Author: Fred Foldvary

Towards a Free and Prosperous Ukraine

Fred Foldvary Liberty

The violence in Ukraine demonstrates once again the failure of centralized democracy. Whenever we see masses of people protesting and rallying in the city streets and squares, it shows that the structure of government has failed. The prime purpose of democracy is social peace. The mass demonstrations show that the people cannot express their views and make policy decisions through the formal channels of government, so they take to the streets.

When government fails, there is another path towards political change: civil disobedience. Rather than massing in the city square or taking control of government buildings, the protestors can stop obeying the government. They can stop paying taxes and stop obeying unjust rules. Civil disobedience is how India won independence and the US civil rights movement ended segregation. Today, protestors use social media to spread the message. Some activists will be put in prison, but there is not enough room to put half the population in jail.

The conflict in Ukraine originated in the 2010 election for president, in which the opposition accused the winner of fraud. The protests began in November 2013, when the president switched from making a trade agreement with the European Union in favor of a pact with Russia, which provided aid to the government of Ukraine.

The protests in Ukraine were intended to be peaceful, but mass protests often become an attractive nuisance for provocateurs. When a small minority of protesters start throwing rocks or fire bombs at the police, that becomes the signal for the police to use lethal force, and then the protestors return fire, and the result is violence and death. Peaceful civil disobedience is decentralized and does not provide such a venue for the chaos makers.

Ukraine is the largest country that is entirely in Europe. It was in the Russian Empire until the Bolshevik revolution of 1917, when it became an independent state. It soon became a republic within the USSR. The Soviet structure of councils and republics served to preserve the identity of Ukraine, which even had its own membership in the United Nations, and achieved independence with the break-up of the USSR in 1991.

Now, in February 2014, following the failure of government repression, the Ukrainian parliament has dismissed the president, restored the 2004 constitution, freed the previous prime minister, and appointed an acting president. The agreement between the government and the opposition was facilitated by the foreign ministers of France, Germany, Poland and a representative of the president of Russia.

The national anthem of the country is “Ukraine has not yet perished.” Millions of Ukrainians died during the years of forced collectivization under the Soviet Union, and more millions, including many Jews, were slaughtered during World War II, but the Ukrainian identity has persevered. Ukrainians now have a unique opportunity to reshape their future.

Some of the conflict in Ukraine comes from its ethnic mix. The westernmost part of the country was part of Poland prior to World War II, although that territory along other neighboring areas had been Ukrainian previously. In 1954, the Crimea was transferred from the Russian Republic to Ukraine. The eastern half of Ukraine is culturally Russian; the main religion is Eastern Orthodox. The western part is ethnically Ukrainian and Catholic, and the people of western cities such as Lviv identify with Europe. Ukraine needs to restructure its governance as well as its economy in order to achieve social peace and prosperity.

Ukraine has a centralized government, but also has 24 provinces, plus the nominally autonomous republic of the Crimea, and two city districts, Kiev and Sevastopol. The democracy of Ukraine can become more authentic by decentralizing the governance into a federation of its subdivisions. An association agreement with the European Union should reduce trade barriers, while the Ukraine should also pursue free trade with Russia and its other neighbors.

The economy of Ukraine suffers from its oppressive tax system. The new tax code adopted in 2011 has 18 national and 5 local taxes. The major taxes include corporate and personal income taxes, a value added tax, and excise taxes. But there is also an economy-friendly, though small, land tax, and royalty taxes on the extraction of natural resources. The current tax rate on corporate gross income is 16 percent. The value-added tax rate of 17 percent is imposed on the sale of goods, including imports. There is also a high social security tax of up to 49.7 percent.

Ukraine’s land tax is paid by the owners and users of land. The tax rates depend on the use of the land. For pastures, the rate is one-tenth percent of the land value, and for farms the rate is three-hundredths of a percent. There are also local real estate taxes per square meter of dwelling space with the tax rate from 1% to 2.7% of the monthly minimum wage.

The Ukranian tax system has been criticized for its complexity, its disincentives to labor and enterprise. and its inducement for tax evasion. Ukraine has the potential to become a great agricultural and industrial economy, but its tax and regulatory policies have been holding it back. The Fraser Institute’s index of economic freedom calculates Ukraine’s level at 6.16 on a range from zero to pure freedom at 10. Out of 152 economies, Ukraine ranks 126 in economic freedom, near the bottom among the countries of the world. The Heritage Foundation index also ranks Ukraine as “repressed,” especially low on investment freedom and freedom from corruption.

If Ukranians seek prosperity, they would be wise to eliminate all their taxes other than the land tax and also enact national and local pollution taxes. The land value tax should be uniform for all land, based on its current market price or rent when put to its best use, regardless of its current use. The elimination of the other taxes would stop tax evasion and liberate the underground economy.

Ukrainians should stop blindly copying the dysfunctional tax system of the European Union and adopt a modern 21st century public finance system suitable to the global economy and Ukraine’s position between Russia and the EU. They can avoid either joining the EU or a Russian-led Eurasian Union by legislating free trade with both regions. They should enact domestic free trade by avoiding the taxation of labor, enterprise, and produced wealth. With rising public revenue from land value, and with rising wages, Ukraine could reduce its social security taxes until the government either funds pensions from land rent or replace government pensions with private retirement accounts.

Land-value taxation would also promote a decentralization of governance and a reduction of corruption. The land of Ukraine is rich and can well support its public finance, and let Ukraine to not just avoid perishing, but to flourish.

The Theory of the Non-Working Class

Fred Foldvary Economics , , , , , , , ,

In the USA, people of age 16 and above are considered of working age. Of those of that age range, those who are working, seeking work, or hired but not yet working, are designated to be in the labor force. The labor force participation rate is the number of people in the labor force divided by the number of those of working age.

From 1950 to 2000, the labor force participation rate in the USA rose from 59 percent to 67 percent. Much of that increase came from the doubling of the participation rate of women, from 30 percent in 1950 to 60 percent in 2000. But total labor participation has declined since 2000 to 63 percent.

While the portion of women in the US labor force rose, the portion of men has been declining. The prime working years are considered to be from age 25 to 54, and one sixth of the men of that age range are not working. In 1950, only four percent of men of that range were not employed.

Many of those not working are not seeking work, and are therefore not counted in the labor force. They are also not counted as unemployed, because by definition, the unemployed are those actively seeking work plus those who have been hired but not yet started to work for wages. Two thirds of working age men are not seeking work, although some who sought work but stopped because they were discouraged, would take a job if offered.

About 40 percent of the men seeking work have been unemployed for six months or more. The chronically unemployed are less likely to become employed, so the long-term unemployment feeds on itself.

The real wage of lower-skilled workers has been falling since 1970. For workers who did not finish high school, the real wage (adjusted for inflation) has fallen 25 percent. That fall in wages is offset somewhat by the availability of new products such as cell phones and by the fall in the relative prices of electronics and other goods, but the cost of housing, medical care, taxes, and college tuition have risen to offset some of that productivity gain.

There are several reasons why male labor participation has fallen. First, more men are attending college. Second, due to the expansion of the war on drugs, the portion of men in prison has risen. Third, as more women work for wages, some male partners choose home production, doing house work and child care at home, which is real labor but not counted in the output data. Fourth, more people are obtaining government’s disability income. Very few on disability go back to work. Fifth, many in the first of the baby-boom generation, born during 1946-1950, are retiring.

The downward trend of labor participation will continue. The Congressional Budget Office estimates that the participation rate will fall to 61% by 2024. CBO calculates that the Affordable Care Act reduce the labor force by more than 2 million jobs. Workers will be able to quit their jobs without losing medical coverage, and the expansion of Medicaid will induce many more adults to obtain medical care without having a job.

One of the problems with a lower labor participation rate is that it reduces the ratio of workers to non-workers. Social Security and Medicare are supported by transferring income from workers to non-workers. A smaller labor participation rate will use up the trust funds and create a deficit for these programs sooner. Also, fewer workers results in lower economic growth, which implies that more of those in poverty will stay that way.

Much of the labor participation decline is not voluntary, but caused by tax and subsidy policies. Without taxes on wages and enterprise profits, both wages and employment would be higher. If the funds now going into Social Security instead went into tax-free private retirement accounts, those who retire would rely on their own past savings rather than transfers from those working. Without the income-tax distortion caused by tax-free medical insurance and taxed money wages, workers would be able to choose the insurance plan that fits them best rather than having to accept the limited plans offered by employers and the government.

The best alternative to taxing wages is to tax land rent or land value. But even without such a fundamental shift in policy, the labor force participation rate can be made more voluntary with employee and self-employment incentives for those long out of work, such as tax offsets and exemptions from restrictions (e.g. licensing, union rules, and city zoning) that prevents working at home, and exemptions from litigation risks. Immigration reform – legalizing those already in the country and allowing more of those with labor skills into the country, would also substantially increase the labor population.

The basic problem with labor world-wide are restrictions on hiring and firing labor, and the heavy costs imposed by taxes, regulations, and mandates on employers. If an employer, including a self-employer, could simply hire a worker without having to deal with forms and regulations, and with no taxes on the employer and the employee, we would have full employment at wages that would provide a decent standard of living. The labor problems we have are iatrogenic, a disease caused by the doctor, in this case, the economic malady caused by government policy. The government people look to for solving economic problems has caused them in the first place.

California’s Environmental Mal-Litigation

Fred Foldvary Current Events, Economics, Law , , , , , ,

The worst intervention by governments, aside from aggressive war, is excessive litigation. Taxes are burdensome, but they are predictable. The reason that enterprises are not entirely crushed by taxation is that much of the tax burden is at the expense of land rent, so it ends up destroying the economy’s surplus, but not totally wreaking the economy. Regulations act as a tax to impose costs on enterprise, and much of the cost is passed on to workers and the public, so they make us poorer but don’t totally stifle the economy. Subsidies create distortions that generate inequality and the boom-bust cycle, but subsidies is what politics is all about. The worst intervention, that does the most to crush enterprise and employment, is vicious litigation.

A prime example of litigative intervention is the California Environmental Quality Act. CEQA is codified at the Public Resources Code Section 21000 et seq. As California’s web site for CEQA states, “Most proposals for physical development in California are subject to the provisions of CEQA.” The “frequently asked questions” web section explains that “CEQA is a self-executing statute.” That means that “its provisions are enforced, as necessary, by the public through litigation and the threat thereof.” Past court cases can be seen on the web site of the California Natural Resources Agency.

As described by a “Schumpeter” blog article in the 25 January 2014 Economist, “The not so Golden State,” this law “has mutated into a monster.” Anybody in California may file a CEQA lawsuit against any project using environmental protection as an excuse. The plaintiffs win half the cases. If someone sues a company and loses, the defendant still has to cover his legal expenses. Many of the lawsuits under CEQA are also against governmental development projects and against permits by local governments to enable private development.

Suppose a developer seeks to build an industrial park. If he hires non-union workers, the union attacks with a CEQA lawsuit. So the builder hires expensive union labor. Suppose someone owns a gasoline station, and a competitor wants to set up a station nearby. The station owner stops the potential competitor by filing a CEQA case. In 2011, there were 254 “California disinvestment events,” in which companies employing more than one hundred workers either left the state or expanded in another state rather than in California. This is estimated to have gotten worse in 2012 and 2013.

The litigations and regulations of California fall hardest on manufacturing. California’s high sales tax and low property tax also induces cities to favor retail stores over manufacturing. Hostile policies in California are largely responsible for the flight of manufacturing to other states and to foreign countries. As noted by the Economist article, electronic devices are designed in “Silicon Valley,” the region from San Francisco to San Jose, but manufactured in Asia. Some environmentalists realize that CEQA does little to protect the environment, but attempts to reform the law have stalled. The frivolous lawsuits reward lawyers, unions, companies seeking to stifle competition, and “not in my backyard” opponents of development.

Litigation is the worst way to handle social problems. Lawsuits impose unpredictable and expensive costs on enterprise. Such laws let opportunists exploit legitimate job-creating industries. Excessive litigation is further rewarded by making the winning defendants of lawsuits have to pay their legal costs. We then get excessive malpractice suits that force doctors to buy expensive insurance. Federal and state laws that enable litigation for job and housing discrimination and environmental protection end up enriching lawyers who get much of the gains.

The best ways to handle environmental destruction is with covenants and easements, along with a liability rule for damages. If some development harms the natural environment, then the government assesses the damage, and the polluter pays for the damage, either as a one-time charge or as periodic payments for on-going pollution. Developers know in advance that they are liable for damage, and so they would have the incentive to prevent the payment by doing their own environmental assessment. The issue would be between the developer and the state, without involving attorneys and court costs.

Economic theory has recognized for the past hundred years that the optimal policy for pollution is a charge paid by the polluters, passed on to the customers, fully compensating society for the damage. That can be done by a pollution tax.

English common law traditionally provided law-suit protection against potential negative effects and damages to one’s property. Litigation can be a useful enforcement and restitution tool, but it has to be within a sensible legal system. In the English tort system, if a plaintiff loses a law suit, the loser has to pay the legal costs of the winner. So if a company sues another firm just to stifle competition, using the environment as an excuse, and that company loses the lawsuit, then that company has to pay the legal costs of the winning competitor. That would stop frivolous or phony law suits. And that is why the lawyer lobby will stop such a legal reform in the USA.

Fractional Reserves in Free Banking

Fred Foldvary Economics, Liberty , ,

by Fred Foldvary

A bank is a firm that accepts funds as deposits. The generic term “bank” includes various institutional types, such as credit unions. The bank is an intermediary between savers and borrowers. The interest paid by borrowers pays the expenses of the bank, and what remains is paid to the depositors.

There are two ways to organize a banking system. The first is with central banks, such as the Federal Reserve (the “Fed”) in the USA. The central bank issues the currency and regulates the private banks. In the USA, the Fed includes regional Federal Reserve Banks, which are the bankers’ banks. The private banks hold accounts with a Federal Reserve Bank; the funds are called “reserves.” The Fed creates money by buying bonds: it pays the seller a check, the seller deposits the check into a bank, the bank presents the check to the Federal Reserve Bank, and the Federal Reserve Bank covers the check by increasing the reserves of that bank, thus creating money out of nothing. The interest income from bonds pays the expenses of the Fed, and the remaining interest is paid back to the US Treasury.

The other method of banking is with free-market banking, or “free banking,” whereby there is no central bank; the private banks issue their own currencies and are not restricted other than by laws that prohibit fraud. The banks would usually use the same unit of account, such as the dollar or euro.

There are two ways to do banking. The first is called “one hundred percent reserves” or “full reserve” banking. In that method, the bank may not loan out the funds that are deposited. One of the challenges of banking is that with checking accounts, also called “demand deposits,” the account holders may withdraw their money at any time. In contrast, loans are typically long term, such as for mortgages or business loans or car loans. So if depositors suddenly want to withdraw much of their funds, the money will not be there. With full-reserve banking, the money is always there, but the bank get no interest payments. The depositors pay a fee to have their money stored at the bank.

The workings of a banking system also depend on the money system. The three basic types of money are 1) commodity money, where a commodity such as gold or silver is used as a general medium of exchange, 2) a fiat money system, in which the currency has no fixed convertibility to any natural commodity, and 3) an artificial-commodity system, where the unit of account is constructed in a way that limits the supply.

With commodity money, banks create money substitutes convertible to the real money at a fixed rate. For example, if gold is the real money, banks issue paper currency convertible into gold, so that, for example, a $20 paper note can be exchanged for a $20 gold coin with $20 worth of gold. All government-created money today is fiat. With fiat money, the real money is paper currency and coins, and bank deposits are money substitutes. The prime example of artificial-commodity money today is the bitcoin, an electronic currency created by computer programs.

The other method of banking is called “fractional reserve banking.” With that method, a bank holds only a small fraction of deposit funds in its reserves. Governments typically impose some minimum of required reserves. The remainder are “excess reserves,” which may be loaned out.

For example, suppose Samantha deposits $100 of currency into her account, and the required reserves are ten percent. The bank keeps $10 in reserve, and loans out the other $90 to Ralph. The loan consists of an account created by the bank. The loan therefore creates $90 in new money, since Samantha still has her $100 in the bank. With the $90 account, the bank again keeps 10%, or $9, and loans out $81. This money creation can continue until all the excess reserves are fully loaned out, in which case the original $100 deposit is multiplied into the creation of $1000.

With all reserves loaned out, if the depositors seek to withdraw their money, the bank will not have sufficient currency. A bank can deal with this liquidity problem in several ways. One is to have most of the funds in time deposits, funds that are held for a fixed period of time, unless the account holder pays a large penalty. Another method is for a bank to be able to borrow funds from other banks or from a central bank. A third way is for the bank to have contracts that state that the bank may not be able to provide withdrawals at times when it has insufficient funds.

Critics of fractional reserve banking claim that the private banks are a private monopoly cartel that inflates the money supply by making loans and obtains interest that robs the economy of money and goes to privileged bank owners.

With fiat money and central banking, there is indeed a potential for inflation, as there is no limit to money creation. The main problem with central banking is that there is no scientific way to know in advance the optimal money supply, and historically, the Fed created destructive deflation in the 1930s, high inflation in the 1970s, and the cheap credit that generated the real estate bubble and the Crash of 2008.

Some critics of central banks want the government to directly issue money. But if the Treasury or Finance department can issue money at will, political influences can induce inflation, and even hyperinflation as happened in Zimbabwe.

However, with free banking and commodity money, these problems do not arise. Banking would not be a monopoly cartel, since new banks, including credit unions can be created. The convertibility of money substitutes into real money prevents inflation, as the quantity of money substitutes is limited by the demand by the public to hold them. Competition among banks limits their profit to normal returns, as the rest of the debt service paid by borrowers goes to interest payments to depositors. Fractional-reserve free banking generates a flexible yet stable money supply. Free banking does not generate inflation, because new deposits into the banking system come from additional real money, such as from gold mining, which is costly to produce.

The failures of central planning in the economy include the failure of central banks to successfully manage the money supply and optimally manipulate interest rates. Free banking worked well where tried, such as in Scotland until 1844, when the Bank of England took over its money system. A pure free market would let the market determine both the money supply and the natural rate of interest. In Scotland, the banks formed an association to lend funds to banks that needed more liquidity. With free banking, the market’s natural rate would avoid the distortions that arise from either cheap credit or a shortage of credit.

The boom-bust cycle will only be eliminated by the prevention of the fiscal and monetary subsidies to real estate. Sustainable economic progress requires both the public collection of land rent and a free market in money and banking.

Note: this article appeared as “Fractional Reserve Banking” in the Progress Report.

Myths about Libertarianism

Fred Foldvary Current Events, Economics , , , , , , ,

Many articles have recently appeared in magazines, web sites, and social media criticizing free markets and libertarian ideas. It seems to me that this opposition is a result of a growing interest in freedom as people realize that the economies of the world are in serious trouble. As people see continuing high unemployment, slow growth, ever greater government debt, environmental disaster, more turbulent weather, and endless wars, some folks seek solutions in greater freedom while others seek solutions in greater state control. The critics of libertarianism and economic freedom have fallen for several fallacies.

1. Critics confuse today’s mixed economies, a mixture of markets and government intervention, with a “free market.” A truly free market is an economy in which all activity is voluntary for all persons. Government intervention changes what people would otherwise voluntarily do. A pure market would not impose the taxation of labor and capital. It would not prohibit trade with Cuba. Free markets would not subsidize industry. Any peaceful and honest action would be free of restrictions and taxes. That is not the economy we have today in any country.

2. Critics use the term “capitalism” to falsely blame markets for economic trouble. Those opposed to private enterprise call today’s economies “capitalist.” They then note that the economy has trouble such as poverty, great inequality, unemployment, and recessions. The critics conclude that “capitalism” causes these problems. This illogic uses a sly change in meaning. They use the term “capitalism” as a label for the current economies and also to refer to free markets. It makes no sense to label the economy as XYZ and then say XYZ causes problems. The critics use the double meaning of “capitalism” to blame the non-existing free market for social problems. This confusion is often deliberate, as I have found that it is almost impossible to get the critics to replace their confusing use of the term “capitalism” with clearer terms such as either the “mixed economy” or the “pure market.”

3. Critics think that the “market” means “anything goes.” For example, they think that a free market allows unlimited pollution. They often call this, “unbridled capitalism.” But freedom stops at the limit of harm. In a pure market with property rights for all resources, pollution that crosses outside one’s own property is trespass and invasion. This violation of others’ property rights would require compensation, and that payment would limit pollution.

4. Critics confuse privatization with contracting out. They then blame private enterprise for problems such as occurs with private prisons. When government contracts with private firms to produce roads, it is still a governmental road. When governments hire private contractors to provide services in a war, it is still government’s war. Government sets the rules when firms do work under contract. Genuine privatization means transferring the whole ownership, financing, and operation to a private firm.

5. Critics overlook subsidies. Government distorts the economy with subsidies to agriculture, energy production, and other corporate welfare. The biggest subsidy is implicit: the greater land rent and land value generated by the public goods provided by government and financed mostly from taxes on labor and enterprise. Critics not only ignore this implicit subsidy but also overlook the explicit subsidies to agriculture and programs such as the promotion of ethanol from corn.

6. Critics do not understand the crowding out of private services because of government programs. The critics of libertarianism say that with less government, old folks and poor folks would starve and die because they would not receive social security and medical care. What they overlook is that the reason many of the elderly have little savings for retirement is that government took away half their income while they were working. Income taxes reduce their net wages, while sales taxes raise the cost of living. Low-income people pay little or no income tax, but they pay hefty sales and excise taxes, and they indirectly pay property taxes from their rental payments to landlords. Libertarians want to abolish poverty and have a society where all people have good medical care. They just want to accomplish this by letting workers keep their full pay, which would enable them to pay for their own medical services. Also, with no taxes on interest and dividend income, people would be better able to provide for their own retirement income, indeed to have much more than social security now provides.

7. Critics fail to understand contractual governance. A pure market would not consist of isolated individuals. Human beings have always lived in community associations. In a free market, communities such as condominiums, land trusts, and civic associations would provide the public goods that the members want.

8. The critics of market believe that corporations control the economy, exploit labor, and plunder the planet. Corporations do have power, but mainly because they obtain subsidies and monopoly privileges from governments. But labor unions and lawyers also lobby the government for power and favors. Rather than blaming private enterprise, the critics should examine how the structure of government enables special interest to obtain power and wealth.

Leo Tolstoy wrote in 1905 that nobody really argues with the economics and philosophy of Henry George and public revenue from land rent; the critics either misunderstand the concepts, or they create misinformation. The same applies to critics of libertarianism. The fact that the critics falsify the free market in criticizing it implies that the actual concept is sound, otherwise they would provide valid arguments.

Nobody has refuted the free market and the libertarian ethic of “live and let live”. The critics of liberty either misunderstand it or else falsify it. Even when their errors in logic, their false evidence, and their confused terminology are pointed out, the critics persist in their falsification. They are stubbornly anchored to their viewpoints. Why this is so is a problem I will leave to psychologists to figure out.

Do we have a Natural Right to be Annoying?

Fred Foldvary Liberty , ,

by Fred Foldvary

Suppose somebody is walking along the sidewalk carrying a big sign saying “I hate you.” Is he violating your natural rights? Should the state prohibit him from being annoying? Does freedom imply being protected from being annoyed, or does it protect our right to be annoying?

The citizens of Brighton, Michigan, believe that we have a right to not be annoyed. In 2008 the city council enacted an ordinance authorizing the police to cite anyone who is annoying in public “by word of mouth, sign or motions.” Violators will pay a fine. Brighton is not alone in this war on annoyance. Royal Oak, Michigan, also had such an ordinance, which serves as a model for other cities to copy.

A common source of public annoyance in some cities are beggars who ask for money as one passes by or, worse, come up to you with a sad story. Now, with the anti-annoyance ordinance, one can call the police, and the beggar will have his food in jail if he refuses to accept the ticket.

In some places, guys walk down the street in baggy pants that hang low. Another annoyance is inconsiderate guys who walk around with a loud portable music player; the music itself is often cacophonous, hence annoying, Those who are annoyed by such fashion and bad taste can now call the police and ask to have the offenders cited.

In economics, uncompensated bad effects on others are called “negative externalities.” The textbooks say that government can correct this by charging the person who emits the externality for the social cost. Evidently Royal Oak and Brighton have implemented this principle. You annoy, you pay.

Unfortunately, if you walk into a shop and seek some service, but the worker there is yakking on her cell phone, it is very annoying, but in Brighton you may not call the police, since the shop is a private place.

But what if the police are annoying? The police should not be above the law. If you are annoyed by a police officer, you should be able to call other police and have the officer cited.

You get a traffic ticket and the judge pounds the gavel and declares, “guilty!” Very annoying, and the court is a public place. You can get back at the judge; call the police and have the judge cited! But that would annoy the judge, so he will have you cited too. Now you have become annoyed again, and can have the judge cited for citing you. After all, if judges are above the law, we have no law.

What a wonderful weapon is this anti-annoyance ordinance. If your neighbor annoys you by hanging underwear in his back yard, call the police! Threaten to cite him, and he will have to do as you say. But that might annoy him, and then you have to do what he says. Whoops, now they are both slaves of one another. At least it’s equal.

Children are often annoyed by the restrictions and punishments imposed by their parents. They can now do something about it. When they are shopping or otherwise out in public, parents are often annoyed by their children whining, crying, complaining. parents can now tell their children that they will call the police if the kids don’t stop being annoying.

Perhaps the residents of Brighton and Royal Oak find this editorial annoying. Too bad; they can’t do anything about it unless I show up in those towns. I will make sure I never enter those towns.

The unemployment rate in Michigan is nine percent, and its major city, Detroit, is in bankruptcy. What I want to know is, if the residents find the bad economy annoying, who gets cited?

(Note: this article is adapted from “Do we have a Constitutional Right to be Annoying?” in The Progress Report, 2009.)

California’s Neighborhood Legislature Initiative

Fred Foldvary Current Events, Politics , , , , , , , ,

In California, the voters are able to put proposed laws on the ballot if they gather enough signatures. This process is called an “initiative.” The legislature may also place propositions on the ballot, a process called a “referendum”.

One of the ballot propositions for 2014 is “The Neighborhood Legislature Reform Act,” which would decentralize the election of representatives in order to reduce the political power of special interests such as corporations, labor unions, and trial lawyers. This reform would shift political power to the people of California. (For the text of the initiative, see this.)

Like the US Congress, the California legislature has two houses, a Senate with 40 members and an Assembly with 80 members. The population of California is 38 million. The districts for the California Senate now have 950,000 persons, a greater number than for Congressional districts, while about 475,000 people live in each assembly district. It now takes a million dollars to win a California Senate seat.

The Neighborhood initiative would instead create Senate districts of 10,000 persons and Assembly districts of 5000. These neighborhood districts would form a greater association of 100 neighborhood districts within the current districts. The association council would elect a representative to the state legislature, thus keeping the same number of representatives in the state legislature. However, the final approval of a law would require a vote by all the neighborhood district representatives. That vote could be done on an Internet web site, as corporations now do for their elections of board members and propositions.

The Neighborhood Legislature proposition was initiated by John H. Cox, who has been a lawyer, real-estate management executive, and local office holder. The aim is to have the measure on the November 2014 ballot. That will require over 800,000 valid signatures, 8 percent of the votes cast for governor in the last election, by May 19. That is a high hurtle, which usually requires several million dollars to pay for signature gatherers. This initiative has already made a splash, with articles in the Wall Street Journal, Washington Post, The Los Angeles Times, and other media.

I have been writing for years on reforming democracy with tiny voting districts in a bottom-up structure. Back in 2007, I wrote an article, “Democracy Needs Reforming”, proposing that the political body be divided into cells of 1000 persons, each with a neighborhood council. A group of these would then elect a broader-area council, and so on up to the national congress or parliament. The state legislature would then only need one house, rather than a bicameral legislature that mimics the US Congress and British parliament. This “cellular democracy” would eliminate the inherent demand for campaign funds of mass democracy.

The Neighborhood Legislature Reform Act would not be quite as thorough a reform as a cellular democracy based on tiny districts, but it has the same basic concepts: smaller voting groups, and bottom-up multi-level representation. This initiative would indeed greatly reduce the demand for campaign funds that are needed in today’s huge California electoral districts.

It will be a great challenge to obtain the needed signatures. It could happen if the media provide editorial support and coverage. At any rate, the fact that this initiative is taking place will go a long ways to publicizing the gross corruption of democracy that is taking place, and the only effective remedy to the inherent dysfunction of mass democracy. Many reforms are needed in today’s governments, reforms in taxation, pensions, environmental protection, transit, criminal law, and economic deprivation. The main reason that useful reforms are not taking place is the subsidy-seeking and reform-blocking induced by mass democracy. The initiative process in California and other states is a way to circumvent the corrupt legislature, but in a large state like California, that process itself requires big money.

It will be interesting to watch the progress of the Neighborhood Legislature initiative, and to watch the special interests jump in with misleading negative ads. If this goes on the ballot and wins, it will be a victory for the people and a defeat for the moneyed special interests.

(Note: this article first appeared in The Progress Report)

Pope Francis on Economics

Fred Foldvary Current Events, Economics, Liberty, Religion , , , , , ,

by Fred E. Foldvary

Any statements which deplore “trickle down” economics reveal that the author has not quite yet grasped the heart of economics.

On November 26, 2013, The Vatican press published the apostolic exhortation, “The Joy of the Gospel.” The text was written in Spanish, and its full title in the English translation (converted here from upper case to initial capitals) is “Evangelii Gaudium of the Holy Father Francis to the Bishops, Clergy, Consecrated Persons and the Lay Faithful on the Proclamation of the Gospel in Today’s World.” Besides its religious calls, Pope Francis makes statements about today’s economic problems, and calls for greater economic justice.

One of the aims of this proclamation is to point out “new paths for the Church’s journey in years to come.” One of the questions the Pope seeks to discuss is “the inclusion of the poor in society.” Chapter Two is entitled, “Amid the Crisis of Communal Commitment.” In paragraph 52, Francis writes that “today we also have to say ‘thou shalt not’ to an economy of exclusion and inequality. Such an economy kills… Today everything comes under the laws of competition and the survival of the fittest, where the powerful feed upon the powerless.”

The Pope is wise and correct in seeing the harm done by inequality, but I urge him to see past the appearances to study the underlying reality. What provides the powerful with their might? The state has the ultimate power of force, and by its power to tax, to restrict, to mandate, and to subsidize, the state endows the powerful with the means to feed on the powerless. Market competition as such cannot impose force, and it does not create poverty. In a free society, each person has the power to be employed and pursue happiness. In a truly free market, all are fit to survive, because workers have access to natural opportunities. It is government intervention that stops this access.

Paragraph 54 is the key, widely cited, economic passage. We need to be sure that the English version is true to the original Spanish. In Spanish, Francis wrote, “algunos todavía defienden las teorías del « derrame », que suponen que todo crecimiento económico, favorecido por la libertad de mercado, logra provocar por sí mismo mayor equidad e inclusión social en el mundo.”

The Vatican’s English translation says, “some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world.”

The English-edition term “trickle-down theories” is translated from the Spanish, “teoria del derrame.” “Derrame” means a slow leak, hence a trickle, and so the English translation is accurate. The translated term “free market” is more literally “the liberty of the market” in the original Spanish, but the meaning is the same.

As noted by Harvard professor Greg Mankiw in his blog, critics of markets often use the term “trickle down” as a pejorative for the effects of a market economy. There is indeed a trickle down effect, for example, when a tourist resort is built in a location with many poor people, where a few get hired to work to clean rooms and wash dishes. A bit of the wealth of the resort trickles to the local population. But this situation does not confront the issue of why the poverty exists in the first place.

The theory of the free market is not one of “trickle down.” A truly free market is a fountain that gushes up wealth for all. Moreover, economic growth in market economies has indeed raised millions of persons up from poverty. However, the theory of market-driven growth does not claim that growth brings justice. The causation is the opposite: economic justice promotes growth. Moreover, justice and liberty are two faces of the same coin, so if a market has liberty, it must also provide justice.

The Pope continues: “This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.”

But the proposition that free markets provide growth that benefits all is not a mere opinion. The proposition is a theory of growth that was first analyzed by the French economists of the 1700s, who concluded that the unhampered market, with free trade, would provide the greatest prosperity for all.

The prescription of the French economists was to abolish taxes on labor and trade, and instead use the surplus of the economy, which is land rent, for public revenue. Adam Smith in his Wealth of Nations brought this theory into classical economics. The American economist Henry George a century later explained in detail how land rent captures the gains from economic progress, and how growth generates inequality and poverty if that rent is not equally shared.

Markets have had various degrees of freedom, but there is no truly free market in the world today. Those who advocate a pure free market do not defend the “prevailing economic system,” but rather, they seek to stop the state’s subsidy of economic powers. The greatest subsidy and economic power is the land rent generated by the public goods provided by government.

The Pope is correct in decrying “the denial of the primacy of the human person” (paragraph 55) and that “Behind this attitude lurks a rejection of ethics” (57). Ethics and the primacy of the human person requires the equal right of each person to pursue happiness without harming others and to keep the earnings of his labor, as recognized by the commandment, “Thou shalt not steal.” Ethics must also respect the equal sharing of the benefits of nature and community, as stated in Ecclesiastes 5:9, “the profit of the earth is for all.”

The heart of economics is the understanding of the root cause of poverty: the forced redistribution of wealth from the working poor to the landed rich. This is caused not by markets but from state policy. It is good that Pope Francis seeks to remedy poverty. His “new path” should be to go more deeply into the economics and politics of maldistribution.

The Canons of Economics

Fred Foldvary Economics, Liberty , , , , , , , , , , ,

by Fred E. Foldvary

A “canon” is a set of items which are regarded by the chiefs of a field to be the accepted elements of the domain. Every religion, for example, has a canon of accepted ideas and documents such as the established books of the Bible. Every scientific field has a canon of propositions and facts accepted as genuine by the experts and by those in authority such as editors of the major journals and most members of the departments of the prominent universities.

The canon of economics consists of the propositions, methods, and historical facts accepted as true and applicable by most scholarly economists. This canon appears in textbooks and in the articles of the prominent journals. The ideas and methods outside the canon are referred to as heterodox economics, in contrast to the mainstream or orthodox canon. There have been articles and organizations about the mainstream and alternative canons, but they have not laid out what the canons consist of. Here is my attempt.

The canon of orthodox neoclassical economics consists of 1) supply and demand; 2) graphical curves of equal utility, inputs, and output; 3) marginal analysis (additional amounts of utility, inputs, outputs); 4) the factors or input variables of capital goods and labor; 5) the price level; 6) equations of production and utility; 7) the government-influenced money supply and the market-based velocity of the circulation of money; 8) economic and accounting profit; 9) market failure and government corrections; 10) equilibrium; 11) maximizing and minimizing within constraints; 12) the premises of subjective values, self-interest, scarcity, unlimited desires, and the uncertainty of the future; 13) the “time preference” for present day good relative to future goods; 14) the trade-off between goods and leisure; 15) the trade-off between equity and efficiency; 16) diminishing marginal utility; 17) diminishing marginal products; 18) theory from mathematical models; 19) econometric testing of hypotheses; 20) the producer and consumer surplus.

Neoclassical economics is divided into several sub-schools for macroeconomic theory. The major schools and their canons are:
1) Keynesian or demand-side economics, with the canons of the consumption function, spending multiplier, and the determination of output from autonomous spending and the multiplier.
2) The Monetarist school, its canon being the equation of exchange: Money times velocity equals the price level times real output, hence monetary inflation generally causes price inflation.
3) The New Classical school with its canon of rational expectations, which makes inflationary policy ineffective.
4) The New Keynesian school with its canon of wages, prices, and interest rates stuck above equilibrium; it accepts New-Classical rational expectations but claims that contracts and other rigid conditions make expansionary policy effective in increasing output.

The heterodox Austrian economic school of thought accepts these elements of neoclassical economics:1, 3, 4, 7, 8, 12, 13, 14, 15, 16, 17, 20. Austrians reject the excessive emphasis on 6, 9, 10, 11, 18, 19. The canons of the Austrian school that have not been absorbed into the mainstream are: 1) the time and interest-based structure of capital goods; 2) market dynamics rather than equilibrium; 3) dispersed knowledge; 4) discrete marginal utility based on diminishing importance; 4) axiomatic-deductive theory (praxeology); 5) entrepreneurship as both discovery and creative reconstruction; 6) free-market money and banking; 7) roundabout production; 8) the market as spontaneous order; 9) the failure of government intervention; 10) the evenly rotating economy that illustrates the role of entrepreneurship in the real world of uncertainty and change.

The Marxist school canon includes 1) class struggle, 2) the labor theory of value; 3) the surplus from labor taken by the capitalists who dominate labor; 4) benefits from socializing wealth.

The Georgist or geo-classical school has these canons: 1) land and its rent as major elements of the economy; 2) the margin of production as the least productive land in use; 3) land speculation and the movement of the margin raising rent and reducing wages; 4) the creation of land rentals from public goods; 5) depressions resulting from land-value bubbles; 6) economic effects of replacing market-hampering market-hampering taxes and subsidies with land-value taxation; 7) the surplus as land rent; 8) the ethics of labor and land; 9) harmony between equity and efficiency, and 10) the social behavioral effects of economic justice.

There is also a school of thought called “public choice,” which has been accepted by neoclassical economics as well as by other schools, as a side branch. Its canon includes: 1) self-interest in politics; 2) the rational ignorance of voters; 3) transfer-seeking and getting due to concentrated interests and spread-out costs; 4) vote trading by representatives; 5) bureaucrats maximizing their power and comfort; 6) the primacy of the median voter; 7) constitutional versus operational choice; 8) clubs that provide collective goods to their members.

The classical economics canon, before it turned neoclassical, included these elements: 1) Say’s law, that production pays factors that enable effective demand; 2) the division of labor; 3) economic growth from unhampered production and free trade; 4) the margin of production as the least productive land in use; 5) population growth pushing the margin to less productive land; 6) the three factors of production as land, labor, and capital goods.

A problem in economics today is that each canon excludes the useful elements of other schools. Economics needs a universalist canon that integrates the best elements from all schools of thought. However, economists disagree on what the canon should be. In my judgment, the most glaring omission in the mainstream canon is the neglect of the Austrian-school time-structure of capital goods, its neglect of the creation of land rent by public goods, and its neglect of the benefits of a prosperity tax shift, the replacement of market-hampering taxes with market-enhancing payments of land rent and pollution charges.

Note: This article first appeared in the Progress Report.

New Mexico’s Police Breaking Badly

Fred Foldvary Current Events, Liberty , , , , ,

by Fred Foldvary

The AMC television channel recently concluded the drama “Breaking Bad.” The series was about a high-school chemistry teacher who has terminal cancer and “breaks bad” by making methamphetamine to get money for his treatments and for his family. The episodes take place in New Mexico, and some of the scenes occur in the desert.

Now the state government of New Mexico is breaking into real-life evil. Its police are stopping drivers and forcing them to submit to intrusive body searches and medical tests for drugs, including X-rays and colonoscopies. The hospitals then bill the victims for the involuntary procedures.

The State of New Mexico is establishing the principle that the state may force people to undergo medical procedures that they then must pay for. The worst aspect of governmental medical provision is that the health of individuals becomes a governmental matter, and therefore the state takes control over medical decisions. The federal and state governments may, in the future, force people to adopt preventive measures and periodic tests. The government will not only force citizens to have medical insurance, but also force people to submit to procedures such as anti-smoking treatments and colonoscopies.

One of the victims of medical coercion is suing the City of Deming in a U.S. District Court for being forced to submit to X-rays, enemas, and a colonoscopy. The police and doctors did not find any drugs in his body. As justification, the police claim that the driver was clenching his buttocks after being stopped for a traffic violation and ordered out of his car.

After that lawsuit was registered, it was reported that another man was probed for drugs in a New Mexico hospital after his car was stopped by police for failure to signal. The news media are now reporting that other drivers in New Mexico are being searched after getting stopped for alleged traffic violations. The police suspect the drivers of drug violations due to their appearance or due to dog sniffing, often with untrained dogs, and obtain warrants for the intrusive drug tests and body searches. In the case of the driver suing the state, the warrant was not even valid for the county and the time in which the colonoscopy took place.

The police in other states have been doing similar things. In Tennessee, the police took a man cited for an expired car licence to a hospital for drug tests, after a sniffing by a drug dog. A woman in Texas was strip-searched and double-probed by the police and by doctors.

The Fourth Amendment to the United States Constitution states, “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.”

Unfortunately it is easy for the police to evade the Fourth Amendment because they can claim that their searches and seizures are reasonable. and some judges will routinely issue warrants if a dog, even if untrained, growls or points at the victim, or perhaps if the victim seems nervous.

Long ago, and still in some countries, highways were dangerous because robbers would halt a carriage or train and steal from the riders. Now, in the USA, the highwaymen are the police who are not content to merely issue citations, but use traffic violations as an excuse to enforce the drug laws. Driving in New Mexico is now dangerous because of the police predators.

Ecology is the relationship of living beings to one another and the environment. Evolution seems to generate predator-prey ecologies. Now that large predators such as lions and wolves have been eradicated from human habitat, ecology has generated human predators such as hijackers. Government is supposed to protect the public from such predators, but the drug laws have turned the police into yet another set of predators.

The German philosopher Nietzsche wrote that the “will to power” is the strongest human motivator. Individuals who seek the thrill of exerting power now become traffic officers, because they can stop any driver and have power over and into his body. This police predation is legalized rape.

What is Reality?

Fred Foldvary Philosophy ,

by Fred Foldvary

Reality is what actually exists. The philosophical question is how can we know reality. Idealists say that all we can do is perceive, and we cannot prove that objects exist in the way we perceive them, and so there is no objective reality. Some idealists go further and claim that all knowledge is based on language. In contrast, realists claim that there is indeed an objective reality apart from our perceptions.

In my judgment, the two methods that best justify a view of reality are foundationalism and coherentism. In foundationalism, truth is founded on a foundation of premises from which a structure of proposition is constructed or derived using on logic and evidence. In coherentism, truth is based on the logical consistency of observations. Coherentism has to have a foundation in order to judge consistency, so the two methods are perfect and necessary complements.

The outcome of coherent foundationalism is what philosopher Edward Pols calls “radical realism.” As I analyze it, the proposition of radical realism is that there is an objective reality apart from any perceptions. However, all that human and other living beings can know is logical propositions and observations. The problem with observations is that they can be false, and that facts are necessarily interpreted.

Reality is derived from observations that are filtered by logical consistency. A person can judge the consistency of objects over time. If I wake up and see a picture, and it is also there the next day, and every day, then this consistency leads me to believe that the picture is actually there. Consistency also involves agreement by a group of persons that their observations are the same. If I see a cat, maybe I imagined it, but if you see it also, and so do many others, then the conclusion that the cat is there is warranted by consistency across persons.

An idealist will reply that even if many people agree about some object, and it is observed consistently over time, it could be a continuing mass illusion. It is still no more than an observation. Radical realism does not deny that what is observed – seen, heard, touched, tasted, smelled – are sensations in the brain. What makes this realism radical, going to the roots of the issue, is the proposition that this is what reality is. Radical realism is the proposition that empirical reality consists of consistent observations and their logical deductions.

Radical realism differs from merely empirical realism in claiming that the observed objects actually exist, so that perceptions are not merely accepted as being useful. Idealists say that when an ordinary person accepts observations as real, this, what is called “direct knowing,” is “native realism” or “vulgar realism” because one cannot logically derive from observations the objective reality of the objects. But radical realism does not blindly accept the reality of observations. It sieves the observations through a filter of logic. It then proclaims that the results of consistent observation is reality, because reality cannot be anything better. We could call it “coherent reality.”

Radical realism also recognizes that facts are always interpretive. Facts are theory-laden. If I see a man wearing blue clothing and a badge, I interpret this as not just a man, but a police officer. But interpretations are also subject to logical consistency. The man might be going to a costume party. But if the actions of the man are consistent with that of a police officer, such as citing people for infractions, we can conclude that the interpretation is reality. Contrary to idealism, reality is not created by thoughts, but rather, reality consists of conclusions from consistent mind observations filtered through logic.

Radical reality recognizes that what we perceive as solid objects are actually made up of molecules, atoms, and other particles we cannot directly observe. But the existence of atoms derived from the observed tracking of the their effects, hence from consistent observation.

The foundation of radical realism is the acceptance of cause and effect, of inductive and deductive reasoning, and the criterion of consistency. If all human beings are somehow fooled into thinking that water exists even when it does not, the consistent perception of water and conclusions from its consequences become the coherent reality.

Radical realism is radical in going to the roots of how we can know reality. This grounding saves it from being merely vulgar or naive. There is much more that we can analyze regarding idealism and realism. Two good books on this topic are The Slightest Philosophy by Quee Nelson, available at Google Books, and Radical Realism by Edward Pols. Most folks handle their daily activities with naive realism, but they fall victim to perverse ideologies ultimately derived from idealism. Thus is it good philosophy to question your beliefs with the Socratic questions, “What do you mean?” and “How do you know?”

Criminalizing Innovation

Fred Foldvary Economics, Liberty , ,

By Fred Foldvary

The U.S. government has attacked an entrepreneur and his new product, as another episode of the federal government’s war on enterprise. In this case, the entrepreneur CEO is Craig Zucker, the company was Maxfield & Oberton, and the product was Buckyballs.

Buckyballs were small magnetic spheres made of neodymium, a rare-earth element that is a powerful magnet. As they stick together, the balls can be assembled into shapes such as pyramids. They were named “Buckyballs” after Buckminster Fuller, an American architect, inventor of the geodesic dome, and futurist visionary. His friends called him “Bucky,” and the neodymium spheres were somewhat like Bucky’s domes.

The company imported the balls from China and started selling them in 2009. They became a popular office toy. But the Buckyballs were banned in July 2012 by the federal Consumer Product Safety Commission, which is now seeking to prosecute Zucker for having sold the balls.

In 2012 the Commission also sent letter to retailers warning of the risks to consumers of using Buckyballs and asking them to stop selling them. That was effective in stopping the sales. The Commission stated that the balls were a hazard for young children who swallowed them.

The company had developed the Buckyballs in collaboration with the Consumer Product Safety Commission, and after the action by the Commission, the firm provided it with a corrective-action plan. Buckyballs were sold with a warning against access by children, and they were not sold in toy stores. But the Commission pursued a lawsuit against the firm even before examining the corrective plan. As pointed out by the Wall Street Journal article (cited below) on that case, there are many potentially dangerous products being sold, such as cleaning chemicals, knives, and balloons. Buckyballs were intended and marketed for adults, and, according to the WSJ article, no deaths have been associated with the Buckyballs.

The Commission declared, as a justification for the ban, that Buckyballs have “low utility” and are unnecessary, despite purchases by 2.5 million adults who spent $30 each. The principle established by the Commission is that government determines which products are desirable, not consumers. Any product could be banned by the standards of the Commission.

The company then engaged in a publicity campaign regarding the actions by the Commission. In the end, the government was too powerful to resist, and the company was terminated in December 2012. However, in February 2013, the Commission charged Zucker as being personally liable for the costs of a recall costing $57 million if the Buckyballs are judged to be defective.

The federal government has by this action abolished limited personal liability under U.S. law for corporations as well as partnerships. From now on, the executives of a firm will be vulnerable for the liabilities of the firms. Any entrepreneur will now risk losing all that he owns if he engages in the production or distribution of any product. The effect of this government action is to strangle American entrepreneurship.

In the case of United States v. Park in 1975, the Supreme Court ruled that the CEO of a food company was criminally liable for a rodent infestation. This ruling was based on the federal Food and Drug Act. But another case, Meyer v. Holley in 2003 ruled that ordinary liability applies unless there is a clear Congressional intent to hold corporate officers personally liable. The relevant law in the Buckyballs case is Section 15 of the Consumer Product Safety Act, which regulates corporate persons, not individual persons.

The WSJ article says that since Zucker did not commit any criminal violation, the Commission’s continuing prosecution of Zucker “raises the question of retaliation for his public campaign against the commission.” If the Commission achieves its goal, personal-injury lawyers will take advantage of personal liability to go after CEOs and other company personae.

This action by Congress, the Courts, and the Commission has to be seen in the perspective of a broad war by government on private enterprise and consumer choice, using taxes, restrictions, mandates, and prosecutions, ultimately resulting in an economy that is nominally private but substantially controlled by governmental chiefs. The name for that system is “fascism.”

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Reference: Sohrab Ahmari, “What Happens When a Man Takes on the Feds,” Wall Street Journal, August 31-September 1, 2013, p. A11.

FATCA closes Americans’ Foreign Bank Accounts

Fred Foldvary Economics , , , ,

by Fred Foldvary

When the USA adopted the 16th Amendment to the Constitution a century ago, did the people understand that this would deprive Americans world-wide of foreign banking services? Americans thought that the income tax would just grab the money from the rich, but they did not understand that the income tax would tax everybody else more. All that is needed to equalize wealth without damage to the economy is to stop government subsidies, but this requires an economic sophistication that so far has eluded most people.

Inherently, an income tax yields an incentive to cheat, as the government depends on reporting. So the Internal Revenue Service has to monitor financial accounts to prevent tax evasion. Gradually, the IRS has extended its reach into accounts, first within the USA, and now into the foreign accounts held by American citizens.

No other country has imposed such costs and mandates on foreign accounts as the USA. So ironically the “land of the free” has the least economic freedom for its citizens abroad. The Foreign Account Tax Compliance Act (FATCA), enacted in 2010 requires foreign financial institutions to make reports on American accounts. Foreign financial institutions with American customers are required obtain a Global Intermediary Identification Number. FATCA requires foreign financial firms to identify their U.S. account holders, to disclose the account holders’ names, social security or other tax IDs, addresses, and the accounts’ balances, receipts, and withdrawals. For some accounts, the foreign bank is required to withhold some of the interest paid to the account, and send it straight to the IRS. This US law overrides the privacy laws of the foreign countries.

US law is thus legislating not only within US territory but throughout the whole world. If a financial firm does not comply, the IRS will tax 30 percent of its US-sourced income. The IRS is also busy laying out the legal infrastructure for enforcing this law with agreements with foreign governments for data sharing. Governments world-wide are signing on, because they too face the problem of tax evasion when they tax income that can hide.

FATCA does not just affect fat cats. Many foreign banks are now refusing to provide Americans with bank accounts and are closing the accounts of Americans, who are now also unable to obtain mortgages and insurance abroad. Americans are increasingly giving up their US citizenship in order to be able to work or retire abroad.

The US economy depends on international trade and global finance, with many Americans working abroad for US and foreign firms. Six million Americans live outside the territory of the USA. If Americans can no longer have foreign bank accounts, because the costs to the banks are too high, they will be so hampered that fewer Americans will be willing to live abroad, and this will hurt American enterprise.

Since the US government cannot directly impose laws on foreign lands, many foreign firms will sell their US affiliates and stop holding assets within the USA, thus putting themselves beyond the control of the US government. The overall cost to the US economy of FATCA may be much greater than the increase in tax revenue from reduced tax evasion. Also, those who seek to evade income taxes will find other ways. High taxes induce tax evasion, and enforcement drives evasion into other channels. How successful are US drug laws in stopping the smuggling in of drugs, and how successful have US immigration restrictions been at preventing illegal immigration?

Another consequence of greater reporting of American accounts is the increased risk of identity theft and theft of money from accounts. The greater the reporting, the greater the revelation of data that can be stolen.

It is no use seeking to repeal FATCA. The regulation of accounts, no matter how costly, follows from the income tax being, as Henry George put it, a tax on honesty. The taxation of wealth that can hide and flee requires strict and costly reporting and enforcement. The only effective remedy is to tax something that will not flee, hide, or shrink when taxed. A tax on land value cannot be evaded, and if that were the only tax, there would be no need to impose costs on finances.

Inequality Unexplained

Fred Foldvary Economics, Liberty , , , , , ,

There is a new economics documentary film that stars Robert Reich, former Secretary of Labor under President Clinton and now a professor at the Goldman School of Public Policy at the University of California at Berkeley. The film, Inequality for All,  directed by Jacob Kornbluth, won a U.S. Documentary Special Jury Award and has been shown nation-wide.

Unfortunately, Robert Reich has not explained why the US has had an increasing inequality of income. Neither in the film nor in his writings and interviews does he examine the cause. Without the elimination of the cause, there can be no remedy. As usual in documentaries of social problems, most of the film just describes and tells stories about the inequality.

Inequality for All is typical of welfare-state presentations in jumping to governmental responses that only treat the symptoms and effects. Reich advocates a higher minimum wage without any analysis what determines wages in a market economy.

Most basically, in a free market, ordinary workers are paid what economists call the “marginal product,” or what an extra worker contributes to output. If a worker adds $10 each hour to total output, then that is what he is paid, and that is what he is worth to the company. If the company pays him any less, say $8, that provides an opportunity for a similar company to offer $9 and get the $10 worth of output, so competition will drive the wage up to the worker’s contribution, his marginal product.

A minimum wage forces the firm to pay more than the worker’s marginal product. The firm will not hire a worker who costs more than he is worth. The reason that workers are not all dismissed is the law of diminishing returns. In a farm or factory, if there are only a few workers, each worker’s marginal product is high, because there is a lot of land and machines, and few workers. As workers are added, each extra worker contributes less extra output. Workers are hired up to the quantity for which the wage equals the marginal product.

The minimum wage acts like a tax on labor that forces the firm to reduce the number of workers employed to that level where the higher marginal product equals the required wage. In some cases, the firm will also respond by reducing benefits such as medical insurance such as by hiring part-time instead of full-time labor.

Many firms in competitive industries respond to the higher minimum wage as they would to a higher tax. They pass on some of the costs to the customers. The higher price reduces sales, production, employment, and income.

The minimum wage is lethal to the economy as it acts as an extra tax on employment on top of payroll taxes, unemployment taxes, workers insurance taxes, and the income tax on the profits of the firm. All these taxes reduce employment and reduce the take-home pay of the worker.

Henry George stated in his 1883 book Social Problems that “There is in nature no reason for poverty.” Poverty is caused not by any lack of natural resources but by human institutions that deprive workers of the ability to buy what they produce. The institution with the power to impose this intervention is government. The totality of restrictions, mandates, taxes, and subsidies reduces enterprise and takes away much of the product of labor. Then impoverished workers need the welfare state to provide the necessities of life.

The ideology of welfare statists makes them only think of governmental aid and reject the idea that governmental intervention is the source of the problem. They sneer at “free market fundamentalism.” They don’t understand the fact that taxes on labor redistribute wealth from workers to landowners as government taxes wages to pay for public goods that generate higher rent and land value. They don’t understand that the worker-tenant pays twice for the public goods of government, once by having half his wage taxed away, and a second time in the higher housing rental he pays because greater governmental services increase locational rents.

The effective remedy for poverty is to remove all punitive taxes and land-value subsidies. We can remove subsidies to the landed interests by having them pay back the rent generated by useful public goods such as roads, schools, and security. Without taxes on labor and enterprise, the cost of labor is lower to employers, while the worker’s take-home pay is higher. The replacement of wage taxes with land value taxes would reduce economic inequality while also increasing the productivity of the economy.

Of course the elimination of poverty also has to include better education, and that can be accomplished with vouchers, payments not to schools but to parents. A voucher is a ticket that a parent could use to send his children to the best schools. It provides an incentive for educators to produce better schools. It is not a panacea, because the home and neighborhood environment are also important, but it would shift the incentives towards better schooling.

It is not only unfortunate but astonishing that a leading professor of public policy who cares about the poor would not make the prosperity tax shift, replacing wage taxes with land value taxes, the core of his policy proposal. I suspect his response would be that while this is a good idea, it is politically unfeasible, while raising the minimum wage has political support. But the reason it is politically unfeasible today is precisely that leading reformers such as Robert Reich refuse to bring the effective remedy to public attention in the ultimately futile effort to advocate policies with the least current political resistance.

Much of the gains from economic growth and welfare get captured by higher rent and land value. Raising the minimum wage is futile because if all workers get a substantially higher minimum wage, their landlords will be able to raise their housing rentals by the amount of their greater ability to pay, and the landed interests will end up with the gains. Why do you think that housing costs have been escalating while wages stagnate?

Libertarianism and Psychology

Fred Foldvary Liberty, Philosophy , , , , , , ,

by Fred Foldvary

Recently there have been a stream of negative critiques of libertarianism. All of them are misunderstandings.  It seems that these critics are just dressing up their antagonism with pseudo-scientific textiles.

The latest attack is in Psychology Today. Peter Corning, Ph.D., asks and answers “What’s the Matter with Libertarianism?” under the rubric “The Fair Society.”

He says, “The libertarian model of individual psychology is grounded in the utilitarian, neo-classical economics model of ‘Homo economicus,'” by which he means selfish economic man. Corning provides a couple of quotes by Nozick and Dawkins, but no general evidence that such is the viewpoint of most libertarians.  Is there a survey?  Is there  inductive logic leading to this conclusion? No, there is nothing. And this is supposed to be a scientific finding of a scholarly psychologist.

He cites the Wealth of Nations by Adam Smith, but is evidently unaware of Smith’s other book, The Theory of Moral Sentiments, in which Smith explained the other human motivation, sympathy for others.  Most libertarians that I know personally or from writings believe that it is quite good to be benevolent.

Perhaps Corning is confusing libertarianism with an extreme version of Randian Objectivism. He cites Ayn Rand as writing “Man’s first duty is to himself.”  But libertarian philosophy posits no such “first duty.”  The only libertarian moral duty is to avoid coercive harm to others.

Some libertarians are “anarcho-capitalists” who seem to envision an atomistic society of individuals contracting with protective agencies.  But libertarianism includes the communitarian vision of consensual communities with collective goods.

Corning claims that “libertarians generally have no model of society as an interdependent group with a common purpose and common interests.”  But no libertarian denies that society is interdependent. What is denied, and properly so, is that all the persons in a country have some common purpose and interests.  A multicultural society such as the USA consists of many interests, sometimes in conflict.  The interest of a thief clashes with that of peaceful victims.  If libertarianism is applied to society, the diverse interests can co-exist, the rule being that one may not force one’s interests on others.

Corning then notes that corporate interests sometimes perpetrate malfeasance. Yes, and if they commit fraud, that is theft, and libertarian policy would be to punish this.

He writes, “our first collective obligation is to ensure that all of our basic needs are met.” Now we see his political agenda.  Corning is a statist collectivist who favors the governmental welfare state. There is no abstract moral collective obligation. All obligations are individual. There can be a group with a mutual contract that then creates a collective obligation, but only from individual delegation.  As to basic needs, libertarian policy enables people to apply their labor and keep all the wages from that, which enables them to provide for their needs.  It is today’s statist restrictions and taxes that deprive workers of the ability to obtain their needs.  The few adults unable to work would get charity. The mass poverty of today is caused by government, not by the non-existent free market.

Evidently Corning believes that a libertarian world would be too selfish to care about the few who fall into misfortune.  But there is no evidence that greater freedom results in greater selfishness in the sense of not caring about others.  So here we have an article that seeks to apply psychology to an ideology, but with no evidence and with flaws in logic.  Psychology here is being applied as a cover for ideological views.  Has this been peer reviewed, or are the peers just as biased and lacking in scientific principle?