Private saving and investment are the heart and soul of the dynamic market process. Together they provide and allocate the resources used to augment the economy’s productive capacity, generate sustained long-run economic growth, and thereby make possible a rising level of living. Economic crises interrupt this process by discouraging investors and causing them to consume their resources or to employ them in relatively safe, low-yielding ways. Absent entrepreneurs willing to take the great risks that characterize investments in great technological and organizational innovations, the growth process fades into economic stagnation or even decline.

The present recession starkly displays this characteristic crisis-related abatement of the economy’s investment process. Indeed, the decline of private investment during recent years has been much greater than most observers realize. Consider the following data, taken or derived from the most recently revised National Economic Accounts prepared by the Commerce Department’s Bureau of Economic Analysis (Tables 1.1.5, 1.1.6, and 5.2.6).

In 2006, gross private domestic investment reached its most recent peak, at $2.33 trillion (in constant 2005 dollars), or 17.4 percent of GDP. After remaining almost at this level in 2007, this measure of investment fell substantially during each of the next two years, reaching $1.59 trillion, or 11.3 percent of GDP, in 2009. This decline is severe enough, but it does not give us all the information we need to gauge the extent of the investment bust.

The greater part of gross investment consists of what the statisticians call the capital consumption allowance, an estimate of the amount of money that must be spent simply to offset wear and tear and obsolescence of the existing capital stock. In a country such as the United States, with an enormous fixed capital stock built up over the centuries, a great amount of funds must be allocated simply to maintain that stock. In recent years, the private capital consumption allowance has ranged from $1.29 trillion in 2005 to $1.46 trillion (in constant 2005 dollars) in 2009. Thus, even in the boom year 2006, about 60 percent of gross private domestic investment was required merely to maintain the economy’s productive capacity, leaving just 40 percent, or $889 billion in net private domestic investment, to augment that capacity.

From that level, net private domestic investment plunged during each of the following three years, taking the greatest dive between 2008 and 2009, when it fell to only $54 billion (in constant 2005 dollars), having declined altogether by 94 percent from its 2006 peak! Last year only 3.5 percent of all private investment spending went toward building up the capital stock. Thus, net private investment did not simply fall during the recession; it virtually disappeared.

Unless this drastic decline is reversed soon, the future will be bleak for the U.S. economy. Without substantial net private investment, brisk economic growth is unthinkable beyond the very short run. Although private investment spending has recovered somewhat since it reached its trough in the third quarter of 2009, gross private domestic investment in the most recent quarter (April to June) of 2010 remained 21 percent below its peak in the first quarter of 2006, and net private domestic investment remained about 64 percent below its previous peak.

While this private-sector disaster was occurring, however, the government sector of the economy was booming. The ratio of all federal government spending – purchases of goods and services plus transfer payments – to GDP increased from 20.6 percent in the fourth (October to December) quarter of 2007 to 25.4 percent in the most recent (April to June) quarter of 2010.

Of this increase, about 73 percent represents an increase in transfer payments. According to the National Economic Accounts (Table 3.2), federal transfer payments for social benefits to persons – old-age pensions, unemployment-insurance benefits, disability-insurance benefits, Medicare benefits, and so forth in great variety — increased from a seasonally adjusted annual rate of $1.28 trillion in the fourth quarter of 2007 to $1.72 trillion in the second quarter of 2010 – a leap of more than one-third in only two and a half years. During the same period, government grants-in-aid to state and local governments rose from a seasonally adjusted annual rate of $382 billion to $525 billion, an increase of more than 37 percent.

Data compiled by the Bureau of Labor Statistics show that the number of private nonfarm employees fell from 114.1 million in 2006 to 108.4 in 2009, and even further this year, reaching 107.9 million in August 2010. At the same time, the number of government employees at all levels increased from 22.0 million in 2006 to 22.5 million in 2009, although a slight reduction has occurred recently, putting the number at 22.4 million in August 2010.

The Federal Reserve System has played a major role during the current recession, acting in unprecedented ways to inject funds into the financial system in general and into selected failing firms in particular, especially AIG, Fannie Mae, and Freddie Mac, which have been effectively taken over by the government, giving rise to a situation in which the government supplies or insures about nine-tenths of all new residential mortgage loans. Before the recession, the Fed’s financial assets consisted overwhelmingly of U.S. Treasury securities. It now holds a variety of securities, including mortgage-backed securities valued on the Fed’s books at approximately $1.1 trillion. In this way, the Fed has become the major direct source of funds for the government-sponsored enterprises that provided an inviting secondary market for the commercial banks and other primary lenders that inflated the housing bubble.

Through the TARP scheme, created late in 2008, the U.S. Treasury acquired ownership stakes in hundreds of commercial banks.

Of course, the government also took over General Motors and Chrysler, bypassing existing bankruptcy laws and ramming into place restructuring arrangements that served the Obama administration’s political goals, especially its support for members (active and retired) of the United Auto Workers.

The foregoing measures constitute only a small fraction of the many significant actions the federal government has taken to augment its size, scope, and power during the current recession. Thus, while the market system’s driving force – private investment – was being brought to its knees, the government’s crisis-driven surge only added an additional discouraging feature to those operating though market channels, such as the reluctance of commercial banks to make new loans and investments and the desire of households to repay debts and increase their holdings of cash balances. A government growing in so many different directions at once, with many additional initiatives — such as higher tax rates, new taxes on energy use, and new restrictions on financial service providers — still awaiting enactment or regulatory specification, creates tremendous uncertainty for anyone contemplating a long-term investment: who knows what the contours of future government exactions, restrictions, and requirements will be, and hence whether a particular investment will prove to be profitable or not?

Therefore, a major consequence of the Great Divergence – the starvation of private investment and the feasting of government – is what I call regime uncertainty. This form of uncertainty is a pervasive incalculable apprehension about the future security of private property rights in capital and the income it yields to investors; indeed, a pervasive apprehension that extends beyond investors to include nearly all private participants in the economy – consumers, workers, and managers, as well as investors — in regard to the future economic order. The Great Divergence in itself is very bad news. Its effects in enhancing regime uncertainty only make it more unfortunate for everyone outside the privileged precincts of government.

The polls seem to indicate that Americans on the margin are sick of Democratic rule. Obama’s approval rating is at an all-time low. Republican politicians look to have a better shot this November than Democrats.

On the definite bright side, this means that many Americans are unhappy with the status quo. But will it usher in real change this year or with the next presidential election? I am less optimistic on that.

In my short lifetime, I have seen things swing back and forth, supposedly signifying revolution.

After the upset of the 1994 elections, the Republicans recaptured the federal legislature for the first time in 40 years. Their “Contract with America” promised big changes. President Clinton announced, in what was supposedly a major ideological concession, that “the era of big government is over.” Throughout the 1990s, the federal government continued to grow, despite some little changes like welfare reform. In 2000, Bush II won the presidency in a controversial election, and the Republicans soon had everything—the presidency, Congress and, although they would tend to deny it, the Supreme Court.

Eight years of nearly undisturbed Republican rule, with 9/11 as an extra boost to their mandate to govern, these clowns managed to drive the economy off a cliff, bust the budget, entrench the nation in two unwinnable and bloody wars, eviscerate Bill of Rights protections so sacred that even average Americans kind of cared about them, and expand the federal government by about 50%. Even domestic programs tended to increase in size far faster than they did under Clinton—even under Clinton with a Democratic Congress.

Discontent with the obvious failures of the Bush administration, a majority of Americans pulled the lever for a Democrat promising hope and change. American voters were tired of the war and, although they were not unified behind a coherent understanding as to the economic reasons behind the failings, they identified the Republicans’ ineptitude at “managing the economy.”

Fast-forward to today. Unemployment is very high, despite Democratic promises that the stimulus would have kept it from getting this high. This summer was supposed to be, as Vice President Joe Biden called it, the “summer of recovery,” but most economic indicators do not vindicate this flamboyant title. The wars continue. So voters are thinking of returning power to the Republicans.

But how has Obama managed to squander his political capital so quickly? Does stagnation alone explain it? The Republicans were so terrible for eight years, and American moderate voters have tended to trust Democrats more with economic policy anyway.

I believe Obama overplayed his hand. Instead of just focusing on coming off as a more reasonable president than the last one, who was highly disrespected and unpopular by the end of his term, Obama attempted to deliver the Democratic Party programs that he had in fact promised, but were not the main reason he won in 2008. American voters did not elect Obama because he offered a dramatic restructuring of the entire health care industry, or because he was advocating carbon taxes or anything like that. They supported him because, in the midst of the financial collapse that was blamed on Republicans, he had the great advantage of not being a repeat of George W. Bush, whereas John McCain had a lot more trouble distancing himself from the lame duck.

Instead of taking the election as a mandate to govern from the center—maybe even with a few expansions of government intervention here and there—Obama took over, failed to change much of anything about the Bush years that was despised, and instead fastened on top of the already ridiculously large and unwieldy federal government even more mandates, responsibilities and spending programs. In less than two years, he has managed to make the Republicans look fiscally responsible again in the eyes of the median voter. It is astounding that he has accomplished this feat. And moreover on the bright side, he has discredited a certain style of Democratic soft socialism. Back before he was president, moderates wanted more environmentalism and a move toward universal health care. It looks as though he has snatched these positions from the center and made them appear to belong to the peripheral leftwing.

At the same time, Obama has tragically solidified the Bush policies of “preemptive war,” indefinite detention, warrantless surveillance and all the rest. The Republican version of the war on terrorism is now completely bipartisan. In terms of changing political opinion for the worse, this is one of the greatest horrors of the Obama presidency.

But while Obama might lose Congressional allies in November and ultimately be a one-term president, we have little reason to believe that government will be cut back when the Republicans take over again. When was the last time they cut government? The 1920s? Maybe the 1950s? Every time Republicans have taken power since then, they have overseen a dramatic expansion of government. Just as Obama has made Bush war policies bipartisan, the GOP has a tendency of making Democratic welfare policies bipartisan—when is the last time, even at a Tea Party, that a notable conservative has seriously proposed abolishing Social Security, Medicare, farm subsidies or federal involvement in public schools—to say nothing of public schools themselves? And surely “defense” spending will continue to be a significant area of waste and, even worse, mass destruction and bloodshed.

So in the short term, the polls are encouraging. In the slightly longer term, I am not as hopeful about what they portend. But in the much longer run, I am much more hopeful. Why is that? Because the discrediting of the Obama revolution of hope and change, just like the discrediting of the Contract with America, serves a long-term purpose of turning Americans away from electoral politics. The Republicans swore they could fix things if they were given power over everything. It took eight years, but Americans realized this was a hoax and a sick one at that. After two years, the most superficially unique and “out of the box” president representing the Democratic Party in a very long time has managed to energize all his natural opponents, disappoint most of his biggest supporters and turn off most independents. If Clinton wasn’t the answer, nor Gingrich—if Bush isn’t the answer, nor Obama—perhaps we are one step closer to Americans withdrawing their consent to the federal government by refusing to participate in the charades of voting and electoral politics.

Maybe Sarah Palin has to win for conservatives to finally give up hope in the false idol of mass democracy, and maybe someone even more cosmetically appealing to the left than Obama has to win and be a disaster for similar long-term lessons to be learned on the left. But I do hold out hope, not for this November or for 2012, but for the future of this country, and certainly humanity. Democracy, or “government by the people,” might just be the last, and best, PR strategy used by governments to trick the people into thinking they are anything other than institutions of corruption, plunder, mayhem and mass murder. If the supposed last best hope for government by the people—the United States—ends up being a parody of its former self, made worse with every national election, then perhaps, on a global scale, government itself will one day reveal itself to everyone as the scam it so obviously is.

The Congressional Oversight Panel evaluating the Troubled Asset Relief Program (TARP) concludes “…that the public ‘stigma’ surrounding the Troubled Asset Relief Program has constrained policy choices and may make it politically impossible to take similar rescue actions in the future,”  according to this article.

The Panel’s report says, “Popular anger against taxpayer dollars going to the largest banks, especially when the economy continues to struggle, remains high… The program’s unpopularity may mean that unless it can be convincingly demonstrated that the TARP was effective, the government will not authorize similar policy responses in the future. ”

That sounds like good news to me.

The Panel’s deputy chairman, Damon Silvers, told reporters, “As long as huge banks can count on taxpayer-funded rescues, we should not be surprised if banks take on enormous risks, knowing they can keep the profits if the banks win and shift the losses onto the taxpayers if he banks lose.”  It sounds like Mr. Silvers has a pretty good idea about why the angry taxpayers referenced above have good reason to be angry.

I’ve been critical of TARP in the past, so it’s nice to see that the program did have some beneficial effects too.

The most recent quote reported in the Wall Street Journal (September 15, 2010) values gold at $1,268.50 per ounce, a historic high, albeit unadjusted for inflation.

Will rosy expectations never fail to persist? It is certainly true that the expansionary policies currently being pursued by Fed Chairman Ben Bernanke auger much higher future rates of price inflation. But it also has never been true that, in the face of economic Armageddon, that people resort to gold-mediated exchange. They instead rely on barter, e.g., trading a pig for a new roof.

‘Investing’ in gold is pure speculation. You may lose or you may gain, but don’t think you are thereby securing your economic future.

Norm Ormstein, AEI scholar and writer of most of the McCain-Feingold Campaign Reform Law (2002), has an interesting observation relating to the success of non-establishment candidates in GOP primaries. “Out go the country-club Republicans like Mitt Romney, in come the grass-roots revolutionaries like Sarah Palin…America just became a lot more ungovernable than it already was.” If true, one can only smile and celebrate. But today, Washington and other government successfully gobbles up 38% of GDP (and spends over 60% of GDP). Today, American life and business are impacted by Ten Thousand Commandments and every American suffers a host of petty permissions just to get through the day. Is Norm lamenting the fact that we still don’t do what we are told 100% of the time? That we don’t give enough money, time or respect to government? This is from a so-called “free-market” think tank. Let’s hope Norm is simply the canary in the command state mine shaft, noticing too late, just as the old Soviet Politiburo once did, that even with their gulags, worthless fiat money, and millions of rules, the state was disrespected, disliked, and doomed. (cross posted at LRC Blog)

Welfare states are unstable, and tend either to give way to free market reforms and liberalization, to collapse under their own weight, or to fall down the slippery slope of interventionism and degenerate into authoritarian regimes.

For as long as I can recall, and certainly for decades before I was born, the American left had a romantic attachment to the welfare states of the rest of the world. Unsatisfied with America’s own burgeoning 20th-century entitlement systems, left-liberals would point to the more domestically interventionist governments abroad as examples showing that some form of social democracy, or even outright socialism, was preferable to the United States’s alleged free market. In these more civilized countries, so goes the progressive narrative, health care and jobs are provided by the government, no one has to pay personally for anything that’s really important — a “safety net” would prevent people from growing old without financial support or getting sick without the comfort of subsidized health care.

This narrative typically neglects America’s own history with welfare, which demonstrates that the market and voluntary community will produce a far better, more humane, efficient and reliable, safety net than anything we can expect from the state. Instead, we were supposed to look to places like France or Sweden as inspiration of what government could do here in America. We should even look to Cuba, where something akin to mild communism was allegedly working well.

Well, in France, the government is on the brink of raising the retirement age to 62, much to the impassioned cries from the French left. Much as in the case of America’s own socialist retirement program, the accounting never adds up as promised. Idealists protest this effective cut in government benefits, but such cuts cannot be avoided forever. Meanwhile, another news story illustrates the fact that welfare states, even admired and civilized ones such as France, tend to have a police state side. The issues are connected, as a government that cares for all cradle to grave, a state that acts as a parent, must also exercise control over its subjects, and show a great interest in who is coming into the country or leaving, and what they are doing with their lives and bodies. So France is in hot water for its round ups and deportation of Gypsies. The nation’s leaders understandably resent the comparisons to the Nazis being thrown around. The Nazis did, in fact, go much further in their brutality. And they also went further in their welfare statism and economic regulation—a truth often forgotten.

As an aside, anti-immigration voices in the U.S. often point out that most other countries have even more severe border controls and immigration policies than are found in the United States. But do we want to be more like France, either in immigration policy or welfare policy? It is revealing that in American history, the further we have moved from free markets and limited government, the more anti-immigration scapegoating has been manifested in actual crackdowns. We used to have more open immigration and less welfare. The more America becomes a full-blown welfare state, the more pressure there is for America to resemble the rest of the welfare states in their exclusion of immigrants. There is a logic here for the left to consider: If you champion the human rights of immigrants, rethink your devotion to the inherently nationalistic welfare state. If we go the route of France in terms of entitlements, increased social tension and worse nativism will be on their way.

Looking over to Sweden, we see this left-liberal utopia on the verge of major privatization plans. Their system, too, is unsustainable as it is. And their welfarism has also bred police state approaches to immigration, drugs and other social issues. The very far-right anti-immigration party has been gaining ground, and it looks like the center-right coalition will have a firm grasp of the state after the elections next week. The greens and social democrats are teeming up with former communists to try to maintain power. But the center-right, which has been running the government and whose tax cuts and reform approach to welfare have been associated with improvements for the economy, looks like a shoe-in. As the AP puts it:

Swedish politics used to be like a long marriage with brief spells of infidelity.

Voters always returned to the long-governing Social Democrats – guardians of the Nordic country’s high-tax welfare state – after short-lived flirts with center-right coalitions.

That love story, it appears, may be coming to an end as Sweden heads into national elections Sept. 19.

But what about Cuba? The more daring progressives have always pointed to this purported example of even something resembling communism working. Well, although he has apparently retracted his statement somewhat, Castro himself admitted publicly that the Cuban model is a failure. He has also apologized for his regime’s unspeakably brutal treatment of gays. This raises another point for the left to consider. The regime they have long defended as enlightened and progressive had some of the most notoriously cruel policies toward gays—but this is often shrugged off as irrelevant to the question of Cuba’s political economy. If George W. Bush had been 1/10 as criminal in enforcing policies against gays, it would have been held up as a prime example of the inhumanity behind his entire alleged ideology of compassionate conservatism. If an American conservative were as bad on homosexual rights as Castro was, he would not be embraced by practically any leftist, no matter what else he stood for. But the Cuban regime has long gotten a pass, because of its free health care system.

We must remember that it is big governments—almost always with the bought support of the people through welfare-state handouts—that segregate, crack down, round up, deport, torture, mass murder and exterminate. It is not usually small governments that do these things. Just as with every socialist state in the modern era, Cuba’s welfarism and its police statism are inextricably linked.

But there is hope for Cuba, that it will liberalize and its socialism will give way to something more humane and economically manageable. Castro seems to be speaking out of both sides of his mouth, but you don’t have to take his word for anything. Actions speak louder than a dictator’s utterances. Cuba is cutting one million public sector jobs—a significant and clear reduction in the size of government, especially considering the nation’s entire population of about eleven million.

The age of the modern entitlement state appears to be in a transition period—and maybe, let’s hope, its final stage. It looks like most of the welfare states around the world are changing, either giving way to rightwing politics, for better and worse, liberalizing voluntarily, or otherwise demonstrating the unsustainability of their current forms. Sweden is no longer a social democratic model. France is turning toward conservatism. Cuba is slashing government. Moreover, there have been welfare riots and strikes throughout much of Europe. And of course China, while still nominally communist, has been liberalizing radically ever since the Mao years—providing the world with perhaps the most inspiring modern example of a nation moving from enslavement under the total state toward freedom, and particularly when we consider how many people’s lives are at stake.

But one country is not moving toward liberalization and free markets, and that is the United States. While the world’s socialist and welfare states are retreating from the politics of entitlement, the U.S. is still on its century-long course in that dismal direction. Last year, Putin famously warned Obama not to travel down the road of socialism, which had brought so much misery to the Russian people. And it’s not just Democrats getting such embarrassing warnings. After the 2008 financial bailouts, Venezuela’s socialist President Hugo Chavez backhandedly called President George W. Bush his “comrade” who was “to the left of me now.”

Let us hope things turn around sooner rather than later. The U.S. welfare state will give way eventually, but it will be none too pretty should the collapse of the U.S. entitlement state be delayed much longer.

It’s unfortunately getting easier and easier to find confirmation that “regime uncertainty” is the biggest drag on the U.S. economy’s chances of recovery. This, from a front-page story in today’s Wall Street Journal:

The U.S. has ample resources to restimulate the global recovery. U.S. companies are sitting on some $1.8 trillion in cash—the highest level, as a share of their total assets, since 1963. If and when uncertainties over income taxes, health care and government policy clear up, companies could grow confident enough to deploy that cash to hire workers and invest in new projects.

The prescription is clear: Congress and the Obama administration need to give up their anti-business (and consumer) activities and let us all resume productive lives.

According to the FBI, violent crimes declined 5.3 percent in 2009, the third year in a row they receded, and property crimes declined 5.3 percent, the ninth year in a row they decreased.

Sociologists, political scientists, criminologists, economists, journalists, pundits and policy wonks will no doubt offer up their theories to explain this trend. It is impossible, I believe, to nail these things down absolutely, what with all the factors involved, but I believe we can arrive at some informed and substantive insights, based on this latest good news and some other facts of contemporary America.

First of all, pedestrian economic troubles do not lead inevitably to more crime. Left-liberals love to blame crime on poverty. There might be correlations, but free will and other factors clearly preclude economic well-being from being the main decisive factor. Crime plummeted during the Great Depression, and with the economy doing poorly in 2009, and violent crime dropping for the third straight year in a row, I think it’s fair to say that welfare and food stamp programs are not all that’s standing between placid civilization and urban chaos.

Second of all, guns do not cause crime and gun control does not stop it. More and more jurisdictions have liberalized their gun laws over the last few decades, and crime has continued to mostly decline. In 2008, the Supreme Court overturned the most draconian gun ban, in DC. Crime dropped there too.

Third, liberalization of society, which has occurred regarding certain questions of social freedom, also does not open the door immediately to chaos in the streets. Many conservatives worried that liberalizing drug laws, in particular — even in the instance of medical marijuana, which has been adopted by many states in the last decade or so — would lead to an enormous increase in violent and property crime. That hasn’t happened.

On the other hand, the police state has seemingly grown overall. We have more prisons, more police, more weapons at their disposal, more tasings than ever. Is this why we are safer than a few years back?

Before addressing this question, we must first recognize that there’s an unseen cost to all this, even if it were to result in fewer reported violent and property crimes (and this completely ignores whether reporting figures are distorted as the police become more intimidating to normal Americans). Let’s say Americans become 5% less likely to be mugged, but 5% more likely to be harrassed by the police – or even unjustly arrested. Or let’s say Americans are less prone to be burglarized in their homes, but they must pay higher taxes, face more invasions into their privacy by the government and face a greater risk of having their door knocked down and their pets or family members killed by police with the wrong address on the search warrant. These excesses of police protection have surely become more severe in recent years, and so even if government growth is the main reason crime has declined, we must keep in mind the very high price paid, not just in liberty but in physical safety from the police themselves. Being clubbed by a police officer is not clearly better than being clubbed by a street thug.

One might interject that there are also unseen costs with drug liberalization and increased gun freedom. Perhaps. But in the discussion over violent crime, the main costs and benefits that are raised as important are the ones concerning freedom from bodily injury or other invasions of one’s person or property. If more guns make people more rude, or more legal marijuana means people will be less productive, that might be an important consideration. But we haven’t even contemplated here the very far-reaching social effects of having a huge police presence. Focusing only on threats to one’s person or property, it is clear that increasing the size of the police force runs the risk of automatically making citizens less physically safe as it concerns the police themselves, even if it could be shown to reduce the risk of being physically hurt by private criminals.

Adding in the social effects of the growing government, we can probably find all sorts of policies that tend to accompany a large police force that also lead indirectly to increased crime: welfare, public education, immigration controls. And of course, the police do spend a lot of time enforcing victimless crime laws, which not only lead to increases in violent crime but are themselves acts that could be defined as violent violations of person and property.

But how do we get around the idea that the government has grown while violent crime has not? We can back up and look at the greater historical trend. The police state has grown incredibly since the 1960s with the advent of Nixon’s war on drugs. So has the welfare state and almost every other tentacle of government. While crime has dropped since the 1980s, it does not appear to be lower than it was in the 50s and early 60s – when the government’s role in our daily lives, and the police powers it claimed over street crimes, real and victimless, were in most ways substantially smaller.

Also, the private sector in rights protection seems to have ballooned. Ever since the 1980s, private security personnel have outnumbered public police. This is a gloriously welcome market trend, and, perhaps not coincidentally, it has come about alongside the recent drop in private crime.

But nevertheless, many will argue that it is the expansion of prisons, surveillance and police forces that, more than anything, has been winning the war on crime. My hypothesis is nearly the opposite: that crime has diminished despite these political trends, and that if the government were to become less involved in law enforcement, as well as in social engineering, violent crime would plummet even further. The historical, economic and philosophical case for relying on market and community norms, rather than the monopolizing state, to enforce the law, is presented in the hundreds of pages of essays, papers and case studies that constitute the Independent Institute’s  indispensable book Anarchy and the Law, edited by economist Ed Stringham. For one example, detailed in the book, the so-called American Wild West was not wild at all, but rather peaceful with very low recorded violent crime. The absence of modern state institutions was probably a great blessing for social tranquility.

But we are about to see another case study unfold over the next few years. Strapped for cash, police forces around the country are slashing law enforcement programs, in particular as it concerns many violent and property crimes. Notoriously, governments facing budget crises never propose to cut pensions for their employees or many of the other programs of obvious waste and graft, but instead go after those the public most demands, so as to gin up support for higher taxes. Will the public go for the extortion racket?

The most desired of government services, the one even most libertarians defend, the protection of person and property, are being held hostage. In my city of Oakland, CA, the police chief threatened earlier this year that if police layoffs occurred, city cops will no longer answer routine calls for burglary, grand theft, identify theft, sex registration violations, waste violations, phony check writing, employee embezzlement, extortion or vandalism—among many other offenses of varying degrees of severity. But now the police chief says that we cannot believe the police union when it claims that crime has risen as a result of these layoffs. Oh. So the police force shrank but we are no less safe than we would have been?

Some worry that more police layoffs through the country will unleash chaos and violent crime. I’m worried about crime rising if the economy truly ever does fall off a cliff, but I am honestly not so concerned that society will crumble even if the police budgets are cut to the bone, and then cut some more. Most homicides are committed by someone who knows the victim, and most of the remainder are due to street violence related to the drug war – the police roaming around the streets probably have a minimal effect on the first category and probably make matters worse in the second. Most property crimes are never solved by the police and I don’t see the police as much of a deterrence. Why is society not brimming with chaotic violence in the streets? Civil society and civilized culture, for which we probably have little to owe the government, is the main reason. It’s corny to say, but the main reason society is relatively civil is because most of your neighbors as children were taught good values by their parents—that is, when they weren’t busy being told to sit still in a government school and hear lectures on how FDR cured the Great Depression. This is the key to civil society, and it is in fact a testament to its power that most human interactions are peaceful and voluntary despite the government doing everything it can to encourage the opposite sort of behavior.

Aside from that, there is private protection of much commercial property by private individuals and private security agencies. I believe everyday Americans owning guns offers much more protection and deterrence than police carrying guns. And I believe the police themselves have become such a threat to liberty that fewer of them prowling the streets, looking for people to fine and arrest, is probably a good thing.

As governments throughout the country continue to lose their grip on law enforcement, as the numbers of cops shrink due to inevitable budget cuts, as the private ownership of guns continues to rise in popularity, as the drug laws continue to liberalize and the market continues to take over security, I am actually somewhat hopeful that violent crime will continue to trend downward. What I am most hopeful for, however, is that Americans will wake up, realizing that the cops are not even good for calling when your house has been robbed any more — just one more key promise that government always uses to expand itself but doesn’t fulfill.

What I fear, more than an increase in private crime accompanying a reduction in police forces, is that the overall trend of expanding the police state will not reverse after all, but that politicians will find a way to continue it. I don’t fear urban chaos following police layoffs. I fear that we and our liberty will be protected to death.

A new study from the Federal Reserve Bank of San Francisco confirms research by Independent Institute scholars that immigrants improve the U.S. economy as a whole, including employment prospects and wages for native-born Americans:

total immigration to the United States from 1990 to 2007 was associated with a 6.6% to 9.9% increase in real income per worker. That equals an increase of about $5,100 in the yearly income of the average U.S. worker in constant 2005 dollars. Such a gain equals 20% to 25% of the total real increase in average yearly income per worker registered in the United States between 1990 and 2007.

The study found no evidence that immigrants displace native-born Americans’ employment, and that they in fact expand employment opportunities for all. This is partly due to the fact, also confirmed by Independent Institute research, that immigrants’ skills are complimentary to native-born workers’, rather than competitive with them:

U.S.-born workers and immigrants tend to take different occupations. Among less-educated workers, those born in the United States tend to have jobs in manufacturing or mining, while immigrants tend to have jobs in personal services and agriculture. Among more-educated workers, those born in the United States tend to work as managers, teachers, and nurses, while immigrants tend to work as engineers, scientists, and doctors.

In addition, as immigrants fill some jobs, this expands opportunities in that sector, resulting in more jobs overall. Furthermore, the new jobs created tend to be better ones that require the stronger communication skills possessed by native-born Americans, moving low-skilled U.S.-born laborers into better-paying jobs. Overall, states that have large numbers of immigrants produce more, hire more, and pay workers more than states with low numbers of immigrants.

The study concludes:

Data show that, on net, immigrants expand the U.S. economy’s productive capacity, stimulate investment, and promote specialization that in the long run boosts productivity. Consistent with previous research, there is no evidence that these effects take place at the expense of jobs for workers born in the United States.

The summary for the study is here. The full paper can be found here.

Each summer, Wall Street strategist Byron Wien convenes a meeting of high rollers to discuss the outlook for investment. This year’s meeting brought together fifty individuals, including more than ten billionaires.  Their expectations, as reported by CNBC, are gloomy:

“They saw the United States in a long-term slow growth environment with the near-term risk of recession quite real,” said Wien, in a commentary to Blackstone clients. “The Obama administration was viewed as hostile to business and that discouraged both hiring and investment. Companies and entrepreneurs were reluctant to add workers because they didn’t know what their healthcare costs or taxes were going to be.”

Add this report to the many similar ones to which my colleagues and I have called attention over the past two years.

Of course, for mainstream macroeconomists, such evidence means nothing. In fact, they hold it in complete contempt because (1) their formal mathematical models do not have a variable called “regime uncertainty,” and (2) even if they could be persuaded to take this factor into account, the canned data on which they rely—the product of the Commerce Department’s Bureau of Economic Analysis, for the most part—do not supply them with an “official” data set for their analysis. What you can’t measure, according to their “scientific” credo, does not exist. Their de facto motto (of which I have more than once been on the receiving end) is: you’ve got no formal model; you’ve got nothing.

In my study of regime uncertainty over the past fifteen years, I have given weight to three independent forms of evidence: (1) specific legislative, executive, judicial, and regulatory actions the government is taking, the ideology embraced by major government actors and advisors, and, in light of basic economic logic, what investors might reasonably infer about the future security of their private property rights from the government’s actions and the ideology of its leading figures; (2) direct testimony by investors themselves, as well as relevant opinion surveys of businessmen, when available; and (3) changes in risk premiums demanded by investors in the corporate bond markets, as shown by changes in the slope of yield curves. During the past two years, my scrutiny of these types of evidence has persuaded me that regime uncertainty has arisen and that this uncertainty probably accounts, at least in part, for the very low level at which long-term private investment has settled, with only relatively small recovery since it hit its most recent trough.

Again, however, full disclosure obliges me to warn the reader that the acknowledged experts in macroeconomics—those who work in this area at MIT, Stanford, Harvard, Chicago, Yale, Princeton, and the other esteemed universities—are to my knowledge unanimous in their disregard of the idea that regime uncertainty might be contributing to the prolongation of the present recession (or might have contributed to the prolongation of the Great Depression, as I argued in my 1997 paper). So, if you prefer to go with the experts, you should disregard my argument and my evidence and make your bets on the basis of what the experts say. You might wish to consider, however, that these are the same experts who, virtually to a man, failed to predict the present recession (and most of the preceding ones, as well) and that, according to their positivistic tenets, predictive power is the sine qua non of a scientific theory, as much in economics as in physics or chemistry.