Tag: free market

Newsweek: Back in Print, Confused as Ever

Dumb arguments against libertarianism are increasing, as guardians of the expansive state begin to worry that the country might actually be trending in a libertarian direction. This may not be the dumbest, but as Nick Gillespie said of a different argument two weeks ago, it’s the most recent:

‘You Ready to Step Up?’

The deadly drug war in Long Island’s Hempstead ghetto is a harrowing example of free-market, laissez-faire capitalism, with a heavy dose of TEC-9s
To be fair, author Kevin Deutsch never uses the terms “laissez-faire” or “free-market” in his detailed article, so we should probably direct our disdain at Newsweek’s headline writers. Deutsch does portray the second-ranking guy in the Hempstead Crips as a businessman seeking to “recruit talent, maximize profits and expand their customer base.” But even the drug dealer gets the difference between selling prohibited substances and doing business in a free market:
“We’re looking to market, sell and profit off drugs the way any business would handle their product,” Tony says. “Only our product is illegal, so more precautions need to be taken. It’s all systematic and planned, all the positions and responsibilities and assignments. All of that’s part of our business strategy. It’s usually real smooth and quiet, because that’s the best environment for us to make bank. But now, we at war, man. Ain’t nothing quiet these days.”
Deutsch describes the competition between the local Crips and Bloods in terms not usually seen in articles about, say, Apple and Microsoft or Ford and Toyota:
As for strategies, they seem to have settled on a war of attrition, aiming to kill or maim as many of their enemies as possible….
 
They’re far better armed and willing to use violence than the smaller neighborhood cliques scattered throughout Nassau County….
 
They’re also able to keep out other competitors through use of brute force….
 
It’s one of hundreds of similar conflicts being fought by Bloods and Crips sets throughout the country. These battles breed shootings, stabbings and robberies in gang-plagued, low-income neighborhoods each day. 
These are, of course, just the sorts of consequences that libertarians and economists expect from prohibition. As Tim Lynch and I wrote in the Cato Handbook on Policy a decade ago,

drug prohibition creates high levels of crime. Addicts commit crimes to pay for a habit that would be easily affordable if it were legal. Police sources have estimated that as much as half the property crime in some major cities is committed by drug users. More dramatic, because drugs are illegal, participants in the drug trade cannot go to court to settle disputes, whether between buyer and seller or between rival sellers. When black-market contracts are breached, the result is often some form of violent sanction, which usually leads to retaliation and then open warfare in the streets.

Jeffrey Miron of Harvard’s economics department and Cato made similar points in his book Drug War Crimes, as have such economists as Milton Friedman and Gary Becker. Miron also noted that prohibition drives up the prices of illegal drugs, making the trade attractive to people with a high tolerance for risk. And so in that sense, it’s true that some people will usually enter the prohibited trade – in alcohol, gambling, prostitution, crack, or whatever – and will employ some techniques that are also used in normal business enterprises. As Tyler Cowen says, there are markets in everything. Given our natural propensity to truck, barter, and exchange in order to improve our own situation, we can expect people to step into any trade, prohibited or not. Better that such trade should take place legally, within the rule of law, than underground, where violence may be the only recourse in disputes.

When the government bans the use and sale of a substance, and imprisons hundreds of thousands of people in an attempt to enforce that prohibition, that’s not “laissez-faire, free-market capitalism.” Duh. 

The U.S. Takes a Dive in Economic Freedom of the World Index

Economic freedom in the United States has plummeted to an all-time low. According to the Economic Freedom of the World: 2012 Annual Report, co-published today with the Fraser Institute, the United States’ ranking has dropped to 18th place after having ranked 3rd for decades up to the year 2000. The loss of freedom is a decade-long trend—the United States ranked 8th in 2005—that has accelerated in recent years.

Virtually every U.S. indicator has seen a deterioration. Government spending and regulations have grown, the rule of law and protection of property rights have weakened, and foreign investment and non-tariff barriers have increased. Authors James Gwartney, Robert Lawson, and Josh Hall note some of the reasons for the decline, including the war on terror and the growth of crony capitalism.

As the graph below shows, the United States now has a lower economic freedom rating than it did in the 1970s.

The United States’ fall is alarming not only because it’s the most important economy in the world, long associated with market-liberal policies, but also because Economic freedom is strongly correlated with prosperity, higher growth, and improvements in the entire range of standard-of-living indicators, so a decline negatively affects those outcomes. The authors calculate, for example, that the loss of economic freedom will cut long-term U.S. growth by half to about 1.5 percent per year.

Another country that has seen a notable, steady drop in its economic freedom is Venezuela, now ranked last in the index. Other countries have been on an upward trend. Chile is now ranked 10th and China, while still largely unfree, continues to head in the right direction (see graph).

Below are the top ten countries in this year’s index. You can see a full listing here on page 10.

As my colleague Richard Rahn says in his column today, this year’s economic freedom report should be a wake up call to all Americans.

IBM as a Metaphor for Economic Success

International Business Machines Inc. is celebrating its 100th anniversary as a company today. In this time of economic worry and uncertainty, it’s worth taking a moment to consider a few policy lessons we might glean from its longevity.

Unlike government agencies and programs, private-sector companies competing in a free market come and go. In an essay posted on the IBM web site, company officials noted:

Of the top 25 industrial corporations in the United States in 1900, only two remained on that list at the start of the 1960s. And of the top 25 companies on the Fortune 500 in 1961, only six remain there today.

How did IBM not only survive but thrive during a century that took us from horses and buggies to FaceBook and iPhones? In a word, adaptability. IBM’s management has been willing to change to meet the evolving demands of a competitive and open marketplace.

When I was researching a speech last year to retired IBM employees, I was struck by how the company has transformed itself. As I shared with the audience, IBM stands as a metaphor for the positive changes under way in our more high-tech and globalized economy:

As you all know, [IBM] has re-engineered itself from a hardware company to a provider of software and services. Today, nearly 60 percent of the company’s revenue comes from services compared to 38 percent a decade ago. Revenue from hardware has been cut in half, to 17 percent.

IBM’s gone global in a big way, too. Almost two-thirds of its revenue now comes from outside the United States. That compares to an S&P average of 47 percent. Emerging markets now account for 50 percent of its revenue growth. IBM is the biggest IT services company in India. For $100 million, it’s helping the northeast China city of Shenyang—one of its most polluted—clean up its air and reduce carbon emissions.

Politicians nostalgic for an America where the dominant companies were unionized, heavy-industry behemoths producing mostly for the domestic market should take note. As I argued at length in my 2009 book Mad about Trade (see chapters 3 and 4) and more concisely in an essay for Barron’s Weekly, America has become a globalized, middle-class service economy. As the success of IBM demonstrates, this is not something we should fear, or try to resist with trade barriers and industrial policy.

Wikileaks Cable: Martinelli Is a Threat to the Rule of Law in Panama

Last August I warned about the troubling signs coming from Panama’s president Ricardo Martinelli. Elected in 2009 on a free market platform, Martinelli has quickly embraced interventionist economic policies (particularly a sharp increase in public spending) that sooner or later will take a toll on Panama’s macroeconomic stability. More worryingly, I pointed at a disturbing pattern of cronyism, erosion of democratic checks and balances, and harassment of the media emanating from the Martinelli administration.

A cable released by Wikileaks this week seems to confirm many of these fears. Dated August 2009 and signed by then U.S. Ambassador to Panama Barbara Stephenson, it describes Martinelli’s “autocratic tendencies” such as asking the U.S. government for help to wiretap political opponents—a request that was promptly rejected by the U.S. embassy in Panama. Stephenson goes on to say that, after meeting the Panamanian president, she is under the impression that Martinelli “may be willing to set aside the rule of law in order to achieve his political and developmental goals.”

According to the cable, Martinelli has resorted to “bullying and blackmailing” of private businesses. Stephenson describes how the Panamanian president told her that “he had already met with the heads of Panama’s four mobile phone operators and discussed methods for obtaining call data.” A bill has also been introduced in the National Assembly (where Martinelli’s coalition enjoys a large majority) that would “require registry of prepaid cell phones and compel mobile operators to submit call data to the government for criminal investigations.” Martinelli also told Stephenson that “he had twisted the arms of casino operators and threatened to cancel their concessions if they did not pay their back taxes and cut their ties to the opposition political figures who had granted their generous concessions.”

The cable ends noticing how “[m]ost of [Martinelli’s] government appointments have favored loyalty over competence.” That is, the Martinelli administration is riddled with cronyism– as I wrote back in August.

There is new evidence outside of the Wikileaks cable which confirms Martinelli’s ominous autocratic inclinations. For instance, international media organizations have lambasted the Martinelli administration in recent months for its encroachment on independent media. Reporters Without Borders dropped Panama 30 spots in its latest Press Freedom Index, noticing that the country “has taken an opposite direction, in an atmosphere growing increasingly tense between the media and the authorities.” The Interamerican Press Association says in its most recent report on Panama that “[o]ver the past six months, freedom of the press has been threatened by actions by institutions belonging to the government of President Ricardo Martinelli, as well as from the Judicial Branch and the Prosecutors’ Office.” As I pointed out in my August op-ed, Martinelli has appointed loyal (and controversial) figures to both the Supreme Court and the Prosecutors’ Office.

The diplomatic cable leaked by Wikileaks as well as these reports by international organizations lend credibility to the argument that Ricardo Martinelli is a growing threat to Panama’s rule of law and democratic institutions. Panamanians have a lot to be worried about.

Comparative Political Economy

Free-marketers often point to the varying success of pairs of countries – the United States vs. the Soviet Union, West vs. East Germany, Hong Kong and Taiwan vs. China – to illustrate the benefits of markets over planning, regulation, and socialism. Some even point out the closer but real differences in GDP per capita between the United States and Western Europe. In his 1984 book Endless Enemies (p. 380) Jonathan Kwitny added the less familiar pairs “Morocco versus Algeria, Malaysia versus Indonesia, Thailand versus Burma, Kenya versus Tanzania.” Now Rama Lakshmi reports in the Washington Post that we can see the results of two systems of political economy in one country:

It didn’t take long for the first athletes arriving in New Delhi last week for the upcoming Commonwealth Games to catch a glimpse of modern India’s two faces.

Their gateway to the country was the capital’s gleaming new international airport terminal, built by a privately led consortium and opened in June four months ahead of schedule.

But the official wristbands that the visitors were handed at the airport turned out to be an emblem of India’s famous red tape and government inefficiency. When the teams reached the athletes’ village, the police guarding the facility refused to recognize the IDs, saying that the Games Organizing Committee had not sent the required authorization order.

The jet-lagged athletes stood about under a tree for hours with their luggage, calling their embassies for help, and the problem was not finally resolved for four more days.

To observers, the incident illustrated more than just the well-documented sloppiness that has marked India’s preparations for the Games. It also underscored the gap that has emerged between a government rooted in a slower-moving, socialist era and a private entrepreneurial class that is busy building global IT companies, the world’s largest oil refineries and spectacular structures such as the $2.8 billion airport terminal.

“It is about two aspects of the India story,” said Rajeev Chandrasekhar, an entrepreneur and member of Parliament. “India’s private sector has been exposed to competition and therefore has developed capability. Accountability is firmly built into the entrepreneurial mind-set. But the government structure is a relic of the colonial past and continues to plod along.”…

For the Delhi [airport] project, [Grandhi Mallikarjuna]Rao said, his company worked with 58 government agencies.

“Our nation is in the process of transition from a command-and-control economic system to a more efficient market-driven structure,” he said. “It will take some time till this transition is complete.”

Given all this history, the interesting question is why some people in the United States want to continually transfer such vital functions as energy and health care from the competitive, accountable, capable entrepreneurial sector to the slower-moving, plodding, command-and-control bureaucratic sector. (Of course, the already-government-influenced health care and energy industries are not the most entrepreneurial sectors of the economy. But as the examples above demonstrate, even imperfect markets work better than government direction. Nor are the government-run local schools very competitive or accountable, but they are more so than they will be under tighter federal control.)

How to Explain Free Trade in Less Than Three Minutes

The professionally ignorant (and I’m thinking here of Lou Dobbs, among others) never “get it” about trade. They think it’s some complex swindle, in which we deny ourselves “jobs,” or that it should be about being “fair” or “balanced.” They don’t see how free trade creates prosperity and peace. I was inspired by the outstanding trade economist Doug Irwin of Dartmouth to explain what goes on when people trade. The challenge was to explain international trade in under 3 minutes. So here’s the result in 2:57: The Great Prosperity Machine.

Share it with your favorite protectionist, or with professors and teachers. (There’s more information at AtlasNetwork.org/BastiatLegacy.)

Watch and share:

Fannie Mae and Greece’s Problems Enabled by Basel

On the surface the failures of Fannie Mae and Freddie Mac would appear to have little connection to the fiscal crisis in Greece, outside of both occurring in or around the time of a global financial crisis.  Of course in the case of Fannie and Freddie, primary blame lies with their management and with Congress.  Primary blame for Greece’s problems clearly lies with the Greek government. 

Neither Greece or Fannie would have been able to get into as much trouble, however, if financial institutions around the world had not loaded up on their debt.  One reason, if not the primary reason, for bailing out both Greece and the US’s government sponsored enterprises is the adverse impact their failures would have on the banking system.

Yet bankers around the world did not blindly load up on both Greek and GSE debt, they were encouraged to by the bank regulators via the Basel capital standards.  Under Basel, the amount of capital a bank is required to hold against an asset is a function of its risk category.  For the highest risk assets, like corporate bonds, banks are required to hold 8%.  Yet for those seen as the lowest risk, short term government bonds, banks aren’t required to hold any capital.  So while you’d have to hold 8% capital against say, Ford bonds, you don’t have to hold any capital against Greek debt.  Depending on the difference between the weights and the debt yields, such a system provides very strong incentives to load up on the highest yielding bonds of the least risky class.  Fannie and Freddie debt required holding only 1.6% capital.  Very small losses in either Greek or GSE debt would cause massive losses to the banks, due to their large holdings of both.

The potential damage to the banking system from the failures of Greece and the GSEs is not the result of a free market run wild.  It was the very clear and predictable result of misguided and mismanaged government policies meant to create a steady market for government borrowing.