The Big-Picture Economy, Part 3: Scarcity, Risk and Debt

"Growth" that depends on manipulated interest rates and easy credit is a sand castle awaiting the rising tide; its destruction is assured. 

When skimming and speculation are more profitable than actually increasing the production of goods and services, the discipline and incentives of a market economy are distorted to the point of no return.

In the natural order of a market economy, income and credit are scarce. Income must be earned, and is thus limited by the hours of the day, capital, competition, ingenuity and luck. Credit is scarce because the pool of savings (capital) available to be loaned out at interest is limited, as is the income available to service debt.

This intrinsic scarcity of income and credit generates capitalism's inherent discipline: capital must be saved by sacrificing consumption, scarce capital must be placed at risk to earn a return, and capital that is lent to borrowers (i.e. credit) must earn a return commensurate to the risks of default and alternative uses of the money.

The natural order has been completely upended in our state/crony-capitalist economy. The Federal Reserve's Zero Interest Rate Policy (ZIRP) and easy credit has destroyed capitalism's inherent discipline and incentivized the destructive forces of speculation, leverage and debt.

We need to distinguish between income earned from generating goods and services and unearned income skimmed from government giveaways and central-bank enabled carry trades. Consider the investment banks that, thanks to the Fed's manipulation, can borrow billions of dollars at near-zero interest and then use the money to buy non-U.S. bonds paying 3.5%. This is a carry trade, as the cost of carrying the debt is much smaller than the yield on the foreign bonds.

In an unmanipulated market economy, the cost of borrowing money would generally be 1.5% above inflation for very low-risk situations. That suggests the interest rate if the Fed ceased its intervention would be around 3.5% to 4%.
How many currently profitable carry trades would vanish if investment banks had to pay 4% to borrow money in the U.S.? How much risk would speculators have to take on to skim higher-yield trades?

The Fed's ZIRP is a blatant gifting of billions of dollars in low-risk carry trades to large banks, speculators and financiers. The Fed might as well write a check and send it to the bankers--ZIRP and easy credit are the equivalent of a free-money check.

On the lower end of the economic spectrum, low rates and abundant government-backed credit enable marginal borrowers to load up on debt that they would not qualify to borrow in unmanipulated markets. This incentivization of marginal borrowers increases risks of defaults and systemic crashes, which tend to be triggered by marginal-debt defaults.

The Big-Picture Economy, Part 2: Surplus, Spending and Debt

Incentivizing fraud and speculation we create a pernicious sense of entitlement

By CHARLES HUGH SMITH

If things are going so great, why does our government need to borrow $1 trillion a year and our central bank create another $1 trillion a year just to keep the bloated status quo afloat? That $2 trillion a year (about 13% of the nation's gross domestic product, roughly equivalent to the entire GDP of France) is really starting to add up.

Federal debt has skyrocketed (note that this is "debt held by the public" and excludes intergovernment debt, i.e. what the Treasury owes Social Security for squandering $4 trillion in Social Security payroll taxes):

Here is the Federal Reserve's balance sheet (bonds bought with freshly created money), which has shot up with quantitative easing money-creation:

The key concept here is surplus. Surplus is what's left after you pay all costs of producing goods and services. You can only spend what's left over, i.e. surplus.

If you own an oil well and it costs $100 to extract and ship a barrel of oil, if the barrel only fetches $90 on the open market, you lose $10 per barrel. Eventually your capital is consumed and you go broke.

If you sell your output for $120/barrel, you need to set aside $10 of the $20 surplus to pay for maintenance and capital investment in the well; you can't just blow every cent of surplus, as eventually the well parts wear out and your production falls to zero.

So you can really only spend $10 of the $20 surplus per barrel.

This holds true for any good or service, for every business and every nation: no nation can spend more than it generates in surplus. the only way we can spend more than we generate in surplus is to borrow money and use the surplus to pay the interest.

The Big-Picture Economy, Part 1: Labor, Imports and the Dollar

It is impossible for the U.S. to maintain the reserve currency and run trade surpluses 

By CHARLES HUGH SMITH

Many well-meaning commentators look back on the era of strong private-sector unions and robust U.S. trade surpluses with longing. The Progressive consensus (articulated by Robert Reich, among others) is that unions gave the working and middle classes bargaining power that has been lost in the decline of unions.

Other commentators look back with similar nostalgia on the large trade surpluses (i.e. current account surplus) of the same era--the 1950s and 1960s.

The two trends are connected. Unions had bargaining power because the corporations on the other side of the table were generally cartels (autos, steel, etc.) that were largely domestic, meaning that they were captive to domestic markets and politics.

All these conditions have changed. Present-day U.S. corporations are global, not domestic; up to 75% of their sales and/or profits are generated in overseas markets, and a similar percentage of their workforces are also overseas, not just for cost reasons but to stay close to the markets generating their profits.

Free-trade agreements restrict attempts to protect domestic markets from overseas competition, and as a result domestic unions have essentially zero bargaining power with either nominally American firms or their global competitors in most markets. The only sectors open to union bargaining power are domestic monopolies or cartels with no overseas competition, i.e. the government, which is why the union movement is now dominated by public unions.

The trade surpluses vanished for two reasons: global competition and protection of the dollar as the world's reserve currency. This is a difficult issue to grasp, so let's do it in parts:

1. When the global exporting nations recovered after World War II, their costs of labor and production were cheaper than American industry, which was hobbled by the strong dollar. For example, $1 bought 250 yen as recently as the early 1970s. Today, it barely buys 100 yen.

2. As a result, cheap imports took market share from domestic producers (believe it or not, BMWs were once relatively cheap), and the U.S. trade balance went negative, i.e. the U.S. ran trade deficits. To settle the deficits, the U.S. had to ship gold to the creditor nations. 

3. As the trade deficits expanded, America's gold holdings shrank. The writing was on the wall: continued deficits would eventually shrink the U.S. gold holdings to zero, at which point deficits would be impossible to sustain.

4. As a result, President Nixon closed the gold window and the U.S. dollar floated in a market of supply and demand.

The second half of the story is Triffin's Paradox, an issue I have covered in depth in:

My name is Bill, and I’m an arthritic

Is Drug Addiction Really Like ‘Any Other Chronic Illness’?

Who can imagine an organization called Arthritics Anonymous whose members stand up and say “My name is Bill, and I’m an arthritic”?

By Theodore Dalrymple

Sometimes a single phrase is enough to expose a tissue of lies, and such a phrase was used in a recent editorial in The Lancet titled “The lethal burden of drug overdose.” It praised the Obama administration’s drug policy for recognizing “the futility of a punitive approach, addressing drug addiction, instead, as any other chronic illness.”  The canary in the coal mine here is “any other chronic illness.”

The punitive approach may or may not be futile. It certainly works in Singapore, if by working we mean a consequent low rate of drug use; but Singapore is a small city state with very few points of entry that can hardly be a model for larger polities. It also seems to work in Sweden, which had the most punitive approach in Europe and the lowest drug use; but the latter may also be for reasons other than the punishment of drug takers. In most countries (unlike Sweden) consumption is not illegal, only possession. That is why there were often a number of patients in my hospital who had swallowed large quantities of heroin or cocaine when arrest by the police seemed imminent or inevitable. Once the drug was safely in their bodies (that is to say, safely in the legal, not the medical, sense), they could not be accused of any drug offense. Therefore, the “punitive approach” has not been tried with determination or consistency in the vast majority of countries; like Christianity according to G. K. Chesterton, it has not been tried and found wanting, it has been found difficult and left untried.

But the tissue of lies is implicit in the phrase “as any other chronic illness.” Addiction is not a chronic illness in the sense that, say, rheumatoid arthritis is a chronic illness. If it were, Mao Tse-Tung’s policy of threatening to shoot addicts who did not give up drugs would not have worked; but it did. Nor would thousands of American servicemen returning from Vietnam where they had addicted themselves to heroin simply have stopped when they returned home; but they did. Nor can one easily imagine an organization called Arthritics Anonymous whose members attend weekly meetings and stand up and say, “My name is Bill, and I’m an arthritic.”

Some people (but not presumably The Lancet) might say that it hardly matters what you call addiction. But calling it an illness means that it either is or should be susceptible of medical treatment. And one of the most commonly used medical “treatments” of heroin addiction is a substitute drug called methadone. According to The Lancet, though, 414 people died of methadone overdose in Great Britain in 2012, while 579 died of heroin and morphine overdose. Since fewer than 40 percent of heroin and morphine addicts are ‘”treated” with methadone, treatment probably results in more death than it prevents, at least from overdose. Moreover, some of the people it kills are the children of addicts.

The United States, with five times the population of Great Britain, has nearly fifteen times the number of drug-related deaths (38,329 in 2010). This, however, is not because illicit drug use is much greater than in Britain. It is because doctors in America are prescribing dangerous opioid drugs in huge quantities to large numbers of patients who mostly do not benefit from them. More people now die in the United States of overdoses of opioid drugs obtained legally than are murdered. It is not true, then, that all the harm of opioid misuse arises from its illegality.

Recently I asked a group of otherwise well-informed Americans whether they had heard of the opioid scandal. They had not. 

When Labour Planned to Turn the Army on the People

Why ‘the people's party’ discussed sending in troops during the banking crisis

By MICK HUME

There were howls of outrage earlier this year when it was revealed that a question on the scholarship exam for Eton, the UK’s top fee-paying school, had asked boys to imagine they were prime minister in 2040, a time of hypothetical economic crisis. They had to write a speech justifying their imaginary use of the army to put down pretend public unrest on Britain’s streets, shooting dead 25 invisible protesters. Labour and liberal-left commentators declared that this showed how Eton-educated ‘Tory toffs’, such as prime minister David Cameron and his chancellor George Osbourne, were being trained in the ruthless arts of oppressing the people to protect the privileges of their class.

Strangely, there have been few such protests this week over revelations that five years ago a non-imaginary Labour prime minister discussed sending real troops on to British streets to crush public ‘anarchy’. As the financial crisis broke in October 2008, New Labour premier Gordon Brown (who was ‘trained’ at Kirkcaldy High School rather than Eton) reportedly told aides that he feared ‘the whole thing will just explode’ with ‘everyone’ looting and rioting, and that they must plan to use the military to restore order.

The furore at the Labour conference has focused on Damian McBride’s revelations of how the Brown team smeared its opponents in the party. That can surely only be ‘shocking’ to the politically naive or those, such as Labour leader Ed Miliband and Ed Balls, apparently suffering from severe (self-induced?) historical amnesia. The section of the book where Brown’s former spin doctor and fixer tells the story of how Labour discussed sending the Army on to the streets has attracted rather less attention. Which is a shame, because it does more than any intra-Labour gossip to reveal the true character of the self-styled ‘people’s party’.

McBride’s memoir, serialised in the Daily Mail, tells how the Labour prime minister was ‘totally gripped’ by what he perceived as the dangers of social unrest as the public panicked in response to the banking crisis of October 2008. ‘Even if there’s a panic in another country, people will see it on the TVs, and they’ll start panicking here’, Brown told McBride. Then things went from bad to much worse in the prime minister’s mind. ‘If the banks are shutting their doors, and the cashpoints aren’t working, and people go to Tesco and their cards aren’t being accepted, the whole thing will just explode’, he said.

The prime minister apparently prophesied doom. ‘If you can’t buy food or petrol or medicine for your kids, people will just start breaking the windows and helping themselves. And as soon as people see that on TV, that’s the end, because everyone will think that’s OK now, that’s just what we all have to do. It’ll be anarchy. That’s what could happen tomorrow. I’m serious, I’m serious.’

So, what was the Labour government to do? Brown, says McBride, was ‘totally gripped by the danger of what he was about to do, but equally convinced that decisive action had to be taken immediately’. The prime minister told aides that ‘We’d have to think: do we have curfews, do we put the army on the streets, how do we get order back?’. Brown said that ‘I’d have to resign’, then apparently immediately thought better of it — ‘but I couldn’t go if there was just carnage out there: someone would have to be in charge’. The Labour premier was, it seems, bravely prepared to carry on in charge, overseeing ‘carnage out there’ on Britain’s streets.

This little vignette speaks volumes about the true character of the Labour Party today – an empty shell run by an elitist clique with little connection to a public which it fears and loathes. The backstabbing petty politicking of Labour courtiers such as McBride, like something out of a bad Elizabethan melodrama, is one side of that story. The other side is the contempt in which a ‘socialist’ leader such as Brown holds the public, and his willingness to use military force to bring the proles to ‘order’.

Moscow issues Eurasian ultimatum

All or Nothing

By M K Bhadrakumar 

In politics or diplomacy it is seldom, if ever, that anything could be reduced to a matter of "all or nothing". Yet that's how Russian Prime Minister Dmitry Medvedev saw the choice before Ukraine. 

He was laying down the stark choice Russia would give its biggest neighbor (population 46 million) in the post-Soviet space. The context was the momentous decision by the Ukrainian government to approve the text of the country's Association of Agreement with the European Union. 

Moscow had fought a rearguard battle to preempt the development. The future trajectory of Ukraine's EU enterprise is poised to become a fateful issue in Russia's troubled relations with the West. Medvedev used blunt language:

The situation is quite simple: accession to the Customs Union will be practically closed for our Ukrainian colleagues if they sign the Association Agreement with the EU states.

The Ukrainian leadership hopes to sign the Association Agreement at the EU's Eastern Partnership summit due to be held in Vilnius, Lithuania, on November 28-29. 
Ukraine is not a member of the Moscow-led Customs Union (at present composed of Belarus, Kazakhstan, and Russia), but Medvedev added that that even the grouping's special partnership regime will not apply to Ukraine after its EU integration. Moscow had envisaged that the regime would incrementally lure Ukraine into the Customs Union tent. 

The Customs Union is Ukraine's number one trade partner, with a two-way turnover of US$63 billion last year, which accounted for 36% of its overall exports. 

Evidently, Moscow is drawing new battle lines. The Russian calculus shows that the war is not yet lost, and Moscow cannot afford to lose, either. The EU is an elusive enemy, which slithers away in daylight but then is also never too far away, leaving Moscow guessing how tenacious it could be when it comes to Ukraine. Besides, the EU also happens to be Russia's partner. 

All the same, Moscow would factor in that the Ukrainian public opinion is divided over the issue. Half the population supports the EU integration but there is an ethnic and regional divide here with the Russian communities in the eastern regions bordering Russia opposed to the gravitation away from Moscow toward Brussels. 

This contrarian nature of national opinion finds reflection within the ruling Regions Party and the Communist Party and gives a plausible basis for Moscow to work on as the next presidential election approaches in 2015. Then there are the Ukrainian oligarchs who make big money in Russia and there are invisible cords that tie them to corridors of power in Moscow. 

Ukraine's geography becomes crucial for Russia's perennial need of a buffer zone vis-a-vis the West and the fear is that alongside the EU integration there could also be membership of the North Atlantic Treaty Organization (NATO). Moreover, Moscow's Eurasian Union project, which aims at integrating the former Soviet republics under its leadership, loses its shine without Ukraine's inclusion. 

Climatologists Face Inconvenient Truth

Warming Plateau?

Data shows global temperatures aren't rising the way climate scientists have predicted. Now the Intergovernmental Panel on Climate Change faces a problem: publicize these findings and encourage skeptics -- or hush up the figures.

By Axel Bojanowski, Olaf Stampf and Gerald Traufetter

For a quarter of a century now, environmental activists have been issuing predictions in the vein of the Catholic Church, warning people of the coming greenhouse effect armageddon. Environmentalists bleakly predict global warming will usher in plagues of biblical dimensions -- perpetual droughts, deluge-like floods and hurricanes of unprecedented force.

The number of people who believe in such a coming apocalypse, however, has considerably decreased. A survey conducted on behalf of SPIEGEL found a dramatic shift in public opinion -- Germans are losing their fear of climate change. While in 2006 a sizeable majority of 62 percent expressed a fear of global warning, that number has now become a minority of just 39 percent.

One cause of this shift, presumably, is the fact that global warming seems to be taking a break. The average global temperature hasn't risen in 15 years, a deviation from climatologists' computer-simulated predictions.

This is a difficult state of affairs for the Intergovernmental Panel on Climate Change (IPCC), which will release its next assessment report on global warming on Friday, Sept. 27.

None of the authors involved in the report are allowed to comment publicly on the report's contents before its official release. Only after days of closed-door negotiations -- which begin in Stockholm this Monday, Sept. 23 -- will the international forecasting body release its findings.

This much, though, is certain -- the new predictions will be essentially the same as the old ones, albeit a little more precise. The only adjustment the IPCC is expected to make is an increase in the predicted rise of sea levels. The new report is expected to forecast that coastal waters may rise by between 29 and 82 centimeters (11 and 32 inches) by the end of the century.

The crucial question, however, is: How will the IPCC address the pause in global warming? And how reliable are the computer models on which the predictions are based, if they failed to foresee the current temperature plateau?

Germany : 'More Alarmist' Voice

In the lead-up to this week's conference, tensions have been high between the IPCC's climate researchers and the IPCC's government representatives, with Germany's governmental delegates playing a particularly questionable role.

The conference's participants will negotiate the creation of a 30-page summary for policymakers from the 1,000-page full report. Governments send representatives from their relevant ministries in order to have a hand in what message that summary will contain. In Germany's case, this means delegates from the Federal Ministries for the Environment and Research.

"If you are offering the choice between 'alarmist' and 'sceptic' then the German delegation is certainly more in the direction of 'alarmist'. But this is too simple a distinction," says British climatologist Mike Hulme from King's College London, who has many years of experience with IPCC bureaucracy.

Christians protest Pakistan church killings

Identity - be it religion, ethnicity or gender - can be the difference between being allowed to live and having a permanent death sentence hanging over you

By Syed Fazl-e-Haider 

Pakistan's Christian minority on Monday demanded better protection from the government after a devastating double suicide bombing at a church killed more than 80 worshippers on Sunday. Seven children were reported to be among those killed, with 37 others among the wounded. Christians staged protest rallies in Islamabad, Lahore, Karachi, Quetta, and Peshawar and other cities and towns across the country over the deadly attack in the country's troubled northwest. 

The September 22 attack on the 130-year-old All Saints Church in Peshawar, the capital of Khyber Pakhtunkhwa province, is believed to be the deadliest ever to target Christians, who make up about 2% of the country's 180 million population and are considered by the Islamist extremists as soft targets. The dead reportedly included two Muslim police officers who had been posted outside the church. 

Khyber Pakhtunkhwa province, which is facing a Taliban-led insurgency, is home to about 200,000 Christians - of whom 70,000 live in Peshawar. The minority community has been the victim of extremism and discrimination throughout the country. In March this year, a frenzied mob of 3,000 set on fire more than 150 houses and several shops and a church of Christians at Joseph Colony in Badami Bagh area of Lahore city over alleged blasphemous remarks against Prophet Muhammed by Sawan Masih, a 28-year-old Christian sanitation worker. 

In 2009, the Christian community in Gojra City, 100 miles southwest of Lahore, was attacked by a mob. Eight members of the community were killed and dozens of houses burned down over an alleged desecration of pages from the Koran, the holy book of Muslims. 

The News commented,

We have become a country where identity - be it religion, ethnicity or gender - can be the difference between being allowed to live and having a permanent death sentence hanging over you. Christians are massacred while they pray, Shias are hauled out of buses and killed over belief, and women are murdered, raped and humiliated because of traditional notions of "honour". 

The Christians - as patriotic and as Pakistani as any of us - have hardly ever been involved in controversies and have generally chosen to keep a relatively low profile, speaking out only peacefully about the ceaseless social, economic and religious discrimination in their face. Have they been targeted because of their association with the "west" and the notion that they have links with the Christians in the US and other nations? Who can assume that the madness that drives some to mow down human beings like that is immune to this brand of hatred?

Thyber Pakhtunkhwa is at present governed by the Pakistan Tehreek-e-Insaf (PTI), led by Imran Khan, which came to power on May 30 after a general election that month. The security challenge it faces is becoming graver with every passing day. 

Union Leaders Denounce Affordable Care Act

The ACA is destroying our healthcare system, the 40 hour work week and the full-time employee status of middle class workers

By Richard Larsen

Contrary to what former Speaker Nancy Pelosi said, the time to find out what was in the dubiously named Affordable Care Act (ACA) legislation was before they passed it, not after. Even before full implementation next year, most Americans have recognized the threats posed by the massive, arguably worse legislation ever passed by any legislative body. Now we’re seeing the worst of those threats materialize.

Some of the most vociferous denunciation of Obamacare is coming from those who were so ardently supporting its passage, and the party that was forcing it upon the nation. Last week representatives of three of the nation’s largest unions sent a warning letter to Senate Majority Leader Harry Reid and House Minority Leader Nancy Pelosi. They accurately identified some of the unintended negative consequences of their onerous legislation, declaring that the health care law would “shatter not only our hard-earned health benefits, but destroy the foundation of the 40 hour work week that is the backbone of the American middle class.”

James Hoffa, president of the International Brotherhood of Teamsters, Joseph Hansen, the international president of the United Food and Commercial Workers International Union, and Donald Taylor, president of UNITE-HERE which represents hotel, food service, textile, gaming, and airport workers, signed the letter.

They began their diatribe, “When you and the President sought our support for the Affordable Care Act, you pledged that if we liked the health plans we have now, we could keep them. Sadly, that promise is under threat…We have been strong supporters of the notion that all Americans should have access to quality, affordable health care. We have also been strong supporters of you. In campaign after campaign we have put boots on the ground, gone door-to-door to get out the vote, run phone banks and raised money to secure this vision. Now this vision has come back to haunt us.”

They continued, “The unintended consequences of the ACA are severe. Perverse incentives are causing nightmare scenarios. First, the law creates an incentive for employers to keep employees’ work hours below 30 hours a week. Numerous employers have begun to cut workers’ hours to avoid this obligation, and many of them are doing so openly. The impact is two-fold: fewer hours means less pay while also losing our current health benefits.”

These observations have been validated by what’s happening with employers across the country. In April, the Society for Human Resource Management conducted a survey of small business owners. According to their study, 41% of 603 small business owners have put a hold on hiring because of Obamacare. Over 20% had already cut hours for their employees and reduced payroll.

Fear the Boom, Not the Bust

Today, we really have a dreaded choice of losing an arm now or two arms and a leg tomorrow

by Frank Hollenbeck

If you listen to TV commentators, you’ve been told the worst is behind us. Growth is picking up, and Europe is coming out of its slumber. No one seems to be concerned that this tepid below-2-percent growth is being entirely fed by the central bank’s massive money printing. It’s a “growth at any price” policy. How quickly we forget.

Back in the boom days, anyone who questioned double-digit growth in housing prices was viewed as an unenlightened Cassandra, lacking knowledge on how the new economy had fundamentally changed the law of scarcity. Austrian economists consistently warned that a boom built on foundation of easy money could only lead to a disaster. Today, most of the growth is coming from the interest rate-sensitive sectors of the economy, such as cars and housing. This should be ringing warning bells everywhere.

The conventional wisdom is that the Fed will begin to taper when growth picks up. This is a complete misreading of what is actually happening. The Fed made a monumental mistake, and does not really know how to get out of the trap it had set upon itself.

The Fed embarked on a “we know best” policy of QE3 in the fall, and induced a market bubble in the spring. The S&P 500 gained 12 percent from January to June 2013 while growth remained subdued. The Fed realized its mistake, and now wants to get out. The problem is that in economics, as with most things in life, it’s much easier to get into trouble than out of it. The FED wants to take away the punch bowl, but knows that interest rates will rise, the stock market will crash, and the economy will tank. The longer it waits, the greater will be the inevitable adjustment.

If we do not learn from history we are bound to repeat it. We have been here before. The depression of 1920 and Roosevelt recession of 1937 show us what happens when excessive monetary printing is followed by tepid tapering.

The 1937 Recession is a perfect example of Austrian business cycle theory. It was severe but short. Output fell by 11 percent and industrial production by 32 percent. Unemployment surged back up from 14 percent to 19 percent.

There is considerable disagreement on the cause of the recession, with some economists blaming the tightening of fiscal and monetary policy. Reserve requirements were increased and the budget deficit was reduced. Yet, spending in the 1937 fiscal year was $7.6 billion compared to $6.5 billion in 1934, and $6.4 billion in 1935: two spectacular boom years. Taxes went up about 1 percent of GDP from 1936 to 1937, but were less as a percentage of GDP than the rebound years of 1938 or 1939. Writing in 1956, E. Cary Brown found that fiscal policy changes accounted for less than a quarter of the downturn. The Fed did raise reserve requirements but banks were already holding abundant excess reserves. The new requirements had very little impact.

The American Economy is Not a Free-Market Economy

Cronyism extends far beyond the financial sector

by David Gordon

Those of us who favor the free market must confront a problem. The virtues of the market, and the vices of socialism and interventionism, have been made incontestably clear by Mises, Rothbard, Hazlitt and others. The case for the free market, as these great figures explain it, can readily be grasped and demands no esoteric knowledge. Yet many academics reject the market. They condemn capitalism for leaving many in poverty and for glaring inequalities. How can so many academics fail to grasp what seem to us obvious truths?

In Crony Capitalism, a vital book, Hunter Lewis solves our problem. Those who condemn the free market do so by considering bad features of the present economy, both in the United States and elsewhere in the world. In judging the free market in this way, they rely on an unexamined assumption. They take for granted that the present order of things is the free market in action.

As Lewis explains and documents to the hilt, this assumption is false. What we have today is not the free market but “crony capitalism,” an altogether different matter. Government and business are in a predatory partnership that extracts wealth to its own benefit. The fact that many suffer under the present system should occasion no surprise. Predatory “cronyism” has existed throughout history and has been the main block to economic progress.

Lewis states his arresting thesis in this way: “indeed it may be argued that cronyism is as old as recorded human history and has always been the dominant system. This is precisely why the human race has made so little progress in overcoming poverty. For most of human history, there has been no economic growth at all. People born poor died poor. Whenever economic capital began to be accumulated, it was generally stolen by rulers or their friends or allies.” (p. 9)

Fortunately for the world, supporters of the free market were able in the eighteenth century and after to gain important victories against the older system of predation; but now matters have been reversed, and cronyism is once more the order of the day. In the United States, we no longer live under a predominantly private market. “But taking into account companies and other organizations that are directly or indirectly controlled by the government, it becomes clear that most of the economy is in the ‘public’ sphere.” (p. 12)

Honesty and Trust

Dishonesty is costly

By Walter E. Williams

Dishonesty, lying and cheating are not treated with the right amount of opprobrium in today’s society. To gain an appreciation for the significance of honesty and trust, consider what our day-to-day lives would be like if we couldn’t trust anyone. When we purchase a bottle of 100 pills from our pharmacist, how many of us bother to count the pills? We pull in to a gasoline station and pay $35 for 10 gallons of gasoline. How do we know for sure whether we in fact received 10 gallons instead of 9 3/4? You pay $7 for a 1-pound package of filet mignon. Do you ever independently verify that you in fact received 1 pound? In each of those cases, and thousands more, we simply trust the seller.

There are thousands of cases in which the seller trusts the buyer. Having worked 40 hours, I trust that George Mason University, my employer, will pay me. People place an order with their stockbroker to purchase 100 shares of AT&T stock, and the stockbroker trusts that he’ll be paid. Companies purchase 5 tons of aluminum with payment due 30 days later.

Examples of honesty and trust abound, but imagine the cost and inconvenience if we couldn’t trust anyone. We would have to lug around measuring instruments to make sure that it was in fact 10 gallons of gas and 1 pound of steak that we purchased. Imagine the hassle of having to count out the number of pills in a bottle. If we couldn’t trust, we’d have to bear the costly burden of writing contracts instead of relying on a buyer’s or a seller’s word. We’d have to bear the monitoring costs to ensure compliance in the simplest  of transactions. It’s safe to say that whatever undermines honesty and trust raises the costs of transactions, reduces the value of exchange and makes us poorer.

Honesty and trust come into play in ways that few of us even contemplate. In my neighborhood, workers for FedEx, UPS and other delivery companies routinely leave packages that contain valuable merchandise on the doorstep if no one answers the door.

The local supermarket leaves plants, fertilizer and other home and garden items outdoors overnight unattended. What’s more, the supermarket displays loads of merchandise at entryways and exits. In neighborhoods where there’s less honesty, deliverymen’s leaving merchandise on doorsteps and stores leaving merchandise outdoors unattended or at entryways and exits would be equivalent to economic suicide.

Why Not Talk to Tehran?

Talk to the man, Mr. President.

By PATRICK J. BUCHANAN

In the fall of 1956, Nikita Khrushchev threatened to rain rockets down on London for the British invasion of Suez and sent his tanks into Budapest to drown the Hungarian Revolution in blood.

He blew up the Paris summit in 1960, banged his shoe at the UN, and warned Americans, “We will bury you!”

He insulted John F. Kennedy in Vienna, built the Berlin Wall, and began secretly to place missiles in Cuba capable of annihilating every city in the Southeast, including Washington.

Those were sobering times and serious enemies.

Yet in the Eisenhower-Kennedy years, living under a nuclear Sword of Damocles unlike any the world had ever known, we Americans were on balance a cool, calm and collected crowd.

How then explain the semi-hysteria and near panic in circles of this city over the possibility President Obama might meet with President Hassan Rouhani and hold negotiations over Iran’s nuclear program?

We hear talk of Hitler in the Rhineland, of a new Munich, of America failing to act as Britain failed to act, until, back to the wall, it had no choice but to fight. The old Churchill quotes are heard once again.

But is the Ayatollah Hitler? Is Rouhani von Ribbentrop? Is Iran the Fourth Reich? Should we be very very afraid?

Iran, we are told, is the most dangerous enemy America faces.

But is this true?

Depending on one’s source, Iran’s economy is 2 to 4 percent of ours. After oil and gas, its big exports appear to be caviar, carpets and pistachio nuts. Inflation is unbridled and Iran’s currency is plummeting.

Here is the New York Times last month:

“Rouhani’s aides describe Iran’s economic situation as the worst in decades. … The signs of woe abound.

“Lacking money, Iran’s national soccer team scrapped a training trip to Portugal. Teachers in Tehran nervously awaited their wages, which were inexplicably delayed by more than a week. Officials warned recently that food and medicine imports have stalled for three weeks because of a lack of foreign currency.”

Should Iran start a war, the sinking of its coastal navy would be a few days’ work for the Fifth Fleet. Its air force of U.S. Phantoms dating to the Shah and few dozen MiGs dating to the early 1990s would provide a turkey shoot for Top Gun applicants.

In 30 days, the United States could destroy its airfields, missile sites and nuclear facilities, and impose an air and naval blockade that would reduce Iran to destitution.

And Iran is not only isolated economically.

How Europe's Economy Is Being Devastated By Global Warming Orthodoxy

That sucking sound of European business going to the US

By Jim Powell

Many Europeans complain about their high energy costs, largely due to their increasing dependence on renewables — the most costly energy sources.  But European political parties as well as a majority of people still want government to promote costly options, especially wind and solar power.

This is killing European economies.  Electricity costs in Europe are more than double the cost of electricity in the U.S.  High electricity costs make it difficult for businesses to operate if they need a lot of electricity.  Their cost of electricity is high, and they might not be able to pass it on to consumers when consumers are free to patronize businesses operating where electricity costs are much lower.  Many businesses under pressure are likely move to a lower-cost location, and jobs will go with them.  Antonio Tajani, European Commissioner for Industry and Entrepreneurship, warned: “We face a systemic industrial massacre.”

The Germans probably have done more than anyone else to promote high-cost wind and solar power.  Other types of renewable energy, like hydropower and geothermal power, usually are limited to a small number of suitable sites. The Germans want to have renewables account for 80 percent of their electricity.  Their experience illustrates consequences of such a policy.

The most obvious consequence is lots of subsidies and taxes.  The German government has arranged for renewable energy producers to sell the power grid their electricity at more than 6 times the wholesale electricity market rate.  Nature reported that in 2012 renewable energy producers “cashed in an estimated €20 billion for electricity worth a mere €3 billion.”  Counting the costs of electricity from all sources, the Institute for Energy Research reported that “Germans pay 34 cents a kilowatt hour compared to an average of 12 cents in the United States).”

Big gap between low U.S. energy costs and high European energy costs

Americans, of course, benefit from the fracking revolution, despite President Obama’s efforts to discourage it.  Fracking is responsible for natural gas prices that are one-third to one-quarter of what Europeans pay for Russian gas.  As we know, fracking has boosted oil production in America, too.  Since 2005, U.S. electricity rates have remained substantially the same, while European electricity rates have jumped about 40 percent.  The expansion of pipelines from Canada, along existing permitted routes, will make it possible to tap larger continental reserves, even if Obama continues to block or severely restrict the Keystone pipeline.  Cheap, reliable American energy helps cover sins like the world’s highest corporate income taxes.   By contrast, in Europe mere talk about fracking can be enough to set off riots.

The Boston Consulting Group affirmed that electricity is one of the biggest factors that determine manufacturing costs.  The cost of U.S. natural gas has come down by half since 2005, and more and more utilities are switching to natural gas, so the outlook is for U.S. electricity rates to remain steady or decline further, whereas European electricity costs seem likely to go higher as more wind turbines and solar panels are installed.

Because crude oil costs less in the U.S. than in Europe, feedstocks are cheaper for companies manufacturing plastics, pharmaceuticals, industrial chemicals and other products.  Neither wind nor solar power produce feedstocks.  IHS, an international market research firm, projects that by 2020 U.S. chemical production will double, but European chemical production could fall by about a third.

The Association of German Chambers of Industry and Commerce (DIHK) reported that its surveys indicated many German business executives would rather move operations to the US than remain handicapped by high European electricity costs as they try to remain competitive in world markets.  DIHK Chief Executive Martin Wansleben acknowledged that “The U.S. has become much more attractive to companies than Europe.”

It’s no wonder more European companies are opening or expanding facilities in the U.S., and more U.S. multi-nationals are shifting overseas operations back home:

·                     Airbus is building an aircraft assembly plant in Mobile, Alabama.  It will produce A320 jets for the American market.  Der Spiegel noted that Airbus “could save on manufacturing costs compared to its plants in Hamburg, Germany, and Toulouse, France.”

·                     Siemens, a German multi-national engineering and electronics company, is making turbines for fossil fuel power plants in Charlotte, North Carolina.

·                     BASF, the German chemical company, has opened a $33 million facility expansion in Research Triangle Park, North Carolina.

·                     Michelin, the French tire producer, is developing a $750 million facility in Greenville, South Carolina.

·                     BMZ GmbH, a German company, opened its U.S. facility in Virginia Beach, Virginia for research, development, assembly and distribution of lithium ion rechargeable batteries.

Some Plain Talk About Rights

Disaster: Import an underclass, then give it with the free meal ticket the right to vote.

By George Handlery 

The right to vote is a key feature of the democratic order. This is so self-evident that one fears to state it. Now, a reason emerges to commit in favor of the sensible application of the principle. The reason is as stunning as it is threatening. This practice is now under attack by the multiculturalists and the Left. 

The right to vote is the ability to decide a group’s future. True, this right is not limited to balloting. The concept assumes that a choice is offered. When the writer was young, the police came to herd voters to the local “Council House”. There one was to vote for Our Beloved Party. Thus, the right to vote deteriorated into an obligation to legitimize oppression. There was no right to abstain or to vote “wrong”, that is for the “Class Enemy”, and against the Soviet “Camp of Peace”.

As mentioned, an attack upon the system of voting, as defined by tradition and common sense, is emerging. Those that think their region will be immune to this threat will be disappointed.

In Western Europe an idea spreads that will not stop at the water’s edge. It is to extend to aliens the right to vote on the local level. This goes beyond voting in private associations. For instance, the writer has been a member of a Swiss village gun club and voted on matters of its governance. Newly, Green – Red projects wish to give the vote to foreigners in local government. This is not a voluntary association but a component of a system that peaks as a sovereign state. 

The power conferred by this right depends on the entity’s system. Centralized France represents a pole and Switzerland illustrates the other extreme. There principled “decentralization” is the fitting term as, in official parlance, “sovereign” means “people” and not the executive. Accordingly, government is built from the bottom to the top. The central government, whose authority flows from “below”, is the executive of local organs.  

In some systems, local government is significant, especially if the parameters of daily life are drawn locally. Thus, local institutions are more than a cog in an aggregate. Whoever controls local government is not in charge of a minor agency but empowered to regulate a key gear. 

Those that propose that the right to vote in local matters be exercised without citizenship imply that the power conferred is insignificant. This empowerment in local politics insinuates that the integration of non-citizens is facilitated through their inclusion in decision-making. This contradicts a traditional approach, which is (a) controlled immigration, (b) residency, (c) integration. Naturalization admits to membership in a community. It is to follow integration - the internalization of the community’s values.