A document I saw on the web last week illustrates a thousand others like it. It pretends to celebrate the life and thought of Thomas Jefferson, and ends the litanies with several quotes from him. Except for one of these I knew and some that could be genuine, the rest were suspicious. I tested two, chosen more or less at random: one was a paraphrase, the other one was fake. The underlying problem of this sort of enterprise seems to lie in an invalid syllogism: Statement P is true; Jefferson only made true statements; therefore, Jefferson could have made statement P. Granting the premises, the conclusion is valid but useless. And the corollary “he said it” is clearly invalid. This approach can be seen as a simple case of circular reasoning. Consider the claim “Statement P is true, therefore Jefferson could (or must) have said it.” But how does the speaker know that statement P is true? I suspect he would say that it is “because Jefferson said it.” In short, the quote comes from Jefferson because it is true, and it is true because it comes from Jefferson. It seems that many people’s whole political-philosophical outlook is based on faulty logic or circular reasoning and thus false information. Believing them on their word has, for some others, the benefit of confirming their prior biases. By giving each person his own printing press, social media has deepened the problem. It is often historically obvious that a quote cannot be genuine—when, for example, Cicero is quoted about the government deficit, which could not exist at the time of the Roman Republic. In other cases, following a simple principle prevents the danger: if a quote has no credible source, assume it is spurious, intentionally or not. (Some sources are more credible than others, whether or not they echo what you believe.) A person who wants you to believe a statement and who has some respect for you will make sure that the statement meets some minimum standards of truth. With AI’s capacity to manufacture “deep fakes”—instead of the ordinary fakes I have been speaking of—much worse is coming. How can we hope that people will have the ability to be critical of the information they receive without being cynical (“Everything is false, except what I know in my guts”)? This is not merely a psychological danger. From those who think that they have a right to prevent other individuals from living peacefully as they want to, it is a mortal political risk. (0 COMMENTS)

One of the wonders of human society is how the individuals of our species found a way to coordinate our actions to collaborate without anyone being in command. Sure, there are governments, but they earn their legitimacy to the extent that they protect individuals’ lives, limbs, and possessions from violence and fraud- not from telling them what to do to make a living. Once the magistrates establish protection against violence, security of possession is all that is needed for a market economy with a price mechanism to develop. The price mechanism tells the economic agents all they need to know to go after their businesses. The relative utility and scarcity of the different goods and services are adequately conveyed to the market participants by the signals given to them by the prices of said goods and services. If I want to know how valuable a particular service is to my fellow man, I just need to check how much I can earn by supplying that service; the same goes for all other goods and services. For about two and a half millennia, human societies have benefited from the existence of coined money as a tool to facilitate the division of labor and to communicate the essential information economic agents need to allow them to act and for society to benefit from the rationalization of economic activities that come from that. It is not that prior to the introduction of coined money, no other instruments were used as media of exchange, units of account, or stores of value. Still, all those functions that we associate with money became much more accessible once coined money was introduced in society. Consequently, the sophistication of our social relationships grew exponentially, and money evolved in its complexity to what we have today. Such is the importance of money that rulers grasped from the beginning that the money supply monopoly would allow them to accrue enormous rents, in the long term by seignorage, and in the short term by manipulating its value, in case of urgent needs. However, manipulation of the value of money, at the time of coined money by debasement, and at the time of fiat money by inflation, good as they may be for the coffers of the state, are the cause of distortions in the price system, giving wrong information to the economic agents and leading them to incur errors.  It is because money is a counterpart in the vast majority of transactions and a necessary measure of relative scarcity in all transactions that the “price of money” is by far the most important in the economy. The “price of money” is purchasing power; it is what you can get in exchange for the money you have. This price illustrates the relation between the supply and demand for money. When the supply of money varies according to the demand for money, the purchasing power of money remains stable; when that relation changes, the purchasing power changes accordingly. Let us assume for a moment that the purchasing power of money is determined “endogenously,” that is, from inside the market, since the government of our hypothetical society has a “hands-off” approach to the money supply. Still, two other relationships determine the “price of money” as essential references for all traders; they are the price of money over time and the price of money in relation to the monies of other societies. They are the interest and the exchange rates. Like the determinations of the purchasing power of money, the interest rate also has a “natural” equivalent, that is, the “time preference” of the economic agents. That is, how much the traders prefer to dispose of goods now compared to some time in the future. The closer the actual interest rates “on money” are to the “natural” rate, the more efficient the capital allocation in society will be. Once the purchasing power of money is established, the most important price in the economy is, therefore, the interest rate, or, in other words, the changes in the purchasing power of money over time. The second most important price is the exchange rate. The reason for that is easy to understand. Every politically organized society is a tiny fraction of the global economy; a medium-sized country like Argentina, for example, produces about 0.5% of the worldwide GDP. If you do not have a freely established exchange rate, one which reflects the actual supply and demand of the local currency in comparison with the currency of the rest of the globe, you are distorting the signs about the relative value of what you produce and consume domestically in relation to 99,5% of all that is made in the world. The chances of error when you distort your information about what is going on outside your borders are immense. In my next post, I will turn to the current situation in Argentina.   Leonidas Zelmanovitz, a Senior Fellow with the Liberty Fund, holds a law degree from the Universidade Federal do Rio Grande do Sul in Brazil and an economics doctorate from the Universidad Rey Juan Carlos in Spain. (0 COMMENTS)

The answer to this question depends entirely on how one defines “cause”. There’s a sense in which wages do not cause inflation, and an equally plausible sense in which wages do cause inflation. I’ll begin with the negative view, by responding to a recent FT story: The Fed expects the labour market to cool this year, but it believes that — unlike in the past — a sharp rise in unemployment will not be necessary to bring inflation to their 2 per cent goal. One reason why is a big influx of foreign workers into the US, helping to contain wage growth and, ultimately, prices. While immigration has become a politically charged topic, with lawmakers on the Hill locked in a months-long debate over migrants entering the country via Mexico, the impact of a post-pandemic wave of new arrivals has been positive for the US economy. The Congressional Budget Office, Congress’s independent watchdog, said on Wednesday that the wave would boost output by $7tn over the next 10 years, with the US labour force likely to have 5.2mn more people by 2033 compared with estimates taken in February 2023. The phrase “contain wage growth and, ultimately, prices” suggests that causation goes from slower wage growth to slower inflation.  Perhaps people are thinking in microeconomic terms; how would an individual firm react to higher wages?  At that level, it really does make sense to speak of wages driving prices higher, as in the case where a restaurant must pay its workers $20/hour instead of $10/hour.   Unfortunately, it’s dangerous to use microeconomic analogies in macro.  For instance, borrowing costs are also important to many businesses.  If firms must pay higher rates to borrow money to finance inventories, then they will have an increased cost of doing business.  But does that mean that the Fed can reduce inflation by reducing interest rates?  Obviously, things are not that simple.  The fallacy of composition says that what’s true for the individual firm may not be true for the economy as a whole. In fact, higher wages probably do not “ultimately” cause higher inflation in the sense that most people view causality: Wages —- > Prices Instead, both wage and price inflation are driven by the third factor: Monetary policy —- > Nominal GDP growth —- > Wages & Prices So if someone tells me they don’t believe wages cause inflation, I won’t disagree. On the other hand, if someone tells me that lower wages will lead to lower inflation, I won’t disagree with that either.  There is a sense in which lower wages lead to lower inflation. The Fed has a dual mandate, stable prices and high employment.  You can think of wage moderation as a factor that allows the Fed to bring down inflation without created high unemployment.  In a technical sense, it’s a tight money policy that slows NGDP growth that ultimately causes lower wage and price inflation.  But downward wage flexibility makes the Fed more willing to undertake that policy. So what’s the most likely source of the wage moderation?  There seems to have been a surge in immigration, which has boosted both labor force growth and real GDP growth.  Because of this extra supply of labor, nominal wages are growing less rapidly than otherwise.  And the faster RGDP growth means lower price inflation for any given NGDP growth rate. That italicized qualification is essential.  I am not saying that faster RGDP growth causes lower inflation.  That would be reasoning from a quantity change.  Rather, faster RGDP growth for any given NGDP (i.e. any given aggregate demand) leads to lower inflation.  But of course there is only one way that RGDP growth can rise if NGDP growth is stable—a positive aggregate supply shock.  And that’s what we’ve had in 2023. To be clear, I am not suggesting that all’s well and that we now have a soft landing.  Today’s disappointing CPI report supports the claims made by those of us worried about the difficulty of achieving the “last mile” of inflation reduction.  But the immigration surge has certainly made a soft landing somewhat more plausible than before.  Now the Fed needs to finish its job and get NGDP growth back down to about 4%. PS.  Whenever I do a wage post, people confuse real and nominal wages.  Nothing in this post has any bearing on the issue of whether higher real wages are desirable.  Personally, I’d love to see workers get much higher real wages.  My focus here is the completely unrelated concept of nominal wage growth, which needs to slow in 2024 from the excessive rate of 2023. (0 COMMENTS)

I’ve often been involved in debates in politics in which people deny actual facts. At first, it’s easy to attribute that to partisanship. But it takes more than partisanship. Consider sports. On Sunday night, I was disappointed when Patrick Mahomes threw the touchdown pass that ended the game in overtime and handed the win to the Kansas City Chiefs. But I didn’t deny that there was a touchdown. I bet there were a few million households in northern and central California and elsewhere in which there were 49ers fans who were quite disappointed. But I have yet to hear from, talk to, or read about a 49ers fan who thinks that Kansas City didn’t score a touchdown. Yet all 49ers fans are, by definition, partisans of the 49ers. Consider, by contrast, politics. I often talk to people about political issues who won’t admit basic facts. So, for example, someone will tell me that the rich don’t pay their “fair share” in taxes. They are usually talking, not about the rich, but about high-income people. I’m long past the days when I would correct them on that, unless it really matters for the discussion. We both know that we’re talking high-income, so I proceed with the discussion. It’s hard to know what their fair share is; that’s a normative issue. But it’s not hard to know what percent of income is paid in taxes by people in various income groups. When I point out that the higher the income, the higher the percent paid (except for, in some countries, a tiny percent at the top), they often deny it. But they don’t show me any data that contradict that. It’s true that it’s a little tougher to find data on that than to notice whether the football player caught the ball in the end zone. But, with Google and other search engines so readily available, it’s only a little tougher. And they often stick with their view. They could argue the economically relevant point that you can’t judge the burden of the tax by who explicitly pays but, instead, have to consider elasticities of supply and demand to figure out who really bears the burden. But that’s not typically what happens. (0 COMMENTS)

When a price is capped under its market equilibrium level, what happens? Few people seem to know the answer except for economists. And even some economists do as if they didn’t know, perhaps distracted by their, or their bosses’, ideology. The answer: price caps create shortages, that is, the stuff disappears from the shelves, waiting lines form, and illegal suppliers are the only recourse if you can’t wait or go without. We had many examples of this during the Covid emergency. It is easy to see all that on a simple supply-demand graph: quantity supplied decreases while quantity demanded increases. (Understanding precisely how the demand and the supply curves are built is a bit more complicated: that’s what classes in microeconomic theory are useful for.) A current example: property-casualty insurance (“Buying Home and Auto Insurance Is Becoming Impossible,” Wall Street Journal, January 8, 2024). In half the states, property-casualty rates require government approval, at least for the non-commercial sector (information for 2011; it may be worse now). Because of higher car and house values, more frequent storms and fire risk, and increasing reinsurance rates (which government controllers don’t necessarily take into account), some property-casualty insurers have left a few states, notably California. For the consumer, there is one thing worse than a price increase: it is to find no supplier, which is exactly what a price cap and a shortage entail. Some of the empty-handed buyers would prefer to pay more but are legally forbidden to or, what amounts to the same, their suppliers are forbidden to respond to bid-up prices. Price caps would be a great way to stealthily nationalize an industry. Perhaps this has started for property-casualty insurance in states with “last-resort insurers,” which are government bureaus or private companies backed by state governments. There are other current examples. The Consumer Financial Protection Bureau is proposing to cap bank overdraft fees with the virtuous goal, the Financial Times tells us, of “saving consumers billions of dollars a year and stepping up US President Joe Biden’s war on so-called junk fees ahead of the 2024 election” (“US Consumer Regulator Proposes Capping Overdraft Fees,” Financial Times, January 17, 2014; see also Nicholas Anthony, “CFRB Targets Overdraft Fees in Biden’s War on Prices,” Cato Institute Blog, January 23, 2024). The targeted large banks will likely stop offering overdraft protection (or other services) to their more risky customers, sending them to smaller and less convenient banks—less convenient as revealed by these consumers’ original choice. Contrary to market competition, political and bureaucratic processes provide no built-in check on prices remaining higher than costs (including normal profits). As more government controls are imposed, shortages become endemic, consumers get more dissatisfied, and they cry for further controls. On this dystopian path, nationalization under the applause of the populace would not be inconceivable. Leviathan would cap more prices and more shortages would develop. “It’s because of the supply chain.” “Is because of corporate greed.” Aren’t consumers already getting a glimpse of this future? Where is John Galt? (0 COMMENTS)

How far back should you go to understand the current moment in the relationship between Israel and its Palestinian neighbors and the attack of October 7? Some would say 2005, or 1967, or maybe 1948 when the State of Israel was founded. But for historian and author Hillel Cohen of Hebrew University, year zero was […] The post Year Zero of the Arab-Israeli Conflict (with Hillel Cohen) appeared first on Econlib.

China’s economy has recently become a subject of widespread concern. The FT has an article with the following headline: China’s consumers tighten belts even as prices fall The term “even” caught my attention.  Surely the FT editors don’t believe that falling prices would be expected to boost consumption?  That would be an EC101-level error.  And yet, the article also contained this odd claim: Weak price growth is not automatically encouraging people to spend. “Theoretically low prices should increase purchasing power of consumers, but that hasn’t been the case,” said Louise Loo, lead economist at Oxford Economics. “We think the reason is because the deflationary mindset has been quite entrenched.” “I think this is the start of a pretty structural trend,” she added. “People have become a lot more precautionary . . . They think a lot harder about how they want to spend an additional dollar of income.” I have no idea what theory Louise Loo is referring to, as it’s one I’ve never seen. Indeed, this sounds a lot like reasoning from a price change. Here it might be useful to review the economy’s circular flow, which says that gross spending equals gross output equal gross income.  Falling prices do not increase purchasing power, unless the fall in prices is caused by a rise in aggregate supply.  But if the fall in prices was caused by a fall in aggregate demand, then you’d actually expect a fall in consumer purchasing power, as a decline in AD typically reduces real output and real income.   Never reason from a price change. In China’s case, the recent fall in prices is almost certainly due to a fall in AD (or more precisely a slowdown in the growth rate of AD).  We know this because output growth is also fairly weak.  This suggests that China’s monetary policy is too contractionary. Milton Friedman once said that persistent inflation is always and everywhere a monetary phenomenon.  Here’s what I’d say: Excessively tight monetary policy is always and everywhere misdiagnosed as some other problem. This misdiagnosis occurs for several reasons.  First, most people—even most economists—have no idea as to how to evaluate the stance of monetary policy.  To put it bluntly, most economists wouldn’t recognize tight money if it were right in front of their nose.  Second, most economies that suffer from tight money also suffer from other problems.  Thus the falling prices and weak output are attributed to other aspects of the economy, not monetary policy.  (Recall when the 2008-09 decline in AD was wrongly blamed on housing and banking problems.) As an analogy, I recently had two consecutive illnesses.  At first, I thought the second was my first illness getting worse.  Only last Wednesday did I go to the doctor and discover I had diverticulitis (a condition I’d never even heard of.)  I’ve also had colds that morphed into pneumonia.  In those cases, I failed to initially see the problem, assuming it was just a “bad cold”.  This sort of error is excusable, as colds do actually make one more susceptible to pneumonia.  Similarly, various “real problems” with an economy make it more likely that a central bank will adopt an excessively contractionary monetary policy.  That’s partly because many central banks target interest rates, and real problems usually lower the natural or equilibrium rate of interest. Mark Leonard recently interviewed a number of economists and other policy experts in China: The critical question behind all this is how well the economy is actually doing. Among the Chinese economists I put this to, the most common answer was “very bad.” But they reject the Western analysis of peak China as a result of demographic issues, an absence of domestic reform and a negative international environment. Instead, they point to China’s structural advantages. Of its 1.4 billion citizens, only 400 million are middle and high income. The remaining billion are still low income — hundreds of millions of them in the countryside — and can still be brought into an urban industrial economy, boosting domestic demand as well as economic growth. The key challenge for China is stimulating that demand. China has a lot of fiscal head room to do this.       At least they understand that the problem is aggregate demand, which the FT article doesn’t even discuss.  But China needs monetary stimulus, not fiscal stimulus. The Chinese economists understand that China has a lot of potential, if they can get the policy right: The demographic situation is not the problem that Westerners think, they feel, at least in the short-term. China is not desperately short of workers: there is 20% unemployment for young people, and it is always possible to bring more workers in from the countryside. Economists are also positive about advances in new technologies. China is overtaking Japan as the world’s largest car exporter this year, and the Chinese company BYD is the world’s biggest manufacturer of electric vehicles, with sales that leave Tesla in the dust), and it is making progress in AI. Economists at Tsinghua and Peking University told me they have built models which show that China’s growth potential for the next decade is between 5 and 6% annually, through a combination of advanced industry upgrades and clean energy technology. In short, Chinese experts feel the economic fundamentals are not as bad as Western debate suggests. Where they are really pessimistic is about the politics. “The United States can’t stop China’s growth,” one economist said, “only the stupidity of our leaders and the sycophancy of their advisers can do that.” The entire article is excellent—well worth reading.  It’s also one of the saddest articles that I’ve read in years. HT: David Levey. PS.  The title and subtitle of Leonard’s article caught my eye: Sunset of the Economists Two decades ago, China’s reformist economists walked the halls of power and dictated policy. Now, they have been side-lined in favor of a new priority: national security. What happened? Wouldn’t these headlines also be somewhat accurate: Two decades ago, America’s reformist economists walked the halls of power and dictated policy. Now, they have been side-lined in favor of a new priority: national security. What happened? Two decades ago, Russia’s reformist economists walked the halls of power and dictated policy. Now, they have been side-lined in favor of a new priority: national security. What happened? Yes, what happened to the entire world? PPS.  Instead of an article with hundreds of ambiguous words, if only the FT had given us this graph: (0 COMMENTS)

Here are some highlights from my weekly reading and viewing. Create Wealth Without Making Anything by Art Carden, AIER, February 5, 2024 A popular and pernicious fallacy that Thomas Sowell calls “the physical fallacy” holds that you’re not creating value if you’re not turning material stuff into another kind of material stuff. In this view, you take some stuff, hit it with something enough times that it becomes other stuff, and presto! You have created wealth. And industrial policy doesn’t seem to account for any other kind of creative value, leading to the all-too-common, and clearly fallacious, claim that “Americans don’t make things anymore.” The statement that we only create wealth by creating physical objects is wrong in both tenets. Just because you’re making something doesn’t mean you’re creating value. You could very well be destroying it, as someone does when he raises cattle on land that would be more profitably used for housing and office space. And conversely, someone creates wealth when they move assets from a lower-valued use to a higher-valued use. Everyone selling things on eBay is creating wealth — or trying to — by matching things with people who want them at prices that make the sale worthwhile to both parties. I’ve been buying a bunch of junk on eBay recently that I find very meaningful. Other people might disagree. My favorite part of Thomas Sowell’s 1980 book Knowledge and Decisions is the one that discusses the physical fallacy and gives great examples. Some Facts about Fires by Timothy Taylor, Conversable Economist, February 6, 2024. As you can see from the above figure, the number of career fire-fighters has expanded by about 50% over the last 40 years (from about 240,000 to 360,000). In that time, the number of fire department calls has more than tripled (from about 11 million to over 36 million). However, the number of calls related to fires has dropped by more than half, reflecting the decline in number of fires. Medical aid or rescue was already a more common fire department activity back in 1980, but it has expanded quite rapidly. Fire department also end up involved in a number of other situations like downed power lines, disaster relief, or even bomb threats. What it means to “be a fire-fighter” has been evolving over time.   OUTRAGEOUS “PET TAX” BILL INTRODUCED IN COLORADO HOUSE BY DEMOCRATS RAISES The Lobby, February 3, 2024. Not only does this bill require pet owners to register their pets with the state, but it also mandates the assignment of a “designated caregiver” for each pet. Failure to name a caregiver would result in an annual cost of $25 per pet. There is no limit or cap on the taxation, meaning that pet owners could potentially face exorbitant costs. This tax would be in addition to any local taxes, such as dog licenses, further burdening pet owners.   Law-Abiding Immigrants: The Incarceration Gap between Immigrants and the US-Born, 1870–2020 by Ran Abramitzky and Juan David Torres, Stanford University; Leah Platt Boustan, Princeton University; Elisa Jácome, Northwestern University; and Santiago Pérez, University of California, Davis, Cato Research Briefs in Economic Policy, February 7, 2024, Number 369 Our data do not enable us to precisely pinpoint why there has been a sharp relative decline in the immigrant incarceration rate since 1960. Nevertheless, we can rule out three plausible explanations. First, the relative decline in immigrant incarceration is not driven by rising incarceration rates of US‐​born black Americans; the decline is also apparent when comparing immigrants with US‐​born white men only. Second, the decline is not driven by changes in immigrants’ observable characteristics—namely, their countries of origin, age, race, marital status, state of residence, or educational attainment. If anything, immigrants’ lower educational attainment in recent decades would predict that they should have higher incarceration rates than they do. Third, the decline is not driven by immigrant offenders becoming more likely to be deported (and thus absent from the incarceration data); the decline is present even among immigrants who are US citizens and thus cannot be deported. Moreover, the timing of the decline is also inconsistent with this explanation; whereas the relative decline in immigrant incarceration emerged in the 1960s, the sharp rise in deportations occurred around 2000.   A Visit to Julian Assange in Prison by Jeffrey Sterling, Antiwar.com, February 8, 2024 I fondly remember Charles Glass. He wrote to me while I was in FCI Englewood, the prison I was bound in after being convicted of violating the Espionage Act in 2015. He and others sent me a few of his books, notably Americans in Paris and Tribes with Flags. I was extremely grateful for such support. I had read them before, but reading from prison allows a different perspective, even on paths previously traveled. My prison eyes were reading them for the first time. In some ways, his visit with Assange was a similar overture of support for me and my experience in prison. I make no attempts to compare myself to Julian Assange, but I know what he is going through and what he is facing. Glass’s statement that Assange’s “…days are all the same: the confined space, the loneliness, the books, the memories, the hope that his lawyers’ appeal against extradition and life imprisonment in the United States will succeed” also applied to me. But, what was particularly profound for me was reading about Glass’s experience as a visitor to someone confined to prison. For me, time with a visitor was a highly-desired oasis in the never-ending desert that is prison. It was the one time I could have a more substantial connection with the world outside the prison walls. Email and letters were always appreciated, but nothing could replace actual contact, or at least being in the same room as a loved one or supporter. The value of having a visitor cannot be understated, the other days fighting against the droll, oppression, and monotony of prison were all endured for the singular experience of a visit. I imagine that Assange has had the same longing anticipation of an upcoming visit, the one time in prison when you can be reminded that you are still alive, still human. Surging Immigration Will Reduce Deficits by $1 Trillion by Eric Boehm, Reason, February 8, 2024 More immigrants will also help reduce future budget deficits—which are expected to average $2 trillion annually over the next 10 years, meaning any help is desperately needed. The changes in the labor force over the past year will translate into $7 trillion in greater economic output over the next decade, the CBO estimates, “and revenues will be greater by about $1 trillion than they would have been otherwise.” Remy: All Oil Everything (Trinidad James Parody) by Remy, Reason, February 9, 2024 My favorite line (at the 1:57 point): “You all should have thought of that before I never read a book.” NOTE: The pic above is of Julian Assange. (0 COMMENTS)

Amid a heated election year, the teachings of economist Friedrich Hayek provide a guiding beacon, urging us to transcend partisan lines and champion free-market capitalism that benefits everyone.  I recently interviewed Dr. Bruce Caldwell of Duke University about his book, Hayek: A Like, 1899-1950, who helped shed light on Hayek’s views on pressing issues today. As we navigate the complex landscape of governance, we should heed Hayek’s call for market-based approaches, especially with trade and immigration, where the clash of political ideologies often obscures the path to rational decision-making. Hayek’s teachings underscore the need for policy approaches prioritizing broader economic health rather than conforming to the whims of political affiliations or interest groups. He did not advocate for simplistic labels like “left and right” but viewed political thought as a triangle, with socialism, conservatism, and liberalism representing the three points. He favored liberalism, in the classical sense. His writings compel us to consider whether policies align with our principles and values. One example is trade protectionism, with tariffs enacted while president and pushed again by Donald Trump. Hayek’s book, The Road to Serfdom, cautioned against the pitfalls of protectionism and advocated for free-market principles that embrace competition in free trade.  While protectionist measures like tariffs may appeal to certain political bases, they come at the expense of economic efficiency and growth. They ultimately cost us more for purchases and inhibit our choices as competition is artificially manipulated where it would otherwise organically select the best providers of resources. A Hayekian approach to trade involves understanding that dynamic economies thrive on diversity and exchanging goods and services across borders. Another issue at the forefront of political debates that Hayek’s approach helps shed light on is immigration.   He recognized that allowing the free movement of individuals fosters economic dynamism and innovation. Policies that restrict immigration solely for political gain risk stifling economic growth and impeding the exchange of ideas that fuels progress. A Hayekian perspective on immigration advocates for policies that acknowledge the economic benefits of a diverse and dynamic workforce. Instead of succumbing to populist narratives that frame immigration as a threat, Hayek prompts us to view it as an opportunity. An influx of skilled and motivated individuals can contribute to a vibrant economy, filling gaps in the labor market and injecting fresh perspectives that drive entrepreneurship. Too often, misinformation about immigration has led even conservatives to favor more government involvement in tightening borders and deportation. However, as Hayek outlined in his development of “the knowledge problem,” expecting a government of people with limited knowledge of the issue and tradeoffs from policy choices too often results in worse outcomes.   The people in government do not and never will have all the answers. Instead, collecting everyone’s ideas in the market leads to having the most available knowledge and, therefore, better outcomes. In short, government failures are worse than any perceived market failures.  Taking a cue from Hayek, we should strive for more free trade agreements, especially with our allies, which means an end to all tariffs and other barriers. We should also enact market-based immigration policies that balance national security concerns with the economic advantages of attracting talent from diverse backgrounds.  As we prepare to select our nation’s president for the next four years, Hayek’s teachings serve as a guidepost, urging us to prioritize people’s well-being over the allure of party-centric agendas.  Embracing a Hayekian perspective requires a willingness to critically evaluate policies based on their economic merit rather than their alignment with partisan ideologies.  Only by doing so can we navigate the complex economic landscape and ensure a prosperous and dynamic future for all.   Vance Ginn, Ph.D., is the president of Ginn Economic Consulting, host of the Let People Prosper Show, and was previously the associate director for economic policy of the White House’s Office of Management and Budget, 2019-20. Follow him on X.com at @VanceGinn.   (1 COMMENTS)

In Colombia, the pension system is regulated by Law 100 from 1993. This law divides the pension system into two main regimes: the average premium regime, which is public and managed by Colpensiones. The Colombian pension administrator is a state-owned industrial and commercial company, organized as a special financial entity, associated with the Ministerio del Trabajo (Ministry of labor). The other is the individual savings regime with solidarity, a private capitalization fund overseen by pension fund administrators (AFP’s). The private capitalization fund acts as if it were a type of savings account, in which each active worker who is contributing has an account in his name, in which he deposits his pension savings every month; such savings are invested by the AFP’s in the stock market, buying shares of companies, currencies, public debt, etc. In this way said pension savings are capitalized, as interest is added and upon reaching retirement age; an accumulated yield will have been generated with which the monthly disbursements will be paid. The private pension system represents an individual’s savings for their retirement. The principle is simple: the more one saves, the higher the eventual payout. This system emphasizes individual responsibility, as each contributor’s pension amount depends directly on their personal contributions. For the public pension system, contributors to Colpensiones allocate a portion of their salary every month toward what is considered pension savings. However, these contributions don’t go to individual accounts but are pooled into a common fund. Unlike the private system, this money isn’t invested to grow over time. Instead, it’s directly used to fund current pensions. Essentially, today’s workers support the pensions of current retirees. This is where the main problem of the public pension system lies, and it is that the more pensioners there are in Colpensiones and the fewer people are contributing in this public system, the less money will be left to pay the current pensions. This happens every year. According to the report on the situation prepared by the Contaduría General de la Nación, during the years 2021 and 2022, there is a trend that Colpensiones’ income is lower than its expenses and costs, by billions of pesos. So, it is up to the State to find the resources to pay the current pensions. In light of this, money from public expenditure is used to meet the payments in question. All Colombians would be forced to pay more taxes to defray such expenditure. According to Azuero (2020), up until the year 2018, the debt presented by the Colombian State with Colpensiones was 787 billion pesos. As a result, while the public pension fund accumulates debt, the private fund accumulates generated value. In addition, the private funds have different modalities; one is free to choose which one they wish to belong to, and they also have short and long-term investments, guaranteeing greater financial security for the contributor. The Mercer CFA Institute’s global report on pensions compares 47 pension systems around the world, and by studying the most recent report, Colombia ranked 24th, while the Netherlands is in first place. In the Netherlands, the Future Pensions Act was recently approved, with the objectives of achieving a supplementary pension that rises faster, a more individual and clearer pension accumulation, and a pension system more in line with people who no longer work for the same employer for 40 years.  Pension systems around the world are under great pressure due to financial crises which have produced relentless inflation, geopolitical uncertainty, economic instability, and other negative consequences that affect individuals. Pension Reform Proposed By The Government Of Gustavo Petro The government of Gustavo Petro has proposed a pension reform in Colombia that aims to alter the current workings of the system. The reform aims to dissolve the two pension regimes created by Law 100 of 1993 and adopt a multi-pillar system as follows: Solidarity: This would grant a monthly stipend of 233,000 Colombian pesos to individuals over 65 years of age. Notably, the government has yet to clarify if this aid will be specific, such as only for elderly individuals living in poverty, or available universally to everyone over 65. This distinction is essential as not differentiating can result in sizable fiscal deficits. Contributory: The average premium regime, managed by Colpensiones, will gather contributions up to the equivalent of three minimum wages. Meanwhile, AFPs will manage contributions beyond this sum. Essentially, those earning up to three minimum wages will be mandated to contribute to Colpensiones, even if they prefer not to. This change might challenge the financial health of the AFPs, given their broad investment activities. Semi-contributory: A provision will cater to those who have contributed, yet fall short of the retirement criteria. Notably, a similar system exists within the private solidarity-based savings scheme. Here, a fraction of savings in private accounts aids individuals who contributed but missed the necessary pension threshold. Voluntary Individual Savings: Those earning above three minimum wages and contributing to Colpensiones can optionally deposit additional funds into a separate private pension plan. Besides the outlined system, the proposal would reduce women’s minimum contribution period by 50 weeks for every child, capped at three children. This adjustment has a dual effect. On one hand, it expedites women’s retirement. On the other, it may affect their employability, as companies might hesitate hiring women foreseeing a shortened work tenure.  Mandating individuals earning up to three minimum wages to contribute to Colpensiones could bolster the system’s short-term and mid-term viability. The system’s structure resembles a pyramid, where younger contributors’ payments sustain those higher up. Absent these payments, the structure risks instability, jeopardizing future pensions for current contributors. Therefore, while reforms targeting vulnerable populations are commendable, they may inadvertently risk their long-term financial stability. This doesn’t mean that such reforms aren’t necessary, as objectives like improving citizens’ quality of life should always be pursued in a society. However, the means employed to achieve these goals must be carefully examined. Nevertheless, the strategies to attain these objectives require thorough scrutiny, necessitating collective participation.   Omar Camilo Hernández Mercado is a law student at the Universidad Libre de Colombia, Senior coordinator of Students for Liberty in Colombia, and a seminarist in “The Austrian School of Economics” at the International Bases Foundation.  (0 COMMENTS)