The world is used to watching economic crises unfold in Argentina time after time. In the past 50 years alone, the country has experienced three hyperinflations (1975, 1989 and 1990) and multiple major debt crises (like in 2001 and 2018). These have resulted not just in widespread poverty, but increasingly in emigration as well. As of early 2023, inflation runs at a 95% annual rate while the country fails to cut taxes, reduce public spending, or achieve a fiscal balance. With a populist government in charge, it would seem as if there is no hope left. However, markets are once again betting on Argentina. Measured in US dollars, most Argentine stocks are up by 100% or more in the last six months. In the New York Stock Exchange, YPF, the country’s state-owned oil and gas company, was trading for around 11 dollars early this week, up from 2.91 in late July. During the same time period, Banco Galicia, one of the most important private banks of the country, went up from 5.75 to over 13 dollars, whereas the stock price of Argentina’s leading real estate development firm, IRSA, increased from 3.16 to 6 dollars. Stock price increases are all over the place. Why is this happening? There is nothing inherent in Argentine companies that has changed from mid 2022 to early 2023, except for one thing: The government’s capacity to do damage to them has fallen. Ever since late 2019, when Peronist Alberto Fernández won the presidency alongside former President Cristina Kirchner (2007-2015) as his running mate, economic policies had been generally bad for business: The government created new taxes and increased existing ones, tightened import controls, reimposed bureaucratic procedures that had been scrapped by the previous administration, and so on. But after a bank run in July, the government pledged to stick to an agreement with the IMF to cut public spending, reduce the deficit and create a friendlier business environment. To secure that in a context of soaring inflation and deep unpopularity of the administration, powerful Sergio Massa replaced powerless Martín Guzmán as Minister of Economy, which signalized that pro-market policies would be somewhat consistent. On the one hand, the ruling coalition seems to have understood that it cannot perpetually tax and spend and still win elections, even if measures to correct the course of the economy continue to cause pushback from inside the government. President Alberto Fernández faces reelection in October, but it is unclear whether he will run as his net approval rate is -54% while his Vice President’s is -44%. Peronists remain hopeful that Minister Massa can be a competitive candidate, but he is the face of fiscal adjustment: Were he to run, it would be the first time in decades that Peronism would show a relatively pro-business candidate. On the other hand, the opposition has also become more market-friendly in recent years. After the 2015-2019 period, which saw little progress on taxes and regulation, former President Mauricio Macri is now vowing not to listen to ‘cynical’ progressives and is openly calling for the privatization or closure of state-owned companies, for example. Buenos Aires Mayor Horacio Rodríguez Larreta, the most serious opposition candidate at the moment, does not go as far but is not perceived as a left-winger who will deepen the country’s structural problems. Last but not least, the emergence of an economically libertarian alternative led by Javier Milei puts pressure to everyone else and could be key in the case of a run-off, which is at this stage likely according to polls. Investors seem to be pricing in the fact that whoever becomes President in December 2023 will not have an incentive to run more deficits and further prevent business operations. At a 32-year high, inflation has become intolerable while debt markets remain closed and taxation is at record levels, which means that there is no room for anyone to promise more public spending as this will be impossible to achieve. And just as a negative policy change was anticipated by markets in 2018 and 2019, when stock prices plummeted as Macri failed and it became apparent that populist policies would return, investors are now also early protagonists of a likely positive change. Of course, the future is impossible to predict. In light of increasing poverty levels, the more radical elements of the Peronist coalition may thrive and keep it anti-business. Moreover, Massa and Larreta, the most likely candidates from the government and the opposition, are notorious crony capitalists: Free markets are unlikely to be their goal, but rather a more friendly business environment for their friends. But in a country that has harbored such strong anti-market feelings for so long, even the expectation of a small change seems enough. Argentina needs a positive direction for its economy, and it looks like it will get it.   Marcos Falcone is the Project Manager of Argentina’s Fundación Libertad the host of the Téngase presente podcast and a bi-monthly contributor to Argentina’s edition of Forbes. (0 COMMENTS)

[ANNUAL LISTENER SURVEY: https://www.surveymonkey.com/r/EconTalk2022Fav. Vote for your 2022 favorites!] Psychologist Adam Mastroianni says peer review has failed. Papers with major errors make it through the process. The ones without errors often fail to replicate. One approach to improve the process is better incentives. But Mastroianni argues that peer review isn’t fixable. It’s a failed experiment. Listen […] The post Adam Mastroianni on Peer Review and the Academic Kitchen appeared first on Econlib.

Damar Hamlin’s shocking injury on the field on January 2nd has reignited debates about safety in the dangerous sport. Safety should be a top priority, but if the NFL or worse, lawmakers, decide to increase safety standards, they may increase critical injuries rather than decrease them. The key to this is the Peltzman Effect. In a 1975 paper, economist Sam Peltzman theorized that automobile safety regulations would, apart from saving the lives of drivers, cause more pedestrian deaths due to the increased recklessness attributable to the safety measures. This can be easily universalized to all kinds of safety measures, especially those found in contact sports. For example, helmets partially protect the head, and professional football has a notorious concussion problem. Why? People are emboldened by the extra protection to lead into tackles headfirst. The recent introduction of additional safety equipment to the NFL is not exempt from this effect. The so-called “Guardian Caps” were introduced in 2022’s training season. They functionally act as an airbag for the head. Data on the Guardian Caps claim that it could reduce the impact of a collision by 10-20% in professional football games. I am not disputing how much they could reduce the impact force of collision. However, we should be concerned with how it affects behavior. Of course, the players will play the game with marginally more carelessness. A good illustration of this problem is bubble soccer. This is a game in which people play soccer while in giant inflatable balls that completely protect them from impacts. The balls are massive and provide almost perfect protection. The result? Families have a grand time crashing into each other at neck-break speeds. Maximum protection, minimum caution. In the case of football, the helmets, Guardian Caps, and other padding only provide partial protection, but given that it provides protection, it should be expected to increase recklessness. The NFL, the press, and potential regulators should ask themselves this: Do the additional safety measures trump the effect of the additional recklessness embraced by the players? Unfortunately, with the injury of Hamlin garnering nationwide attention, the NFL might get pressured into introducing more safety measures; the Guardian Cap could be one of them. The problem of risk compensation is not mainstream, so I doubt that the NFL will be pressured into considering the Peltzman Effect. Rightfully so, they are looking out for themselves; increasing safety measures protects them from lawsuits and government regulators, but they might end up hurting those they intend to protect. Additional equipment has a diminishing effect on recklessness, doing away with most protection could be a step in the right direction. I am not the only one to suggest this. Luckily, sports journalists have given the idea serious consideration in the past, and it has even been tried in some states such as New Jersey, Pennsylvania, Maryland, and Texas. Former Steelers receiver Hines Ward has even suggested removing helmets from the games in order to prevent concussions. Economist Art Carden in a 2021 article has also suggested, citing the Peltzman Effect, ditching safety gear. There is still a long way to go before the public is convinced of the Peltzman Effect. Introducing the very concept makes people shake their heads and chuckle, but this is nothing to laugh about. People’s lives and bodies are being ruined, and we must do our best to convince the mainstream of this theory’s validity. Until then, we should all wish Damar Hamlin a speedy recovery.   Benjamin Seevers is a student at Grove City College studying economics and philosophy.  (0 COMMENTS)

When non-economists discuss the relative wealth of nations, they have a tendency to focus on each country’s endowment of natural resources.  But there’s actually not much evidence that natural resources play a big role, except in a few cases of countries combining low populations with unusually large resource endowments (Kuwait, UAE, Qatar, etc.).  Consider this graph from the Financial Times: That’s quite a striking turnaround, which requires some explanation.  A casual reader might assume that New Mexico is unusually well-endowed with oil.  In fact, Mexico likely has much larger oil reserves.  Instead, New Mexico has aggressively utilized new technologies such as fracking, while Mexican production has stagnated as a result of nationalistic economic policies that favor the highly inefficient state-owned Pemex.  More generally, America has not become the world’s largest oil producer because we have unusually large oil reserves, rather we are willing to engage in fracking while many other places (including much of Europe) have banned fracking, or have economic policies that discourage foreign investment. I often argue that Texas has economic policies that are especially well suited to promoting economic growth, and as a result its population has increased rapidly during recent decades.  One response is that Texas is “lucky”, as it is unusually well endowed with oil.  But does that argument actually hold up on closer inspection? When I was young, New Mexico was rarely cited as a major oil producer.  Instead, states like Texas, Louisiana, Oklahoma, California and Alaska were the major producers.  Since then, fracking has pushed New Mexico and North Dakota into the major leagues, while California and Alaska have slipped a bit as tight environmental regulations make new drilling difficult.  So how has population growth fared in these oil states? Since the 2020 census, California, Louisiana and New Mexico have lost population.  North Dakota and Alaska are roughly flat, which means they’ve grown less than the overall US.  Oklahoma is up about 1.5%, a bit more than the US (which rose 0.6%), while Texas saw its population soar by roughly 3%.  Indeed nearly half of America’s population growth since 2020 has occurred in Texas. If Texas’s rapid population growth were due to oil, then you’d also expect lots of growth in places like New Mexico and Louisiana.  But those states have a less favorable set of government policies.  For instance, both places have state income taxes. The Dakotas provide another example.  North Dakota has lots of oil and South Dakota does not.  And yet it is South Dakota that has seen rapid population growth in recent years, indeed last year it was at the fifth highest rate among US states.  And South Dakota is one of the few states with no (state) income tax. To summarize, Mexico does not even have economic policies that encourage energy production, much less economic growth.  New Mexico does have policies that encourage energy production.  But Texas has policies that encourage energy production and also policies that encourage economic growth in a wide range of other industries. PS.  Which country has more resources, Russia or the Netherlands?  Russia has plenty of land, but doesn’t use it wisely.  The Netherlands doesn’t have much land—so they made some more. (0 COMMENTS)

A review of Arthur B. Laffer, Brian Domitrovic, and Jeanne Cairns Sinquefield, Taxes Have Consequences: An Income Tax History of the United States, New York: Post Hill Press, 2022. As economists will tell you, the world runs on incentives. Human beings act rationally by making choices that have the greatest perceived value given all available outcomes. The history of tax law in America exemplifies this point. In the book Taxes Have Consequences: An Income Tax History of the United States, the well-known economist Arthur Laffer, with coauthors Brian Domitrovic and Jeanne Cairns Sinquefield, provides an in-depth look at American income tax history from a supply-side perspective. From chapter one, Laffer et al make it clear how they believe taxes impact the economy, saying “Low tax rates at the top permit the rich to pursue their natural inclination to put their resources to profitable use in the economy at large.” They go on to spend the rest of the book convincingly backing up the argument that taxes are a key driver of economic performance through a historical and economic analysis of the complex tax changes in this nation’s history. Although he denies credit for inventing the concept, Laffer is best known for his work involving the Laffer Curve, which shows the relationship between tax rates imposed and tax revenue collected by the government. On this curve, there is a tax rate which will induce the maximum amount of tax revenue for the government. However, any rate above this point is called the prohibitive range. This means that tax rate increases in this range will only lead to a decrease in tax revenue due to the disincentives created to earn and/or fully report income.  Throughout Taxes Have Consequences, Laffer et al argue that the tax rates on the top earners have been in the prohibitive range for all of American income tax history. The major tax cuts that have been enacted demonstrate this best, as every tax rate reduction has led to a subsequent increase in tax revenue for the government. The first of these tax cuts happened in the Roaring ‘20s and were designed by U.S. Treasury Secretary Andrew Mellon. In 1921, the highest tax rate was 73 percent.  By 1929, this rate had decreased to 24 percent. During this time, the tax revenue paid by the top 1 percent of filers more than doubled. GDP also rose by an astounding 45 percent. Laffer et al make a compelling case that tax cuts drove the Roaring ‘20s prosperity. The next tax cut success was during the post-World War II boom. In 1945, Congress and President Truman agreed to lower the top war-time tax rate of 94 percent. The new rate of 86% percent meant after-tax earnings for the top income earners’ marginal dollar more than doubled. There was also a so-called “state-forced federal tax cut,” as states switched to community-property systems where income could be split among the husband and wife of a household for tax-filling purposes. These state reforms compelled Congressional action. Overriding President Truman’s veto, Congress introduced income-splitting into the federal tax code with the married filing jointly category, allowing most high earners to shift into lower tax brackets. These tax cuts, along with the elimination of the national jobs program proposal and decreases in federal spending, spurred economic recovery and prosperity in the late 1940s. The John F. Kennedy tax cuts are another much-heralded success story for the supply-siders. There were three parts to these tax cuts that allowed the economy to boom. In 1962, Kennedy signed legislation which shortened the depreciation schedule for corporations and introduced an investment tax credit of up to 7 percent. Kennedy also cut taxes when he was given the power as the president to negotiate trade, reducing tariffs by an average of 35 percent. Finally, the 1964 tax reform, spearheaded by Kennedy and signed by Johnson shortly after Kennedy’s assassination, decreased the top personal income tax rate from 91 percent to 70 percent and the corporate rate from 52 to 48 percent. GDP growth expanded tremendously at over 5 percent per year in the second half of the 1960s—a direct result of the supply-side tax reforms, according to Laffer and his coauthors. The next success story would not come until the period known as the Great Boom of 1982-2000. During this time, Art Laffer was an economic advisor to Ronald Reagan, and he helped him spur an economy that had previously been plagued by stagflation into a robust recovery. Over a series of tax-cutting bills through the 1980s, the top income tax rate was decreased to a modern low of 28 percent, and the top corporate rate was also decreased to 34 percent. The capital gains rate went down to 28.5 percent, the estate tax went down to 55 percent, and individual tax brackets were indexed for inflation. This all culminated in a booming economy, where economic growth on a per capita basis was an astounding 16 percent above the overall growth trend between 1950 and 2017. Finally, there was the Trump tax cut, again based on analysis from Laffer and the supply-siders. This cut included a corporate rate decrease from 35 to 21 percent and a top individual rate decrease from 39.6 to 37 percent. These reforms allowed the United States to dramatically increase economic growth eight years into the recovery from the 2008-2009 recession, even as Eurozone growth slowed to a crawl. Through each of these examples, Laffer et al mark tax rate cuts as the reason for both economic growth and tax revenue increases. The authors argue that this is no coincidence, since unleashing capital and providing entrepreneurs the incentive to invest leads logically to a booming economy. In many, if not all of these cases, these tax cuts were undoing high taxes that brought about economic downturn. For example, stagflation crippled the economy during Jimmy Carter’s administration, but the Reagan tax cuts were able to restore prosperity. The authors detail the tax-avoidance schemes – most of them 100% legal – used by the wealthy and showed the great lengths to which the rich will go to shelter their income when tax rates are high. Municipal bonds were a great shelter for income, as the federal government cannot collect taxes on the interest paid by state and local government bonds. Entertainment expenses, leisure incorporations, and creative executive compensation packages also allowed high earners to avoid taxes. When there is an incentive to avoid taxes (high tax rates) and all of these legal ways to do it, it becomes obvious why government revenues drop when tax rates are increased. Throughout the book, the authors demolish the arguments made by progressive economists such as Thomas Piketty that increasing tax rates on the rich to over 70 percent will lead to greater income equality. The basis of this argument is the U-shaped curve.  As Laffer et al note, this analysis says that “income inequality used to be high, as it has been high in recent years (the sides of the U); however, in the mid-century, income inequality was low (the bottom of the U).” Piketty argues that taxation is behind this: income inequality goes up with low tax rates and down with high tax rates. However, Laffer et al show where this theory goes wrong.  Because the rich did not fully report all their income to be taxed during these periods of high tax rates, the decline in measured inequality is an illusion; the yawning gap between rich and poor is masked by the disincentive for the rich to earn and report income by investing in growth-enhancing enterprises. It is important to note that as the rich get richer (through lower top tax rates), the poor also get richer. So, on the flip side, as Laffer notes, when high top tax rates are introduced, both the rich and the poor are worse off. While in direct contradiction to Piketty’s income inequality argument, this lines up with a Daily Wire investigation that income-inequality is higher in progressive-run states with higher tax burdens. The states of New York, California, and Connecticut have the most inequality, and they all also have some of the highest tax burdens. On a minor note of critique, while Laffer et al do a great job at showing the correlation between tax cuts and a booming economy, as well as tax increases and a sluggish economy, this book gives minimal mention to many of the other factors that impacted the economy outside of taxation. For example, the authors failed to discuss the monetarist view of the Great Depression, which implicates the Federal Reserve’s failure to keep the money supply from falling as the chief cause of the massive slump during the 1930s. Also, while discussing the economic boom from 1982 to 2000, Laffer fails to talk about the Fed’s role (with Paul Volcker at the helm) in getting the economy out of stagflation by dramatically increasing interest rates to cut inflation. And finally, it seems odd that the authors failed to mention the banking crisis a single time when discussing the Great Recession. Overall, Taxes Have Consequences is a thorough review of the effects of taxation on the American economy and is a book that is well worth the read. Laffer et al are clearly able to debunk Thomas Piketty’s claims about promoting income equality with a “tax the rich” policy while driving home the point that taxation above the optimal amount shown on the Laffer curve is detrimental to the economy, both for individuals and the government. This book also serves as a warning to politicians and their constituents of the detrimental effects that come along with the “tax the rich” movement, showing how high tax rates can wreck the entire economy. For Laffer and his colleagues, taxation is the key to understanding the economy, and understanding its history is imperative to making wise economy-growing decisions in the future.   Brendan Cairney is an economics student at Ferris State University. (0 COMMENTS)

In my previous post, I outlined some of the possible explanations for spectacular business failures such as the recent collapse of the FTX crypto exchange. Which is the most plausible explanation?   The Evidence So Far. Let us look at “the first rough draft” of FTX’s history and let us try to place the information revealed to date into the four different templates. Of course, it very well may be that more than one template helps to explain the collapse of FTX.   Fraud. The argument that fraud took place at FTX is simple. People who gave their assets to FTX were apparently promised that it would not be lent out by the exchange. FTX was to be a custodian of their assets. Yet their assets apparently were lent out. According to Reuters, as much as $10 billion may have been lent out to Alameda Research, the hedge fund supposedly run (very poorly) by SBF’s sometime mistress Caroline Ellison. That would seem to be criminal. Thus, Count One of the U.S. Attorney’s criminal complaints says: “Bankman-Fried agreed with others to defraud customers of FTX.com by misappropriating those customers’ deposits and using those deposits to pay expenses and debts of Alameda Research, Bankman-Fried’s proprietary hedge fund, and to make investments.” The man now charged with sorting through the rubble at FTX, John Ray III, a 63-year-old insolvency attorney (who, coincidentally, oversaw the post-wreckage sale of Enron’s assets), described the cause of FTX’s collapse as follows: “This is just old-fashioned embezzlement. This is just taking money from customers and using it for your own purposes.” If that is in fact the story of FTX, no new regulations are needed. Negligence. Samuel Bankman-Fried, immediately following FTX’s bankruptcy, told the New York Times that he had lost control of the company’s operations because he was distracted by his other projects. “Had I been a bit more concentrated on what I was doing, I would have been able to be more thorough. That would have allowed me to catch what was going on on the risk side.”[1] But the lack of financial oversight at FTX went well beyond the CEO’s personal distractions. Consider: Enron’s Board of Directors was much criticized in post-mortems on many grounds, from its deference to CEO Ken Lay, to its failure to grill subordinate executives, to its willingness to waive conflict-of-interest rules. FTX had no real board of directors at all; the nominal board consisted of SBF and two of his employees, and they held no meetings. Similarly, Enron’s Chief Finance Officer, Andy Fastow, was much criticized for his Rube-Goldberg accounting structures and for his extensive self-dealing. FTX did not even have its own accounting department. Self-dealing? In one instance, SBF was both the issuer and recipient of a loan. [2] In his 30-page report on FTX, John Ray wrote: “I have over 40 years of legal and restructuring experience. I have been the Chief Restructuring Officer or Chief Executive Officer in several of the largest corporate failures in history…. Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”[3] This degree of financial negligence seems easily within the scope of current laws punishing corporate misfeasance. Mistakes. But perhaps the bottom-line of this story is just that the people in charge of FTX screwed up. Crypto-currency is a new field of finance. The people involved with FTX were undoubtedly intelligent (SBF has a degree in physics from MIT), but they were mostly young. John Ray described them as “a small group of grossly inexperienced, unsophisticated individuals.”[4] One month before FTX’s troubles became public knowledge, short-seller Marc Cohodes was warning (in obscene and slashing terms) against trusting the firm. And one of his chief questions was: “Who taught this guy the ropes?” Who is SBF’s mentor? Yes, SBF is smart. Yes, his parents are smart (professors at Stanford Law). But Cohodes said he couldn’t find anybody in SBF’s background who had served as his mentor in the art of trading. Corporate Culture. So, there is reason to believe that the collapse of FTX is attributable to bad decisions, negligence, and fraud. But one cannot help sensing, when reading about the fall of FTX, that its failure was also caused by something in the very spirit of the place. This was a company whose executives had no desire to follow the “best practices” for business success laid down by bourgeois capitalism between 1700 and 1950. Again, those “best practices” of bourgeois capitalism might be summarized as: Don’t mix business and politics. Be forthright with counterparties. Understand the value of what you are producing. The unifying theme of those three precepts is: Make sure you are obtaining profits that are earned, and only profits that are earned—not profits based on rent-seeking, market hype, or daydreams. On all three counts, the evidence seems to show, FTX (like Enron) was a fundamentally contra-capitalist company. And the contra-capitalist soul of FTX may well prove to be the ultimate explanation of its implosion.   Conclusion Business failures such as FTX are bound to be exploited by anti-capitalist theorists and politicians, just as Enron was. National Review columnist Andrew C. McCarthy has already warned about this. McCarthy, formerly chief assistant in the U.S. Attorney’s office that has now indicted SBF, recently wrote: “The administration and Democrats have been biding their time, waiting for some financial catastrophe that can be stoked into a groundswell of support for thoroughgoing crypto regulation. In Bankman-Fried’s alleged FTX scam, they obviously perceive such an opportunity.”[5] That is why pro-capitalist theorists must understand thoroughly what happened at FTX: to prevent its collapse from becoming an excuse for legislation irrelevant to the underlying causes. But once pro-capitalists understand how the FTX bankruptcy occurred, they can use that information as their own intellectual ammunition. After all, one of two things is going to be true about it (although both may be true): (1) The failure resulted from violations of capitalist law—bans on fraud and negligence—and thus demonstrates the wisdom of the free-market’s guardrails. (2) The failure resulted from business misjudgments and thus serves once again to educate free-market participants—most particularly ordinary participants in the free market: small-scale consumers, savers, investors, and traders—about the need for knowledge and prudence. The first point is easily made by pro-market advocates; the second is more difficult, because exercising “knowledge and prudence” in a free-market entails focusing on two very different attributes of companies: Achievement and Philosophy. The need to evaluate Corporate Achievement knowledgeably and prudently has been fairly well understood ever since Benjamin Graham and David Dodd published Security Analysis in 1934. But the need to evaluate Corporate Philosophy knowledgeably and prudently, and to avoid dealing with contra-capitalist companies, is only beginning to be understood. Perhaps FTX will serve as a stimulus to that understanding. Roger Donway is a research assistant at the Institute for Energy Research and freelance editor and writer.   [1] Samuel Bankman-Fried, quoted in David Yaffe-Bellany, “How Sam Bankman-Fried’s Crypto Empire Collapsed,” New York Times, November 14, 2022. [2] John J. Ray III, testimony, House Financial Services Committee, December 13, 2022. The quotation about self-dealing loans is available here, from the Washington Post via YouTube. [3] In re: FTX Trading Ltd. et al., filed November 17, 2022, U.S. Bankruptcy Court for the District of Delaware, “Declaration of John J. Ray III in Support of Chapter 11 Petitions and First Day Pleadings,” p. 2. [4] Marc Cohodes, interviewed by Keith McCullough, Hedgeye Investing Summit, Fall 2022, via YouTube, at 44:55. [5] Andrew C. McCarthy, “Progressive Regulators Are Salivating over the Sam Bankman-Fried Scandal,” National Review Online (website), December 17, 2022. (0 COMMENTS)

On January 11 around 25,000 British ambulance workers went on strike, their second since December, in an ongoing pay dispute with the government. ‘Mature’ Brits are reminded of the (in)famous ‘Winter of Discontent’ of 1978/79 when the country suffered a wave of strikes as unions resisted the Labour government’s attempt to limit pay increases to 5% to fight inflation. In January 1979 Bill Dunn of the Confederation of Health Service Employees appeared on television from a picket line outside a hospital saying “if it means lives lost, that is how it must be…we are fed up of being Cinderellas. This time we are going to the ball.” In May Margaret Thatcher’s Conservatives were elected with a mandate to get both inflation and the unions under control.   Unions or government? Britain was plagued by high inflation in the 1970s. The Retail Price Index rose from 2.5% in 1967 to 24.2% in 1975. The unions were often blamed. The ‘cost-push’ theory of inflation said that, as the unions struck for and won wage increases, prices were pushed up. Acting on this theory, the main tool used by British governments to combat inflation were incomes policies, like 1976’s ‘social contract’, deals struck with unions to limit pay increases. The unions found an unlikely defender in the economist Milton Friedman. In 1970 he had written: Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. In his 1980 book Free to Choose Friedman produced a number of charts supporting this, showing the relationship between changes in the money supply (as measured by the M2 quantity of money per unit of output) and changes in the Consumer Price Index (CPI) for a number of countries. These charts, Friedman argued, disproved a number of common explanations of inflation, including unions: Unions are a favorite whipping boy. They are accused of using their monopoly power to force up wages, which drive up costs, which drive up prices. But then how is it that the charts for Japan, where unions are of trivial importance, and for Brazil, where they exist only at the sufferance and under the close control of the government, show the same relation as the charts for the United Kingdom, where unions are stronger than in any of the other nations, and for Germany and the United States, where unions have considerable strength? Unions may provide useful services for their members. They may also do a great deal of harm by limiting employment opportunities for others, but they do not produce inflation. Wage increases in excess of increases in productivity are a result of inflation, rather than a cause. In 1976, noting the relationship between “the increase in money supply each year in excess of the increase in output with the increase in prices two years later,” an early British convert to Friedman’s ‘monetarism’, Times editor William Rees-Mogg, wrote: If the Excess Money Supply determines the rate of inflation equally closely in years subject to incomes policy and in years without, there seems to be no evidence left that incomes policy has any significant influence on inflation. Friedman commented that: …the social contract, together with low monetary growth, will curb inflation. With rapid monetary growth, it will be another unsuccessful experiment.   Now is the winter… That was the story of the ‘Winter of Discontent’. In 1976 Prime Minister James Callaghan told the Labour party’s conference: We used to think that you could spend your way out of a recession, and increase employment by cutting taxes and boosting Government spending. I tell you in all candour that that option no longer exists, and that in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of infla­tion into the economy, followed by a higher level of unemployment as the next step. Higher inflation followed by higher unemployment. This monetary and fiscal restraint brought inflation down to 8.3% in 1978. Then, with an election looming, Callaghan’s Chancellor, Denis Healey, announced tax cuts of £2 billion and over £500 million of extra spending financed by monetary expansion. Inflation began accelerating (it would peak at 18.0% in 1980). Unions, not unreasonably, resisted pay agreements which the government would, in effect, unilaterally repudiate with inflationary policies. This is the story of the current ‘winter of discontent’. The British government has, once again, caused inflation by printing money to keep down the costs of vast borrowing. If it gives the unions what they want that won’t be inflationary provided they don’t fund it by printing money. As we once learned, it isn’t the pay increases that are inflationary but the means of paying for them.   John Phelan is an Economist at Center of the American Experiment. (0 COMMENTS)

“The Securities and Exchange Commission today charged Samuel Bankman-Fried with orchestrating a scheme to defraud equity investors in FTX Trading Ltd. (FTX), the crypto trading platform of which he was the CEO and co-founder.”[i] That announcement from the SEC was released at 2:10 am Eastern Standard Time on the morning on December 13, 2022. Why would bureaucrats send out a press release—concerning what was, after all, an accusation of mere civil-law violations—at two o’clock in the morning, an hour when only the unfortunate night-desk editors would be awake to receive it? Perhaps because the SEC (and its publicity-hungry head, Gary Gensler) had been told that the U.S. Attorney for the Southern District of New York, often called the sheriff of Wall Street, was going to livestream his much more attention-getting criminal-law charges against Samuel Bankman-Fried later that day, at two o’clock in the afternoon on December 13.[ii] In short, just one month after FTX declared bankruptcy, the competition was on among regulators and bureaucrats to appropriate for the advantage of their personal fiefdoms whatever hay could be made from the company’s collapse and its customers’ ruination. Of course, that is just what the Public Choice theory of James Buchanan would have predicted about bureaucratic behavior: Whether it is pay, people, power, or publicity—they grab as much as they can. The irony is that the basic accusation being lodged against Samuel Bankman-Fried by the SEC and the Manhattan U.S. Attorney was exactly: misappropriating assets for personal advantage.   Why Market Advocates Should Care If no more were at stake than a turf war between law-enforcement agencies, if this were just a battle to claim credit for punishing Bankman-Fried and his confederates, the whole affair might not matter very much to pro-capitalist on-lookers. But judging from history, very much more is going to be at stake. Anti-capitalist politicians and bureaucrats absolutely love business bankruptcies. Bankruptcies allow them to say to voters: “Forget the theoretical case against capitalism. You can see for yourselves the consequences of private enterprise. You can see that government must do something to protect you from this deeply flawed system.” In 1932, the collapse of Samuel Insull’s Midwest utility empire first became fodder for FDR’s presidential campaign, and then (after FDR’s election) became a political justification for the creation of the SEC. It did not matter in the slightest that, as Insull’s most meticulous biographer concluded, “Nobody got the story straight.”[iii] In 2002, the failure of Enron provided the main political justification for the Sarbanes-Oxley Act, signed into law in July 2002, just eight months after Enron entered Chapter 11. The American Enterprise Institute blurbed its 2006 book on the subject as follows: “The Sarbanes-Oxley Act of 2002 (SOX) is a colossal failure, poorly conceived and hastily enacted during a regulatory panic.” A 90-page Yale Law Review article published in 2005 provided a definitive account of the Act’s creation by grandstanding politicians, and it called the result “quack corporate governance.” In 2022, the FTX debacle is already being touted as possibly the largest business scandal in U.S. history. So that is Why market advocates must prepare to understand its collapse: to prevent this “crisis” from becoming yet one more excuse for “leviathan.”[vi] But How should market advocates understand FTX’s failure? The short answer is: We don’t know yet. The facts are still coming in. And in the immortal words of Sherlock Holmes, “It is a capital mistake to theorize before one has data. Insensibly, one begins to twist facts to suit theories instead of theories to suit facts.” All that market advocates can do at this time is to draw on past experience and set forth the various frameworks within which pro-capitalists might interpret this particular business failure. Then, as facts become available, they can be fitted to one or more of the potential interpretations.   Four Templates Market advocates have four basic options when trying to understand why a significant business failure has taken place. The first two involve illegality: (1) Criminal Fraud, and (2) Culpable Negligence. The second two involve mental error: (3) Mistaken Business Judgment, and (4) Flawed Corporate Culture. The first two present no challenge to capitalism. Fraud and Negligence are banned by the laws that govern even the freest markets. Businessmen are jailed if they practice fraud and sued if they are negligent. David Henderson has made a hobby of watching anti-business films, where people heroically fought against certain business behavior, and pointing out that the heinous business behavior being damned in these films was always behavior that was expressly forbidden and punished in a free-market society. Mistaken business judgment, the third possible explanation for catastrophic corporate failures, involves no violation of capitalist rules. So it is, in that sense, more difficult for pro-capitalists to explain to a public seeking political vengeance. The failure of IBM executives to foresee the decline of mainframes economically devastated my home locale of Dutchess County for an entire generation. What can one say? Like everybody else in this world, businessmen make mistakes, whether it is IBM, AT&T, US Steel, or GM. So, don’t put all your eggs in one basket, either as an individual or as a community. Progressives naturally promise that interventionism, if overseen by bureaucrats, will make fewer mistakes than free markets, but that has been decisively proven false, in practice and in theory. The extended order of the market keeps the inevitable mistakes of business fewer and smaller, discovers them earlier, and eliminates them faster. It also rebuilds prosperity more quickly. Creative destruction is creative as well as destructive. Responding to business errors with regulations or protectionism or subsidies will only slow down the beginnings of new growth. Contra-Capitalism. Then there is the fourth interpretative option, again one not involving legal misdeeds: This interpretation says: The company failed because its corporate culture was contra-capitalist, that is, opposed in spirit and morality to bourgeois capitalism, the outlook that created the wealth of the West. The term “contra-capitalism” was coined by business historian Robert Bradley Jr. in his tetralogy on the rise and fall of Enron, where he worked for nearly twenty years. While at Enron, but more especially while writing its history amid the wreckage of the company, Bradley noticed a syndrome of destructive corporate behavior that did not fit neatly into any of the other three destructive patterns. On the one hand, the behavior was not illegal. It was not negligence or fraud. Certainly it would not be considered such under the laws of laissez-faire capitalism, whatever today’s laws may say. But on the other hand, the destructive behavior in question was not simply a matter of some “best laid plans” that did not quite work out. It was not simply Mistaken Business Judgment. What Bradley noticed was a syndrome of management actions and employee behavior at Enron that seemed to run—consistently and persistently—contrary to the broad contours of the “best practices” developed by bourgeois-capitalist morality during the two-and-a-half centuries of that system’s existence (1700-1950). The Enron people involved were no longer even trying to live up to the traditional bourgeois-capitalist model of behavior. They were practicing business flatly contrary to that model. The broad contours of bourgeois-capitalist behavior that Bradley had in mind included: a reliance on free markets, frank and honest communications with counterparties, and a determination to confront reality when evaluating risks. Because behavior at Enron again and again ran contrary to those capitalist traditions, Bradley termed the pattern of behavior he was observing: Contra-Capitalism. And contra-capitalism thus becomes the fourth interpretative possibility for FTX. Where does this leave us? In my next post, we’ll examine the evidence so far.   Roger Donway is a research assistant at the Institute for Energy Research and freelance editor and writer. [i] Securities and Exchange Commission, “SEC Charges Samuel Bankman-Fried with Defrauding Investors in Crypto Asset Trading Platform FTX,” press release no. 2022-219, December 13, 2022. Indictment available at: Securities and Exchange Commission v. Samuel Bankman Fried, U.S. District Court, Southern District of New York, Civil Action No. 22-cv-10501, filed December 13, 2022. [ii] The speculation about the SEC’s motives is from Jeff John Roberts, “Gary Gensler’s PR Stunts Can’t Hide How He Botched Crypto Regulation,” Fortune Crypto, December 14, 2022. The livestream announcement from U.S. Attorney Damian Williams of the Southern District of New York is available from YouTube here. The criminal indictment is United States of America v. Samuel Bankman-Fried, a/k/a “SBF,” U.S. District Court, Southern District of New York, 22 Crim 673, unsealed December 13, 2022. [iii] Forrest McDonald, Insull: The Rise and Fall of a Billionaire Utility Tycoon, (Chicago, IL: University of Chicago Press, 1962; repr. Washington, DC: Beard Books, 2004), p. 339. [vi] The way that U.S. Progressives have used emergencies to increase statism received its most memorable formulation in Robert Higgs, Crisis and Leviathan: Critical Episodes in the Growth of American Government (New York: Oxford University Press, 1987). A parallel study of the same process in the field of energy (Energy Crisis and Leviathan) is forthcoming from business historian Robert Bradley Jr., chronicler of Enron’s rise and fall. (0 COMMENTS)

In his State of the Union address on Tuesday night, President Biden stated: We have to reward work, not just wealth. Pass my proposal for the billionaire minimum tax. You know, there’s [sic] a thousand billionaires in America. It’s up from about 600 at the beginning of my term. But no billionaire should be paying a lower tax rate than a schoolteacher or a firefighter. I mean it. Think about it. I have thought about it. I have four thoughts.   The above is from David R. Henderson, “Taxing Wealth Is Taxing Work,” TaxBytes, Institute for Policy Innovation, February 9, 2023. Read the piece (it’s not long) to see what my 4 thoughts are. (0 COMMENTS)

The Economist has a couple articles on the rise in economic nationalism, which make some important points: For many in Washington—both Democrats and Republicans—this new [protectionist] approach is common sense. It is, they believe, the only way that America can protect its industrial base, fend off the challenge from a rising China and reorient the economy towards greener growth. But for America’s allies, from Europe to Asia, it is a startling shift. A country that they had counted on as the stalwart of an open-trading world is instead taking a big step towards protectionism. They, in turn, must decide whether to fight money with money, boosting their subsidies to counter America’s. If the result is a global subsidy race, the downsides could include a fractured international trading system, higher costs for consumers, more hurdles to innovation and new threats to political co-operation. The first big crack in America’s commitment to free trade came when Donald Trump levied tariffs on products from around the world. In some ways, though, it is this second crack—the present ratcheting up of subsidies—that hurts more. “Free trade is dead” is the blunt assessment of a senior Asian diplomat in Washington. “It’s basic game theory. When one side breaks the rules, others soon break the rules, too. If you stand still, you will lose the most.” European officials are outraged: The angrier reaction in Europe is partly because of its weak position. . . . There is anecdotal evidence that Europe is already losing investment. Northvolt, a Swedish manufacturer, is reviewing its plan for a factory in Germany in favour of its existing American operations. Others will follow. In theory, our allies could bring a case to the WTO, except that the US has effectively destroyed that organization: The WTO’s prohibition against subsidies involving local-content requirements is clear. Yet so far there is little appetite for such a challenge. If America were to lose, it could appeal against the ruling, which would in effect bring the case to an end since the WTO no longer has a viable appellate body (thanks to America’s decision to block appointments). On the other hand, the “senior Asian diplomat” who said, “If you stand still, you will lose the most” was wrong; indeed just the opposite is true: There is an economic rationale for staying on the sidelines. When America pays for technologies at great cost to its taxpayers, these technologies should, in time, become cheaper for everyone. However much America throws at its companies, it cannot have a comparative advantage in all products. Some officials in Asia cling to the hope that their governments and those in Europe will exercise restraint. “That way all non-Americans could have a level playing field with each other,” says a Japanese official. But the voices calling for more subsidies seem to be prevailing. Most politicians don’t understand the economics of subsidies.  It’s not a question of subsidies helping one country and hurting another; all countries suffer. Here’s what politicians don’t understand.  It is not possible for governments to subsidize “industry” as a whole.  All they can do is boost one industry at the expense of another.  If the US subsidizes industries A, B and C, then we implicitly penalize industries D, E, and F.  Two hundred years ago, Ricardo developed the concept of comparative advantage, which explains why helping one set of industries effectively hurts the remaining industries.  Back in the 1990s, Paul Krugman pointed out that for many people, included even high-level policymakers, “Ricardo’s Difficult Idea” is hard to grasp.  Policymakers view the world in partial equilibrium terms when they need to look at things from a general equilibrium perspective. Every time we put a tariff on steel or aluminum imports, we give a cost advantage to Asian and European firms that use steel and aluminum, such as carmakers.  Every time we subsidize US chipmaking, we give a boost to Asian and European firms that do not make chips.   Unfortunately, it’s not a zero sum game—industrial policies are negative sum.  In another article, the Economist points out that these subsidies reallocate global production in a highly inefficient fashion: By our calculation, duplicating the world’s existing stock of investments in semiconductors, clean energy and batteries would cost between 3.2% and 4.8% of global GDP. . . .  Countries like China and Russia do present a profound threat to the current global order. Russia’s curbing of gas exports to Europe in response to European support for Ukraine highlights the risks of relying on such places for crucial imports. The urge among Western democracies to hobble adversaries economically to diminish such dangers is understandable. But it will have huge costs. What is more, the economic policies being adopted in the name of national security and competitiveness are so sweeping and clumsy that they are hurting allies as much as enemies. The zero-sum mindset may or may not succeed in making the world safer for democracy. But it will certainly make the world poorer. [Emphasis added] I give credit to Treasury Secretary Janet Yellen.  If I had to sit in a room and listen to the economically illiterate views espoused by President Biden’s more nationalistic policy advisors, I would lose my cool.  I don’t know how she puts up with it. PS.  You might say to yourself, “Sure the policies have some problems, but they can be fixed.”  Nope.  Too late: President Biden suggests America “never intended to exclude folks who were co-operating with us”. Practically, though, it is not easy to recraft the rules. Legislation was written precisely, specifying amounts, timelines and conditions. Congress would need to pass formal amendments—a tall order at the best of times and inconceivable when the House of Representatives is dysfunctional.  (0 COMMENTS)