So, with this storm brewing, the Fed’s committee to save the world has started its roadshow.
Brian Maher of the Daily Reckoning quotes Murray Rothbard and me in his incisive critique of Modern Monetary Theory (MMT), which has lately been embraced by proponents of the "Green New Deal."
On the Lions of Liberty podcast, Marc Clair and Ryan McMaken discuss the government shutdown and the need to decentralize the national parks:
While Congress and the president fight over funding a border wall, they continue to ignore the coming economic tsunami caused by the approximately 22 trillion dollars (and rapidly increasing) federal debt. President Trump may not be troubled by the debt’s effect on the economy because he believes he will be out of office before it becomes a major problem. However, the crisis may come sooner than he, or most people in DC, expects.
The constituency for limited government, while growing, is still far outnumbered by those wanting government to provide economic and personal security. From lower-income Americans who rely on food stamps, public housing, and other government programs, to middle-class Americans who live in homes they could not afford without assistance from federal agencies like Fannies Mae and Freddie Mac, to college students reliant on government-subsidized student loans, to senior citizens reliant on Social Security and Medicare, to billionaire CEOs whose companies rely on bailouts, subsidies, laws and regulations written to benefit politically-powerful businesses, and government contracts, most Americans are reliant on at least one federal program. Many programs are designed to force individuals to accept government aid. For example, it is almost impossible for a senior citizen to obtain health insurance outside of Medicare.
The welfare state is fueled by the Federal Reserve’s easy money policies, which are also responsible for the boom-and-bust cycle that plagues our economy. The Federal Reserve’s policies do not just distort our economy, they also distort our values, as the Fed’s dollar depreciation causes individuals to forgo savings and hard work in favor of immediate gratification. This has helped create an explosion of business and individual debt. There has been a proliferation of bubbles, including in credit card debt, auto loans, and student loans. There is even a new housing bubble.
An economy built on fiat currency and public and private debt is unsustainable. Eventually the bubbles will burst. The most likely outcome will be the rejection of the dollar’s world reserve currency status due to government debt and the Federal Reserve’s monetization of debt. When the bubbles pop, the result will be an economic crisis that will likely dwarf the Great Depression.
The fall of the dollar and the accompanying economic downturn will make it impossible for the government to continue running up huge debts to finance a massive welfare-warfare state. Thus, Congress will be forced to raise taxes and cut benefits. Cowardly politicians will likely outsource the job of raising taxes and cutting benefits to the Federal Reserve. This will cause a dramatic increase in the most insidious of taxes: the inflation tax.
As the Federal Reserve erodes the value of the dollar, thus reducing the value of both earned paychecks and government-provided welfare benefits, a large number of Americans who believe they are entitled to economic security will react by engaging in acts of violence. Politicians will use this violence to further crack down on civil liberties. The resulting economic and civil unrest will further the growth of authoritarian political movements.
Fortunately, the liberty movement continues to grow. This movement counters the authoritarian lies with the truths of Austrian economics and the non-aggression principle. While the years ahead may be tough, if those of us who know the truth work hard to educate others, the cause of liberty can prevail.
A growing chorus of alarmist voices decries the rising economic inequality in the Western world and especially in the United States.1 Surprisingly enough, the same mainstream analysts complain about the anemic growth of labor productivity without seeing the correct link between the two.
Data shows a strong correlation between labor productivity and economic inequality (the two charts below). From the end of Second World War until the mid-1970s, labour productivity grew at a robust rate of almost 3% per annum while income inequality declined. Afterwards both trends reversed - labor productivity slowed to below 2% growth p.a. on average and almost stagnated since the Great Recession while both wealth and income inequality expanded steadily.2
What common factor could explain the two divergent trends that the mainstream analysts seem to overlook? In the 1940s Mises3 was impressed by the ”miraculous” rise in the standards of living of American wage earners which had been going on for more than two centuries. For him the answer was straightforward: capital accumulation is the driving force behind both labour productivity and standards of living convergence.
Building on Mises' work, Rothbard4 explained in detail what capital accumulation requires: (i) new capital investment that lengthens the structure of production and (ii) technological progress that overcomes the diminishing returns accompanying the increase in the supply of capital goods. However, Mises also warned that a depletion of the capital stock would hamper capital accumulation and labor productivity.5 Unfortunately, mainstream analysts and the United States seem to have forgotten this valuable lesson.
In terms of technological progress, the U.S. has maintained its world leadership during past decades. It ranks second in the world to Switzerland in terms of both innovation and business sophistication6, spends more for Research &Innovation than the OECD or EU on average relative to GDP7 and makes up for the majority of the top 25 universities in the world.8 Moreover it has issued the same amount of patents over the last three decades compared with the previous 150 years.9
In terms of capital stock, the picture is completely different. According to estimates of the Bureau of Economic Analysis (BEA),10 the stock of private non-residential assets per worker has increased in real terms at about 1% p.a. from 1947 to 2009 and stagnated since the Great Recession (left chart below). However, BEA's alleged sustained pace of capital growth seems hard to reconcile with the falling private investment and savings since the mid-1970s (right chart below).
In addition, the BEA methodology presents some serious shortcomings. Except for cars, BEA uses the “perpetual inventory method” to estimate fixed assets.11 According to it, the value of the capital stock is indirectly estimated as the sum of past investment flows minus the estimated depreciation. It means that all past investments are considered sound by default which is certainly not the case nowadays when recurrent boom and busts cause significant volumes of 12malinvestments. Other question marks relates to the accurate estimation of depreciation rates in the face of rapid technological progress and the use of GDP deflators while their accuracy is unreliable especially as regards real estate investment.
All these considerations have led not only us, but also the Federal Reserve Board (FRB) to suspect that BEA's estimates of the U.S. capital stock are overvalued.13 It is intriguing that the FRB adjusts the BEA estimates downwards, especially as regards real estate assets - "structures" in BEA's jargon, when it uses them as input for the calculation of the capital stock in manufacturing. As a result, there is a substantial difference between BEA and FRB estimates of the evolution of the volume of manufacturing capital stock from 1952 to 2016, in particular for the real estate component (left chart below).14 Therefore, we tried to recalculate the BEA estimate of the total stock of private non-residential capital per employee by extrapolating the difference between the two manufacturing indexes coming from BEA and FRB (right chart below).
The new results suggest that the real stock of capital per worker has grown in a clear and sustained manner only until the end-1970s and fell afterwards until the trough of the Great Recession. The recalculated capital stock is both more consistent with the observed declines in investment and productivity since the mid-1970s and confirms Mises' prediction that wrong policies would lead to capital consumption.
For the United States, the failed economic policy is the exponential growth of government intervention in the economy in the 20th century, which stifled entrepreneurship and capital accumulation. This is obvious in the rise of both government spending that redistributes away economic resources from their originators (left chart below) and the amount of regulatory burden (right chart below). Another key factor taking a toll on capital endowment is inflation, which gained traction since the de-facto abolishment of the gold standard in 1971.
Most importantly, inflationary policies trigger boom-bust cycles via the artificial lowering of interest rates below their free market level. In a recent article on the business cycle,15 Salerno emphasizes that, "overconsumption" and "malinvestment" are the two salient marks of the boom and not "overinvestment" as wrongly understood by some mainstream critics. It is no surprise that the capital stock per worker dropped during the business cycles that occurred regularly since the 1970s and culminated in the Great Recession. The illusion of the boom fuels not only capital consumption but also the polarization of wealth and incomes in the society. The fiduciary credit expansion fuels an increase in asset prices, most commonly on stock exchanges and in real estate (charts below).
Although starting from a limited number of transactions, all owners calculate their net worth with the newly inflated asset prices, boosting the value of household assets in excess of liabilities. As a result, the rich appear to get even richer in an economy on steroids. This explains why both the U.S. national wealth has grown much faster than national income since the end-1970s (left chart below) and the number of wealthy people increased significantly (right chart below).16
The rising inequality since the 1970s has been fueled by both the decline in labor productivity and the monetary expansion inflating asset prices. Both are perverse effects of government interventionist policies, which led to a gradual erosion of the U.S. capital stock per employee. This is the correct linkage between inequality and productivity as explained by Mises and other Austrian School economists.
People have different skills and preferences, so the free market does not lead to a complete equalization of incomes and wealth. Nevertheless, it does ensure the proper allocation of capital to increase labor productivity and satisfy the most urgent needs of consumers. As a result, the gap between the well off and the poor is not only gradually diminishing, but also gets less significant in terms of consumption. Eventually the disadvantage of wealth inequality becomes mostly a psychological one.17 As long as the capitalist consumes only a fraction of his wealth and invests the rest into productive businesses, the real beneficiary of the increase in labor productivity is the poorer part of the society.
- 1. See George Reisman’s devastating critique of Thomas Pikkety's Capital in the Twenty-First Century (2014) at http://georgereismansblog.blogspot.com/2014/07/pikettys-capital-wrong_28.html , or the OECD at http://www.oecd.org/social/in-it-together-why-less-inequality-benefits-all-9789264235120-en.htm .
- 2. In addition to the share of total income and wealth gained by the top 1% rich, the share of both the bottom 50% and especially the middle 40% went down since the 1980s, reflecting the "hollowing-out" of the middle class.
- 3. See Ludwig von Mises, Human Action ( 1998), pp. 611-612.
- 4. See Murray N. Rothbard, Man, Economy, and State with Power and Market, (2009) pp.537-543.
- 5. See Ludwig von Mises, Human Action ( 1998), pp. 844.
- 6. See the Global Competitiveness Index 2017-2018 at https://www.weforum.org/reports/the-global-competitiveness-report-2017-2018 .
- 7. See the OECD data at https://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm .
- 8. See rankings at https://www.topuniversities.com/ .
- 9. See data from the US Patent and Trademark Office at https://www.uspto.gov/web/offices/ac/ido/oeip/taf/h_counts.htm .
- 10. The most authoritative U.S statistics of capital stocks are provided by BEA who estimates long term series of the net stocks of fixed assets for the US economy. See BEA data that I used at: https://apps.bea.gov/iTable/iTable.cfm?reqid=10&step=1&isuri=1#reqid=10&step=1&isuri=1 under section 4: Section 4 - Nonresidential Fixed Assets (Table 4.2)
- 11. See the BEA methodology at https://apps.bea.gov/national/pdf/Fixed_Assets_1925_97.pdf at M-6.
- 12. The Austrian Theory of the Business Cycle pioneered by Mises, Hayek and Rothbard explains how malinvestments create significant distortions in the structure of production and reduce directly the capital stock in the economy during the boom.
- 13. See https://www.federalreserve.gov/releases/g17/CapitalStockDocLatest.pdf , pages 5 and 6.
- 14. See BEA data at: https://apps.bea.gov/iTable/iTable.cfm?reqid=10&step=1&isuri=1#reqid=10&step=1&isuri=1 under section 3: Section 3 - Private Fixed Assets by Industry (Tables 3.2ESI, 3.2E and 3.2S ) and FRB estimates at https://www.federalreserve.gov/econresdata/notes/feds-notes/2016/annual-data-on-investment-and-capital-stocks-20160302.html and FRB data in Table G.17 at https://www.federalreserve.gov/releases/g17/download.htm#capstock .
- 15. See Joseph Salerno.2012. "A Reformulation of Business Cycle Theory in Light of the Financial Crisis", Quarterly Journal of Austrian Economics, Vol 15/No1/3-44 at https://mises.org/library/reformulation-austrian-business-cycle-theory-light-financial-crisis-0 .
- 16. Capgemini Financial Services define HNWIs as those who have investable assets of more than USD 1 million, excluding primary residences, collectibles and consumer durables. It estimate that the number and wealth of U.S. HNWIs more than doubled in less than a decade of ultra-low interest rates; see report at https://www.worldwealthreport.com/reports/population .
- 17. George Reisman.2014. "Pikkety's Capital: Wrong Theory/Destructive Program", pp. 25.