Minimum wage laws are counterproductive on YouTube

My second try. Hopefully, I've improved. Any criticism would be appreciated.

Obama's economic agenda is fallacious

President Obama delivered his first speech to a joint session of Congress yesterday. By employing a lot of platitudes and unwittingly painting a dreadfully wrong picture of what his plans will achieve, he tried to win the hearts of the nation once again. Let's have a closer look at his visions:

Obama said it's time to act boldly not just to revive the economy, but "to build a new foundation for lasting prosperity."

The only sustainable foundation for lasting prosperity is capital accumulation. Saving. Deferred consumption. Obama's stimulus plan entails quite the opposite, deficit spending and inflation. That may be the foundation for a new economic bubble, but it's far from being a foundation for prosperity.

"While the cost of action will be great, I can assure you that the cost of inaction will be far greater," he said.

This view implies that only government can take (and therefore must take) action or an already bad situation is bound to get even worse. Obama apparently doesn't believe in the power of emergence and grassroots operations, but rather trusts his own wits instead of letting the combined abilities and ideas of millions of individuals work out a solution. Such a stance requires quite a lot of self-confidence - Hayek coined it "presumption of knowledge".

Obama said his administration already has identified $2 trillion in government spending cuts that can be made over the next decade.

A surprisingly positive remark. Let's hope that "can" is not just a euphemism for "should be, but won't".

Obama predicted that because of the recovery plan, the United States will double its supply of renewable energy in the next three years. [...] Obama also pledged a "historic commitment" to health care and said the recovery plan could lead to a cure for cancer. He also promised the "largest investment ever" in preventive care. [...]

I don't even know how to call this. His first claim about a doubling output at least sticks to classic central planners' rhetoric, but holding out the prospect of a "cure to cancer" is one step beyond that. How can you promise a scientific breakthrough as a politician? Does he really think that throwing money after a project is all it takes? Amazing.

"Slowly, but surely, confidence will return, and our economy will recover," he said, asking Congress to join him in "doing whatever proves necessary because we cannot consign our nation to an open-ended recession."

The unfortunate aspect is that he's trying to imitate or even surpass Roosevelt in his "stimulus spending", thereby dramatically increasing the likelihood of an "open-ended recession". As I said above, dreadfully wrong expectations.

Obama promised to reform the regulatory system to "ensure that a crisis of this magnitude never happens again."

By ignoring the origins of the crisis, the existence of a central banking system, two state-backed mortgage corporations and a number of laws prohibiting banks from discriminating against customers with a low degree of creditworthiness, and instead opting for the popular, but misguided view of an "out-of-control market system", Obama is bound to aggravate the crisis and to sow the seeds for a new economic bust.

"A surplus became an excuse to transfer wealth to the wealthy instead of an opportunity to invest in our future," Obama said.

This quote scares me. Obama seems to hold the view that giving money to the wealthy does not lead to any kind of investment. While it was certainly bad-mannered to grant tax cuts to the rich, but not to the poor, any new private sector money creates more prosperity and opportunity than wasteful and misdirected government spending. Is a tax cut some sort of "gift" to Obama? Do we need to stop giving gifts when times get tough and instead "save" money by giving it to government? The idea makes me shudder.


Even more disturbing is the response of his alleged political "opponents":

Louisiana Gov. Bobby Jindal, who delivered the Republican response to Obama, blasted the Democrats' stimulus plan, saying, "while some of the projects in the bill make sense, their legislation is larded with wasteful spending."

No principled opposition to stimulus packages. No defense of free markets or individual decision-making. No, just an admonishment for being "too wasteful". Another reminder that working within the two-party-system might be a giant waste of time if your goal is to promote liberty, though Governor Jindal found stronger words to express his support for a bottom-up grassroots society in his YouTube response. So we shouldn't judge too soon.


In conclusion, Obama's attitude resembles the confidence of a central planner when it comes to controlling the lives of millions of individuals. His distaste for private investment and his obsession with politically correct spending are frightening. The lack of a principled opposition should be clarion call for action to all friends of liberty.

Minimum wage laws are counterproductive

For several reasons:

1) A wage determines the value of work performed. This value cannot be changed by fiat because it depends on how much customers are willing to pay for it. If we assume that a certain type of labor only generates a profit of 4 dollars per hour, then an employer can only pay a wage of 4 dollars per hour at the maximum to avoid a loss. If the worker were in an entrepreneurial position, he couldn't charge more than 4 dollars per hour for his work either or else he wouldn't find willing customers. A law that prohibits him from earning less than 5 dollars per hour would not increase his income, but most likely cost his job.

2) There's no "positive upwards spiral" created by minimum wage laws. Some proponents argue that more revenue earned by underprivileged workers will cause more money to circulate in an economy and in the end, everyone is supposed to be better off. If that were possible, we shouldn't stop at 8 dollars per hour, but enact laws that allow everyone to earn a gazillion dollars per hour at the minimum. That may sound insane, but it's merely the logical conclusion of the "positive upwards spiral" argument.

In reality, a finite amount of money chases an equally finite amount of goods and services. Prices for these goods and services need to be set according to supply and demand or else calculational chaos (such as we've been witnessing in the Soviet Union) will ensue. A minimum wage of one million dollars would totally destroy the division of labor. A minimum wage of 8 dollars doesn't do as much damage, but has exactly the same effects on a smaller scale.

3) Empirical evidence indicating that minimum wages and increased employment correlate is negligible. Minimum wage laws are one factor in an economy that influences the demand for labor. If other factors outweigh the damage done by minimum wage laws, there can be increased employment despite of, not because of minimum wage laws. One should not confuse correlation with causation.

Thus, while minimum wage laws may, on first glance, seem like a good idea to protect unskilled workers from bad living conditions, in reality all they do is create barriers for the poor, disturb the division of labor and decrease overall wealth and opportunity.

How to treat a recession IV

We often hear claims for tax cuts by free market advocates in times of a recession. Generally, they are right: cutting taxes allows people to control a greater share of their resources, thus making production according to public demand, not government fiat more profitable and thereby increasing the likelihood of an economy that actually satisfies people's demands.

But there's a catch: cutting taxes only works if government spending is cut by the same amount or more at the same time. Otherwise, it'll be merely make-believe: while you may have some more dollars in your wallet, your government will already be engaged in deficit spending or monetary inflation to keep up with the cost of burdensome state programs.

The current recession seems to be a prime example of this schizophrenic mentality: in order to reach a "compromise", supposed free marketeers and those who put their trust in government agree to cut taxes, but increase spending ("stimulate the economy") at the same time. That's like eating your cake and having it, too. You can only spend money once: either for private sector needs and wants or for state purposes. If both compete for a finite amount of goods and services, prices will go up and your tax cuts will essentially vanish.

Not only is this a very dishonest method of trying to buy as many political sympathies as possible, but it's more of the same "let our grandchildren pay" mentality. At some point in time, debt incurred by a state will have to be paid back: either by taxing every bit of surplus wealth out of those who are still producing, a sure-fire way to economic collapse. Or by madly inflating the currency, another quick road to economic turmoil through hyperinflation. Or by pleading with creditors to forgive debts which they will only do for a good amount of political favors - which means that the bosses you can still vote on will be subject to the decisions of another layer of creditor functionaries - so you'll be even more screwed.

In conclusion, be careful whose tax cut plan you support. Paying less is only reasonable if less is being spent as well. Otherwise, nothing fundamental changes about the unsustainable attitude of spending until the cows come home.

How to treat a recession III

When everything else fails, there's still the printing press - even though today's money creation happens mostly within the digital realm. Anyhow, politicians praise inflationary policies in recessions as a means to achieve three things:

1) Generating funds to finance stimulus packages without taxation
2) Creating incentives to spend money now due to expected future inflation
3) Preventing falling prices

As for the first part, that's pretty easily refuted. There's no such thing as a free lunch. Even though you don't have to tax at gunpoint in this case, the effects of inflation will be the same as taxing a comparable amount of money. Your dollars lose purchasing power, thus they're worth less - you're likely to need more of them to buy the same amount of goods and services. It may not be as obvious, but it still happens and there's no categorical difference between governmental inflation and taxation. It's merely semantics.

The second point rests on the fallacious view that "consumption drives the economy". If you can stimulate aggregate demand, that'll increase aggregate supply and everything's supposed to be fine again. But an economy exists to satisfy wants and needs. The fact that vast shifts in the structure of production are occuring (with the accompanying recessionary inconveniences) shows there is a vast discrepancy between what is being produced and what is being demanded. Artificially changing these demand patterns by threat of inflation does no good to the general welfare - it's like offering someone a childhood painting of yours for 50 dollars or else he will get shot. Considering his options, your counterpart will probably go for your painting - not because he demands this particular good, but because the only alternative you grant is much worse. Actual demands are not going to be satisfied. It's a charade.

Falling prices and deflation are among the biggest scare stories around. According to some, they will lead us into a downwards spiral that'll only end once we hit rock bottom. However, prices and wages need to drop if necessary adaptions to vast changes in customer demands are to be performed. If nobody wants to build a house anymore at current market rates, what's the use in upholding wages of construction crews? If jewelry is too expensive for the majority of previous customers, why should you keep prices up? It's a clinging to a previous state of affairs that may have been more beneficial to some individual market participants, but turned out to be unsustainable. Trying to freeze the economy in this boom period to prevent a supposed downwards spiral will only hinder essential corrections and prolong the recession.

In short, printing money does not increase wealth. As simple as that sounds, it's a pretty tough story to sell in Washington, D.C..

How to treat a recession II

Some more water's been going down the Mississippi since my last post. I decided it was time to get into the business again. Starting with a few minor design changes, I intend to contribute content more regularly now and offer some additional features to complement my random thoughts on supposedly important topics. Let's get back to work!

Now that a new high-priest in chief has been sworn into office, I figured it'd be a kind gesture to provide some more advice concerning the treatment of a recession. We'll examine public works programs today.

There is a widespread belief that one of the purposes of "the economy" is to provide jobs. This is false. The purpose of economic transacation is to satisfy needs and wants. The reason why the first cavemen engaged in trade with each other was precisely the effectiveness of the division of labor when it comes to satisfying diverse needs and wants. One caveman would hunt deer whereas the other one would collect berries. The two could then engage in voluntary exchange, improve their diet and increase their survivability - or just have more pleasure eating. In any case, they'd be better off than their non-trading caveman friends.

Of course, in the process of satisfying wants and needs, work opportunities are created. A few years down the road, the berry-trading cavemen may have been able to hire other neanderthals to collect more berries for him and get paid in, say, deer meat. The example isn't all too significant since it lacks a common currency and the job is not really an advance from scratch for the one performing it, but still. We now have employment. Meaningful employment. If our neanderthal would carve beautiful wooden dolls, that'd be great, but useless in the absence of demand for beautiful wooden dolls. There's no point in forcing the berry entrepreneur to give deer meat to the doll carver in order for the carver to continue his business, but that's exactly what public works programs are all about.

Instead of pursuing meaningful and profitable employment on the market, people are incentivized by the state to engage in random activity subsidized by tax money. The activity may not appear to be random since it benefits someone, but it remains a subsidy at best, for if the job was profitable, there'd be no need for the state to provide it. Thus, public works programs not only extract labor from the market to use it in unproductive endeavors, but force productive workers to finance this madness. That way, the real function of markets - the satisfaction of needs and wants - is impaired from two sides at the same time.

Public works programs do not support, but hinder economic recovery. The idea should've been discarded long ago.

Fred Thompson on the economy

Thanks to Gary North for pointing me to this great video by former Republican Senator Fred Thompson in which he's making fun of the breathtakingly ignorant 'remedies' we're being sold in order to 'cure' the recession. Thompson also participated in last year's presidential race on the Republican party ticket, so he shouldn't be a stranger to anyone who is following current events.

While some of his views are not quite the libertarian choice, he's spot-on with that one. Enjoy.

How to treat a recession I

In my last article I argued that recessions are actually a good and desirable development and should be greeted whenever they occur. However, I admitted that recessions are connected with temporary hardships that ought to be overcome as quickly as possible.

Quite a number of people put their trust in government to accelerate the process. So I figured I better start a new series: a handbook for the aspiring central banker and bureaucrat to find out how to ruin an economy in transition, in other words, what NOT to do.

Today we shall start with a popular magic trick out of Mr. Keynes' cylinder: deficit spending.

The reasoning behind running up debt to become wealthy is the idea that recessions are not caused by far-reaching shifts in customer preference patterns, but by "uncertainty" and "confusion". If people can be manipulated to spend money faster than they would under true market conditions, this is seen as a success and the correction of a "market failure". Keynes doesn't want to wait until markets have adapted in the long run to what customers actually desire because "we're all dead in the long run".

Debts can be repaid in boom periods, Keynes assumes. That way, we get the best of both worlds: a stable economy and zero public debt.

However, Keynes doesn't answer the question of how to determine which public works program that we need to go into debt for will yield a sufficient profit so we can repay our obligations. Obviously, government doesn't follow the price mechanism - it would be unnecessary otherwise. That leaves political/ideological projects and socialized industries as areas to invest.

An example for an ideological project would be renewable energies. You can pump a lot of money into it without clearly defining your aim. Do you want long-lasting home generators for survivalist-minded folks in the outback, or high-performance cells with a relatively low shelf life for emergency use in factories and offices? Or do you intend to replace every non-renewable energy source in the country with wind parks and solar panels? You need to calculate your budget accordingly, and need a good reason why your specific purpose is more worthwhile than any other use (e.g., researching waterproof solar panels for diving purposes). It's a subsidy in any case, however, and yields no expected positive return. Otherwise, the market would do it.

Socialized industries include, but are not limited to, streets and police. One might wonder how building more streets or hiring more cops is going to boost profitable trade and commerce. As I explained above, there's just no way to determine and thus, no way to promise that debt incurred during a period of economic adjustment will ever be paid back.

And that's exactly what's been going on ever since. A lot more debt during recessions and a little less more debt during a boom. Interest needs to be paid for this debt in the future, this will drag down economic development since taxes need to be levied or money needs to be printed which will lead to inflation, a hidden tax, in order to repay it. Deficit spending is a vicious cycle.

In addition, government needs to borrow somewhere to finance its deficit spending. Even though credit markets have been extended ridiculously through fractional reserve banking and the Fed itself, there is still no unlimited amount of credit available. If government buys up all the credit, this drives up interest rates for private sector businesses in need. They may not get the loan they need and go bust. This is called "crowding out".

Anything more to say about it? Government deficit spending ignores your personal subjective value choices, sacrifices long-term, but stable business plans for short-term, debt-based ones and levies taxes on your children's future. In other words: hands off !

All hail the recession !

First, I'd like to apologize to my dear readers for being unproductive over such a long time span. Lack of inspiration, business in out-of-blog life and general tiredness kept me from writing.

Today, however, I feel like commenting on the craze of the day: claims that someone finally "get us out" of the coming recession.

It is a generally accepted view that recessions are bad. 'Something' ought to be done about them, we are told by all the concerned-looking pundits, otherwise we might face the full impact of the bust. And that is, supposedly, "bad" for "the economy".

That may be true in Bizarro World. On Earth, a recession indicates a reallocation of resources away from seemingly unproductive enterprises to those which actually satisfy customer demands. Various shifts in preference patterns may occur: market participants may either change their preferences for certain goods and services while remaining in the same time preference pattern, e.g. change their fondness for chewing gum to a liking for white bread, or alter their time preference altogether, e.g. stop buying video games and instead save for a house. As long as this happens in small doses, the impact of the reallocation is hardly recognizable. If, however, for some reason a large amount of market participants decide to switch from popular industry A to unpopular product B, markets need to restructure on a grand scale.

This, in turn, leads to temporary inconveniences such as unemployment, wage reductions, short-time work (or overtime) or business failures.

Think about it again: politicians, economists and pundits generally support fighting this process. How does that make any sense? It is not some bad voodoo that tends to haunt our world for an unknown reason from time to time, but simply markets reacting to future trends and expected modifications in supply and demand. So why would they want to stop it?

Of course, the argument "it's bad for the economy" holds some truth: it is bad for those entrerprises that are expected to undergo enormous changes or go bust due to production of goods or services that are not in demand (anymore). Nobody wants to leave a front row seat in the ride of life, but we have to decide at some point: Do we want an economy that produces goods and services according to market demand, or a museum economy which reflects demands and speculations of the past, but is unwilling and unable to adapt to our changing wishes and needs?

If you don't want to live in a museum, you'll be just as glad as me to see the recession unfold. Gas prices dropping, house prices dropping, commodity prices dropping in general, laggard companies like GM that have been more busy meddling with Michigan politics than producing neat cars for decades threatened to be finally gone for good, Ponzi schemers like Bernie Madoff going broke as well and, maybe of paramount importance, politicians that are too busy "fixing the economy" to think about going to war another time. I might be wrong with that one, but at least it's a reasonable hope.

Thus, as the headline said: all hail the recession !