Scientific Progress Needs Entrepreneurial Progress

2593426985_21eb9aa4eb_oIn our age of technological marvels, it’s easy to be in awe of science, and even to believe that science in and of itself is responsible for the high living standards enjoyed in some nations. Likewise, it’s all too easy to see poverty and economic stagnation as stemming from a lack of scientific progress, and conclude that to make the world a better place, all we need are more breakthroughs and inventions.

However, the recent explosion of interest in “science” tends to overlook what is maybe the most important fact about human progress: it doesn’t happen without entrepreneurial progress. In other words, scientific breakthroughs don’t actually increase most people’s welfare until entrepreneurs figure out how to make them do something practical, at prices consumers find reasonable. As Peter Klein points out, such was the case of the internet, which had little value until it was integrated into the market economy.

Given the popularity of celebrity scientists like Neil deGrasse Tyson, or of pages like “I f@&%ing love science,” it’s vital to stress the common-sense economics of scientific research. It’s when science enters our lives through the market that it bestows the greatest benefits on humanity. Whether it’s a basic invention or the most advanced physical science, entrepreneurs make the wonders of the scientific world into commonplace conditions of everyday life.

What science needs then is a guiding hand (hint: an invisible one), a means to assess the social worth of new knowledge and inventions. And that’s exactly what the market provides through the indispensable tool of economic calculation. Because their mission is to improve the lives of consumers, entrepreneurs are the standard-bearers of scientific progress, looking constantly to the frontiers of knowledge for new ways to increase human well-being.

China Overtakes US

The IMF announced that the GDP of China has now exceeded the GDP of the USA. In this interview I explain some of the “back story” on this topic and also alert listeners of the implications of the current world currency war and looming economic crisis.

“In the US, the GDP growth has been driven largely through a process of large government deficits and the burgeoning national debt,” he said.

“An unprecedented radical monetary policy of keeping interest rates very low” also contributed to an unsustainable economic growth, Thornton told Press TV on Wednesday.

The American economist said China’s growth policies are also questionable and will not be sustainable in the future.

“They (China) have a lot of planned investment in infrastructure, housing, office space and the building of giant skyscrapers and they have a lot of inventory of all those products and under utilization of infrastructure investment,” he noted.

China remains the biggest foreign holder of US government debt, holding an estimated $1.27 trillion in US Treasury bonds.

The United States accuses China of lowering the price of its exports by manipulating its currency.

“Growth is a good thing, but in the case of China and the US, we have to question whether it’s natural, sustainable,” Thornton said.

First Trickle Through the Dam

The United Kingdom has announced that it will be the first government outside of China to issue bonds denominated in the Chinese currency, the Renminbi. Forbes reports that the bond sale will be tiny. For the UK it represents another attempt to become the eminent world financial center. For the US it represent another small blow to the status of the Dollar and US financial markets. The US Dollar has already lost its near monopoly position as a reserve currency and medium of international trade. The competitive position of the Chinese Renminbi continues to improve in small ways. The question is whether this will be a multiple decade competition between the Dollar and the Renminbi, or whether the “dam will break” like it did in WWI when the eminent currency status changed from the British Pound to the US Dollar.

A Sensible Central Banker?

1280px-Ottawa_-_ON_-_Bank_of_CanadaWith all the lunacy coming from the world’s central bankers since, well, ever, it’s refreshing to hear something (anything!) sensible coming from one of them finally. Bank of Canada Governor Stephen Poloz’s recent announcement that the BoC would stop using forward guidance included all sorts of encouraging tidbits.

Canada’s central bank needs to communicate with “full transparency” the risks that it is weighing because, according to Poloz, this “causes the market to assess new information more or less the way as the central bank does.” In effect, he wants the BoC to stop trying to trick investors to get them to do things they otherwise wouldn’t.

Poloz is also concerned not just with the risks lurking around the dark corners of the economy, but the uncertainties no will see coming.

As economists and policy makers, we know that uncertainty is everywhere and that it has worsened in the aftermath of the global financial crisis…. I believe that the sort of uncertainty we are dealing with today is more profound than that which is typically subjected to rigorous analysis – that it simply does not lend itself as easily to either mathematical or empirical analysis, or any real sort of formalization.

Of course, the BoC leaves unchanged its commitment to low interest rates, but it’s heartening to see some recognition of the risks involved with this policy.

(Cross posted at Mises Canada.)

The Obama Climate Policies That Will Hurt the Poor

ShellMartinez-refiShawn Ritenour writes in The Patriot-News of Harrisburg, Pennsylvania:

In anticipation of this week’s United Nations Climate Summit, tens of thousands of activists stormed Manhattan in what organizers dubbed “The Peoples Climate March.”

Organized by environmentalist, labor, and self-styled social justice groups, marchers demanded “climate justice now,” even observing a minute of silence to recognize those most affected by climate change.

They should have taken a moment to pray for the world’s poor, too. Because the policies they demand would devastate hundreds of millions of lives worldwide.

That’s the conclusion of a new report published by the Cornwall Alliance, A Call to Truth, and co-signed by 150 evangelical leaders, pastors, economists, scientists, and others, including myself.

We analyzed how environmental legislation and regulations—like the ones called for by President Obama at the U.N.—reduce the standard of living for hundreds of millions of the world’s poorest citizens.

Mandatory reductions in carbon dioxide emissions are among the most common demands of climate activists.

By cutting these emissions across the board, the argument goes, it will reduce greenhouse gas emissions and lower global temperatures. This supposedly will save the earth by healing her atmosphere and calming her seas.

What this argument does not include, however, is the effect such draconian cuts will have on electricity prices.

By effectively prohibiting the cheapest and most abundant sources of energy—i.e., fossil fuels—government-imposed cuts to carbon dioxide emissions necessarily cause electricity bills to skyrocket. Forcing millions of people who can’t even afford food for dinner to pay more for electricity is far from social “justice.”

Read the whole article. 

 

Mises Weekends: Claudio Grass Explains The Upcoming Swiss Gold Referendum

Jeff Deist and Claudio Grass discuss the uniquely Swiss mindset behind the upcoming Swiss gold referendum, and how decentralization of political power is part of Swiss DNA; the tremendous geopolitical aftershocks that would occur if the referendum passes — including the physical repatriation of gold to Switzerland; and how the Swiss people may be waking up to the sellout of their country by the Swiss National Bank and the IMF.

How Saving Grows the Economy

comic2Mises Daily Friday by Dan Sanchez:

Dan Sanchez examines Irwin Schiff’s timeless comic book on how savings, innovation, and risk are the building blocks of productivity, progress, and wealth.

Be Careful When you Wish for a Weak Dollar

12531001294_cdcbab77cd_bA little over a year ago, Canadians were alarmed by the surging loonie. As the argument went, foreigners (and Americans in particular) couldn’t afford to buy Canadian-made goods. Since the country couldn’t compete, better get the Bank of Canada on the job and inflate so as to depreciate the dollar.

One year on and people got what they wished for. The loonie has lost about 7% of its value against the Greenback, and nearly 15% since 2012. This should be a great stimulus for the economy, right?

Wrong. Not only has manufacturing not rebounded from the depreciation, but now Canadians are getting hit hard on everything they import into the country, which for the average Canadian is one out of every three dollars they spend.

The Globe and Mail (which less than a year ago was one of the main promoters of the “prosperity through depreciation” argument) has changed its tune.

A money-saving suggestion for Canadians with a taste for travel in the United States: Skip the trip.

The Canadian dollar’s descent to five-year lows in early October reminds us that a weak currency has its price. Everything we import from the United States costs more, although intense competition among retailers may limit the impact for a while at least. A more immediate impact is the cost of buying U.S. dollars and paying credit card bills for U.S. purchases.

The cheapest vacation of them all is the staycation, where you do all the fun stuff you don’t normally have time for in your hometown. But there’s a certain satisfaction you get from visiting different places that staycations can’t match.

Be careful what you wish for. Just like in other economic matters, depreciating one’s currency is not a panacea. At least Canadians will have lots of time to think about this as they sit at home this coming holiday season.

(Cross posted at Mises Canada.)

The Politics of Secession, Regional Net Taxpayers, and Net Tax Receivers

The discussion over Scotland’s possible secession has often touched on the issue of regional net tax payments as a decisive issue in secession decisions. That is, if a region is a net tax-receiving region, then there is little incentive to secede, whereas, a net tax-payer region has significant incentive to secede. In the case of Venetian secession, for example, it has clearly been an issue for many decades as northern Italy (including Veneto) is well aware of its status as a the wealthier region of Italy that subsidizes the poorer south.

This also appears to be the case with Catalonia, where the region generally pays more in tax revenues than it receives.

Not all regions are aware of where they fit into the net tax-receiver puzzle however, and there’s a big blind spot on this in the United States. Many have assumed that those areas of the country most associated with supporting government welfare programs, such as the northeast, must be net tax receiver areas. The reality, however, is that the northeast is a net taxpayer region, as are other areas of the country most associated with being “pro-welfare” such as the west coast and Illinois.

On the other hand, the region of the country most associated with being for “free markets” is the American south (not including Texas) which is generally far more of a net tax receiver region than anywhere else in the country. This runs contrary to many political narratives which insist that the so-called blue states are living off the sweat of the red states. The fact remains though, that it’s the left-liberal regions of the country that are paying in the most in taxes, and much of that revenue moves south.

Many left-wing bloggers are quite fond of pointing this out, as in this graphic here:

taxpayers

The blogger is trying to make a political point by including the political party affiliation of each state’s US senators, although that’s of pretty dubious value. The tax numbers appear to check out pretty well, though, and this map is just one example of many that can be found online.

The breakdown here should not be surprising at all, however. The subsidized states on the map, such as Mississippi, Alabama, South Carolina, and others, all tend to have lower income residents, which means lower income-tax rates. Thanks to a progressive income tax, rich people really do pay more income tax, even after taking advantage of all those rich-guy tax shelters. Also, states with older populations, such as Arizona and West Virginia, will certainly have more people on welfare, or as the recipients of such funds like to call it: “Social Security and Medicare.” But also having a proportionally-large number of low-income people in general will mean more Medicaid money coming in, plus regular old TANF-type payments.

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“Depenalizing” Marijuana Reduces Crime


A recent paper published in the prestigious Journal of Political Economy, “Crime and the Depenalization of Cannabis Possession: Evidence from a Policing Experiment,” reports on experimental policing in the city of London. In the experiment, police depenalized the possession of small quantities of cannabis in the London borough of Lambeth. Researchers found that the offense rate for total non-drug crime in Lambeth fell significantly by 9.4% The offense rate declined in all crime categories. The declines in robbery, burglary, theft and handling, fraud and forgery and criminal damage were statistical significant, but the offense rate for violence, sexual offenses and robbery was not. Researchers found that police reallocated their resources which led to more arrests and “clear ups.”

England’s Private Road Rakes in the Money

tollsA couple of months ago I wrote about Mike Watts, the businessman who built a private toll road to replace a public road destroyed by a landslide. Because local government couldn’t fix the damaged road for almost a year, drivers were obliged to take an extremely inefficient detour, greatly increasing commute times and other transportation costs. In response, Watts and his wife stepped in and risked their life savings to open a toll road alongside the closed public one.

The big question when it opened was whether Watts would be able to recover his expenses, and so far the answer seems to be, yes. Watts just served his 100,000th customer, earning him £200,000 in the process. His total expenses for the project will be about £250,000, so he’s well on his way to breaking even before the public road is scheduled to reopen some time in December.

Naturally, Watts is having trouble with local government, which hates to look bad when entrepreneurial initiative accomplishes what it can’t, and at a fraction of the cost. He’s had to retroactively apply for a planning permit for the road that has already cost £25,000 in surveyor’s fees and ecological assessments. The local council has even spent an additional £660,000 to speed up repairs to the old road, which will now cost £2.66 million to get running again. This kind of desperation only goes to show how threatening it is for public officials when entrepreneurs provide services usually protected by monopoly.

Left and Right Agree: War Is Popular

toys2Mises Daily Thursday by Andrew Syrios

The occasional eruptions of anti-war positions from conservatives and progressives are more a function of what political party controls the White House than of any principled ideological stance. Don’t expect sustained opposition to war to come from either side.

Murray N. Rothbard: The Man and His Work

murrayoct2Mises Daily Thursday:

Lew Rockwell and Tom Woods discuss Muray Rothbard, his life, writings, students, and career.

 

Interesting micro-documentary on ABCT

This documentary takes only about 15 minutes to watch, and presents a good overview of business cycles caused by central banks. Mises and Rothbard feature prominently.

 

Some Fortunate Facts about Ebola

220px-Mosquito_2007-2With reporters of the Western World losing their heads over the outbreak of the Ebola virus, it’s helpful to put it in the context of other diseases.

This year roughly 8,000 West Africans have contracted the disease, mostly limited to just four countries (Liberia, Nigeria, Sierra Leone and Guinea). Of these there are 3,866 confirmed deaths, for a mortality rate of a hair under 50%.

This might seem pretty serious, but as far as threats in West Africa, it’s really small potatoes.

Malaria is so common that in these countries that it is almost a rite of passage. Last year there were about 1 million cases reported in the four aforementioned countries. Of these around 15,000 people died. The mortality rate of 1.5% might not be high by Ebola standards, but in terms of gross numbers there is no comparison.

Ebola seems to be a big deal because it is not a virus that is present in general life. While malaria is a continual threat, outbreaks of Ebola happen only every so often. (There have been 14 since 2000, though this most recent one of the largest.) These past outbreaks were also big news items at the time, and I doubt anyone remembers them any longer. Certainly the only memory of Ebola that I can remember is compliments of a Saturday Night Live skit in the late mid-1990s.

As for being infectious, Ebola is transmitted through bodily fluids. Even the CDC admits that the potential for widespread infection is quite low since direct contact with someone infected with the disease is necessary.

Malaria, by contrast, is spread by a means mostly out of our control – mosquitoes. Cover up because you could be in trouble if you get bit with a mosquito that previously bit an infected person. By comparison, stopping the transmission of Ebola relies on clean hospital practices when dealing with patients, as well as sanitary disposal of infected corpses. (Incidentally, those rules aren’t unique to stymieing the spread of Ebola and apply to basically any infectious disease.)

Just like I can’t remember any of the other 14 outbreaks of Ebola these past 14 years, I’m sure this one will fade away from my memory. More likely it is promoted by news agencies looking for a story. Of course, if that were the case you’d wonder why people wouldn’t be more interested in the tens of millions who have contracted malaria over the past decade.

(Cross posted at Mises Canada.)

Home Price Growth Slowing, In Spite of Rock-Bottom Interest Rates

Last week, S&P/Case-Shiller released its latest data, up through July 2014. The 20-city home price index was up, year-over-year by 6.7 percent.  S&P’s spokesman described the latest data as evidence of a “broad-based deceleration in home prices.” It’s true that’s the smallest YOY change since December 2012, but 6.7 percent is still a long way from zero or negative territory. July was the 8th month in a row that the YOY change in the index got smaller, and while I’m certainly not in the prediction business, that trend looks a lot like what we saw in 2006 as the last housing boom started to lose steam quickly. This graph provides a quick visual reminder of recent home industry history:

The old bubble is obvious over on the left side, and then there’s the following bust. That little eruption back up into positive territory in 2010 was largely a result of the first-time homebuyer tax credit that was pushed through at that time. Many buyers rushed to make a purchase in time to qualify for the tax credit, pushing prices up temporarily. But prices headed down again in the wake of the tax credit, which had only really provided an incentive to hurry up for people who were already planning to buy anyway. To halt that downward slide you see in late 2010 and 2011, the Fed kicked in QE2, and managed to re-inflate a new housing bubble.

cs2

Policymakers Don’t Care About Affordability 

Pushing up home prices is basically gospel at this point with the central bank, so from their perspective the last two years have been a success story. The problem for ordinary people, of course, is that home prices are up. In fact, even in this environment of “weakening” home price inflation, 6.7 percent in one year is a punishing rate of price growth for an ordinary person. If you decided to wait a year and put your money in the bank while you saved more for your down payment, well guess what: you certainly didn’t get 6.7 percent on your savings account. You just lost a bunch of money to inflation over that year. It doesn’t matter to the important people though, because for the sake of too-big-to-fail banks and major investment institutions who still have a lot of mortgage-based investments on their books, the prices just had to be forced back up. As we can see in the second graph, Mission (Partially) Accomplished:

cs1

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Central Banking Distorts Markets

800px-Federal_Reserve_Bank,_Richmond,_VirginiaIn today’s Wall Street Journal, two Fed insiders Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, and John A. Weinberg, director of research of the Federal Reserve Bank of Richmond, effectively argue that central bank “actions that alter the allocation of credit … endanger the stability the Fed was designed to ensure.”  Their explicit targets for criticism are the Fed purchases of mortgage backed securities and other “actions in the recent crisis” that “bore little resemblance to the historical concept of a lender of last resort.” In my view they correctly recognize that while “these actions were intended to preserve the stability of the financial system, they may have actually promoted greater fragility.” They correctly assert “(w)hen the central bank buys private assets, it distorts markets”.

Lacker and Weinberg are late to the dance. Stanford economist John Taylor in 2009 coined the term “Mondustrial Policy” to criticize the Fed and Treasury response to the financial crisis. Taylor’s remarks are highlighted in a WSJ bolg post by Jon Hilsenrath. Hilsenrath reports that Taylor used this “unflattering term” to describe a policy environment that was “not a monetary framework. It is an intervention framework financed by money creation.”

Jeffrey Rogers Hummel in his important  “Ben Bernanke versus Milton Friedman: The Federal Reserve’s Emergence as the U.S. Economy’s Central Planner illustrates significant differences in “approaches to financial crisis” between the Bernanke/Yellen approach and a Friedman approach. In addition to exposing the theoretical foundation of the recent misguided and dangerous policy approach, Hummel provides a very detailed almost step by step use of this type of policy in response to the major events of the recent crisis. He summarizes, “those differences resulted in another Fed failure – not quite as serious as the one during the Great Depression, to be sure, yet serious enough – but they have also resulted in a dramatic transformation of the Fed’s role in the economy. Bernanke has so expanded the Fed’s discretionary actions beyond controlling the money stock that it has become a gigantic, financial central planner.”

Lacker and Weinberg see the major problem associated with this monetary central planning as “undermining central bank independence.”John Taylor sees the cause of the problem as the Fed failing to follow a rules based policy.  Research by Selgin, Lastrapes, and White (“Has the Fed Been a Failure?” points in another direction. Central banking per se may be the problem. Contra Taylor, the Great Moderation was perhaps not as great a success for monetary policy as Taylor believes. The improvement was temporary and ‘appears to be due to factors other than improved monetary policy.” Selgin, Lastrapes, and White conclude, “the real hope for a better monetary system lies in regime change.” Austrians have a strong comparative advantage in discussion of what the foundations of this regime change should look like. Reform should go much further with a goal of sound money, not a goal of stable prices.

Venezuela’s Biggest Shortage

Breast_implants_in_hand_01Venezuela’s socialist government has beset the population with all sorts of terrible travesties, from high inflation to shortages of toilet paper. Now the country’s poor citizens have one more shortage to grapple with: breast implants.

Apparently the country’s restrictive currency controls have hindered physicians from buying approved implants. Unable to beautify themselves the way they want, women are resorting to barter to pay for their silicone. Of course, because of the vagaries of the black market they are forced to resort to, these ladies are not sure of what exactly is in their implants. On Craigslist, “sellers post pictures of black market implants of unknown origin sitting in sealed packages on kitchen tables, complete with stories of spouses who changed their minds and reassurances that the pouches remain sterile.”

At least one doctor has doubts as to the black market implants’ safety, claiming that the cheaper implants come with heightened risks:  “I’m not saying they’re not safe, but I’ve removed more than a few ruptured Chinese implants. I just don’t feel comfortable with them.”

Some may think this is not a big deal, or that these women shouldn’t be so vain as to concern themselves with such procedures. This largely misses the point. It’s not up to me to decide whether food or breast implants is more important, valuable, or a more egregious shortage to face. That’s for the individual to decide.

More than 85,000 breast implants were performed in the country last year – more than every country except the U.S., Brazil, Mexico and Germany, all countries with vastly larger populations. In beauty conscious Venezuela, these things matter.

Maybe protests over food shortages have been insufficient to get the government to liberalize its exchange rate policy, but let’s hope that the dearth of breast implants gives them one (or two) more reasons to rethink it.

(Cross posted at Mises Canada.)

Will the CDC Save Us From Ebola?

Biosafety_level_4_hazmat_suitDisease pandemics are a dream come true for central planners. Hysterical over possible contagion, citizens clamor for government action, government quarantines, government coercion, and government planning. In these cases, large numbers of people want government to do what government does best: seize people and property, coerce, issue orders, and spend lots of money.

In the United States, the Centers for Disease Control presents itself as the answer to every pandemic. Nevermind the fact that the Federal government is an organization that mishandles live anthrax, has cross-contaminated benign bird flu with deadly bird flu, and then sends contaminated samples across the country. And of course, the Feds, who apparently can’t keep disease samples contained, spend enormous amounts of money on making deadly diseases more deadly so as to weaponize them.

This organization, the same one that did such a stellar job with FEMA and the Hurricane Katrina “relief,” is the organization that will apparently save us from Ebola.

So, good luck to us all in surviving the US government’s war on pandemics.

Moreover, a more long-term view of the history of disease prevention does not present much of an impeachable case for government intervention. Indeed, governments excel at creating the conditions that enhance the spread of disease, as they did with the Spanish flu in the aftermath of World War I.

We also know that government interventions in the marketplace for medications (including price controls for vaccines and other treatments) used by states tend to create shortages where they are needed most.

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Reality Check on Employment Numbers

On Friday, the big news was that the unemployment rate had fallen below 6 percent for the first time in six years. That’s swell news, but the headline unemployment rate tells us virtually nothing at all about the real employment situation. Since the unemployment rate is a function of both the labor force size and the total number of people who self-report as employed, we need to get a sense of both labor force dynamics and total employment. Below, I’m going to use the government’s own numbers, so keep in mind this data is the rosiest picture that BLS could credibly paint. I will not be using the so-called “seasonally adjusted” (SA) numbers, because they’re more heavily manipulated than the not-seasonally adjusted (NSA) numbers. Also, seasonal adjustment is simply unnecessary and adds  totally unnecessary complexity to the data. Everything I look at below is not adjusted, and is from the BLS.

Here’s the unemployment rate graph:

emp5

The unemployment rate bottomed out near 4 percent during the last expansion (2002-2008), and it then shot up to over 10 percent. Ever since then, it’s been heading down steadily. The headline SA number for September 2014 was 5.9 percent, and in this case the NSA number was even lower, at 5.7 percent for September. That’s down from a year earlier, when the rate was 7.0 percent.

How great! What a big drop. We’re finally back to what was ten years ago considered a mediocre unemployment rate. But it’s better than ten percent, right?

Sure, it’s better, but what really matters, in terms of the unemployment-stats game is how much actual employment opportunity there is. The fact of the matter is, the total number of employed persons in the US has gone basically nowhere since 2007.  We see this if we look at the components of the unemployment rate, which are the labor force size and the total number of employment persons. This is the Household Survey, which means that the data is based on surveys of actual persons who are asked if they want to be employed, and if they have actually managed to find employment. People who have given up looking for work, or gone back to school, or just accepted a lower standard of living because they’re premature retirees who’ve given up permanently, are all excluded from the labor force. So, looking at the components of the unemployment rate, we see:

emp3

When the gap between the two lines is big, the unemployment rate is high. And when the gap is small, the unemployment rate is smaller. It’s perfectly possible to get a decline in the unemployment rate without adding any new jobs at all. All you need to have is a decline in the size of the labor force. We saw this at work back in 2010 and 2011, when the unemployment rate was dropping, but employment growth was near-stagnant. This was because the labor force size fell slightly, in spite of the fact that 3.3 million people continued to graduate from high school each year. Did 100% of them go to college full time? And what happened to all the people who graduated from college in those years? Well, they apparently didn’t enter the labor force. Labor force growth continues to be anemic, and it’s certainly not just because baby boomers are retiring. Many people are simply electing to leave the work force for a variety of reasons, including declines in opportunities for work. Many critics of the administration have correctly pointed to the fact that labor force participation is at very low levels.

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