Topic: Political Philosophy

Venezuela Verifies Hayek on Exchange Controls

Foreign airlines have begun to restrict ticket sales in Venezuela. As the bolivars’ value evaporates, and with exchange controls in force, the airlines fear that the funds they have in Caracas will evaporate, too. By restricting ticket sales, the airlines will limit the amount of new money that is trapped behind the government’s wall of exchange controls.

Of course, President Nicolas Maduro isn’t the first autocrat to impose exchange controls, and he won’t be the last to impose these confiscatory policies. Indeed, the pedigree of exchange controls can be traced back to Plato, the father of statism. Inspired by Lycurgus of Sparta, Plato embraced the idea of an inconvertible currency as a means to preserve the autonomy of the state from outside interference.

So, the temptation to turn to exchange controls in the face of disruptions caused by hot money flows is hardly new.  Tsar Nicholas II first pioneered limitations on convertibility in modern times, ordering the State Bank of Russia to introduce, in 1905–06, a limited form of exchange control to discourage speculative purchases of foreign exchange.  The bank did so by refusing to sell foreign exchange, except where it could be shown that it was required to buy imported goods.  Otherwise, foreign exchange was limited to 50,000 German marks per person.  The Tsar’s rationale for exchange controls was that of limiting hot money flows, so that foreign reserves and the exchange rate could be maintained.  The more things change, the more they remain the same.

This brings me to Nobel laureate Friedrich Hayek’s 1944 classic, The Road to Serfdom. Many thought Prof. Hayek hurt his case because he was extreme. What nonsense. Just consider the Wall Street Journal’s reportage from Caracas about the real concerns of foreign airlines that have funds locked up in Venezuela. And then reflect on the following insightful analysis from the Road to Serfdom:

The extent of the control over all life that economic control confers is nowhere better illustrated than in the field of foreign exchanges. Nothing would at first seem to affect private life less than a state control of the dealings in foreign exchange, and most people will regard its introduction with complete indifference.  Yet the experience of most Continental countries has taught thoughtful people to regard this step as the decisive advance on the path to totalitarianism and the suppression of individual liberty.  It is, in fact, the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape—not merely for the rich but for everybody.

Hayek’s message about convertibility has regrettably either been overlooked, or thought to be too extreme. Exchange controls are nothing more than a ring fence within which governments can expropriate their subjects’ property. Open exchange and capital markets, in fact, protect the individual from exactions, because governments must reckon with the possibility of capital flight.

This House Does Not Believe in Hope

Happy Valentine’s Day, Washington: Netflix has a present for you. Tonight, you and your significant other can curl up on the couch with Frank and Claire Underwood, D.C.’s favorite backstabbing power couple. House of Cards, Netflix’s ridiculous (yet hard to resist) telenovela, is back. Apparently, many Hill staffers were irate that Netflix didn’t release the show early, for binge-streaming during yesterday’s snow day.

HoC’s story, focused on a Machiavellian congressman’s rise to power, isn’t heavy on verisimiltude. Like many fictional depictions of Washington, it fails to capture “the nation’s capital as the bureaucratic and constipated place that it in fact is,” as Christopher Hitchens once put it. It takes a lot of suspension of disbelief to buy into the show’s vision of a Capitol of cunning and competent schemers.

Still, some of the characterization rings true. Two decades in, this town probably would transform Princess Bride’s pure-hearted “Buttercup” into a vicious social X-ray running a phony environmental think tank. Likewise, my colleagues at Cato’s Center for Educational Freedom will probably appreciate the casting choice that led to former Sopranos hitman Mikey Palmice’s turn as a teacher’s union leader.

And overall, HoC is a major improvement over the last Beltway drama official Washington fell in love with: The West Wing, Aaron Sorkin’s unctuous Valentine to the Heroic Presidency. Sorkin built that show around the concept of an incorruptible president devoted to good works: the unbearably decent Josiah (Jed) Bartlet, a theologian-cum-Nobel laureate in economics, backed up by a staff of the most selfless, high-minded, public-spirited and charming political operators ever devised. It was altogether the throne-sniffingest portrayal of Washington imaginable.

I’ll take HoC’s Beltway Borgias over Sorkin’s Cartoon Camelot any day. As I wrote in the Washington Examiner this week: “At least ‘House of Cards’ is willing to entertain the idea that political animals aren’t angels and that ‘public service’ often deserves the scare quotes.”

Hayek: The Market and Other Orders

Volume 15 of the Collected Works of F. A. Hayek has just been published by the University of Chicago Press. This volume, edited by series editor and Hayek biographer Bruce Caldwell, is The Market and Other Orders. It contains many of Hayek’s most important papers:

  • The Use of Knowledge in Society
  • The Meaning of Competition
  • The Results of Human Action but Not of Human Design
  • Competition as a Discovery Procedure
  • The Pretence of Knowledge, his Nobel Prize lecture
  • and The Political Ideal of the Rule of Law, lectures delivered in Egypt in 1954-55 that served as early drafts of chapters 11, 12, 13, 14, and 16 of The Constitution of Liberty

That’s only the beginning in this impressive volume, which should be of interest to any Hayek scholar, and indeed any student of economics or complex social orders.

Lawrence Summers, former secretary of the Treasury and president of Harvard, said in an interview for The Commanding Heights, Daniel Yergin and Joseph Stanislaw’s 1998 study of the resurgence of economic liberalism,

What’s the single most important thing to learn from an economics course today? What I tried to leave my students with is the view that the invisible hand is more powerful than the hidden hand. Things will happen in well-organized efforts without direction, controls, plans. That’s the consensus among economists. That’s the Hayek legacy.

This volume is a great introduction to those key ideas.

 

The Tyranny of Good Intentions: How Politicians Waste Money, and Sometimes Kill People, With Kindness

If logic decided policy in Washington, federal spending would be low, the budget would be balanced, the benefits of regulations would exceed the costs, and policymakers would guard against unintended consequences.  Unfortunately, the nation’s capital is largely impervious to logic, and the tragic results are obvious for all to see.

Emotion and intention seem to have become the principal determinants of government policy.  People are poor.  Increase the minimum wage.  Not everyone can afford a home.  Create a dozen housing subsidy programs. 

As I wrote in the Freeman:

Never mind the consequences as long as the officials involved mean well and their ideas sound good.  No need to detain our leaders on white horses, who have other crusades to lead.

This widespread inability to compare consequences to intentions is a basic problem of humanity.  In fact, it’s one of the reasons the Founders desired to limit government power and constrain politicians. 

For instance, the newly created federal government possessed only limited, enumerated powers.  Even if you had weird ideas for transforming the American people, it wouldn’t do you much good to get elected president or to Congress.  The federal government wasn’t authorized by the Constitution to engage in soul-molding.

Moreover, there would be strong resistance to any attempt to expand federal power.  The constitutional system preserved abundant state authority.  Three federal branches offered “checks and balances” to abusive officials or majorities. 

Most important, the majority of Americans shared the Founders’ suspicions.  At the end of the 19th century a Democratic president still was willing to veto unemployment relief because he believed Congress had no authority to approve such a bill.

However, over the following century and more virtually every limitation on Washington was swept away.  Equally important, as faith in religion ebbed faith in politics exploded.  Today those who think with their hearts rather than their minds have largely taken control of the nation’s policy agenda.

No where has this been more destructive than in the area of poverty.  How to deal with the poor who, Christ told us, would always be with us?

As Charles Murray demonstrated so devastatingly three decades ago in his famous book, Losing Ground, ever expanding federal anti-poverty initiatives ended up turning poor people into permanent wards of Washington.  Worse, unconditional welfare benefits turned out to discourage education, punish work, inhibit marriage, preclude family formation, and, ultimately, destroy community.  It took the 1996 reforms to reverse much of the culture of dependency.

Similar is the minimum wage, which may become a top election issue this fall.  Unless businesses are charities, raising the price of labor will force them to adjust their hiring.  How many low-skilled workers will be hired if employers are told to pay more than the labor is worth?  There isn’t much benefit in having a theoretical right to a higher paying job if you are not experienced or trained enough to perform it.

There are similar examples in the regulatory field.  No one wants to take unsafe, ineffective medicines.  So the Food and Drug Administration was tasked with assessing the safety and efficacy of new compounds before they can be released.  The intention is good, but ignores the inescapable trade-off between certainty and speed. 

The rise of AIDS brought the problem into stark relief, as people faced an ugly death while the bureaucratic, rules-bound FDA denied them the one effective medicine, AZT, in order to make sure it didn’t have harmful side-effects.  Years before the agency held up approval of beta-blockers, killing people lest they suffer some lesser harm from taking the drug.

Few people in politics fail to claim to be acting for the public good.  In many cases they really believe it.  But good intentions are never enough.  Consequences are critical.  What you intend often doesn’t matter nearly as much as what you actually accomplish.

Likely Sources of Obama’s Misconceptions about Income Mobility

President Obama has been expressing inordinate alarm about differences between income groups, and about mobility between such groups over time.   “The combined trends of increased inequality and decreasing mobility,” he says, “pose a fundamental threat to the American Dream, our way of life, and what we stand for.”  

A fundamental limitation of annual income distribution figures is that income in any given year may not be at all typical of a family’s normal or lifetime income.  Job loss or illness can push one year’s income well below normal, for example, and asset sales can produce one-time windfalls. People are commonly much poorer when young than they are by middle age, after accumulating experience and savings. For such reasons, the President’s strong opinions about “decreasing mobility” could be important, if true.

We need to separate two concepts of mobility. One is intergenerational mobility – whether “a child born into poverty … may never be able to escape that poverty,” as the President put it. Another involves intertemporal mobility – whether starting with a low wage at your first job supposedly impedes moving up the ladder of opportunity.

The President’s opinion that intergenerational mobility has declined was rigorously debunked by Raj Chetty, Emmanuel Saez and others.  As for inequality and mobility being related, they also found that, “the top 1 percent share is uncorrelated with upward mobility [p. 40].” Moreover, “The fraction of children living in single-parent households is the strongest correlate of upward income mobility among all the variables we explored [p.45].”  Since other countries have fewer single-parent households, this is just one reason for being wary of facile international comparisons.

Intertemporal mobility is not about links between parents and children, but about the ease with which individuals move from a lower to a higher income group, and vice-versa.  Are we stuck with the same paycheck we had just after leaving school, or can we move up with effort, experience, learning and saving?  Did having a big gain in the stock market in 2007 ensure that would happen again in 2008-2009?

The Federal Reserve Board’s Survey of Consumer Finances (SCF) tracks income mobility of the same families over time.  It turns out that mobility is surprisingly hectic even over short periods.

‘Libertarian Paranoia’ Strikes Deep?

In case you missed it, in his Bloomberg column last week, law professor and former Obama administration OIRA head Cass Sunstein offered tips on “How to Spot a Paranoid Libertarian.” They’re people who “have a wildly exaggerated sense of risks to liberty, who adopt a presumption of bad faith on the part of government, who have a sense of victimization, who ignore the problem of tradeoffs, and who love slippery-slope arguments.” I probably know some folks who resemble that remark.

In the column and a follow-up blogpost, Sunstein distinguishes between “Paranoid Libertarians” and libertarians in general, who are “speaking on behalf of an important strand in America’s political culture.” And he’s right that virtually all ideologies, libertarianism included, attract some swivel-eyed, conspiratorial adherents who use too much ALLCAPS in their emails. 

What Sunstein doesn’t have is anything resembling a case that “libertarian paranoia” is worth worrying about. In fact, beyond a few anodyne statements like “paranoia isn’t a good foundation for public policy,” he barely tries to make one.  

But, Sunstein suggests, something of what he’s getting at can be found in a 2005 paper on “Libertarian Panics” by his colleague Adrian Vermuele.

I remember that paper very well, having blogged a fairly lengthy critique of it when it came out. It hasn’t improved with age.

The basic argument is plausible enough: Vermuele holds that the same biases and cognitive flaws that can make Americans hysterical about the risk of terror can also make us hysterical about the risks of government abuse. Thus, the salience of past examples of government overreaction to security threats—like WWII Japanese Internment—could lead us to overreact to liberty threats from government in the same way we might overreact to terrorist threats to security.

But when Vermuele gets to specific examples of destructive “libertarian panics,” there’s very little there there. The paper offers two: the American Revolution and the PATRIOT Act. 

See You Next Weekend at the Students for Liberty Conference

Next weekend, February 14-16, the seventh annual International Students for Liberty Conference will be held at the Grand Hyatt hotel in Washington, D.C. Though it is now the largest annual gathering of young libertarians in country, I can remember speaking to a “large” crowd of 100 students at the first ISFLC in snowy New York City. This year more than 1,400 passionate young libertarians are expected to attend, and will bring with them smart ideas grounded in individual liberty and limited government, two concepts in short supply in our nation’s capital. 

Cato will be well represented at the conference. On the main stage, Cato CEO John Allison will offer attendees “A Philosophic Defense of a Free Society,” and I’ll present “10 Ways to Talk about Freedom.” Cato scholars will also lead breakout sessions about their areas of expertise, including a live recording of a Libertarianism.org Free Thoughts podcast. See the schedule below for more details.  Additional Cato scholars will be speaking on panels hosted by other organizations; look for them in the conference program 

If you are in the area, I hope you will plan to come out to support the next generation of liberty advocates.  You’ll likely learn something new in the process.  I encourage you to register, and be sure to stop by the Cato booth to pick up our newest research and chat with Cato representatives. 

 

Saturday, February 15    
Time Speakers Title Location
10:00 -10:30 AM John Allison A Philosophic Defense of a Free Society Main Stage
       
12:30 - 1:00 PM David Boaz Ten Ways to Talk about Freedom Main Stage
       
2:00 - 2:45 PM Julian Sanchez
Amie Stepanovich (Senior Counsel at Access)
Rise of the Surveillance State (and How to Fight It) Franklin
       
3:00 - 3:45 PM Chris Edwards
Ben Friedman
How Can Government Spending Be Cut? Franklin
       
4:00 - 4:45 PM Alex Nowrasteh
Aaron Powell
LIVE Libertarianism.org Podcast: The Philosophy of Free Immigration Franklin
       
5:00 - 5:45 PM Mike Tanner
Michael Cannon
How Government Robs the Young to Pay the Old Franklin