Fiat Money, Government and Culture


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The money we use every day has roughly zero intrinsic value. That includes paper, coins made from base metals, and electronic bookkeeping entries that can be drawn on via plastic cards and communication devices. We take it for granted that all of these forms of payment will be accepted in transactions. The dollars we use in the U.S. are backed only by the “full faith and credit” of the U.S. government, which is quite a bit of nothing when it comes right down to it. This form of money is called “fiat money” because it derives value essentially by decree, including the government’s willingness to accept your dollars in payment of taxes. It’s a fine thing that such a level of trust exists in society, and most important is trust that the next seller will accept your dollars in trade.

An old maxim in economics known as Gresham’s Law holds that “bad money drives out good”, particularly when the “good money” and the “bad money” are assigned the same legal value in exchange. The good money, having greater intrinsic value than the bad money, will quickly disappear from use as a medium of exchange. Like any asset, the good money will be held as a store of value, but not used in routine transactions.

In the past, our “good money” consisted mainly of claims on precious metals. However, the U.S. government stopped redeeming dollars in gold in the 1930s, silver in the 1960s, and silver coins stopped circulating at about the same time.

What’s so “bad” about fiat money, given that we trust its usefulness in the next transaction? The lack of intrinsic value places its issuing authority, the Federal Reserve in our case, in a position of tremendous power and responsibility as the keeper of the “full faith” of the U.S. government. However, the Fed is privately owned (by banks), and no one at the Fed is elected. The members of its Board of Governors are appointed by the President to 14-year terms. The lengthy terms are hoped to keep the Fed independent and immune to political manipulation. Ostensibly, the Fed conducts policy in the objective pursuit of price stability and full employment. (Never mind that the two goals may be incompatible.)

The Fed, as the authority responsible for the nation’s fiat money, has traditionally allowed the money supply to grow by issuing “new money” in exchange for federal debt obligations, like Treasury bonds. The Fed buys the bonds, and the payment becomes a seed for new money growth. For the Treasury, which raises funds to finance government activities by collecting taxes and borrowing, this mechanism is quite convenient. The Fed can act to “accommodate” the government’s needs, essentially printing money to fund deficits.

Does it happen? Absolutely, although in the past few years, the Fed has demonstrated a more subtle variation on this theme, and one that is cheaper for the government. That will be the subject of a future post. The key point here is that with the cooperation of the monetary authority, the government avails itself of the so-called printing press. Thus, it is not answerable to taxpayers for any expansion in its spending. The government can commandeer resources as it sees fit, with no restraint from the governed.

That’s the key point made by Jörg Guido Hülsmann in a post on the Mises Wire blog, “How Fiat Money Destroys Culture“. On that note, I’d say first that enabling the displacement of private commerce for government-directed activity is a sure-fire prescription for degrading the culture. Government is not and never will be a font of creativity. Capitalism and markets, on the other hand, deliver an astonishing degree of cultural wealth to every segment of society. The freedom to create and share art, cuisine, customs and technology, without interference by government, is the very essence of culture. Some might object that government often serves as a conduit for bringing cultural works to the public, and that government can and does direct resources to the arts. There is an extent to which that’s true, of course, but it may be a deal with the devil: public sector support for new art is often subject to strings, politicization, and favoritism. That’s crony culturalism, to coin a phrase.

Hülsmann discusses other cultural repercussions of fiat money. By enabling the government to compete for resources with the private sector, and by swelling the quantity of money relative to goods and assets, fiat money puts upward pressure on prices. This might manifest in the prices of goods, the prices of assets, or both, and it might be very uneven. This changes the distribution of rewards in society in fundamental ways.

Price inflation penalizes those who hold currency. Hülsmann says:

In a free economy with a natural monetary system, there is a strong incentive to save money in the form of cash held under one’s immediate control. Investments in savings accounts or other relatively safe investments also play a certain role, but cash hoarding is paramount, especially among low-income families. … By contrast, when there is constant price inflation, as in a fiat-money system, cash hoarding becomes suicidal.

Price inflation also rewards those in debt. Strictly speaking, this is true only when inflation accelerates unexpectedly, since lenders tend to demand sufficient interest to offset expected inflation. Hülsmann blames the widespread growth of debt financing in modern society on fiat currency. There is an element of truth to this assertion, but it strikes me as an exaggeration, given the advances in financial markets and technologies over the past century or so. We are much better at allocating resources inter-temporally than in 1900, for example, so the growth of consumer and business debt over the years should be viewed in the context of future earning power and enabling technology. Still, there are those for whom these markets and technologies are out of reach, and the destructive effect of inflation on their ability to save should not be minimized. This contributes to greater dependency at the lowest levels of the socioeconomic spectrum, a very regrettable kind of cultural change.

Growth of the money stock tends to reward many at the top of the socioeconomic spectrum, partly because it is associated with stock market appreciation. Again, when the Fed buys government bonds, or mortgage bonds, or any other asset, it always finds willing sellers, usually brokers/dealers and banks. Successful bidding by the Fed for assets is the first step in lifting asset prices (and reducing yields). But market participants tend to know all this in advance. Therefore, private traders will bid up asset prices in advance, assuming that the Fed has indicated its intentions. Other assets, being substitute vehicles for wealth accumulation, will also be bid upward, as a given amount of income produced by an asset is valued more highly when competing yields are low. After the Fed completes a round of asset purchases, the process can repeat itself.

Goods inflation and higher asset prices generated by continuing debt monetization and distorted interest rates tend to skew the distribution of wealth toward the top and away from the bottom. Moreover, if cost and pricing pressure build up in goods markets, those with the greatest market power always fare best. Thus, debt monetization has the potential to be a very inegalitarian process, and one not based on fundamental economic criteria such a productivity. This too represents a damaging form of cultural change.

A more accurate form of Gresham’s law might be the following: government ambition drives out “good money”. The existence of fiat money creates an avenue through which the expansion of government can be funded without approval by current or future taxpayers. This ultimately leads to a stagnant economic environment and a stagnant culture: government displaces private activity, the economy’s growth potential and vibrancy deteriorates, and society’s ability to support all forms of culture declines. To add insult to injury, the process of monetizing government debt punishes small savers and rewards the privileged. The distribution of cultural rewards will follow suit.

Negative Rates and the Thrift Imperative


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An article of faith among central bankers is that negative interest rates will stimulate spending by consumers and businesses, ending the stagnant growth that has plagued many of the world’s biggest economies. Short-term rates are zero or negative in much of Europe and Japan, and even the Federal Reserve holds out the possibility of bringing rates below zero in the event of a downturn. This policy is almost assuredly counter-productive. It very likely stimulates saving, especially in the context of an aging population, and it distorts the allocation of resources over time and across the risk classes to which saving is applied.

Real vs. Nominal Rates

A preliminary consideration is the distinction between the so-called nominal or stated interest rates, those quoted by banks and bond sellers, and real interest rates, which are net of expected inflation. If the short-term nominal interest rate is zero, but expected inflation is -2%, then the real interest rate is +2%. If expected inflation is +2%, then the real interest rate is -2%. When negative rates are discussed in the media, they generally refer to nominal rates, and central bank interest rate targets are discussed in nominal terms. Again, some central banks are targeting very low or slightly negative nominal rates today. In most of these cases, inflation is low but positive, indicating that real interest rates are negative. With that said, it’s important to note that the discussion below relates to real interest rates, not nominal rates, despite the fact that central banks explicitly target the latter.

Saving Behavior

Most macroeconomists casually assume that lower interest rates discourage saving and thus stimulate spending. However, this is being called into question by observers of recent central bank actions around the world. Those actions have been relatively futile in stimulating spending thus far. In fact, data suggest that the negative-rate policies might be increasing saving rates. These points are discussed in “Are Negative Rates Backfiring? Here’s Some Early Evidence” in the Wall Street Journal (or this Google search if the first link fails).

An examination of the microeconomic foundations of the standard treatment of saving behavior shows that it requires some limiting assumptions. We all face constraints in meeting our future income goals: our current income imposes a limit on what we can save, and the rate of return we can earn on our funds limits what we can accumulate over time from a given level of saving. Those constraints must be balanced against an individual’s preferences for present pleasure relative to future gain.

Time Preference

The rate at which agents are willing to sacrifice future for present consumption is often called the rate of time preference. This differs from one individual to another. A high rate of time preference means that the individual requires a large future reward to induce them to set aside resources today, foregoing present consumption. A low rate of time preference means that little inducement is necessary for saving, so the individual is “thrifty”. It’s generally impossible to directly observe differing rates of time preference across individuals, but they reveal their preferences for present and future consumption via their saving (or borrowing) behavior. If an individual saves more than another with an equal income, it implies that the first has a lower rate of time preference at a given level of present consumption.

Substitution and Income Effects

A lower interest rate always creates a tendency to substitute present for future consumption. That’s because the change is akin to an increase in the price of future consumption. However, that substitution might be offset, or more than offset, by the fact that total achievable lifetime income is diminished: the lower rate at which the individual’s use of resources can be transferred from the present to the future means that some sacrifice is necessary. In other words, the negative “income effect” might cause consumers to reduce consumption in the future and in the present! Thus, saving may increase in response to a lower interest rate. Perhaps that tendency will be exaggerated if rates turn negative, but it all depends on the shape of preferences for present versus future consumption.

Which of these two effects will dominate? The substitution effect, which increases present consumption and reduces saving? Or the income effect, which does the opposite? Again, consumers are diverse in their rates of time preference. There are borrowers who prefer to have more now and less later, and savers who might wish to equalize consumption over time or accumulate assets in pursuit of other goals, such as bequests. A shift from a positive to a negative interest rate would reward borrowers who wish to consume more now and less later. Both their substitution and income effects on present consumption would be positive! In fact, spending by that segment might be the only unambiguously stimulative effect from negative rates. But individuals with low rates of time preference are more likely to spend less in the present, and save more, after the change. Two individuals with identical substitution effects in response to the shift to negative rates may well differ in their income effects: the largest saver of the two will suffer the largest negative income effect.

Ugly Intervention

These uneven impacts on saving are a testament to the pernicious effects of central bank intervention leading to negative rates. Savers are punished, while those who care little about self-reliance and planning for the future are rewarded. Of course, at an aggregate level, saving out of income is positive, so on balance, agents demonstrate  that they have sufficiently low rates of time preference to qualify for some degree of punishment via negative rates. After all, savers will unambiguously suffer a decline in lifetime income given the shift to negative rates.

The Necessity of Thrift

The fact that a standard macroeconomic treatment of saving ignores negative income effects at very low rates of interest is surprising given the very nature of thrift. Savers obviously view future consumption as something of a necessity, especially as they approach retirement. Present and future consumption are locally substitutable, but large substitutions come only with great pain, either now or later. Another way of saying this is that present and future consumption behave more like complements than substitutes. (A more technical treatment of this distinction is given in “Complementarity, Necessity and Preferences“, by Steven R. Beckman and W. James Smith.) This provides a basic rationale for a conflicting assumption often made in macroeconomic literature: that economic agents attempt to “smooth” their consumption over time. If present and future consumption are treated as strict complements, there is no question that the income effect of a shift to negative  rates will increase saving by those who already save.

This is not to imply that savers always respond to lower rates by saving more. In “Choice between Present Consumption and Future Consumption“, Supriya Guru asserts that empirical evidence for the U.S. suggests that the substitution effect dominates. However, extremely low or negative interest rates are a recent phenomenon, and empirical evidence is predominantly from periods of history with much higher rates. Moreover, the advent of very low rates is coincident with demographic shifts favoring more intense efforts to save. The aging populations in the U.S., Europe and Japan might reinforce the tendency to respond to negative rates by saving more out of current income.

Risk As a Relief Valve

Another complexity regarding the shape of preferences is that consumers might never be willing to substitute present consumption for less in the future. That is, their rate of time preference may be bounded at zero, even if the interest rate imposed by the central bank is negative. An earlier post on Sacred Cow Chips dealt with this issue. In that case, saving will increase with a shift to negative rates under two conditions: 1) there is a minimal level of future consumption deemed a necessity by consumers; and 2) that level exceeds the consumption that is possible without saving (endowed or received via transfers). That outcome represents a “corner solution”, however. Chances are that consumers, having been forced to accept an unacceptable tradeoff at negative “risk-free” rates, will lean more heavily on other margins along which they can optimize, such as risk and return.

That eventuality suggests another reason to suspect that very low or negative rates are not stimulative: savers face a range of vehicles in which to place their funds, not simply deposits and short-term money market funds earning low or negative yields. Some of these alternatives earn much higher returns, but only at significant risk. Nevertheless, the poor returns on safe alternatives will lead some savers to “reach for yield” by accepting high risks. That is a rational response to the conditions imposed by central banks, but it leads consumers to accept risk that is otherwise not desired, with a certain number of consumers suffering dire ex post outcomes. It also leads to an allocation of the economy’s capital that is riskier than would otherwise occur.

Furthermore, as mentioned in the WSJ article linked above, consumers might regard negative rates as a foreboding signal about the economic future. The negative rates are bad enough, but even reduced levels of future consumption might be under threat. Thus, risk aversion might lead to greater saving in the context of a shift to negative rates.

Corporate Saving and Capital Investment

A great deal of saving in the economy is done by corporate entities in the form of “undistributed corporate profits”, or retained earnings. It must be said that these flows are not especially dependent on short-term yields, even if those yields have a slight influence on corporate management’s view of the opportunity cost of equity capital. Rather, those flows are more dependent on the firm’s current profitability. To the extent that very low or negative interest rates discourage consumption, their effect on current profitability and the perceived profitability of new business capital projects cannot be positive. To the extent that very low or negative rates portend risk, their effect on capital investment decisions will be negative. Savings out of personal income and from retained earnings is likely to exceed the amount required to fund desired capital investment. The funds accumulated in this way will remain idle (excess working capital) or be put toward unproductive uses, as befits an environment in which real returns are negative.

We Gotta Get Out of This Place

Central banks will be disappointed that the primary rationale for their reliance on negative interest rates lacks validity, and that the policy is counterproductive. Statements from Federal Reserve officials indicate that the next expected move in their interest rate target will be upward. However, they have not ruled out negative rates in the event that economic growth turns down. Perhaps the debate over negative rates is still raging inside the Fed. With any luck, and as evidence piles up from overseas on the futility of negative rates, those arguing for a “normalization” of rates at higher levels will carry the day.

Good Bets, Bad Bets & Student Debts


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Recent proposals for “free” college education are partly motivated by a hubbub over crushing student debt, but a recent book by Sandy Baum of the Urban Institute questions that narrative. Entitled “Student Debt: Rhetoric and Realities of Higher Education“, the book offers perspective on the use of debt to fund post-secondary education. Student loans are perfectly good funding methods in many circumstances, but it should go without saying that borrowing is a bad idea when the sought-after education is a bad idea.

Here are some facts about student-loan debt presented in an interview with Baum by National Public Radio (NPR). They are not particularly alarming:

  • A third of college students who earn a four-year degree graduate with no debt…. 
  • A fourth graduate with debt of no more than $20,000.
  • Low-income students hold only 11 percent of all outstanding [student] debt.
  • Almost half of the $1.3 trillion in student loan debt is held by 25 percent of graduates who are actually making a pretty high income.

Hindsight is 20/20 when a student fails to complete a course of study, but a non-trivial percentage of individuals have no business entering college programs to begin with, let alone with the aid of publicly subsidized loans. Quite simply, good risk management demands that loans be withheld from students who lack minimum academic qualifications. Odds are heavy that it would be a favor to the taxpayer, and an even bigger favor to the erstwhile student. There are many degree programs that have low labor-market value, which are therefore likely to be poor investments for students and lenders. And a number of institutions have records of poor performance in preparing students for the labor market. It would be wise for anyone seeking additional education to avoid these schools.

Baum asserts that these issues must be addressed through better guidance for prospective students:

Some schools don’t serve students well. Some students aren’t prepared to succeed no matter where they go to college. We just tell everybody: ‘Go to college. Borrow the money. It will be fine.’ … We don’t give people very much advice and guidance about where … when to go to college, how to pay for it, what to study.

Baum goes on to offer a socioeconomic profile of individuals with a high propensity to default on student loans:

The problem is that we have a lot of people actually borrowing small amounts of money, going to college, not completing [a degree] or completing credentials that don’t have labor market value. They tend to be older. They tend to come from disadvantaged, middle-income families and they’re struggling. [But] not because they owe a lot of money.

For those who are not promising students, many skills can and should be developed by leveraging low-level employment opportunities. That may well be the most productive path for them, and we should not be shy about saying so, but mutually beneficial work arrangements between employers and these prospective workers are discouraged by wage floors and other regulations.

What isn’t mentioned in the NPR interview is that some individuals fitting the socioeconomic profile actually have excellent academic prospects, so borrowing might be worthwhile. And Baum notes that the great majority of students entering baccalaureate programs are very good credit risks. Subsidizing them with a “free” education is unnecessary and bad public policy:

People have an image of a recent bachelor’s degree recipient who went to college for four years and is now 22-23 years old and is working at Starbucks. Those people are very rare. … People who earn bachelor’s degrees, by and large, do fine. … We should worry a lot less about 18-year-olds going off to college and borrowing $20,000, $25,000, for a bachelor’s degree.

While Baum justifiably contends that many students are good credit risks, I do not subscribe to the notion that all student loans should be subsidized by taxpayers at below-market interest rates. The returns to education are such that most students can afford to pay market rates, but those rates must compensate lenders for the risk of default. Minimizing default risk on the lending side becomes an impotent afterthought in a world of lax academic standards and universal loan subsidies. Bad loans can only be reined-in by sober admission policies and wise selection of degree programs that have labor market value. For this reason, Paul Kupiec and Ryan Nabil of the American Enterprise Institute recommend reforms that would give academic institutions better incentives to ensure the success of their students by putting “skin in the game”:

Colleges typically do not lend to students directly. Consequently, they have little incentive to ensure that the debts incurred by their students are repaid. So, like brokers in a predatory lending process, colleges and universities push their students to take on debt, regardless of their future ability to repay.

To correct these misaligned incentives, schools would essentially pay a financial penalty when their former students, graduates or dropouts, default on loans.

With ‘skin in the game,’ colleges will face pressure to control unnecessary costs and limit student indebtedness. Colleges will redouble their efforts to ensure that students graduate with the skills necessary to succeed in the job market. Resources will no longer be freely available for unnecessary non-educational university spending. To achieve these goals, the share of university-provided student funding must be large enough to give colleges the requisite incentives.

Kupiec and Nabil briefly describe several possible mechanisms whereby schools could handle these kinds of demands.

Problems with crushing student loan debt are confined to certain segments of borrowers. Failure to complete a program, and degree programs that add little to a student’s labor market value, are prescriptions for default. Admitting unqualified students and offering weak degree programs are shortcomings of the schools themselves. Without fundamental reform, schools have little incentive to act responsibly. Furthermore, loan subsidies encourage excessive borrowing and fuel inflation in tuition. “Free college” proposals do not offer a serious solution for stemming these losses.

The Fascist Roader


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Obamas - fascist world government









President Obama is a believer in centralized social and economic management, despite the repeated disasters that have befallen societies whose leaders have applied that philosophy in the real world. Those efforts have often taken the form of socialism, with varying degrees of government ownership of resources and productive capital. However, it is not necessary for government to own the means of production in order to attempt central planning. You can keep your capital as long as you take direction from the central authority and pay your “fair share” of the public sector burden.

A large government bureaucracy can coexist with heavily regulated, privately-owned businesses, who are rewarded by their administrative overlords for expending resources on compliance and participating in favored activities. The rewards can take the form of rich subsidies, status-enhancing revolving doors between industry and powerful government appointments, and steady profits afforded by monopoly power, as less monied and politically-adept competitors drop out of the competition for customers. We often call this “corporatism”, or “crony capitalism”, but it is classic fascism, as pioneered by Benito Mussolini’s government in Italy in the 1920s. Here is Sheldon Richman on the term’s derivation:

As an economic system, fascism is socialism with a capitalist veneer. The word derives from fasces, the Roman symbol of collectivism and power: a tied bundle of rods with a protruding ax.

With that in mind, here’s an extra image:

Mussolini Quote

The meaning of fascism was perverted in the 1930s, as noted by Thomas Sowell:

Back in the 1920s, however, when fascism was a new political development, it was widely — and correctly — regarded as being on the political left. Jonah Goldberg’s great book ‘Liberal Fascism’ cites overwhelming evidence of the fascists’ consistent pursuit of the goals of the left, and of the left’s embrace of the fascists as one of their own during the 1920s. … 

It was in the 1930s, when ugly internal and international actions by Hitler and Mussolini repelled the world, that the left distanced themselves from fascism and its Nazi offshoot — and verbally transferred these totalitarian dictatorships to the right, saddling their opponents with these pariahs.

The Obama Administration has essentially followed the fascist playbook by implementing policies that both regulate and reward large corporations, who are only too happy to submit. Those powerful players participate in crafting those policies, which usually end up strengthening their market position at the expense of smaller competitors. So we have transformational legislation under Obama such as Obamacare and Dodd-Frank that undermine competition and encourage concentration in the insurance, health care, pharmaceutical  and banking industries. We see novel regulatory interpretations of environmental laws that destroy out-of-favor industries, while subsidies are lavished on favored players pushing economically questionable initiatives. Again, the business assets are owned by private cronies, but market forces are subjugated to a sketchy and politically-driven central plan designed jointly by cronies inside and outside of government. That is fascism, and that’s the Obama approach. He might be a socialist, and that might even be the end-game he hopes for, but he’s a fascist in practice.

As Sowell points out, Obama gains some crucial advantages from this approach. For starters, he gets a free pass on any claim that he’s a socialist. And however one might judge his success as a policymaker, the approach has allowed him to pursue many of his objectives with the benefit of handy fall-guys for failures along the way:

… politicians get to call the shots but, when their bright ideas lead to disaster, they can always blame those who own businesses in the private sector.  Politically, it is heads-I-win when things go right, and tails-you-lose when things go wrong. This is far preferable, from Obama’s point of view, since it gives him a variety of scapegoats for all his failed policies, without having to use President Bush as a scapegoat all the time.

Thus the Obama administration can arbitrarily force insurance companies to cover the children of their customers until the children are 26 years old. Obviously, this creates favorable publicity for President Obama. But if this and other government edicts cause insurance premiums to rise, then that is something that can be blamed on the “greed” of the insurance companies.The same principle, or lack of principle, applies to many other privately owned businesses. It is a very successful political ploy that can be adapted to all sorts of situations.

Obama’s most ardent sycophants are always cooing that he’s the best president EVAH, or the coolest, or something. But the economy has limped along for much of his presidency; labor force participation is now at its lowest point since the late 1970s; and median income has fallen on his watch. He has Federal Reserve policy to thank for stock market gains that are precarious, at least for those companies not on the fascist gravy train. Obama’s budgetary accomplishments are due to a combination of Republican sequestration (though he has taken credit) and backloading program shortfalls for his successors to deal with later. Obamacare is a disaster on a number fronts, as is Dodd-Frank, as is the damage inflicted by questionable environmental and industrial policy, often invoked via executive order.  (His failures in race relations and foreign policy are another subject altogether.)

Fascism is not a prescription for rapid economic growth. It is a policy of regression, and it is fundamentally anti-innovation to the extent that government policymakers create compliance burdens and are poor judges of technological evolution. Fascism is a policy of privilege and is regressive, with rewards concentrated within the political class. That’s what Obama has wrought.


Big-Time Regulatory Rewards


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Government Control

Why does regulation of private industry so often inure to the benefit of the regulated at the expense of consumers? In the popular mind, at least, regulating powerful market players restrains “excessive” profits or ensures that their practices meet certain standards. More often than not, however, regulation empowers the strongest market players at the expense of the very competition that would otherwise restrain prices and provide innovative alternatives. The more complex the regulation, the more likely that will be the result. Smaller firms seldom have the wherewithal to deal with complicated regulatory compliance. Moreover, regulatory standards are promulgated by politicians, bureaucrats, and often the most powerful market players themselves. If ever a system was “rigged”, to quote a couple of well-known presidential candidates, it is the regulatory apparatus. Pro-regulation candidates might well have the voters’ best interests at heart, or maybe not, but the losers are usually consumers and the winners are usually the dominant firms in any regulated industry.

The extent to which our wanderings into the regulatory maze have rewarded crony capitalists — rent seekers — is bemoaned by Daniel Mitchell in “A Very Depressing Chart on Creeping Cronyism in the American Economy“. The chart shows that about 40% of the increase in U.S. corporate profits since 1970 was generated by rent-seeking efforts — not by activities that enhance productivity and output. The chart is taken from an article in the Harvard Business Review by James Bessen of Boston University called “Lobbyists Are Behind the Rise in Corporate Profits“. Here are a couple of choice quotes from the article:

Lobbying and political campaign spending can result in favorable regulatory changes, and several studies find the returns to these investments can be quite large. For example, one study finds that for each dollar spent lobbying for a tax break, firms received returns in excess of $220. …regulations that impose costs might raise profits indirectly, since costs to incumbents are also entry barriers for prospective entrants. For example, one study found that pollution regulations served to reduce entry of new firms into some manufacturing industries.”

“This research supports the view that political rent seeking is responsible for a significant portion of the rise in profits [since 1970]. Firms influence the legislative and regulatory process and they engage in a wide range of activity to profit from regulatory changes, with significant success. …while political rent seeking is nothing new, the outsize effect of political rent seeking on profits and firm values is a recent development, largely occurring since 2000. Over the last 15 years, political campaign spending by firm PACs has increased more than thirtyfold and the Regdata index of regulation has increased by nearly 50% for public firms.

A good explanation of Bessen’s findings is provided by Guy Rolnik, including an interview with Bessen. Law Professor Glenn Reynolds of the University of Tennessee put his finger on the same issue in an earlier article entitled “Why we still don’t have flying cars“. One can bicker about the relative merits of various regulations, but as Reynolds points out, the expansion of the administrative and regulatory state has led to a massive diversion of resources that is very much a detriment to the intended beneficiaries of regulation:

… 1970 marks what scholars of administrative law (like me) call the ‘regulatory explosion.’ Although government expanded a lot during the New Deal under FDR, it wasn’t until 1970, under Richard Nixon, that we saw an explosion of new-type regulations that directly burdened people and progress: The Clean Air Act, the Clean Water Act, National Environmental Policy Act, the founding of Occupation Safety and Health Administration, the creation of the Environmental Protection Agency, etc. — all things that would have made the most hard-boiled New Dealer blanch.

Within a decade or so, Washington was transformed from a sleepy backwater (mocked by John F. Kennedy for its ‘Southern efficiency and Northern charm’) to a city full of fancy restaurants and expensive houses, a trend that has only continued in the decades since. The explosion of regulations led to an explosion of people to lobby the regulators, and lobbyists need nice restaurants and fancy houses.

Matt Ridley hits on a related point in “Industrial Strategy Can Be Regressive“, meaning that government planning and industrial regulation have perverse effects on prices and economic growth that hit the poor the hardest. Ridley, who is British, discusses regressivity in the context of his country’s policy environment, but the lessons are general:

The history of industrial strategies is littered with attempts to pick winners that ended up picking losers. Worse, it is government intervention, not laissez faire, that has done most to increase inequality and to entrench wealth and privilege. For example, the planning system restricts the supply of land for housebuilding, raising property prices to the enormous benefit of the haves (yes, that includes me) at the expense of the have-nots. … 

Why are salaries so high in financial services? Because there are huge barriers to entry erected by government, which hands incumbent firms enormous quasi-monopoly advantages and thereby shelters them from upstart competition. Why are cancer treatments so expensive? Because governments give monopolies called patents to the big firms that invent them. Why are lawyers so rich? Because there is a government-licensed cartel restricting the supply of them.

Ridley’s spirited article gives emphasis to the fact that the government cannot plan the economy any more than it can plan the way our tastes and preferences will evolve and respond to price incentives; it cannot plan production any more than it can anticipate changes in resource availability; it cannot dictate technologies wisely any more than it can predict the innumerable innovations brought forth by private initiative and market needs; it almost never can regulate any better than the market can regulate itself! But government is quite capable of distorting prices, imposing artificial rules, picking suboptimal technologies, consuming resources, and rewarding cronies. One should never underestimate the potential for regulation, and government generally, to screw things up!

Clinton Foundation Domain of Darkness


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Hillary Clinton provides a fascinating case study in the art of graft, and the Clinton Foundation provides her with brilliant cover. The foundation masquerades as a legitimate charity, avoids taxes, and it provides a vehicle for what’s known as “pay-to-play” influence-buying. It appears that Bill Clinton made a lucrative career of this while his wife was serving in public office. It was a sensitive issue when Hillary Clinton was Secretary of State, given the potential for compromising national objectives. It is still sensitive in view of the many gifts to the Clinton Foundation provided by foreign entities, not to mention the handsome speaking fees paid by foreign entities to the Clintons.

Here, I discuss some of the suspicious activities of the Clinton Foundation. This post is the last in a three-part series on Hillary’s most recent sandals. The first in the series covered Hillary’s Benghazi disaster; the second post dealt with her negligent email practices and handling of classified information, as well as her prevarication in responding to investigative efforts (and to the public).

Last year, the New York Times published a report on the Clinton Foundation’s (CF) connections to a series of deals that ultimately gave a Russian company control of a large share of worldwide uranium supplies:

At the heart of the tale are several men, leaders of the Canadian mining industry, who have been major donors to the charitable endeavors of former President Bill Clinton and his family. Members of that group built, financed and eventually sold off to the Russians a company that would become known as Uranium One. … the sale gave the Russians control of one-fifth of all uranium production capacity in the United States. … Among the agencies that eventually signed off was the State Department, then headed by Mr. Clinton’s wife, Hillary Rodham Clinton.

As the Russians gradually assumed control of Uranium One in three separate transactions from 2009 to 2013, Canadian records show, a flow of cash made its way to the Clinton Foundation. Uranium One’s chairman used his family foundation to make four donations totaling $2.35 million. Those contributions were not publicly disclosed by the Clintons, despite an agreement Mrs. Clinton had struck with the Obama White House to publicly identify all donors. Other people with ties to the company made donations as well.

The amounts involved are far greater than the figures in the quote suggest. One individual with intimate connections to the deals gave in excess of $31 million to the CF. The Times report gives details on the shifty ways in which some donor money found its way into CF coffers, often not attributed to the donors themselves in official records. These practices look an awful lot like a sophisticated way of laundering money for influence buying:

A person with knowledge of the Clinton Foundation’s fund-raising operation, who requested anonymity to speak candidly about it, said that for many people, the hope is that money will in fact buy influence: ‘Why do you think they are doing it — because they love them?’

There are many other suspicious links between the CF and rent-seeking individuals and institutions. Jonathan Turley has detailed the unsavory nature of the Clinton’s connection to Laureate International Universities, an online college that encompasses Walden University Online, known in some circles as an operator of scams far-exceeding the allegations against Trump University. The chairman of Laureate, Douglas Becker, has been a major donor to the Clintons and their foundation. As it happens, Laureate received $55 million in funds from State Department Grants. Bill Clinton was paid $16 million to serve as Laureate’s “Honorary Chancellor”. Here is one interesting comment from Turley:

Laureate has come up in the Clinton email scandal. In her first year as Secretary of State, Clinton is quoted as directly asking that Laureate be included in a high-profile policy dinner — just months before the lucrative contract was given to Bill Clinton. Hillary Clinton later references ‘Laureate Universities, started by Doug Becker who Bill likes a lot.’

There might not be anything to top the cronyism inherent in the activities of the CF in pretending to rebuild Haiti after a massive earthquake struck the island in 2010. The article at the last link offers descriptions of a number of projects, ostensibly funded for the benefit of Haiti, that involve double-dealing by the Clintons and CF:

The Haitian protesters noticed an interesting pattern involving the Clintons and the designation of how aid funds were used. They observed that a number of companies that received contracts in Haiti happened to be entities that made large donations to the Clinton Foundation. The Haitian contracts appeared less tailored to the needs of Haiti than to the needs of the companies that were performing the services. In sum, Haitian deals appeared to be a quid pro quo for filling the coffers of the Clintons.

Foreign governments gave to the CF while Hillary Clinton was serving as Secretary of State and have continued to do so even after her presidential candidacy was made clear. This was reported more recently, and includes gifts from “friends” of foreign governments and other foreign interests including Mexico, Turkey, Japan, Saudi Arabia, the UAE, and of course Russia. Many contributions are “bundled” by third-party entities, an apparent but ineffective effort to obscure the true sources of gifts:

A number of Hillary Clinton’s top lobbyist bundlers, who have raised millions for her presidential campaign, either directly represent foreign entities or work at firms that represent foreign entities, according to documents from the Justice Department’s Foreign Agents Registration Unit.

Here is a New York Times review of “Clinton Cash: The Untold Story of How and Why Foreign Governments and Businesses Helped Make Bill and Hillary Rich”, by Peter Schweitzer. Rep. Marsha Blackburn (R – TN) is urging the FBI, the IRS and the FTC to investigate the activities of the Clinton Foundation.

The CF is guilty of ignoring widely accepted charitable best practices, according to this report. Its small board of directors is insular and lacking a sufficient degree of independence. Its record-keeping is suspicious, such as a $12.6 million expense for Bill Clinton’s 60th birthday expensed as “fund raising costs”. Inappropriate gifts to the Clintons from directors have raised eyebrows, and apparent “payoffs” for retiring directors, in the form of appointments to powerful positions, have made the CF into a veritable revolving door for Clinton insiders.

I include this last bit because it amuses me: according to Dr. Ben Carson, Hillary Clinton is Lucifer in the flesh. The explanation is that Hillary liked Saul Alinsky in college (and maybe still does), and Alinsky acknowledged Lucifer as the “first radical”. That probably leaves a few degrees of separation between the two. Economist Tyler Cowan does not agree with Carson, but he toys with the notion in a short analysis on Marginal Revolution. Here are a few of his bullets on the topic:

This topic seems to have entered the news cycle. I am not sure how, so I thought I would add a few observations in the interests of clarity: 

1. Under the most plausible ‘yes’ scenario, Lucifer inhabits the corpus of us all, not just the Clinton family, grandchildren included. 

2. The correct answer is still ‘probably not.’ 

3. Is there a greater chance that Hillary Clinton is in fact Lucifer himself, rather than merely being possessed by him? (Would that not also be a new kind of transgender relation?) No, more likely she would have a Satanic familiar. In most equilibria, the number of familiars is greater than the number of Satans. Far greater.

A better argument for Hillary’s connection to the Prince of Darkness would rely on the self-serving nature of the “charitable” Clinton Foundation while disguised as a charity. It is both a repository for future policy influence and a pool for enrichment of the Clintons themselves and their cronies. The CF represents a grotesque distortion of the charitable motive. Let’s hope James Comey, Director of the FBI, can direct a competent investigation into the CF’s activities. More importantly, let’s hope that come November, the better judgement of American voters will deny Hillary the presidency.



Hillary’s (C)mail Fail


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Clinton email

Hillary Clinton’s classified email scandal might look like a minor distraction once facts about the suspicious dealings of the Clinton Foundation are unraveled. I’ll cover the foundation later this week. In this post, I’ll review some considerations relevant to the email case. This is the second in a three-part series of posts on Hillary’s more recent foibles, following the first installment on her role in the Benghazi disaster.

Hillary Clinton’s “grossly negligent” misuse of classified email during her tenure as Secretary of State was harshly criticized by FBI Director James Comey last week. Nevertheless, the Bureau declined to recommend an indictment to the Department of Justice (DOJ) based on their inability to prove mens rea, or any awareness of guilt or an intent to do harm. It is doubtful that Clinton had any intent to harm the country. At a minimum, however, Comey’s statements implied that she did not take security seriously.

The basis of any claim that Clinton lacked awareness of her security responsibilities is shaky, to say the least. Clinton’s private email stunt was a willful effort to avoid legitimate scrutiny, such as FOIA requests. The IT expert who set up her private servers and other devices pled the Fifth Amendment to avoid self-incrimination! There have been reports that Clinton asked aides to remove classified markings (also see here). All we have from the State Department on that allegation is a denial. Clinton repeatedly lied to the public and to Congress (under oath) about classified material and the number of devices she used. She also lied to a federal judge (under oath) about having turned over all work-related emails to the State Department. Many of those emails were deleted, leaving suspicious gaps in the pattern of traffic. Indeed, Clinton’s actions in the case give every appearance of an effort to obstruct justice.

Some of the missing emails will come to light. Wikileaks has released a trove of Clinton’s emails showing additional classified material. There are also pending civil cases related to the emails in which the plaintiffs wish to subpoena Mrs. Clinton. Needless to say, her lawyers are making every effort to stop the subpoenas.

Jacob Sullum at Reason discusses Comey’s decision in the context of mens rea. He notes that Clinton’s offenses were certainly prosecutable under the letter of the law. Despite denials from Clinton apologists, the case of a Navy operations specialist in 1992 is instructive. The defendant in that case claimed that willingness to mishandle classified information was not sufficient for a conviction, but the military court disagreed under the same provision of the law referenced by Comey:

… the court turned to the subsection at issue in Mrs. Clinton’s case: ‘Section 793(f) has an even lower threshold, punishing loss of classified materials through ‘gross negligence’ and punishing failing to promptly report a loss of classified materials.’

Nevertheless, Sullum thinks Comey’s defense of mens rea protections for individuals accused of certain violations of law is admirable, and I agree (except Comey’s second clause in the quote below, regarding “in that statute in particular“, is not strictly true). The explosion of federal law, especially regulatory law, makes this more crucial than ever from a libertarian perspective. Here is Comey:

‘The protection we have as Americans is that the government in general, and in that statute in particular, has to prove before [it] can prosecute any of us that we did this thing that’s forbidden by the law, and when we did it, we knew we were doing something that was unlawful. We don’t have to know the code number, but [the government must show] that we knew we were doing something that was unlawful.’

For background on the issue of a defendant’s willingness to violate the law, Paul Rosenzweig of the Heritage Foundation has a great article called  “Ignorance of the Law Is No Excuse But It Is In Reality“. By that title, Rosenzweig means that there are so many federal crimes today that ignorance of the law very often should be a valid excuse. However, the contention that Hillary Clinton was ignorant of the law regarding her duties in handling classified information is dubious at best.

Unfortunately, Clinton’s interview with the FBI just days before Comey’s announcement was not conducted by Comey, was not made under oath, and was not recorded. That leaves significant doubt about the seriousness of the FBI’s effort to learn the truth about the record, or any contradictions in the record, that might shed light on Clinton’s awareness or intent to violate the law. And Attorney General Loretta Lynch, after a “personal” meeting with Bill Clinton, recused herself and her office from prosecutorial duties prior to Comey’s announcement, stating that she would accept the FBI’s recommendation without examining the case. That step casts doubt on her seriousness as an independent prosecutor. Hillary skates, for now.


Beastly Hillary Benghazi Baggage


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The Clinton Can-o’-Worms is just as slimy and writhing as ever. We’ve heard about Hillary’s misadventures for decades: defending the rapist of a 12-year-old girl and later gloating (on tape) about the light sentence she’d helped arrange; dismissal from the staff of the House Judiciary Committee for lying during the Watergate case, and the shady Whitewater land deal. The most recent trio of scandals include 1) questionable decisions and misleading public statements in the Benghazi affair; 2) exposing national security to compromise via her private servers; and perhaps the biggest of the biggies: 3) suspicious relationships between the Clinton Foundation and foreign governments with whom she dealt as Secretary of State for four years. I’ll discuss Benghazi in this post, but I’ll return to Clinton’s grossly negligent email handling and the Clinton Foundation pay-to-play activity in the next few days.

The Benghazi attack in 2011 was at least in part a reaction to arms shipments that Libyan Ambassador Chris Stevens was attempting to arrange. This is believed to have involved weapons belonging to Libyan rebels, some of them jihadists, and to the deposed Libyan regime of Muammar Gaddafi. Apparently, Stevens mission was to work to get those arms into the hands of Syrian rebels, many of whom turned out to be jihadists as well, of course. Apparently there were Libyans who wanted to see those arms stay at home. Stevens and three other Americans lost their lives in the attack. It turns out that Stevens had asked repeatedly for additional security in Benghazi, but the requests ware denied by Clinton’s State Department. When the attack went down, requests for aid in the form of air support and even a tactical team were denied, despite the fact that “assets” were within reach. “Stand down” was the order of the day, in keeping with the Obama Administrations “no boots on the ground” policy.

It is now clear that the attack was planned, but Mrs. Clinton, who knew the facts, told the American public that the attack was precipitated by an amateur video critical of radical Islamists. Why the misleading statements? The Benghazi mission was politically sensitive, of course. In addition, an objective during the presidential election season was to play down terrorism, to propagate the myth that the terrorists were “on the run” under Obama. There is no doubt that Clinton lied to the American people in this case, but apparently her supporters think that’s unimportant in a leader.

A recent defense of Clinton and the administration has it that aid should never have been expected for the Americans in Benghazi during the 13 hours of the siege. After all, according to this reasoning, Ambassador Stevens and the other personnel knew it was a risky mission. Well, so much for “leave no man behind“, which has a long and honorable tradition in the military. Soldiers on patrol often accept great risk, yet no one would suggest their acceptance of risk as an excuse to refuse them aid when in dire need.

While it is true that the host country is presumed to be responsible for providing the first line of security for foreign diplomats, that was not realistic in Libya at the time. The guards and contractors attached to the mission in Benghazi were obviously inadequate to defend the staff under the circumstances. Military assets are in place to respond under just such a contingency. Given the nature of Stevens’ mission, which was apparently to transfer arms to parties intended to serve as sub rosa U.S. military proxies in Syria, the military should have been allowed to honor the “leave no man behind” imperative. Unfortunately, the administration’s political objectives, and the terrorists, won the day in Benghazi. Hillary Clinton was complicit in this.

Race and Crime, Cops and Race


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Good Cop Bad Cop

Blacks are arrested in the U.S. at a disproportionately high rate relative to their share of the population, and they are killed by police at a disproportionately high rate as well. Does that prove that police target blacks unfairly? No, it depends on additional considerations not revealed by a simple comparison of police actions against blacks to their representation in the overall population.

This matter was put into perspective earlier this year by Heather Mac Donald in the Wall Street Journal (the link is to a Google search that should get around the WSJ paywall). Her analysis relies in part on a data base of fatal police shootings in 2015-16 maintained by the Washington Post, available here. Some of the most telling points noted by Mac Donald were the following:

  •  “… in 2015 officers killed 662 whites and Hispanics, and 258 blacks. (The overwhelming majority of all those police-shooting victims were attacking the officer, often with a gun.)” The most recent data for 2016 are incomplete, but of the 509 police shootings recorded so far this year, the proportion involving blacks appears to be roughly consistent with the 2015 figures.
  • There were 6,095 black homicide deaths in 2014—the most recent year for which such data are available—compared with 5,397 homicide deaths for whites and Hispanics combined. Almost all of those black homicide victims had black killers.
  • Over the past decade, according to FBI data, 40% of cop killers have been black. Officers are killed by blacks at a rate 2.5 times higher than the rate at which blacks are killed by police.
  • According to the Bureau of Justice Statistics, blacks were charged with 62% of all robberies, 57% of murders and 45% of assaults in the 75 largest U.S. counties in 2009, though they made up roughly 15% of the population there.
  • Such a concentration of criminal violence in minority communities means that officers will be disproportionately confronting armed and often resisting suspects in those communities, raising officers’ own risk of using lethal force.
  • A March 2015 Justice Department report on the Philadelphia Police Department found that black and Hispanic officers were much more likely than white officers to shoot blacks based on “threat misperception”—that is, the mistaken belief that a civilian is armed.
  • A 2015 study by University of Pennsylvania criminologist Greg Ridgeway … found that, at a crime scene where gunfire is involved, black officers in the New York City Police Department were 3.3 times more likely to discharge their weapons than other officers at the scene.

It is a tragic fact that the black community is plagued disproportionately by crime and violence. However, that has nothing to do with the manner in which police perform their duties when confronted with danger. Rather, it has to do with historical inequities, poor educational institutions, dismal economic opportunities, and a number of misguided government policies. The latter include minimum wages that diminish opportunities for black workers to gain job experience, anti-poverty initiatives that destroy work incentives and undermine family structure, a failed public school system, and the misguided war on drugs. Drug prohibition ensnares those who face insidious alternatives to legal market activity, which is often unavailable. Unfortunately, all of these policies have a disproportionate effect on the black community.

Any assessment of police conduct must acknowledge the circumstances under which officers work. If a particular demographic is disproportionately involved in crime, and affected by crime, then it is reasonable to expect that police action will be disproportionately focused on that group. This is not prima facie evidence of racism in police work. Quite the contrary: it is evidence that the police are fulfilling their obligation to protect innocents within that demographic, even if other institutions are aggravating the social dysfunction.



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