27 April 2016

Albany pranked New York in cruel April Fools’ Day joke

New Yorkers awoke on the first day of April with news that, among those budgetary items Governor Andrew Cuomo tentatively finalised with the legislature, was an increase in the hourly minimum wage (staggered across industries and jurisdictions over the next six years), from $9 to $15 — the cruellest of April Fools’ Day jokes, with consequences lasting more than a day and afflicting more than the targeted beneficiaries.

Governor Cuomo, speaking of the plan at a January rally, took aim at critics by a populist appeal. ‘We are going to do it for the State of New York, we are going to lead the way for this nation, we are going to restore honor and dignity and respect to the workers, we are going to say to this country, “You can do very well on the top level and you can also rise up the bottom level.”’

As Cuomo doubtless knows but heeds not, the arguments against the minimum wage are legion: that it hurts the working poor, that it penalises workers with low skills, and that it bars young job-seekers (particularly the marginalised) from gaining valuable experience and work-habits — criticisms that are all well-rehearsed, but no less true.

Yet in laying out the case for the minimum wage, Governor Cuomo raised issues that are further proof that state intervention into markets only compounds problems the political process purported to fix. He is not alone, for it must be a prerequisite of political office to misjudge the organic nature of market operations.

The market is a clearinghouse, with individuals offering each other what they have — be it goods and services — for what they need. Barter was the modus operandi at the beginning; with various media being introduced in time to facilitate transactions. But in its essence, exchange means exchange. You can only buy if you have something to sell and cannot sell if you price yourself out of the market.

But through its economic interventions, the State has priced the poor out of market, and in many cases (such as the minimum wage), have left them nothing to exchange (e.g., their labour). The only thing left they have to barter is their vote, and in this exchange, between the individual and the political process, the parties are unevenly matched.

‘The minimum wage doesn’t even work numerically in this State,’ bewailed the Governor. ‘This is below a subsistence level. You can’t make it on a minimum wage job. You need two, three, four minimum wage jobs to actually make it, and that’s not what the minimum wage was all about.’

However, if the market were allowed free scope, buyers and sellers would have to reach agreement, or else neither would be able to exchange. What impediments stand in their way?

At January’s announcement, Cuomo pointed the finger at businesses that ‘make money on the minimum wage’, noting that ‘McDonalds pays a minimum wage, but at the minimum wage in this State, you are still below the poverty level. So this State then, with tax dollars, gives you a welfare payment, food stamp payment, housing assistance. When you look at it at the end of the day, McDonalds pays the minimum wage [$18,000] and the people of the State of New York pay on average $6,800 more.’

With the availability of State aid and the get-out-of-purdah free pass of a legislated minimum wage, who can blame McDonalds or any other industry from maximising its profits, given the perverse government incentives?

‘I am getting out of the hamburger business,’ the Governor promised; but who put State officials into the free market exchange in the first place?

Moreover, as a result of this minimum wage legislation, the New York Post reported, ‘Wages will be hiked to the new minimum for 2.3 million workers in New York, a move Cuomo says will infuse $15.7 billion into the state economy’ — with nary a second thought about the origins of this bounty nor Albany’s ‘take’ thereof. Such an echt bureaucratic attitude from the State capital.

‘If you had taken the minimum wage in 1970,’ Cuomo observed nonchalantly at the rally, ‘and you had indexed it to inflation, you know what it would be today? Fifteen dollars an hour. That’s the fair wage for a minimum wage in the State of New York.’

But as American fiat greenbacks are nothing more than a medium of exchange, without any connexion to real worth — such as the gold standard — government-induced money inflation does not add to America’s net worth but only benefits those crony capitalists with government ties and hurts those of low incomes hit by inexorable price increases.

As negotiations had neared completion, Cuomo told waiting reporters, ‘I believe that this is the best plan the State has produced in decades.’ Nonsense. This April 1st budget is only the latest example of government having a good laugh at citizens’ expense.

04 April 2016

On the Record | Mill Power

Please see my latest post for the Quarterly Review, ‘Mill Power’:

On the campaign stump, Donald Trump’s visceral answer to manufacturing decline has been called a self-defeating return to the processes of primitive economics. But Trump’s route to powering America’s revival does lead through a mill — John Stuart Mill.

Trump’s economic prescription to ‘Make America Great Again’ by imposing tariff walls to foreign trade has been lampooned by mainstream economists as equating the Great Depression hysteria that gave rise to the Smoot-Hawley tariff act, which saw affected nations impose retaliatory trade restrictions.

Many of these same economists prefer their own Depression-era madness, in the form of Keynesian stimulus that argues that downturns are caused by a lack of aggregate demand, requiring government spending to prime the pump and restore consumerism.

Long before Lord Keynes, however, nineteenth-century classical economists had debunked this fallacy, notably J. S. Mill.

Read more…

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My thanks to Dr Leslie Jones of the Quarterly Review and to Professor Steven Kates of RMIT University, who introduced me to the classical economics of J.B. Say and J.S. Mill, and to Ricardo’s succinct refutation of Malthus: ‘Men err in their productions, there is no deficiency of demand.’

31 December 2015

Year in Review

The year now passing began with sickness for yours truly — which more-or-less set the tone for the ensuing twelve months. Good grief!

Research and writing therefore proceeded haltingly and with many interruptions but, with the onset of winter, there was some resolution in selecting ideas to explore in the weeks ahead:

  1. Free markets, capital formation, entrepreneurship, and legal rules, as essential components of economic growth;
  2. American politics and fidelity to the U.S. Constitution, culminating with the presidential election in November;
  3. British conservatism, in theory and practice, especially from the historical perspective of Benjamin Disraeli and Margaret Thatcher; and
  4. Mediæval culture, particularly in relation to the Enlightenment, and the rise of capitalist economics and the pursuit of liberty. (My conceit is that a conservative appeal to the Middle Ages, rightly applied, can provide all the better aspects of the eighteenth century, without those ‘atomising’ elements eschewed by Tories.)

So, before sending 2015 on its way and welcoming with hopeful anticipation the new year, here is a round-up of essays posted throughout the year:

If any of these essays catch your fancy, please share them with your friends and colleagues. DMI needs encouragement to flourish and seek out new research and publishing opportunities!

As a special treat, the Institute was mentioned in a New York Sun column on America’s ‘Constitution Day’. Many thanks to the editor, Seth Lipsky.

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It only remains to remind you to follow DMI on Twitter and on Facebook, and to wish all my readers good health and good fortune in 2016!

14 October 2015

Unleash prosperity by giving full rein to capital accumulation

As the health of America’s economy remains mired in the doldrums, a new organisation débuts to refresh the winds of forward movement: the Committee to Unleash Prosperity.

An inaugural press release announces that the Committee ‘was founded to combat America’s “growth gap” by promoting an agenda that will revitalize America’s economy.

In the past decade and a half, under both Republican and Democratic presidents, U.S. economic growth has diminished to roughly 2% annually—a significant decrease from its Post-World War II average of 3.5%.

This subpar growth rate has come at tremendous cost to American families, household incomes, employment opportunities, investment, and poverty levels. Above all, the lack of growth has led some to doubt the attainability of the American Dream and to wonder if our current economic climate is the new norm.

The Committee has six main objectives: (1) a broad-based, low rate, flat tax; (2) limited government spending; (3) decreased regulation; (4) sound money; (5) free trade; and (6) rule of constitutional law. Given the aim of unleashing prosperity, the Committee has effectively laid out a programme for capital accumulation.

But, as a necessary first step toward economic growth, the state must be constrained to its constitutional duties — a programme which would have won the approval of Calvin Coolidge, the last American president whose adherence to limited government and low taxes encouraged the longest period of exceptional economic performance: average real growth of 4.82 per cent during his tenure. As he wrote in his second ‘State of the Union’ address delivered to Congress:

Nothing is more likely to produce that public confidence which is the forerunner and the mainstay of prosperity, encourage and enlarge business opportunity with ample opportunity for employment at good wages, provide a larger market for … products, and put our country in a stronger position to be able to meet the world competition in trade, than a continuing policy of economy.

The vision offered by capital accumulation

The source of prosperity in the West, noted Ludwig von Mises — the foremost economist of the twentieth century — was the initiation of capital accumulation. ‘The historical period in which the smooth working of the market economy was again and again interrupted through expansionist ventures was an epoch of continuous economic progress,’ he wrote in his magnum opus, Human Action. ‘The steady advance in the accumulation of new capital made technological improvement possible. Output per unit of input was increased and business filled the markets with increasing quantities of cheap goods.’1

Savings and investment are the sources of new capital, which investors and entrepreneurs employ to satisfy consumer wants with better methods of industrial production or with the introduction of new goods and services. But additional capital equipment cannot come into existence if surplus earnings, either of individuals or corporations, are taxed away by government to fund present demands, usually in the form of redistributionist policies to combat the bugbear of ‘income inequality’.

If the United States is to enjoy capital formation and the ensuing prosperity the Committee wants the country to unleash, then it needs limited government, restrained from tampering with the spontaneous order of the market, as a first step; low taxes and minimal regulation — and the end of cronyism which feeds on favouritism — are corollaries of the minarchist state. But will Americans support a suspension of their entitlement culture?

The seductive illusion of government intervention

Modern governments in the post-Keynesian era create only the illusion of general prosperity, by taxing those who have (wealth creators) and redistributing to those who have not (wealth eaters). The importance of saving surplus earnings for investment purposes was deemed ridiculous by the Depression chimera that too-much savings was a major cause of unemployment. Reflating the work rolls through government spending and make-work projects was championed as the easy route to riches for all.

But genuine prosperity can only be assured by actual employment and an increase in real wage rates — both of which are dependent upon capital accumulation above the level of employment. Job opportunities and greater productivity result, in addition to fueling entrepreneurial incentive. But the threat of intervention dissipates incentive: whether through punitive income taxes, capital gains taxes, or corporation and dividend taxes, or the equally damaging loss of confidence which constant interference engenders. The Manhattan Institute reports that GDP for 2015 is projected to be less than 2 per cent, with investment a negligible 0.6 per cent.

Moreover, if capital is consumed and not replenished, then previous accumulations — in the form of factories, equipment, and the other means of production — wear out, are depleted, or become obsolete through change in technology or consumer wants. Production stagnates, while entrepreneurs and innovation go without the necessary tools for growth. Employment stalls and prices rise.

In addition, capital accumulation can falter if governments promote, through loose monetary policy, goods and services which do not satisfy consumer needs: what von Mises termed ‘malinvestment’. Any capital thus dedicated to specious demand is wasted, as it is not fungible and cannot be rededicated to more useful purposes. The Committee to Unleash Prosperity is wise, then, to target low taxation and a stable currency as necessary conditions for capital accumulation.

‘The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology’, states Human Action.

The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers’ stone to make it last.2

The task before the Committee is to demonstrate to a sceptical populace, beguiled by government legerdemain, that capital accumulation is the true philosophers’ stone of prosperity. ‘What determines the course of a nation’s economic policies is always the economic ideas held by public opinion,’ cautioned von Mises. ‘No government, whether democratic or dictatorial, can free itself from the sway of the generally accepted ideology.’3

Enlightening people about the true source of wealth and prosperity

The trouble is that for many Americans the generally accepted ideology is the welfare state; those Americans who receive more from government than what they pay in taxes, nearly 50 per cent of whom pay no income taxes at all. For them, self-interest militates against reform away from redistribution toward individual effort. ‘‘In the days of laissez faire people looked upon government as an institution whose operation required an expenditure of money which must be defrayed by taxes paid by the citizens,’ wrote von Mises.

Today the majority of the citizens look upon government as an agency dispensing benefits ...expect[ing] to receive from the treasury more than they contribute to its revenues. The state is in their eyes a spender, not a taker. These popular tenets were rationalized and elevated to the rank of a quasi-economic doctrine by Lord Keynes and his disciples. Spending and unbalanced budgets are merely synonyms for capital consumption [emphasis added].4

This is the dilemma of democratic government: when states, formerly charged with maintaining the rights of private property, weaken to popular appeals to redistribute wealth through confiscatory taxation, dressed up in the language of ‘fairness’ or ‘equality’ or the more brutally honest ‘soak the rich’ mentality — social justice in the form of the ‘clientele’ state. It was a contest foreseen by the legendary French economist, Frédéric Bastiat:

‘…when plunder is organised by law for the profit of those who make the law, all the plundered classes try somehow to enter — by peaceful or revolutionary means — into the making of laws,’ he wrote in his classic pamphlet on spoliation.5 ‘According to their degree of enlightenment, these plundered classes may propose one of two entirely different purposes when they attempt to attain political power: either they may wish to stop lawful plunder, or they may wish to share in it.’

It is the pre-eminent political contest facing the United States. Do Americans want to continue spending to-day the profits of capitalism, or will they choose to save for to-morrow and reap the benefits of capital investment? Upon the answer rests the American Dream and the ultimate success of the Committee to Unleash Prosperity.

ENDNOTES

1. Ludwig von Mises, Human Action: A Treatise on Economics [1949], 4th rev. ed., Bettina Bien Greaves, ed. (San Francisco: Fox & Wilkes, 1996), 561.

2. Human Action, 575.

3. Human Action, 850.

4. Human Action, 849-50.

5. Frédéric Bastiat, The Law [1850], Dean Russell, trans. (London: Institute of Economic Affairs, 2001), 26-27.

27 August 2015

On the Web: Thoughts on charity in the workplace

Please see my first post for the Intercollegiate Review website, ‘What Role Does Charity Have in the Workplace?

Charity may begin at home but it ends at the workplace, suggests a report from the New York Times. The world cheered when Dan Price, cofounder of Gravity Payments, decided to initiate a minimum salary of $70,000 per year across the board for his workforce, this after hearing a friend complain about making ends meet on $40,000 a year and realizing that many of his 120 employees earned less.

Those who were already receiving this minimum salary, however, didn’t like it. They had had to work long hours to attain that pay level. Experience and the hard work that gave rise to it merited their compensation, but now new hires and others with lower seniority were reaping the benefits without the effort. Minimum-wage mandates have always raised the hackles of classical economists, but rarely have they drawn the publicly vented ire of employees themselves. Until now.

Read more…