I was invited to speak on entrepreneurship at San Jose’s Tax Day Tea Party event last week, so I thought I would post my remarks.  I took a markedly global perspective that focused on free trade and open immigration.  The take away is that economic freedom is the key to growth. Of course, a speech at a political rally is necessarily less precise than a scholarly article, but I draw heavily on evidence found in Andre Shleifer’s paper “The Age of Milton Friedman”, arguments in Peter Leeson’s piece “Two Cheers for Capitalism?”, as well as various other sources. It was an enjoyable experience talking to a larger group than I’m accustomed to (700-900 people according to one news source), and I hope that I was able to persuade some of them of the merits of economic liberty. The full speech is below:

Recent events and the words of our politicians have popularized the idea that while markets can be important to economic growth and prosperity, they can also undermine it. It is fashionable to give a nod to the forces of entrepreneurship but in the same breath assert that the power of markets must be tamed by regulation. It is complacently accepted that somehow, these regulators—the men and women in Washington—know what’s best for American consumers.

When the current administration talks of entrepreneurship, they speak of politically favored businesses and privileged recipients of the taxpayers’ dollars. To be clear, that is not entrepreneurship. It has become conventional to say that those who openly embrace capitalism, free markets and free trade are dogmatic, ideologues, idealistic, or market fundamentalists. And if you look to the media and our leaders, you get the impression that being in favor of free markets is somehow an unreasonable position.

Unless one is ashamed of unprecedented increases in income, rising life expectancy, greater education, and more political freedom, there is no reason to be a fair-weather fan of capitalism. Sprawling free markets in countries that became more capitalist over the last 25 years have meant many more people enjoy improvements in well being and opportunities to advance human capabilities.

There is no evidence that countries that eschewed freer markets and embraced substantially greater state control performed better on any of these major indicators. On the contrary, those countries that adopt increased taxation, increased regulation, fiscal mismanagement and enormous public debt have performed demonstrably worse.

From a global perspective, we have witnessed remarkable progress of mankind through the increased acceptance of free market policies in both rich and poor countries. Before the industrial revolution, 80% of the world’s population lived in abject poverty. By 1980, that number has fallen to 34.8% and by 2000, less than 20% of the population lives on less than $1 a day. In five years, the number is expected to fall to 10% if free trade is allowed to flourish.

In just the past 25 years increased private ownership, increased free trade, and lower taxes all came at the hands of politicians like Deng Xiao Ping in China, Margaret Thatcher in England, and Ronald Reagan in United States. In the years following the adoption of these policies by these global leaders, per capita income nearly doubled from 1980 to 2005; Tariffs fell and trade increased; Schooling and life expectancy grew rapidly, while infant mortality and poverty fell just as fast.

In the average country that became more capitalist over the last 25 years, the average citizen gained a 43% increase in income, nearly half a decade in life expectancy, and a 2-year increase in the average years of schooling. In my lifetime alone, freer markets have improved the lives of billions of people from all walks of life.

When we look back at our own history, the tremendous economic growth that Americans experienced from the time of the original Tea Party up to 1914 was the result of economic freedom from government regulation, open boarders for free immigration, and very few trade restrictions on the global flow of goods, services, and capital. Anyone could get on a boat, land on Ellis Island and become an immigrant and this benefited both domestic Americans and the immigrant alike. Business and labor were free to be entrepreneurial—and entrepreneurship created wealth. But we don’t want wealth for wealth’s sake. Wealth allows for the improvement of the human condition.

For example, in 1905, our average life expectancy in the U.S. was 47. Today it is 78. A hundred years ago only 14% of homes had a bathtub; 8% had a phone; 95% of all births took place at home; most women washed their hair once a month; and the average worker made about $300 per year.

As recent as 1984, it took the average American wage earner 456 hours of labor to earn enough to purchase a cellphone. Today, it takes the average American 4 hours. A computer has fallen from costing 435 hours of labor to less than 20. None of this accounts for the tremendous improvements in technological capacity. There are several reasons that the costs of goods have dropped so drastically, but perhaps the biggest is increased international trade.

Simply put, the free market means the poor are less poor. Globalization extends and deepens a capitalist system that has for generations been lifting American living standards—for high-income households, of course, but for low-income ones as well. When the world embraces free market reforms, the world economy expanded greatly, the quality of life improves sharply for billions of people, and dire poverty was substantially scaled back. This is not a coincidence.

It is a well-established fact that when people are free to buy from, sell to, and invest with one another as they choose, they can achieve far more than when governments attempt to control economic decisions. Widening the circle of people with whom we transact—including across political borders—brings benefits to consumers in the form of lower prices, greater variety, and better quality, and it allows companies to reap the benefits of innovation, specialization, and economies of scale that larger markets bring. Free markets are essential to prosperity, and expanding free markets as much as possible enhances that prosperity.

Voluntary economic exchange is inherently fair and does not justify government intervention. When two free people come together on terms they have agreed upon to exchange peacefully, both benefit. Government intervention in voluntary economic exchange on behalf of some citizens at the expense of others is inherently unfair. One person is coerced in order to privilege another. It really is that simple.

When goods, services, labor and capital flow freely across U.S. borders, Americans can take full advantage of the opportunities of the international marketplace. They can buy the best or least expensive goods and services the world has to offer; they can sell to the most promising markets; they can choose among the best investment opportunities; and they can tap into the worldwide pool of capital. Study after study has shown that countries that are more open to the global economy grow faster and achieve higher incomes than those that are relatively closed. This is capitalism.

Growth is not guaranteed. It seems obvious that the central challenges facing America have to do with the with predatory regulatory and tax policies conducted by governments domestic and abroad. From an economic perspective, then, the case for unilateral trade liberalization—that is reducing our own trade barriers and subsidies without preconditions or reciprocal commitments from other countries—is the best policy to promote peace and prosperity globally.

Politically, however, the concentrated and organized beneficiaries of protectionism are powerful relative to the much larger, disorganized, beneficiaries of free trade. Politicians tend to be most responsive to the loudest interest groups and are therefore inclined to view free trade unfavorably. But we as Americans must be clear—capitalism is not evil. It has done more good for more people than any acts of state, any stimulus spending, any health program or welfare initiative. Americans can no longer afford to fear freedom.

Finally, acknowledging the relationship between free markets and economic prosperity does not make someone “dogmatic”. It is unreasonable to continue to ignore these facts. Capitalism’s superiority for economic growth and development deserves the unqualified support of everyone who believe that wealth is better than poverty, life is better than death, and liberty is better than oppression.

April 19 marks the anniversary of Lexington and Concord (1775), the Warsaw ghetto uprising (1943), and the day the FBI finished off the siege at Waco, Texas, that left nearly 80 civilians dead (1993). It is a good day to think of liberty and the timeless struggle of the state vs. the individual. How fitting, then, to see that American distrust in the federal government is near an all-time high of 80%.

Trust in the federal government was tending to decline until 9/11, when American faith in the warfare state and Pentagon skyrocketed, despite 9/11 being one of the most conspicuous and important government failures in modern memory. But this trend appears to have reversed with the bungling of Bush in his foreign wars, after Katrina, and in the midst of the 2008 financial crisis. Obama is only increasing mass distrust in Washington. This is all to the good.

I spent several hours today preparing a short article on defense spending for The Beacon, updating similar articles I wrote in 2004 and 2007. The subject matter required me to do a fair amount of work that most people no doubt would consider tedious—locating and cross-checking data, performing various arithmetic operations, checking my figures again and again to ensure their accuracy. I have been doing this sort of work off and on ever since my college days, and strange to say, I rather enjoy it. I used to joke with my grad students that “I’m what you might call a data man, Jack” (with apologies to Group Captain Lionel Mandrake).

Today, however, as I was working along, my mind seized on something I had never dwelt upon. Numbers, data checking, mathematical operations—these things are abstract and in themselves completely lifeless, regardless of the human qualities or quantities to which they sometimes relate. One can work on the figures themselves without being drawn, perhaps unwillingly, into reflections on distressing things: loss, disappointment, pain, desperation, sorrow, death. Perhaps this disjunction between the black-and-white of numbers and numerical computations, on the one hand, and the exquisitely varied coloration of human life and death, on the other, explains the origin of the expression “cold, calculating killer.”

At this point in my reflections, I could not help recalling Robert Strange McNamara. (Was it simply a coincidental family oddity—his mother’s maiden name—that denominated him strange, or was his middle name divinely ordained to serve as a warning?) McNamara was a promising young man, but the big impetus to his later career achievements came during World War II, when he impressed his superiors while serving in the air force as a bombing efficiency expert. I wonder if he ever thought, while examining his data on the results of the U.S. incendiary bombing of the highly flammable Japanese cities, about the human beings—the old women, the infants and little kids, and all of the others who had done so little to deserve their fiery fate—who were suffering the unimaginable agonies of being terribly burned or of seeing their loved ones burned to death and torn apart by blasts. Or did the up-and-coming young officer think only about the ratio of X to Y during his working hours, and then stop by the officers’ club for a stiff drink or two before dozing off between clean sheets?

I don’t pretend to know what passed through his mind, or through the minds of countless other men who played similar roles amid the madness of war. I do know that many people have the capacity to keep troubling thoughts out of the forefront of their minds, to avoid dwelling on things they tell themselves they cannot do anything about in any event, and thus to steer clear of speaking or even thinking about exactly what they are doing.  This self-protective evasiveness may explain why soldiers so often speak not of causing horrific deaths and destruction, but of “getting the job done” so they can return home for a slice of blueberry pie with their wives or sweethearts.

Data, then, may serve as soporifics—medicinal tablets that keep our minds off things about which we dare not think too hard or too long. Even then, however, we may be left with Hamlet’s ominous worry, for in that sleep, what dreams may come?  Whether nightmares disturbed McNamara’s slumber during World War II or later, when he was secretary of defense during the Vietnam War, with responsibility for the B-52s employed to turn immense swaths of land into carpet-bombed hell, I do not know.

I do know, however, that in the 1960s he surrounded himself with “whiz kids” who were devoted to bringing their “planning, programming, and budgeting system” to bear on getting “more bang for the buck.” People who knew McNamara’s background were surely not surprised. “Cold, calculating killers” – can anyone honestly deny that this term applies in an altogether literal way to these men. And who would have expected anything else? Hadn’t they already honed their skills while working for the RAND Corporation, where they had learned to speak “rationally” of megadeaths and to conclude with numerical precision that if in a nuclear exchange with the Soviets, we suffered 100 million deaths and they suffered 150 million deaths, we would have “won the war”?

Data are fine things; I’ve devoted much of my professional life to their examination and analysis. Yet it behooves all of us to realize that data may sometimes clothe madness or veil inhumanity, and to beware the power of numbers to lull us into an immoral sleep.

When President Obama presented his budget recently for fiscal year 2011, he proposed that the Pentagon’s outlays be increased by about 4.5 percent beyond its estimated outlays in fiscal 2010, to a total of almost $719 billion. Although many Americans regard this enormous sum as excessive, few appreciate that the total amount of all defense-related spending greatly exceeds the amount budgeted for the Department of Defense.

In fiscal year 2009, which ended last September, the Pentagon spent $636.5 billion. Lodged elsewhere in the budget, however, other lines identify funding that serves defense purposes just as surely as—sometimes even more surely than—the money allocated to the Department of Defense. On occasion, commentators take note of some of these additional defense-related budget items, such as the Department of Energy’s nuclear-weapons program, but many such items, including some extremely large ones, remain generally unrecognized.

Since the creation of the Department of Homeland Security, many observers probably would agree that its budget ought to be included in any complete accounting of defense costs. After all, the homeland is what most of us want the government to defend in the first place.

Other agencies also spend money in pursuit of homeland security. The Justice Department, for example, includes the Federal Bureau of Investigation, which devotes substantial resources to an anti-terrorist program. The Department of the Treasury claims to have “worked closely with the Departments of State and Justice and the intelligence community to disrupt targets related to al Qaeda, Hizballah, Jemaah Islamiyah, as well as to disrupt state sponsorship of terror.”

Much, if not all, of the budget for the Department of State and for international assistance programs ought to be classified as defense-related, too. In this case, the money serves to buy off potential enemies and to reward friendly governments who assist U.S. efforts to abate perceived threats. About $5 billion of annual U.S. foreign aid currently takes the form of “foreign military financing,” and even funds placed under the rubric of economic development may serve defense-related purposes indirectly. Money is fungible, and the receipt of foreign assistance for economic-development projects allows allied governments to divert other funds to police, intelligence, and military purposes.

Two big budget items represent the current cost of defense goods and services obtained in the past. The Department of Veterans Affairs, which is authorized to spend about $124 billion in the current fiscal year, falls in this category. Likewise, a great deal of the government’s interest expense on publicly held debt represents the current cost of defense outlays financed in the past by borrowing from the public.

To estimate the size of the entire de facto defense budget, I gathered data for fiscal 2009, the most recently completed fiscal year, for which data on actual outlays are now available. In that year, the Department of Defense itself spent $636.5 billion. Defense-related parts of the Department of Energy budget added $16.7 billion. The Department of Homeland Security spent $51.7 billion. The Department of State and international assistance programs laid out $36.3 billion for activities arguably related to defense purposes either directly or indirectly. The Department of Veterans Affairs had outlays of $95.5 billion. The Department of the Treasury, which funds the lion’s share of military retirement costs through its support of the little-known Military Retirement Fund, added $54.9 billion. A large part of the National Aeronautics and Space Administration’s outlays ought to be regarded as defense-related, if only indirectly so. When all of these other parts of the budget are added to the budget for the Pentagon itself, they increase the fiscal 2009 total by nearly half again, to $901.5 billion.

Finding out how much of the government’s net interest payments on the publicly held national debt ought to be attributed to past debt-funded defense spending requires a considerable amount of calculation. I added up all past deficits (minus surpluses) since 1916 (when the debt was nearly zero), prorated according to each year’s ratio of narrowly defined national security spending—military, veterans, and international affairs—to total federal spending, expressing everything in dollars of constant purchasing power. This sum is equal to 67.6 percent of the value of the national debt held by the public at the end of 2009. Therefore, I attribute that same percentage of the government’s net interest outlays in that year to past debt-financed defense spending. The total amount so attributed comes to $126.3 billion.

Adding this interest component to the previous all-agency total, the grand total comes to $1,027.8 billion, which is 61.5 percent greater than the Pentagon’s outlays alone.

In similar analyses I conducted previously for fiscal 2002 and for fiscal 2006, total defense-related spending was even greater relative to Pentagon spending alone – it was 73 percent greater in fiscal 2002 and 87 percent greater in fiscal 2006. In fiscal 2009, the ratio was held down in large part by the reduced cost of servicing the government’s debt, owing to the extremely low interest rates that prevailed on government securities. This situation cannot last much longer. As interest rates on the Treasury’s securities rise, so will the government’s cost of servicing the debt attributable to past debt-financed defense outlays.

For fiscal 2010, which is still in progress, the president’s budget estimates that the Pentagon’s spending will run more than $50 billion above the previous year’s total. Any supplemental appropriations made before September 30 will push the total for fiscal 2010 even farther above the trillion-dollar mark.

Although I have arrived at my conclusions honestly and carefully, I may have left out items that should have been included—the federal budget is a gargantuan, complex, and confusing collection of documents. If I have done so, however, the left-out items are not likely to be relatively large ones. (I have deliberately ignored some minor items, such as outlays for the Selective Service System, the National Defense Stockpile, and the anti-terrorist activities conducted by the FBI and the Treasury.

For now, however, the conclusion seems inescapable: the government is currently spending at a rate well in excess of $1 trillion per year for all defense-related purposes. Owing to the financial debacle and the ongoing recession, millions are out of work, millions are losing their homes, and private earnings remain well below their previous peak, but in the military-industrial complex, the gravy train speeds along the track faster and faster. 

Here’s an illuminating passage from James C. Scott’s The Art of Not Being Governed: An Anarchist History of Upland Southeast Asia (Yale University Press, 2009):

At a time when the state seems pervasive and inescapable, it is easy to forget that for much of history, living within or outside the state — or in an intermediate zone — was a choice, one that might be revised as the circumstances warranted. A wealthy and peaceful state center might attract a growing population that found its advantages rewarding. This, of course, fits the standard civilizational narrative of rude barbarians mesmerized by the prosperity made possible by the king’s peace and justice — a narrative shared by most of the world’s salvational religions, not to mention Thomas Hobbes.

This narrative ignores two capital facts. First, as we have noted, it appears that much, if not most, of the population of the early states was unfree; they were subjects under durress. The second fact, most inconvenient for the standard narrative of civilization, is that it was very common for state subjects to run away. Living within the state meant, virtually by definition, taxes, conscription, corvée labor, and, for most, a condition of servitude; these conditions were at the core of the state’s strategic and military advantages. When these burdens became overwhelming, subjects moved with alacrity to the periphery or to another state. . . . And, finally, the early states were warmaking machines as well, producing hemorrhages of subjects fleeing conscription, invasion, and plunder. Thus the early state extruded populations as readily as it absorbed them, and when, as was often the case, it collapsed altogether as the result of war, dought, epidemic, or civil strife over succession, its populations were disgorged. . . . For long periods people moved in and out of states, and “stateness” was, itself, often cyclical and reversible.

The book traces the history of “Zomia,” an isolated, upland region stretching across seven Southeast Asian countries. Scott’s thesis is that its inhabitants chose a particular culture and lifestyle — farming technology, housing, social structures, language, art, and so on — for the specific purpose of avoiding entanglement with the coercive state. A very interesting read.

That has been a hot topic in Florida this past week, because the Florida legislature passed a bill that would remove job protection from tenure for teachers, prohibit teachers from being paid more for holding advanced degrees, or for being paid more for number of years on the job, and require merit pay based on the performance of their students.

Governor Charlie Crist vetoed the bill today.

Despite the rhetoric on both sides of doing what’s best for Florida’s schools, there were some politics involved on both sides.  Teachers’ unions lean strongly Democratic, and Florida’s Republican legislature was, at the very least, not concerned about passing legislation the teachers’ unions opposed.  Democrats, of course, supported the union line on this and opposed the bill.

A host of Republican heavyweights in Florida came out in support of the bill, including former Governor Jeb Bush and two former Speakers of the Florida House of Representatives.  There was a clear partisan divide on this bill: Republicans in favor; Democrats against.

The veto by Republican Governor Charlie Crist is interesting in the context of the upcoming election, as Governor Crist has decided not to run for a second term as governor, but to run for an open U.S. Senate seat instead.  He is being challenged (on the Republican side) by former Speaker of the Florida House Marco Rubio, who now leads Governor Crist in the polls.

It appears that Crist’s veto will cost him even more Republican support, making it more likely he will lose the Republican primary.  Meanwhile, a poll indicates that if Crist did lose the primary and ran as an independent in November, he would win a three-way race.

Despite rumors that Crist might run as an independent, he has said he is a Republican and will be running as a Republican for the Senate.  But his veto of this legislation with strong Republican support suggests he’s setting himself up to win a three-way race in November, should Rubio win the Republican primary.

Setting aside all the political maneuvering, it’s also worth considering whether it’s a good idea to pay teachers based on the performance of their students rather than on years on the job, with a pay premium to advanced degree holders, and whether job protection for tenured teachers is a good policy.

I was interviewed recently by Angel Martin for Libertad Digital, an interesting Spanish website. The interview was posted today. Topics discussed include the recent financial debacle, the current recession, the government’s recent policy actions, and several related, more general subjects, such as “regime uncertainty” and U.S. foreign policy. For those who might be interested in this interview but do not read Spanish, I am posting here the original questions and my original answers in English. I am grateful to Angel Martin for undertaking this project.

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Los acontecimientos actuales requieren de los analistas económicos, entre otras cosas, una teoría económica sólida, amplitud de miras y una buena dosis de humildad, para adentrarse en el frondoso bosque de los complejos fenómenos y datos económicos, y salir de él con una aceptable comprensión de lo que está pasando. Pero además, el conocimiento detallado de la historia económica puede ayudar notablemente a tener una mejor y más amplia perspectiva de los hechos recientes. No en vano, la crisis actual ha sido comparada con otros periodos anteriores, como la Gran Depresión de los años 30, o ha sido calificada en más de una ocasión como la crisis más grave desde la Segunda Guerra Mundial.

Todas estas cualidades son las que cumple a la perfección el economista e historiador norteamericano Robert Higgs, a quien entrevistamos en exclusiva. Él es investigador sénior en economía política del think-tank californiano The Independent Institute, y es autor de numerosas obras relacionadas con la historia económica norteamericana y la evolución y desarrollo moderno del gobierno estadounidense, de entre los que destacan Crisis and Leviathan (“Episodios críticos en el crecimiento del gobierno norteamericano”) y Depression, War, and Cold War (“Cuestionando los mitos sobre el conflicto y la prosperidad”).

PREGUNTAS

Orígenes de la crisis

P. Los analistas no se ponen de acuerdo sobre las causas de la crisis. Unos culpan a la política monetaria demasiado laxa de la Fed, otros a políticas gubernamentales de fomento de la propiedad inmobiliaria, al exceso de ahorro de países asiáticos o a la desregulación financiera, los complejos derivados… ¿Qué interpretación encuentra más sólida? ¿Por qué?

No consensus on the causes and origins of the crisis. Some blame the Fed’s expansionary monetary policy, government policies on fostering homeownership (Fannie, Freddie, CRA…), others the Asian savings glut, others financial deregulation and complex derivatives… Which position, if any, is the most solid? Why?

The crisis has multiple causes. In the United States, the most important were the Fed’s easy-money policy between 2001 and 2005, which fueled the housing boom; the pressures many different government officials and agencies brought to bear on banks and other lenders to lower their mortgage-lending standards so that they would lend more to home buyers who lacked the qualifications to receive loans under traditional underwriting standards; the rapid growth of the highly leveraged government-sponsored enterprises Fannie Mae and Freddie Mac as secondary mortgage purchasers and as issuers of securities to fund their own operations; the failure of the (officially privileged) ratings agencies to identify the actual risk associated with many of the financial derivatives based on the expected flow of future mortgage-loan repayments; and the failure of many financial institutions to recognize the actual risks of their investments and to avoid those risks or to hedge or insure against them properly. Of these causes, the first two—bad Fed policy and government’s various interventions in the housing-finance industry—were probably the most critical.

¿Rescates gubernamentales para salvar al capitalismo?

P. Se han justificado las masivas intervenciones públicas con el pretexto de salvar al capitalismo. El sistema financiero hubiera colapsado de no haber rescatado e intervenido el gobierno en numerosas entidades financieras, tal y como nos muestra la quiebra de Lehman Brothers; ello hubiera desencadenado un proceso de quiebras sistémicas, argumentan. ¿Hay algo de cierto en todo esto?

Massive public interventions have been justified on the grounds of saving capitalism. The financial system would have collapsed, many banking institutions would have gone bust, which would have brought about some disastrous consequences for the American people (as Lehman’s failure has shown). Is there some truth in all this?

Capitalism has not existed in the United States since the early twentieth century, so whatever the government might have imagined itself to be saving, it certainly was not capitalism. In fact, the government’s various interventions have focused on saving the insurance giant AIG, Fannie Mae and Freddie Mac, big commercial banks and big investment banks, and the automobile manufacturers General Motors and Chrysler—all of which ought to have been liquidated—and on enriching members of the United Auto Workers Union, various government-employee unions, and other supplicants with political clout.

Systemic risk is greatly overblown, as a lobbying ploy; the entire system as such was never at substantial risk. If a market sector of the economy is to be preserved, it must be a system of private profit and private loss, not a system of private profit and public loss. The government’s interventions have created a large number of zombie firms, which are actually bankrupt but are kept in operation by infusions of government-supplied funds.

Deuda pública

P. Los niveles de deuda y déficit públicos parecen haber llegado a niveles insostenibles, gracias a los estímulos fiscales. Está la cuestión de Grecia. ¿Cómo cree que puede evolucionar esto? ¿Conseguirá la administración Obama reducir significativamente su déficit en el corto-medio plazo?

Public debt and deficits seem to have reached unsustainable levels, due to fiscal stimulus. There is Greek question. How do you think this situation might evolve? Will Obama reduce significantly the debt and deficit in the short-medium term?

The current debt and the projected deficits create a substantial risk of default on the U.S. government’s debt service. Even if the current crisis had not occurred, the government’s promises to provide benefits for retired people and for health care cannot be kept much longer. The government will probably deal with this unsustainable situation by taking a series of marginal, often hidden steps to raise taxes and to chip away the promised benefits. Another possibility is rapid inflation, which would reduce the real value of the government’s interest payments on its debt and amount to a form of indirect default. Outright default is the least likely outcome, but it is conceivable. After all, the U.S. Treasury defaulted before, when the government abandoned the gold standard in 1933 and the Treasury refused to keep its promises to repay bond purchasers in gold as promised.

Deflación

P. Los políticos, autoridades monetarias y buena parte de economistas temen la deflación como el peor mal posible, y actúan para evitarla casi a cualquier coste, apoyándose en lo que ocurrió en los 30 en EEUU y en la deflación japonesa para defender los estímulos monetarios. ¿Es la deflación tan peligrosa? ¿Se sostiene su evidencia empírica/histórica?

Politicians, monetary authorities and many economists are very fearful of deflation, claiming it is much worse than inflation, which has prompted them to act accordingly at almost any cost. They seem to base their opinions on what happened in the 1930s contraction (monetarist story), and in the Japanese deflation. Is deflation so dangerous? Is the empirical/historical evidence correct?

The modern fear of deflation is irrational. Gradual deflation that reflects ongoing improvements in productivity is for the most part a desirable condition. Between 1865 and 1897 gradual deflation reduced consumer prices by about 50 percent. During the same years, the United States experienced very rapid growth of real GDP per capita. Prices fell greatly between 1920 and 1922 and would have fallen further, had the Fed not acted (unwisely) to stabilize the commodity price level for the rest of the 1920s. However, rapid unexpected deflation caused by changes in the demand for or supply of money are not desirable and may cause substantial harm, as they did in the United States between 1929 and 1933. Nevertheless, constantly erring on the side of inflation, as the Fed has done since the 1930s, is bad policy because it results in secular loss of the dollar’s purchasing power. Since the Fed’s creation in 1913, the dollar has lost more than 95 percent of its purchasing power.

Gran Depresión

P. Hablando de la recuperación económica y las previsiones, usted elaboró el concepto de “incertidumbre de régimen” para explicar por qué la Gran Depresión se prolongó durante tantos años. ¿Podría explicar el concepto? ¿Puede estar pasando algo parecido actualmente con las políticas de Obama?

Talking about the economic recovery and future forecasts (which I know you are rightly very skeptical about)… you elaborated the concept ‘regime uncertainty’ to explain why the Great Depression lasted so long. Could you explain it? Could that be happening again with Obama?

“Regime uncertainty” is the name I give to widespread fears that the nature of the economic order will be changed. This has to do mainly with fear that private property rights will be altered for the worse by higher taxes, more costly regulation, more hostile treatment by government functionaries of all kinds, and perhaps outright confiscation of private property. When investors feel regime uncertainty, they are reluctant to make long-term investments because they fear that they will be unable to receive the income those investments will generate and may even lose the capital itself. Between 1935 and 1940, many U.S. investors feared that the market-oriented U.S. economy was going to be transformed into fascism, socialism, or some other system dominated by the government. During the past two or three years, similar fears have arisen because of the many large-scale government interventions (or likely future interventions) into the financial markets, the health-care system, the regulation of carbon emissions, and  the automobile industry, besides the imposition of higher taxes and more onerous regulations in general. However, because the U.S. economy is already subject to pervasive government intervention of many kinds, the present situation is not fully comparable to the situation in the late 1930s.

Reforma sanitaria

P. Entre estas políticas, Obama ha dado gran importancia a su reforma sanitaria. ¿Cuáles pueden ser las consecuencias de esta medida? ¿Ha tomado Obama una vía adecuada para incrementar la cobertura médica a los más necesitados y mejorar la eficiencia del sistema?

Amongst these policies, Obama has attached much importance to his healthcare reform. What can be the consequences of such a reform? Has Obama taken the good path to address the problems of the current American healthcare system (allegedly, high costs, low medical coverage for the poor…)

The health-care law just enacted will prove disastrous, both for the operation of the health-care industries and for the government’s finances. It will also lead to a great loss of freedom for the American people, tens of millions of whom will be forced to purchase health-care “insurance” that they do not want to purchase, or to pay large fines. Insurance companies will benefit in the short term by gaining millions of unwilling customers, but in the long run, the entire health-care insurance industry is likely to be taken over by the government because the “mixed” (fascist) arrangement will not work well and will lead to tremendous public dissatisfaction – which, strange to say, will be blamed on” the market system,” an institutional arrangement that has not existed in this area for decades because of pervasive interventions by state and federal governments.

Guerra contra el terrorismo

P. Usted también ha estudiado con detalle la cuestión de la guerra, tanto históricamente como en los episodios actuales, y es muy crítico con la política exterior norteamericana actual. ¿En qué se basa? ¿Había alternativa tras los ataques del 11S? ¿Es una estrategia de salida sensata salir inmediatamente de Iraq, como defiende Ron Paul, o ello generaría un ambiente de guerra total entre los iraquíes?

You have also worked on war issues, both in the past and recent events. You are very critical of the American foreign policy. What are your opinions on this based on? Was there an alternative to the 9/11 attacks? Is a sensible exit strategy for Iraq to leave it immediately, as for example Ron Paul defends, or would that create a horrible scenario of conflict for Iraqis at home?

Aggressive U.S. foreign policies have always been damaging to the interests of most Americans, but important political elites and crony capitalists have benefited from U.S. military engagements abroad and have promoted them as essential for U.S. national security. Since World War II, the U.S. government has maintained a vast, worldwide military presence, which it uses to intimidate various groups and governments and to create favorable conditions for the operation of foreign investors with close ties to the U.S. government, especially in the financial and petroleum industries. These foreign engagements create enemies, who occasionally strike back at the United States by terrorist acts, such as the attacks of 9/11. Those attacks ought to have been treated as criminal acts, not as excuses for a “war on terrorism” (a senseless concept in any event, because terrorism is a kind of action, not an enemy who can be killed). Police (of various countries) and private bounty hunters authorized by the government should have sought to capture the perpetrators and bring them to justice. Instead, the Bush administration used the 9/11 attacks as a pretext for attacking Afghanistan and Iraq, the latter of which had nothing to do with the attacks. These wars, which continue to drag on and on, have been disastrous for the people of Afghanistan and Iraq and a terrible burden, both economic and moral, for the American people. The sooner the U.S. government withdraws its military forces from Afghanistan and Iraq, the better the situation will be for almost everyone.

The Independent Institute, Economic Thinking, and the Institute for Principle Studies cordially invite homeschooled teenagers and their parents to attend:

UNDERSTANDING TODAY’S ECONOMY, 2010
Preview for Homeschoolers from the Challenge of Liberty Summer Seminars

Learn what’s going on in today’s economy from excellent educators devoted to free enterprise, limited government, and natural rights.

WHEN:
Thursday, May 20, 2010 [Note New Date!]
4:30-7:30 p.m.

WHERE:
The Independent Institute
100 Swan Way
Oakland, Calif.
Map and directions

PROGRAM:
Why Economics Matters More than Ever
Greg Rehmke, EconomicThinking.org / E Pluribus Unum Films

Healthcare Reform: A Principled Critique
Mike Winther, Institute for Principle Studies

Runaway Federal Deficits: Their Cost and Cure
Emily Schaeffer, Ph.D., The Independent Institute / San Jose State University

Will Civil Liberties Survive the Growth of Government?
Anthony Gregory, The Independent Institute

Freedom and Prosperity: Lessons from Classic Authors
José Yulo, Ph.D., The Independent Institute / Academy of Art University

ADMISSION:
$5 per person. Includes pizza dinner.

R.S.V.P. required. Contact the Independent Institute at 510-632-1366 or events@independent.org.

To learn about the Challenge of Liberty Summer Seminars, visit www.independent.org/students/seminars.

With the May 3 deadline less than one month away, college students and untenured college teachers eligible to enter the 2010 Sir John M. Templeton Fellowships Essay Contest may wish to consult a helpful online resource—the Essay Reference Bibliography. Divided into two sections, this list cites books and articles about the meaning and significance of economic personal liberties—and, in particular, publications (many of them online) related to this year’s topic:

“Everyone wants to live at the expense of the state. They forget the state wants to live at the expense of everyone.” –Frederic Bastiat (1801–1850)

Assuming Bastiat is correct, what ideas or reforms could be developed that would make people better aware that government wants to live at their expense?

Contest winners receive a two-year subscription to The Independent Review and may receive travel assistance for presenting their papers at an academic conference. (Four winners of the 2009 Templeton Fellowships Essay Contest delivered their papers today at a special Templeton Essay Contest Panel held at the 2010 conference of the Association of Private Enterprise Education at Caesers Palace in Las Vegas, Nevada.) And have we mentioned the 2010 contest prize money?

College Student Division:

1^st Prize: $2,500
2^nd Prize: $1,500
3^rd Prize: $1,000

Junior Faculty Division:

1^st Prize: $10,000
2^nd Prize: $7,500
3^rd Prize: $4,000

Contest participants and general readers alike can get an idea of the quality and style of winning essays by reading winning essays from previous years.

This program is made possible by the generous assistance of the John Templeton Foundation.

Census forms are due April 12, and soon Census workers will be seen pounding the streets, looking for the unaccounted-for.

This year’s promotional campaign by the Census Bureau, urging compliance so that each of us can get our “fair share” of government money, turns the traditional purpose of a census on its head: from time immemorial, governments have counted the people in order to make sure the state got its “fair share” of taxes.

After all, Jesus was born in Bethlehem—fulfilling prophecy—because of the Roman Empire’s census. As the NIV version of the Bible explains:

In those days Caesar Augustus issued a decree that a census should be taken of the entire Roman world. (This was the first census that took place while Quirinius was governor of Syria.) And everyone went to his own town to register.

So Joseph also went up from the town of Nazareth in Galilee to Judea, to Bethlehem the town of David, because he belonged to the house and line of David. He went there to register with Mary, who was pledged to be married to him and was expecting a child. While they were there, the time came for the baby to be born, and she gave birth to her firstborn, a son. She wrapped him in cloths and placed him in a manger, because there was no room for them in the inn

Yet other translations of the passage have it as:

And it came to pass in those days, that there went out a decree from Caesar Augustus that all the world should be taxed.

The U.S. Constitution likewise aligns the Census and taxes:

Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding to the whole Number of free Persons, including those bound to Service for a Term of Years, and excluding Indians not taxed, three fifths of all other Persons. The actual Enumeration [Census] shall be made within three Years after the first Meeting of the Congress of the United States, and within every subsequent Term of ten Years …

Note that “Indians not taxed” were not be counted, and “other Persons”—non-free Persons, i.e., slaves—were to be counted at the rate on which taxes were paid: three fifths.

Remember that a rallying cry for the American Revoluton had been “No taxation without representation.” Thus, the method established by the Constitution to set representation proportional to taxation was no mere coincidence. After all, if those not taxed had representatives in Congress, what would stop them from passing expensive legislation that had to be covered by taxes they didn’t have to pay?

When the 16th amendment replaced the “direct Taxes” provided for in the Census clause with an income tax, the Census, representation, and taxation were decoupled:

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

Fast forwarding to today, the Tax Foundation reports that record numbers of Americans pay no income taxes—in 2008, nearly 40%, and growing:

Meanwhile, the taxes paid by the top 1% of taxpayers now exceeds that of the lower 95%:

There’s a lot of loose talk these days about the Constitution being outmoded. But the Founders were no fools—and no fans of democracy, which they apocryphally characterized as “3 wolves and a sheep voting on what’s for dinner.”

So here’s a modest proposition: let’s either return to taxation proportional to enumeration, or representation proportional to taxation. To have neither means that today, 95 wolves and one sheep are voting. Of course the wolves will eventually discover that one sheep doesn’t go very far, but it may take a while. In the meantime, try not to baaa too loudly.

With the deadline upon us, if you need help completing your Census form, Christopher Walken offers this helpful how-to video.