Economic Science and the Underworld

The individual needs freedom and the free market. The socialist alternative threatens to blot him out of the equation.

BY JR NYQUIST

While economics depends on man’s rational side, humanity nonetheless clings to the irrational. We want to have our cake and eat it. We want a free lunch, free health care, free schools, and free retirement. But nothing is free. Someone must pay. Economic science says so.

When we say economics is a science, the ordinary man thinks of physics and biology. But economics is a different kind of science. According to the Austrian school, economics is an a priori science which assumes that purposeful behavior can alleviate a “felt uneasiness.” The process by which the greatest alleviation is made possible is called capitalism, or the free market. Whatever anyone wishes to say against market freedom, there is no workable alternative.

According to Mises, writing in his book The Anti-Capitalist Mentality, 

“The emergence of economics was one of the most portentous events in the history of mankind. In paving the way for private capitalistic enterprise it transformed within a few generations all human affairs more radically than the preceding ten thousand years had done.” 

Yet more amazing still, economic science and the capitalist transformation of human life was accomplished by a very small number of authors whose books influenced a similarly small number of statesmen. As Mises explained, 

“Not only the sluggish masses but also most of the businessmen who, by their trading, made the laissez-faire principles effective failed to comprehend the essential features of their operation. Even in the heyday of liberalism only a few people had a full grasp of the functioning of the market economy.”

It was a freak of history that a handful of thinkers began to understand economic science. It was rarer still, in terms of politics, that a handful of statesmen were able to make use of that understanding. As Mises explained, 

“Western civilization adopted capitalism upon [the] recommendation … of a small elite.” 

As such, capitalism has always hung by a slender thread. For how often do we find sufficient intelligence within ruling elites? How often does genius go unrecognized? After all, every man is a genius in his own mind. Consider how the many geniuses who produce so little of worth from their swollen egos today must naturally malign anyone whose thinking stands on higher ground. In fact, the grim history of humanity suggests that a true and worthy social science (or economic science) is as unlikely as a mouse chasing a cat. For that which touches on society and institutions must necessarily fall victim to powerful interests and political passions.

Yet economic science performed its miracle. Wonders of technology and wealth now abound. Our ancestors could hardly imagine the modern world. At the same time, a dark cloud approaches. The intelligent few seem to have been overwhelmed by the many-too-many. None should be naïve enough to imagine that history is only a story of progress. If we have been paying close attention, we might remember the saying, “What goes up, must come down.”

The Slow Death of 'Traditional' Families in America

More than 20 percent of non-college grads are raising their kids alone

by DEREK THOMPSON

Thanksgiving is perhaps the quintessential American family holiday, but what, exactly, does the quintessential American family look like today? Gay marriage laws have happily extended legal rights to same-sex couples, but over the last half century, a less auspicious family development has been the rise of single moms and dads and the decline of two-parent households, particularly among lower-income and less-educated families.

New Census numbers help tell the story:

The big takeaway here is that college graduates overwhelmingly raise children together (88 percent have a married spouse present). Non-college-grads are more than twice as likely to raise their child alone.

I took the Census figures and turned them into pie charts to accentuate the percentage difference in family arrangements by education. What you might call the "traditional" family structure (two parents raising their kids, together) dissipates as you move down the education ladder.

The blue slice represents what some people might consider a traditional family: Two married parents raising kids together.

Education and income go hand-in-hand, and so it will come as no surprise that richer individuals are more likely to married, regardless of race and education, and poorer individuals are much less likely to be married. This graph shows *all* Americans over the age of 15.

The point here isn't that marriage should be universal, or that we should abolish divorce, or that married two-parent households are the only possible way to properly raise a child. Rather, the big idea is that rich, educated people are more likely to marry, more likely to marry each other, and more likely to use their resources and the obvious time benefits of a two-parent household to produce educated (and rich) children. This is a virtuous cycle, and it turns vicious for the poor. Across the income spectrum, single parents have a tough time balancing work and child-rearing, especially when work earns them very little money. You don't have to be a cultural conservative to acknowledge that the disintegration of the traditional family structure at the bottom of our economic ladder means thattoo many kids have fallen behind before they set foot in school.

Being raised by both parents should not be a rich kid's exclusive privilege. And it isn't, yet: More than 60 percent of high-school dropouts still raise their children in two-parent households. But that figure is inching dangerously downward.

Rescuing the Bottom Billion From the Pope’s Peronist Economics

It is very easy when appalled by one’s fellow human beings to want impose virtue (or taste) upon them, but this is a temptation that should be resisted

by Theodore Dalrymple

It is not difficult both to dislike and to criticize consumerism. It is often as vacuous as it is unattractive. Last week, for example, my wife took me to something called an ‘outlet village,’ an expanse of shops built in faux Eighteenth Century style that sold designer products at allegedly low prices (though, wanting nothing in particular, they seemed high enough to me). There was actually a queue to obtain entry into Prada whose products are hardly those of first or primary necessity. However deep our economic crisis, this was no queue for rations in wartime; and though I am far from an egalitarian I felt uneasy that there were so many people wanting and even eager to pay hundreds or perhaps thousands for what seemed to me to be aesthetically cheap and vulgar gewgaws while so many people await their heating bill with extreme anxiety and trepidation.

If I am honest, however, what really appalled me about the ‘outlet village,’ which, incidentally, proclaimed itself a ‘community,’ was the appalling taste of the moneyed masses. Though they shopped all day for clothes – you couldn’t buy so much as a newspaper, let alone a book, in the ‘community’ – I didn’t see a single smartly dressed person among them, let alone an elegantly dressed one. On the contrary, they were to a man and woman attired in expensive slum- casual garments whose brands alone distinguished them from what the poor would wear. As consumers, then, they weren’t even very good at what they did, namely consume. They wore brand names as if they were medals awarded in the war to distinguish themselves as individuals from others in some way. If the justification for disparities in wealth is that the wealthy beautify the world, these people failed utterly to justify their prosperity. Purchasing power without power of discrimination is (at any rate for me) dispiriting to behold; but I am under no illusion that if income and assets were more equally distributed in society things would be any better from the aesthetic point of view, irrespective of the economic or social effects of redistribution.

Appalled or even disgusted as I was by what I thought was this vast outdoor exhibition of mass vacuity and spiritual emptiness, to say nothing of absence of taste, I kept enough control of my gut reaction not to suppose that it would be a very good guide to or motive for economic or social policy. It is very easy when appalled by one’s fellow human beings to want impose virtue (or taste) upon them, but this is a temptation that should be resisted. Deeper reflection is necessary; intemperance and impatience usually end in something worse than they were designed to amend.

In France, the Far Right Rises and Rises

France Accelerates Descent Towards Fascism

By Walter Russell Mead

President François Hollande is now the most unpopular French leader of the Fifth Republic. Opinion polls put his approval rating at just 21 percent. French citizens find his strict tax plans deeply upsetting and fear that his policies are weakening the economy and selling out the country to Brussels and Berlin. “Opinion poll after opinion poll reveals that the French are pessimistic about their future,” writes Jeremy Jennings, a professor at Kings College in London.

Hollande appears to be in real trouble. “Attempts to reassert his authority before the French electorate have unfailingly backfired,” Jennings writes. “Even members of his own party have taken to booing and whistling when Hollande’s name is mentioned. Not only this, but his government looks to be disintegrating…. Ministers frequently and publicly disagree with each other. Measures are announced, only to be withdrawn days later after the latest round of popular protests. The impression is one of confusion and panic.”

As Hollande slips the popularity of Marine Le Pen, the head of the far right National Front party, is growing, despite her controversial views on immigrants, Islam, and European integration. “Only last month a poll published in the left-wing Nouvel Observateur revealed that in next year’s European elections more people intended to vote for the Front National than for any other party.”

Le Pen has worked hard to take her party into the mainstream. Her father, Jean-Marie Le Pen, the founder of the National Front, was successfully prosecuted for denying the Holocaust, a legacy that still haunts the party. When Marine proposed an alliance with the similarly anti-EU UK Independence Party, Nigel Farage said his party would never “get into bed” with the National Front and its “deeply embedded” elements of anti-Semitism. Nevertheless, Le Pen has managed to broaden her support by appealing to voters’ sense of patriotism and championing strong defense and security policies, while railing against the euro (“a German invention”), the weakening of French industry and agriculture by “pot-bellied emirs” and ”voracious big bosses,” and the rising number of immigrants (“itinerant thieves”) taking jobs and housing from true French. The National Front, she has suggested, should be described not as “far right” but as the “patriot party.”

It’s working. Her popularity is growing—a recent poll found that 56 percent of French voters think Le Pen is the most capable politician to take on Hollande—and so is her political influence. Sarkozy’s former prime minister has spoken publicly about the prospect of an alliance with the National Front. “We will be in power in the next 10 years,” Le Pen told Bloomberg last month.

It is disillusionment with the moderate parties of both the right (Sarkozy) and the left (Hollande) in France, occurring at the same time as an economic decline and harsh austerity (?) imposed by Brussels (and reality), that is causing many French voters to find some comfort in Le Pen’s message of national strength and pride. Though still held at arm’s length by most voters, she is growing increasingly popular and her rise could have resounding implications for French politics, France’s role in the EU, and for the EU itself.

An Idiot’s Guide to Unpacking the Courts

Looking for a new Robert Taft

by Angelo M. Codevilla

“Abortion Cases in Court Helped Tilt Democrats Against the Filibuster.” This New York Times front-page story was a press release rather than an investigative report. Through it, the Obama Administration and the Democratic Party cast aside their pretense that they had turned the Senate into a purely partisan body for any public-spirited reason, and broadcast to their most faithful supporters a powerful message: We are packing the Federal Courts for you! Democrat constituencies whose daily bread comes from partisan regulations – the alternative energy industry, for example – knew that already. But less sentient parts of the “base” needed to have it spelled out that the Party uses absolutely all its powers to serve them.

Which brings us to the really interesting part: The Republican Establishment has responded to the Obamian Democrats’ seizure of parliamentary power and, prospectively, of the judiciary, with mere calls to “vote Republican.” The reason such calls are unconvincing is that the Republican Establishment has no intention of using any of the powerful powers it has to prevent court-packing, and indeed to unpack the courts.

It is no little indictment of our Mitch McConnells, John Boehners, and Chris Christies that they leave it to a poor columnist to point out the obvious.

Yes, the Democrats can name and confirm their faithful Felix the Cat to any court in the land. But Felix can exercise that judicial power only if he is paid, his clerks are paid, and his expenses are paid. That takes money from the Treasury. Art. I:9 of the Constitution says that money can come from the Treasury only by law passed by both Houses and signed by the President. Republicans can negate Felix’s appointment by not funding his position.

There are several ways of doing that. If the government were to be funded by regular appropriations bills, the Republican House could simply not increase (or even decrease) the amount allotted to the court on which Felix was to sit. So long as the Democrats insist on funding the government by the noxious device of Continuing Resolutions, the Republican House can write the budget for each of the courts into the CR – which it has every right to do. If it really, really wants to drive a stake into Felix, it can place this staple of Congressional power into the law: “no funds authorized herein shall be spent for…” To make triply sure, it can add this other staple: “notwithstanding any other provision of law or administrative action…”

These devices can be used as well to un-pack courts that are already packed. Here, Continuing Resolutions can be used for positive leverage. Either house of Congress can add language setting the number of judges on any court. If it reduces the number of judges, it can designate the class of judges (the earliest confirmed, or the latest, for example) placed on inactive status.

Revolutionary France’s Road to Hyperinflation

Paper money eventually returns to its intrinsic value — zero

by Frank Hollenbeck

Today, anyone who talks about hyperinflation is treated like the shepherd boy who cried wolf. When the wolf actually does show up, though, belated warnings will do little to keep the flock safe.

The current Federal Reserve strategy is apparently to wait for significant price inflation to show up in the consumer price index before tapering. Yet history tells us that you treat inflation like a sunburn. You don’t wait for your skin to turn red to take action. You protect yourself before leaving home. Once inflation really picks up steam, it becomes almost impossible to control as the politics and economics of the situation combine to make the urge to print irresistible.

The hyperinflation of 1790s France illustrates one way in which inflationary monetary policy becomes unmanageable in an environment of economic stagnation and debt, and in the face of special interests who benefit from, and demand, easy money.

In 1789, France found itself in a situation of heavy debt and serious deficits. At the time, France had the strongest and shrewdest financial minds of the time. They were keenly aware of the risks of printing fiat currency since they had experienced just decades earlier the disastrous Mississippi Bubble under the guidance of John Law.

France had learned how easy it is to issue paper money and nearly impossible to keep it in check. Thus, the debate over the first issuance of the paper money, known as assignats, in April 1790 was heated, and only passed because the new currency (paying 3 percent interest to the holder) was collateralized by the land stolen from the church and fugitive aristocracy. This land constituted almost a third of France and was located in the best places.

Once the assignats were issued, business activity picked up, but within five months the French government was again in financial trouble. The first issuance was considered a rousing success, just like the first issuance of paper money under John Law. However, the debate over the second issuance during the month of September 1790 was even more chaotic since many remembered the slippery slope to hyperinflation. Additional constraints were added to satisfy the naysayers. For example, once land was purchased by French citizens, the payment in currency was to be destroyed to take the new paper currency out of circulation.

Moving to the Heart of Europe

Migration tends to be greater where there is a wider gulf between employment and economic opportunities

by Wendell Cox

Europe's demographic dilemma is well known. Like East Asia and to a lesser degree most of the Western Hemisphere, Europe's birth rates have fallen so far that the population is becoming unable to replenish itself. At the same time, longer  life spans have undermined the poulation’s ability to withstand a growing  old age dependency ratio, challenging the financial ability (and perhaps even willingness) of a smaller relative workforce in the decades to come. The EU-27 (excluding Croatia) over 65 population is projected by Eurostatto increase 75 percent relative to its working age population (15-64) between 2015 and 2050, more than either the 60 percent increase the UN projects in the United States and Japan (though Japan’s current ratio is much higher than the EU or the US).

This problem could be partially addressed by international migration, which could increase the size of labor force required to support expensive social welfare commitments. Our analysis of available Eurostat data (European Commission) data indicates that international migration to the European Union (EU) is strong. Further, migration has been shifting with the changing economic fortunes of EU nations, led by strong growth in the “heart of Europe” but slowing growth along much of the periphery of the former EU-15.This suggests that strong economic growth may be the key to solving, or at least ameliorating,  Europe’s looming demographic crisis.

All EU-15 Nations have Attracted Migrants

Since the 2004 enlargement of the European Union, now at 28, with the recent addition of Croatia, the former EU-15 has attracted millions of international migrants, including many from the newer entrants to the original fifteen memnbers. Eurostat data indicates that nearly 11 million people more people moved to these nations between 2005 and 2012 than moved away.

The Conservative Mistake

Stasis is not an option

by david friedman
Critics of free immigration worry that immigrants might change the country, make it more socialist, more crime ridden, more like the places they are coming from, but offer no strong reason to expect those particular effects. Leaving the place where you grew up to move somewhere very different is, after all, evidence that you prefer the latter. As I pointed out in one exchange, the Volokh brothers, associated with the popular libertarian/conservative legal blog the Volokh Conspiracy, are immigrants from the ex-Soviet Union. While Eugene and Sasha Volokh may be slightly more socialist than I am, they are much less socialist than most of their fellow academics, not entirely surprising given that they have experienced socialism at first hand.

The critics’ argument takes it for granted that change is presumptively bad.

The same assumption appears implicitly in arguments over global warming. It seems likely that the average temperature of the globe will go up by several degrees C over the next hundred years due to increased Carbon dioxide in the atmosphere, a change that will have both good and bad effects. If I had to guess, my guess would be that the net effect will be positive, for at least two reasons. The first is that human habitability is limited mostly by cold not heat—the equator is populated, the poles are not. The second is that, for well understood reasons, global warming can be expected to increase temperatures more in cold places and at cold times than in warm. Combine those two and one might guess that a somewhat warmer world would be, on the whole, more suited to humans, not less. Here again, the explanation of the opposite view seems to me to be the conservative mistake, the assumption that change is presumptively bad. The same is true, I think, of concerns about a variety of other issues, from fracking to cloning to GMO foods.

I call it a mistake, but perhaps that is unfair. We know that the present is at least tolerable, since we are at present tolerating it. A change might make things better, might make them worse, so why chance it? That sounds like a plausible argument, but it contains a hidden assumption—that stasis is an option, that if we do not have more immigration our cultural and political circumstances will remain the same, that without anthropogenic CO2, climate will stay what it currently is.

Both are demonstrably false. Over my lifetime the cultural and political institutions of the U.S. have changed substantially for reasons that had little to do with immigration. Over the past million years, the climate of the earth has changed radically, time after time, for reasons that had nothing to do with anthropogenic CO2. A rise in sea level of a foot or two would create problems in some parts of the world, but not problems comparable to the effect of half a mile of ice over the present locations of Chicago and London. 

Puerto Rico the Next Detroit?

So how is Puerto Rico's debt going to be paid back? The answer is it won't.

By Mike "Mish" Shedlock

Puerto Rico has been in recession for 8 years. The unemployment rate is 15% and debt has piled up to the tune of $70 billion. For Comparison purposes, California public debt is $96 billion and Detroit debt was $18 billion. Wall Street rates Puerto Bonds at one step above junk.

How did Puerto Rico get into trouble? The short answer is the same way as Detroit: loss of industry coupled with lavish pensions.

The Washington Post reports Puerto Rico confronts a rising economic misery.

 Boxes and wooden crates filled with household items bound for the U.S. mainland are stacked high in the Rosa del Monte moving company’s cavernous warehouse, evidence of the historic rush of people abandoning this beautiful island.

The economy here has been in recession for nearly eight years, crimping tax revenue and pushing the jobless rate to nearly 15 percent. Meanwhile, the government is burdened by staggering debt, spawning comparisons to bankrupt Detroit and forcing lawmakers to severely slash pensions, cut government jobs and raise taxes in a furious effort to avert default.

Officials in San Juan and Washington are adamant that a federal bailout is not on the table, but the situation is being closely monitored by the White House, which recently named an advisory team to help Puerto Rican officials navigate the crisis.

The island’s problems have ignited an exodus not seen here since the 1950s, when 500,000 people left for jobs on the mainland. Now Puerto Ricans, who are U.S. citizens, are again leaving in droves.

Puerto Rico lost 54,000 residents — 1.5 percent of its population — between 2010 and 2012 alone. Since recession struck in 2006, the population has shrunk by more than 138,000 to 3.7 million, with the vast majority of the outflow headed to the mainland.

The brutal combination of a long recession, a shrinking population and overwhelming debt has left Puerto Rico’s political leaders struggling to manage a conundrum: How do they tame at least $70 billion in debt while marshaling the resources to grow a shrinking economy and battle corrosive social problems, including a homicide rate that is nearly six times the U.S. average?

Nobody knows how to make a pencil, or a health-care system

I Pencil

By Kevin D. Williamson

Everybody knows the first words spoken on a telephone call — Alexander Graham Bell’s simple demand “Mr. Watson, come here. I want to see you.” April marked the 40th anniversary of the first cell-phone call, which was quite different in tone. Two research teams had been competing to bring the first real consumer cell phone to market, and the first mobile call was placed by Motorola engineer Marty Cooper to his chief rival, Joel Engel of Bell Labs. “Joel, this is Marty,” he said. “I’m calling you from a cell phone.” In other words: “You lose, suckers.”

It took nearly a century to get from Alexander Graham Bell’s conversation to Marty Cooper’s, even though the basic technologies of mobile phones — telephony and radio — date from the 19th century. Conversely, it took only 66 years for mankind to go from the Wright brothers’ flight at Kitty Hawk to Neil Armstrong’s stroll on the moon. Technology does not move in predictable ways.

But it does move.

We treat technological progress as though it were a natural process, and we speak of Moore’s law — computers’ processing power doubles every two years — as though it were one of the laws of thermodynamics. But it is not an inevitable, natural process. It is the outcome of a particular social order.

When I am speaking to students, I like to show them a still from the Oliver Stone movie Wall Street in which the masterful financier Gordon Gekko is talking on his cell phone, a Motorola DynaTac 8000X. The students always — always — laugh: The ridiculous thing is more than a foot long and weighs a couple of pounds. But the revelatory fact that takes a while to sink in is this: You had to be a millionaire to have one. The phone cost the equivalent of nearly $10,000, it cost about $1,000 a month to operate, and you couldn’t text or play Angry Birds on it. When the first DynaTac showed up in a movie — it was Sixteen Candles, a few years before Wall Street— it was located in the front seat of a Rolls-Royce, which is where such things were found 25 or 30 years ago. By comparison, an iPhone 5 is a wonder, a commonplace miracle. My question for the students is: How is it that the cell phones in your pockets get better and cheaper every year, but your schools get more expensive and less effective? (Or, if you live in one of the better school districts, get much more expensive and stagnate?) How is it that Gordon Gekko’s ultimate status symbol looks to our eyes as ridiculous as Molly Ringwald’s Reagan-era wardrobe and asymmetrical hairdos? That didn’t just happen.

In his classic short story “I, Pencil,” economist Leonard Read considers the incomprehensible complexity involved in the production of a simple No. 2 pencil: the expertise in design, forestry, mining, metallurgy, engineering, transportation, support services, logistics, architecture, chemistry, machining, and other fields of knowledge necessary to create a product so common, so humble, and so cheap as to have become both ubiquitous and disposable. Read’s conclusion, which is one of those fascinating truths so obvious that nobody appreciates them, is that nobody knows how to make a pencil.Nobody is in charge of the operation, and nobody understands it end to end. From the assembly-line worker to the president of the pencil company, thousands or millions of people have tiny, discrete pieces of knowledge about the process, but no coordinating authority organizes their efforts.

Puerto Rico might be a little too big to fail

Puerto Rico, with at least $70 billion in debt, confronts a rising economic misery

By Michael A. Fletcher

Boxes and wooden crates filled with household items bound for the U.S. mainland are stacked high in the Rosa del Monte moving company’s cavernous warehouse, evidence of the historic rush of people abandoning this beautiful island.

The economy here has been in recession for nearly eight years, crimping tax revenue and pushing the jobless rate to nearly 15 percent. Meanwhile, the government is burdened by staggering debt, spawning comparisons to bankrupt Detroit and forcing lawmakers to severely slash pensions, cut government jobs and raise taxes in a furious effort to avert default.

The implications are serious for Americans outside Puerto Rico both because a taxpayer bailout would be expensive and a default would be far more disruptive than Detroit’s record bankruptcy filing in July. Officials in San Juan and Washington are adamant that a federal bailout is not on the table, but the situation is being closely monitored by the White House, which recently named an advisory team to help Puerto Rican officials navigate the crisis.

The island’s problems have ignited an exodus not seen here since the 1950s, when 500,000 people left for jobs on the mainland. Now Puerto Ricans, who are U.S. citizens, are again leaving in droves.

They are choosing the uncertainty of the job market in Orlando or New York City or Philadelphia over what they view as the certainty that their dreams would be crushed by the U.S. territory’s grinding economic problems.

“We used to move a lot of machinery into Puerto Rico, and executives who worked in the pharmaceutical industry here,” said Neftaly Rodriguez, whose father founded Rosa del Monte. “Now we are packing people up to go out. Everybody is looking for a better opportunity.”

Puerto Rico lost 54,000 residents — 1.5 percent of its population — between 2010 and 2012 alone. Since recession struck in 2006, the population has shrunk by more than 138,000 to 3.7 million, with the vast majority of the outflow headed to the mainland.

The brutal combination of a long recession, a shrinking population and overwhelming debt has left Puerto Rico’s political leaders struggling to manage a conundrum: How do they tame at least $70 billion in debt while marshaling the resources to grow a shrinking economy and battle corrosive social problems, including a homicide rate that is nearly six times the U.S. average?

The crisis has left Puerto Rican Gov. Alejandro Javier Garcia Padilla juggling competing demands for budget cuts and other types of austerity demanded by Wall Street rating agencies, and the incentives and other spending needed to ignite growth.

“Sometimes, you are between the wall and sword,” Padilla said in an interview.

Arsonists Running the Fire Brigade

Promoting Failure

By John Mauldin

The true measure of a career is to be able to be content, even proud, that you succeeded through your own endeavors without leaving a trail of casualties in your wake.

– Alan Greenspan

If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.

– John Maynard Keynes

And He spoke a parable to them: "Can the blind lead the blind? Will they not both fall into the ditch?"

– Luke 6:39-40

Six years ago I hosted my first Thanksgiving in a Dallas high-rise, and my then-90-year-old mother came to celebrate, along with about 25 other family members and friends. We were ensconced in the 21^st floor penthouse, carousing merrily, when the fire alarms went off and fire trucks began to descend on the building. There was indeed a fire, and we had to carry my poor mother down 21 flights of stairs through smoke and chaos as the firemen rushed to put out the fire. So much for the advanced fire-sprinkler system, which failed to work correctly.

I wrote one of my better letters that week, called "The Financial Fire Trucks Are Gathering." You can read all about it here, if you like. I led off by forming an analogy to my Thanksgiving Day experience:

I rather think the stock market is acting like we did at dinner. When the alarms go off, we note that we have heard them several times over the past few months, and there has never been a real fire. Sure, we had a credit crisis in August, but the Fed came to the rescue. Yes, the subprime market is nonexistent. And the housing market is in free-fall. But the economy is weathering the various crises quite well. Wasn't GDP at an almost inexplicably high 4.9% last quarter, when we were in the middle of the credit crisis? And Abu Dhabi injects $7.5 billion in capital into Citigroup, setting the market's mind at ease. All is well. So party on like it's 1999.

However, I think when we look out the window from the lofty market heights, we see a few fire trucks starting to gather, and those sirens are telling us that more are on the way. There is smoke coming from the building. Attention must be paid.

I was wrong when I took the (decidedly contrarian) position that we were in for a mild recession. It turned out to be much worse than even I thought it would be, though I had the direction right. Sadly, it usually turns out that I have been overly optimistic.

This year we again brought my now-96-year-old mother to my new, not-quite-finished high-rise apartment to share Thanksgiving with 60 people; only this time we had to contract with a private ambulance, as she is, sadly, bedridden, although mentally still with us. And I couldn't help pondering, do we now have an economy and a market that must be totally taken care of by an ever-watchful central bank, which can no longer move on its own?

I am becoming increasingly exercised that the new direction of the US Federal Reserve, which is shaping up as "extended forward rate guidance" of a zero-interest-rate policy (ZIRP) through 2017, is going to have significant unintended consequences. My London partner, Niels Jensen, reminded me in his November client letter that,

In his masterpiece The General Theory of Employment, Interest and Money, John Maynard Keynes referred to what he called the "euthanasia of the rentier". Keynes argued that interest rates should be lowered to the point where it secures full employment (through an increase in investments). At the same time he recognized that such a policy would probably destroy the livelihoods of those who lived off of their investment income, hence the expression. Published in 1936, little did he know that his book referred to the implications of a policy which, three quarters of a century later, would be on everybody's lips. Welcome to QE.

It is this neo-Keynesian fetish that low interest rates can somehow spur consumer spending and increase employment and should thus be promoted even at the expense of savers and retirees that is at the heart of today's central banking policies. The counterproductive fact that savers and retirees have less to spend and therefore less propensity to consume seems to be lost in the equation. It is financial repression of the most serious variety, done in the name of the greater good; and it is hurting those who played by the rules, working and saving all their lives, only to see the goal posts moved as the game nears its end.

Central banks around the world have engineered multiple bubbles over the last few decades, only to protest innocence and ask for further regulatory authority and more freedom to perform untested operations on our economic body without benefit of anesthesia. Their justifications are theoretical in nature, derived from limited-variable models that are supposed to somehow predict the behavior of a massively variable economy. The fact that their models have been stunningly wrong for decades seems to not diminish the vigor with which central bankers attempt to micromanage the economy.

Seattle en route to Venezuela

A Socialist Wins in Seattle

By John Nichols

When Machinists union members rallied in Seattle in mid-November to protest Boeing’s demand for wage and pension cuts, the newest municipal official roused the crowd. “We salute the Machinists for having the courage to reject this blatant highway robbery from the executives of Boeing in pursuit of their endless, endless thirst for private profit.” Kshama Sawant, an economics professor and Occupy Seattle activist who had just won a citywide City Council seat, said threats to shift production out of state could be met with an eminent domain move allowing workers to “take over the factories.”

Condemning private profit and talking up worker control of factories? That sounds kinda socialist. And socialists don’t win elections in the United States, right? Wrong. Sawant is the most recent in a long line of “out” socialists elected to city councils, mayoralties and even seats in Congress over the past century. Yet her win drew headlines as far away as her native India.

What made Sawant’s victory historic was the context. Since 2008, Republican politicians and their media echo chambers have built a cottage industry around the comic claim that Barack Obama is a socialist. The man who took single-payer healthcare off the table and refused to break up “too big to fail” banks wouldn’t qualify as a mild social democrat, let alone the raging “Marxist” of Rush Limbaugh’s hallucinations.

Still, the charge persists. In October, Sarah Palin was peddling the fantasy that problems with the Affordable Care Act website were part of an elaborate scheme to steer America toward “full socialized medicine.” The rhetorical strategy imagines that the mere suggestion of a socialist or socialized tendency is a deal killer. It’s not just Republicans who buy into the notion; Democrats, with rare exceptions like Representative John Conyers and Senator Bernie Sanders, are almost as quick as conservatives to distance themselves from the s-word.

But the American people are less concerned. Thirty-nine percent of Americans surveyed for a November 2012 Gallup poll said they had a positive image of socialism. In a 2011 Pew survey, 49 percent of Americans under 30 said they felt positive about socialism, while just 46 percent felt positive about capitalism. Among African-Americans, 55 percent had a positive reaction to socialism, versus 41 percent to capitalism. Among Latinos, it was 44 percent for socialism, 32 percent for capitalism.

Even socialists have a hard time agreeing on definitions of socialism, so there may not be a consensus on what all those Americans feel positive about. But in an era of lingering unemployment, cuts to public education and public services, and ever-widening incomeinequality, it should not be surprising that millions of Americans are ill at ease with capitalism—at least as it’s defined by Ted Cruz and Paul Ryan—and that many of them are open to alternatives. Nor should it be surprising that, after all the silly ranting about Obama’s “socialism,” voters are increasingly immune to redbaiting. In New York City this fall, Bill de Blasio’s Republican opponent seized on a New York Times story that said the Democratic mayoral candidate had once expressed an interest in “democratic socialism”; he attacked de Blasio for running a campaign “directly out of the Marxist playbook.” The New York Post featured an image of the Democrat next to a hammer and sickle. De Blasio laughed the attacks off, continued to describe himself as a progressive and won 73 percent of the vote.

Frustration with America’s constrained political discourse, and the dysfunctional governance that extends from it, is palpable, and people are looking for fresh policies and approaches. Virginia Libertarian gubernatorial candidate Robert Sarvis just won 15 percent of the under-30 vote, securing almost 150,000 votes statewide. Political and media elites acknowledge that libertarian ideas can attract votes, but they still wrestle with the notion that socialist ideas might also have appeal. Sawant put the prospect to the test in Seattle, a city with a population larger than the District of Columbia, Vermont and Wyoming. Identifying herself as a “Socialist Alternative” candidate who would fight for a $15 minimum wage, taxation of millionaires and expanded public services, she beat a sixteen-year incumbent who had broad support from mainstream Democrats and environmental groups. It’s fair to suggest that much of her backing came from Seattle voters who wanted to shake things up: on the same Election Day, the city turned out a mayor and changed its system of electing Council members. But it is also fair to suggest, as Sawant does, that her win has “shown the strongest skeptics that the socialist label is not a bad one for a grassroots campaign to succeed.”

That’s not a new notion. The acceptance of socialist candidates and ideas has waxed and waned in American history. With the rapid evolution of our politics in an age of instant communication and growing anger at income inequality, fear of the s-word is diminishing. And voters—especially younger ones—are beginning to demand a politics that, instead of rejecting solutions or candidates based on a label, considers their merits.

Venezuela’s Price Police

Sooner or later, price inflation will cause Maduro's demise

By Alvaro Vargas Llosa

The Venezuelan government’s war on price inflation is not a metaphorical one—last weekend President Maduro, who owes his title to April’s rigged election, ordered the military takeover of Daka, a chain of electronic stores, and the arrest of several managers from that and other retail companies. The rhetoric employed by Maduro was inevitably interpreted by the masses as an encouragement to loot—which is what they did in the city of Valencia.

Besides the images sent out by citizen-reporters in Valencia, the picture that best captures the essence of what is happening is the one tweeted by a government minister who tried to justify the measures. The photo shows a washer/dryer that, in the words of the minister, “cost 39,000 VEF on November 1 and today costs 59,000 VEF, a nearly 100 percent rise in a week...”

Yes, minister, that is precisely what happens when you are on the verge of hyperinflation! The inflation rate is now nearing 60 percent and, as anyone who has lived under those conditions (including yours truly) knows, going from 60 percent to 1,000 percent is a lot easier than going from 3 percent to 40 or 50 percent.

For many years Venezuela has produced nothing but oil (in decreasing quantities) and has therefore had to import pretty much everything the population consumes. The artificial level at which the government has kept the bolivar in spite of the massive outflow of hard currency required to meet those import needs has, of course, caused a severe drop in foreign-exchange reserves. Government controls and the militarization of the economy have not prevented the black market from taking the real exchange rate to a level ten times higher than the official one. No wonder people who have to obtain US dollars to import even the most basic stuff sell it at much higher prices than the government Wonderland economy dictates.

But that is not all. Since 2002 the money supply (M1) has grown at an annual rate of 54 percent while real GDP per capita has risen at an annual rate of just under 4 percent. The socioeconomic model based on producing nothing and consuming everything at subsidized prices, printing colossal amounts of money to paper over the government’s yawning fiscal gap, and waging literally a war on private businesses has led to a stagflation—minimal growth and skyrocketing prices that have turned ministers into photographers. A few weeks from the local elections that will be the first test of Maduro’s support since the rigged presidential election, the political consequences are already serious—he faces the possibility of such a big defeat that the numbers will simply overwhelm the government´s ability to commit yet another electoral fraud.

This explains Maduro’s desperate move over the weekend. The man who openly encouraged people to loot and ordered the military to takeover several stores around the country in an attempt to lower consumer prices understands all too well that he is in danger. He lacks Hugo Chavez’s charisma, he is presiding over a regime that exhibits growing cracks, and he is fast losing support according to the few polls one can trust in that environment.

We don’t know if he will be able to rig the next election at this point. But we do know this: He cannot win the war on inflation (soon hyperinflation) no matter how many stores he takes over, how many managers he throws in jail, and how many businesses he allows the masses to loot. Sooner or later, price inflation will cause his demise.

Government is dangerous. Handle with care.

Government is dangerous. Handle with care.

The corruption of the federal government was a key element in the career of Whitey Bulger (seen here in a 1955 mug shot taken in Miami Beach). Officials charged with defending the public from gangsters like Bulger used their considerable influence to defend the gangster instead.

by Jeff Jacoby

THERE IS NO connection, of course, between the prosecution of notorious gangster James "Whitey" Bulger and the recent spate of scandals and revelations roiling the Obama administration. Or is there?

Law enforcement and criminal justice are essential functions of government. No civilized society could survive for long if it lacked tools to combat lawlessness or make dangerous villains answer for their crimes. And Bulger was certainly dangerous — "one of the most vicious, violent criminals ever to walk the streets of Boston," as Assistant US Attorney Fred Wyshak called him in summing up for the prosecution last week.

But Bulger wasn't the only one on trial in Boston's federal courthouse. So was the government trying him. Bulger and his henchmen may have been the degenerates who physically committed the gruesome murders and other crimes that jurors learned about during 35 days of sometimes stomach-churning testimony. But it was other degenerates, in the FBI and the Justice Department, who for so long enabled Bulger's bloody mayhem. They enlisted Bulger as an informant, protected him from police investigations, and warned him to flee when an indictment was imminent. "If the FBI had not made Whitey its favorite mobster, broken the rules, and rigged the game to his benefit," reporter David Boeri has concluded, "Bulger would never have reached as high as he did."

The corruption of the federal government was a key element in Bulger's trial, as it was in so much of his sadistic career. Officials charged with defending the public from gangsters like Bulger used their considerable influence to defend the gangster instead.

It would be comforting to believe that this was a one-off, that law enforcement agencies never abuse their authority, that the immense powers of the federal government are always deployed with scrupulous integrity. But no one believes that.

As Bulger's racketeering prosecution was playing out in Boston, other stories of federal overreach, secrecy, and obstruction were making headlines: The scandal at the Internal Revenue Service, which for more than two years had targeted conservative grassroots groups for intimidation and harassment. The Justice Department'sunprecedented designation of national-security reporter James Rosen as a "co-conspirator" in order to trawl through his personal email, and its surreptitious seizure of telephone records from up to 20 Associated Press reporters and editors. The disclosure that the National Security Agency's collection of domestic communications data is far more intrusive than was previously known, with the NSA reportedly collecting billions of pieces of intelligence from US internet giants such as Google, Facebook, and Skype.

President Obama insists that none of this should undermine confidence in the federal government. "You've grown up hearing voices that incessantly warn of government as nothing more than some separate, sinister entity," he told Ohio State's graduating class in May. "You should reject these voices."

At a press conference in June, he likewise assured Americans that they needn't worry about the NSA's vast data-mining operation being abused. "We've got congressional oversight and judicial oversight," he said. "And if people can't trust not only the executive branch, but also don't trust Congress and don't trust federal judges to make sure that we're abiding by the Constitution and due process and the rule of law, then we're going to have some problems here."

According to Gallup, nearly half of Americans believe that the federal government "poses an immediate threat to the rights and freedoms of ordinary citizens." A Rasmussen Poll asks whether the NSA's metadata is likely to be used by the government to persecute political opponents; 57 percent say yes. Maybe we do have some problems here.