Theresa May leads the singing of Kumbaya in Davos

 

(Here’s my response to British Prime Minister Theresa May’s speech at the recent World Economic Forum in Davos, Switzerland. Find the full text of her speech below my comments.)

Oh, boy…where to start?…

If May wants to promote free trade and globalization, then why not just declare unilateral free trade for Britain and forget about negotiating trade deals that may never happen or, if they do, will simply protect the status quo? Set a good example.

“Shared Society”…sounds very socialist to me, and it probably is.

She doesn’t like “the cult of the individual”, huh? Well, guess what, we are all individuals. I’m fed up with groups. How about you?

“You don’t want a government that will get out of the way…” Oh, yes, we do!

As for business:

  1. “It must pay its fair share of taxes.” Oh, yeah? What are those? And guess who really pays corporate taxes? The consumer.
  2. “Business has an obligation to its employees and supply chains”  Huh? Well, yeah, business has an obligation to pay its employees, but what are its obligation to its supply chains other than paying them, too? What gobbledygook. Of course, there is no mention of business’ obligations to its customers. Isn’t that why business is in business?
  3. “Business must trade in the right way.” Another great big HUH? What is the right way?
  4. “Business must invest in communities.” She’s just another shake down artist; i.e., you want to build a factory here, then you must pay to play. We need parks, community centers, etc. and we don’t want to tax our constituents to provide them.
  5. And she wants to “address executive pay”. Another big fat UH OH. Government will decide how much people can make, not shareholders. That will really attract the best and the brightest.

My conclusion…just another pie in the sky call for more socialism disguised in the garb of free trade. But I bet they were all singing Kumbaya in Davos.

Patrick Barron

 

This is the full text of the speech delivered by British Prime Minister Theresa May to the World Economic Forum in Davos, Switzerland on Thursday, January 19 2017:

 

This is an organisation that is, as it says in the very first line of your Mission Statement, committed to “improving the state of the world”. Those of us who meet here are all – by instinct and outlook – optimists who believe in the power of public and private cooperation to make the world of tomorrow better than the world of today. And we are all united in our belief that that world will be built on the foundations of free trade, partnership and globalisation.

 

Yet beyond the confines of this hall, those forces for good that we so often take for granted are being called into question. The forces of liberalism, free-trade and globalisation that have had – and continue to have – such an overwhelmingly positive impact on our world…

 

That have harnessed unprecedented levels of wealth and opportunity…

 

That have lifted millions out of poverty around the world…

 

That have brought nations closer together, broken down barriers and improved standards of living and consumer choice…

 

Forces that underpin the rules-based international system that is key to our global prosperity and security, are somehow at risk of being undermined.

 

And as we meet here this morning, across Europe parties of the far left and the far right are seeking to exploit this opportunity – gathering support by feeding off an underlying and keenly felt sense among some people – often those on modest to low incomes living in relatively rich countries around the West – that these forces are not working for them.

 

And those parties – who embrace the politics of division and despair; who offer easy answers; who claim to understand people’s problems and always know what and who to blame – feed off something else too: the sense among the public that mainstream political and business leaders have failed to comprehend their legitimate concerns for too long.

 

This morning, I want to set out a manifesto for change that responds to these concerns and shows that the politics of the mainstream can deliver the change people need.

 

I want to show how, by taking a new approach that harnesses the good of what works and changes what does not, we can maintain – indeed we can build – support for the rules-based international system.

 

And I want to explain how, as we do so, the United Kingdom – a country that has so often been at the forefront of economic and social change – will step up to a new leadership role as the strongest and most forceful advocate for business, free markets and free trade anywhere in the world.

 

Brexit

 

For that is the unique opportunity that Britain now has.

 

I speak to you this morning as the Prime Minister of a country that faces the future with confidence.

 

For a little over six months ago, millions of my fellow citizens upset the odds by voting – with determination and quiet resolve – to leave the European Union and embrace the world.

 

Let us not underestimate the magnitude of that decision. It means Britain must face up to a period of momentous change. It means we must go through a tough negotiation and forge a new role for ourselves in the world. It means accepting that the road ahead will be uncertain at times, but believing that it leads towards a brighter future for our country’s children, and grandchildren too.

 

So while it would have been easy for the British people to shy away from taking such a path, they fixed their eyes on that brighter future and chose a bold, ambitious course instead.

They chose to build a truly Global Britain.

 

I know that this – and the other reasons Britain took such a decision – is not always well understood internationally, particularly among our friends and allies in Europe. Some of our European partners feel that we have turned our back on them. And I know many fear what our decision means for the future of the EU itself.

 

But as I said in my speech earlier this week, our decision to leave the European Union was no rejection of our friends in Europe, with whom we share common interests and values and so much else. It was no attempt to become more distant from them, or to cease the cooperation that has helped to keep our continent secure and strong.

 

And nor was it an attempt to undermine the European Union itself. It remains overwhelmingly and compellingly in Britain’s national interest that the EU as an organisation should succeed.

It was simply a vote to restore, as we see it, our parliamentary democracy and national self-determination. A vote to take control and make decisions for ourselves.

And – crucially – to become even more global and internationalist in action and in spirit too.

Because that is who we are as a nation. Britain’s history and culture is profoundly internationalist.

 

We are a European country – and proud of our shared European heritage – but we are also a country that has always looked beyond Europe to the wider world.

 

That is why we are among the most racially diverse countries in Europe, one of the most multicultural members of the European Union, and why – whether we are talking about India, Pakistan, Bangladesh, America, Australia, Canada, New Zealand, countries in Africa, Asia or those that are closer to home in Europe – so many |of us have close friends and relatives from across the world.

 

And it is why we are by instinct a great, global, trading nation that seeks to trade with countries not just in Europe but beyond Europe too.

 

So at the heart of the plan I set out earlier this week, is a determination to pursue a bold and ambitious Free Trade Agreement between the UK and the European Union. But, more than that, we seek the freedom to strike new trade deals with old friends and new allies right around the world as well.

 

I am pleased that we have already started discussions on future trade ties with countries like Australia, New Zealand and India. While countries including China, Brazil, and the Gulf States have already expressed their interest in striking trade deals with us.

 

It is about embracing genuine free trade, because that is the basis of our prosperity but also the best way to cement the multilateral partnerships and cooperation that help to build a better world.

For the challenges we face, like terrorism, climate change and modern slavery, don’t stop at national borders. Nor do they stop at the borders of continents. The challenges and opportunities before us, require us to look outwards in a spirit of cooperation and partnership.

 

That is why, as I said in my speech on Tuesday, I want the UK to emerge from this period of change as a truly Global Britain – the best friend and neighbour to our European partners, but a country that reaches beyond the borders of Europe too; a country that gets out into the world to build relationships with old friends and new allies alike.

 

And that is exactly what we are going to do.

 

Global Britain

 

We are going to be a confident country that is in control of its own destiny once again.

And it is because of that that we will be in a position to act in this global role.

Because a country in control of its destiny is more, not less able to play a full role in underpinning and strengthening the multilateral rules-based system.

 

A Global Britain is no less British because we are a hub for foreign investment. Indeed, our biggest manufacturer, Tata, is Indian – and you still can’t get more British than a Jaguar or a Land Rover.

Britain is no less British because it is home to people from around the world. In fact, we derive so much of our strength from our diversity – we are a multi-racial, multi-ethnic, multi-faith democracy, and we’re proud of it.

 

And Britain is no less British because we have led the way in multilateral organisations like the UN, NATO, IMF and the World Bank over many years.

 

Membership of these bodies magnifies all their members’ ability to advance the common goods of peace, prosperity and security.

 

I believe strongly in a rules based global order. The establishment of the institutions that give effect to it in the mid twentieth century was a crucial foundation for much of the growing peace and prosperity the world has enjoyed since. And the tragic history of the first half of the last century reminds us of the cost of those institutions’ absence.

 

The litany of follies of that time are mistakes that we should never forget and never repeat. So we must uphold the institutions that enable the nations of the world to work together.

And we must continue to promote international cooperation wherever we can.

 

One example of that is modern slavery – a scourge of our world, which we can only defeat if we work together, changing attitudes, rooting out such abhorrent practices and prosecuting the perpetrators.

 

That is why at Davos this year I have convened a high-level panel discussion to continue our co-ordinated effort to save those many lives which are, tragically, being stolen.

 

International cooperation is vital. But we must never forget that our first responsibility as governments it to serve the people. And it is my firm belief that we – as governments, international institutions, businesses and individuals – need to do more to respond to the concerns of those who feel that the modern world has left them behind.

 

Economic reform

 

So in Britain, we have embarked on an ambitious programme of economic and social reform that aims to ensure that, as we build this Global Britain, we are able to take people with us. A programme that aims to show how a strong Britain abroad can be a better Britain at home.

Because talk of greater globalisation can make people fearful. For many, it means their jobs being outsourced and wages undercut. It means having to sit back as they watch their communities change around them.

 

And in their minds, it means watching as those who prosper seem to play by a different set of rules, while for many life remains a struggle as they get by, but don’t necessarily get on.

And these tensions and differences are increasingly exposed and exploited through the expansion of new technologies and the growth of social media.

 

But if we are to make the case for free markets, free trade and globalisation, as we must, those of us who believe in them must face up to and respond to the concerns people have.

And we must work together to shape new policies and approaches that demonstrate their capacity to deliver for all of the people in our respective countries.

 

I believe this challenge demands a new approach from government. And it requires a new approach from business too.

 

For government, it means not just stepping back and – as the prevailing orthodoxy in many countries has argued for so many years – not just getting out of the way. Not just leaving businesses to get on with the job and assuming that problems will just fix themselves.

 

It means stepping up to a new, active role that backs businesses and ensures more people in all corners of the country share in the benefits of its success.

 

And for business, it means doing even more to spread those benefits to more people. It means playing by the same rules as everyone else when it comes to tax and behaviour, because in the UK trust in business runs at just 35% among those in the lowest income brackets. And it means putting aside short-term considerations and investing in people and communities for the long-term.

 

These are all things that I know the vast majority of businesses do already. Not just by creating jobs, supporting smaller businesses, training and developing people, but also by working to give something back to communities and supporting the next generation.

 

Businesses large and small are the backbone of our economies, and enterprise is the engine of our prosperity. That is why Britain is – and will always be – open for business: open to investment in our companies, infrastructure, universities and entrepreneurs. Open to those who want to buy our goods and services. And open to talent and opportunities, from the arts to technology, finance to manufacturing.

 

But, at the same time as promoting this openness, we must heed the underlying feeling that there are some companies, particularly those with a global reach, who are playing by a different set of rules to ordinary, working people.

 

So it is essential for business to demonstrate leadership. To show that, in this globalised world, everyone is playing by the same rules, and that the benefits of economic success are there for all our citizens.

 

This work is absolutely crucial if we are to maintain public consent for a globalised economy and the businesses that operate within it.

 

That is why I have talked a great deal about our country delivering yet higher standards of corporate governance, to help make the UK the best place to invest of any major economy.

That means several things.

 

It means businesses paying their fair share of tax, recognising their obligations and duties to their employees and supply chains, and trading in the right way;

 

Companies genuinely investing in – and becoming part of – the communities and nations in which they operate, and abiding by the responsibilities that implies;

 

And all of us taking steps towards addressing executive pay and accountability to shareholders.

 

And that is why I welcome the World Economic Forum’s ‘Compact for Responsive and Responsible Leadership’ that businesses are being asked to sign up to at this conference.

 

It is this change – setting clear rules for businesses to operate by, while embracing the liberalism and free trade that enable them to thrive – which will allow us to conserve the ultimate good that is a globalised economy.

 

I have no doubt at all about the vital role business plays – not just in the economic life of a nation, but in society too. But to respond to that sense of anxiety people feel, I believe we – business and government working together – need to do even more to make the case.

 

That is why in Britain, we are developing a new Modern Industrial Strategy. The term ‘industrial strategy’ has fallen into something approaching disrepute in recent years, but I believe such a strategy – that addresses the long-standing and structural weaknesses in our economy – is essential if we are to promote the benefits of free markets and free trade as we wish.

 

Our Strategy is not about propping up failing industries or picking winners, but creating the conditions where winners can emerge and grow. It is about backing those winners all the way to encourage them to invest in the long-term future of Britain.

 

And about delivering jobs and economic growth to every community and corner of the country.

We can’t leave all this to international market forces alone, or just rely on an increase in overall prosperity.

 

Instead, we have to be practical and proactive – in other words, we have to step up and take control – to ensure free trade and globalisation work for everyone.

 

Social reform

 

At the same time, we have embarked on an ambitious agenda of social reform that embraces the same principles. Active, engaged government that steps up and works for everyone.

Because if you are someone who is just managing – just getting by – you don’t need a government that will get out of the way. You need an active government that will step up and champion the things that matter to you.

 

Governments have traditionally been good at identifying – if not always addressing – the problems and challenges faced by the least disadvantaged in our societies.

 

However, the mission I have laid out for the government I lead – to make Britain a country that works for everyone – goes further. It is to build something that I have called the Shared Society – one that doesn’t just value our individual rights but focuses rather more on the responsibilities we have to one another. That respects the bonds that people share – the bonds of family, community, citizenship and strong institutions.

 

And that recognises the obligations we have as citizens – obligations that make our society work.

It is these bonds and obligations that make our society strong and answer our basic human need for definition and identity.

 

And I am absolutely clear that it is the job of government to encourage and nurture the relationships, networks and institutions that provide that definition, and to correct the injustice and unfairness that divides us wherever it is found.

 

Too often today, the responsibilities we have to one another have been forgotten as the cult of individualism has taken hold, and globalisation and the democratisation of communications has encouraged people to look beyond their own communities and immediate networks in the name of joining a broader global community.

 

To say this is not to argue against globalisation – nor the benefits it brings – from modern travel and modern media to new products in our shops and new opportunities for British companies to export their goods to millions of consumers all around the world.

 

But just as we need to act to address the deeply felt sense of economic inequality that has emerged in recent years, so we also need to recognise the way in which a more global and individualistic world can sometimes loosen the ties that bind our society together, leaving some people feeling locked out and left behind.

 

Conclusion

 

I am determined to make sure that centre-ground, mainstream politics can respond to the concerns people have today. I am determined to stand up for free markets, free trade and globalisation, but also to show how these forces can work for everyone.

 

And to do so, I turn to the words of the 18th century philosopher Edmund Burke who said “a state without the means of some change is without the means of its own conservation”.

That great Conservative principle – change in order to conserve – is more important than ever in today’s complex geopolitical environment.

 

And I feel it is of huge relevance to those of us here in Davos this week.

 

And it is the principle that guides me as I lead Britain through this period of change.

 

As we build a new, bold, confident Global Britain and shape a new era of globalisation that genuinely works for all.

 

As we harness the forces of globalisation so that the system works for everyone, and so maintain public support for that system for generations to come.

 

I want that to be the legacy of our time.

 

To use this moment to provide responsive, responsible leadership that will bring the benefits of free trade to every corner of the world; that will lift millions more out of poverty and towards prosperity; and that will deliver security, prosperity and belonging for all of our people.

 

 

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A statist view of the world

From today’s Open Europe news summary:

Meanwhile, The Guardian reported that Lodewijk Asscher, leader of the Dutch Labour party (PvdA), which is currently a partner in the ruling coalition government, has said “I propose to come to a new trade agreement with Great Britain, but only if we can agree firmly upon tackling tax avoidance and stopping the fiscal race to the bottom.”

According to the Dutch Labour party leader, when a business or individual takes legal steps to avoid taxes and/or a country decides to lower its taxes, both are engaged in a “fiscal race to the bottom”. This is the perspective of all statists; i.e., that they are entitled to our money first and any scraps we are allowed to keep should be accepted with gratitude.

Patrick Barron

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My letter to the NY Times re: Free basic income is not a solution to unemployment

Re: Free Money for the Jobless

Dear Sirs:

Your article about Finland’s experiment in providing a free basic income to the unemployed fails to address the main question–what exactly is the cause of unemployment and what is the best way to eliminate it? The cause of unemployment is a change in the market, which, if not caused by government itself, is a natural occurrence in a dynamic economy. The great Austrian economist Joseph Schumpeter coined the phrase “creative destruction” to describe the process whereby an advancing, wealth generating economy is constantly shedding old production methods for better ones, causing malinvestment of capital and temporary unemployment of labor. Government programs such as unemployment insurance hinder the necessary and beneficial process of capital and labor adapting to the new market environment. Not only do they cause disincentives to adaptation, they must be funded out of the wealth generating sector of the economy. Finland’s experiment in going beyond unemployment payments and providing a basic income is simply the welfare state bureaucracy trying to justify its own existence after the failure of its previous programs. There is no solution to unemployment other than that provided by the market itself.

Patrick Barron

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The Chimera of Mandating Health and Safety Standards

Federal regulation of health and safety is based upon several illogical premises. Unfortunately these premises are never discussed. Instead we are bombarded with scare stories that business intends to make its profits with no consideration to the health of the public or the safety of its workers.

 

Illogical premise number one: There is an absolute criteria for health and safety that can be discovered.

 

Wrong! There is only a continuum of healthier and safer practices. For example, we accept some level of pollution and some level of worker risk. Some level of pollution escapes from factories, commercial establishments, and even homes. Likewise, there are many occupations that are obviously dangerous, such as lumberjack and commercial fisherman. Furthermore, even occupations that no one would consider to be dangerous contain some level of risk. My wife broke her foot a few years ago when she slipped on a well waxed hallway at work.

 

Illogical premise number two: The federal government should be responsible for conducting research into determining the extent of risks to health and worker safety.

 

Wrong! All research should be conducted by private means, because such research itself comes at a cost to society. Wealthier societies can afford more research than poorer ones. Yet the federal government will command resources to conduct health and safety research that the free market would direct to a higher use. Nothing should be exempt from the market test. Therefore, all research should be conducted at private expense.

 

Illogical premise number three: The federal government should be responsible for setting health and safety standards based upon either public or private research.

 

Wrong! Any standards should be set by the most local community affected. For example, pollution standards may be different in Gary, Indiana than Hollywood, California. The former is a major industrial city, and the latter is a wealthy bedroom community. Hollywood’s residents may very well set more stringent standards than Gary residents, because there is little factory-type pollution or worker risk there. Therefore, stringent standards would not affect production or jobs. Jurisdictions may even be a city block or two long and not encompass an entire city. Residents of Gary, Indiana may set more stringent noise level standards in residential neighborhoods than directly across the street from a factory. Of course, there may be natural gradations to noise level, with homes in noisier neighborhoods selling cheaper than homes in quieter neighborhoods.

 

Illogical premise number four: The federal government should fine and/or shut down businesses that violate its standards.

 

Wrong! Violations of health and safety are torts–i.e., harms–or a taking–i.e., violation of the benefits of property rights–that can be adjudicated only in a court of law based upon the standards of the local community. Standards need not be the same for every community. Any financial remedy should go entirely to the plaintiffs and not to a federal government agency. Otherwise, the federal government agency becomes a legitimate shakedown/extortion racket, funding itself through its own fines imposed for so-called violations of its own standards. (Regrettably, this is the situation today!)

 

Conclusion:

Standards for health and safety are legitimate concerns. Violations are torts (harms) and/or takings (of property rights). There is no one standard that can be discovered, only a continuum of standards that may be different in different places, according to community desires. All standards impose costs that involve tradeoffs with other needs. In other words, a costly new standard may be accepted in some richer venues and rejected in poorer ones. Imposing one strict standard impoverishes the latter while perhaps having little or no effect on the former. Therefore, health and safety standards should be adopted by the smallest constituency possible.

Patrick Barron

 

 

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Germans favor a self-destructive policy

From today’s Open Europe news summary:

Majority of Germans want Merkel to take tough stance in Brexit negotiations

A poll for the Körber Foundation reveals that 58% of Germans think Chancellor Angela Merkel should ‘negotiate tough’ with the UK while 40% say she should be ‘ready to compromise’. Within Merkel’s CDU party 65% are in favour of a hardline approach whereas supporters among the leftwing parties and the AfD are more inclined towards a compromise deal. The poll also shows that 67% of Germans think that the UK’s decision to leave the EU has reduced the cohesion among the remaining members of the bloc. Meanwhile, 62% believe that the EU is not on the right track and 42% want a referendum about Germany’s EU membership.

Although this short clip never defines what constitutes a “tough stance”, I assume it means that goods and services from the UK should face restrictions–tariffs, quotas, or even outright prohibitions–regarding accessing the EU market. OK. Does that also mean that EU businesses should be restricted from exporting to the UK? I doubt that the Germans want to reduce sales, but the only way UK customers can buy EU goods is with euros obtained from exports to the EU. Of course, the Europeans could continue to sell to the UK and stockpile their British Pounds, but that is equivalent to buying something with a check that the payee never cashes. In other words, the EU would be making a gift to the UK. Let us not forget that the purpose of exporting is to import.

Patrick Barron

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Raising taxes is “tax harmonization”; lowering taxes is “Brutal Brexit”

From today’s Open Europe news summary:

European Commission plans corporate tax rule harmonisation

The European Commission will announce plans today to harmonise corporation tax policy across the EU. The plans would not mandate a single tax rate across Europe, but would instead seek to “eliminate the mismatches and loopholes between national tax systems, which companies can currently exploit,” as well as applying only to firms with an annual turnover above €750 million. An opinion piece for Expansión describes mooted reductions in UK corporation tax as ‘Brutal Brexit.’

Source: Expansión Politico

Doublespeak” is alive and well at the European Commission.

Patrick Barron

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Should the Fed Raise Interest Rates?

For some time now the Fed has been hinting that it will moderate its interventions–monetizing government debt by printing money to buy government bonds and now quantitative easing by printing money to buy corporate bonds–in order to drive down the interest rate to unprecedented low levels. The Keynesian theory behind these interventions is that lower interest rates will spur lending, which in turn will spur spending. In the Keynesian mindset spending is all important–not saving, not being frugal, not living within one’s own means–no, spend, spend, spend. The Keynesians running all the world’s banks firmly believe that it is their duty that spending not diminish one cent, even if this means going massively into debt. Keynes himself famously said that government should borrow money to pay people to dig holes in the ground and then pay them again to fill them back up.

 

To Austrian school economist like myself, this is childish, shallow, and ultimately dangerous thinking. Austrians understand that economic prosperity depends first of all upon savings, not spending. Savings is funneled by the capital markets into productive, wealth generating enterprises. Gratuitous spending is simply consumption. Now, there is nothing wrong with consumption…as long as one has actually produced something to be consumed. Printed money is not the same as capital accumulation. Or, as Austrian school economist Frank Shostak explains, goods and services are the “means” of exchange and money is merely the “medium” of exchange. Expanding the means of exchange through increased production–which requires increased capital, which itself requires increased savings–is a hallmark of a prosperous society. Increasing the medium of exchange out of thin air, as is current central bank policy, is the hallmark of a declining society that has decided to eat its seed corn.

 

Of course, the central bankers and their political friends are terrified of a recession that undoubtedly would follow an increase in interest rates. What our monetary and political masters do not understand is that the recession is both necessary and inevitable. It is necessary in order to end capital consumption and wealth destroying enterprises. Furthermore, it is inevitable in that the structure of production has been so skewed toward capital consumption that production is threatened. We are living on both borrowed money (at home and abroad), and  the accumulated capital of previous generations. This one time spending spree WILL end. The longer we try to prop up spending with borrowed and printed money, the worse will be the reckoning when it does come.

 

So, how far should the Fed go in raising interest rates? There is no answer for this question. The Fed must end its monetary interventions and allow the free market to determine the interest rate that balances savings with loan demand. The last time the free market was allow to work, in the era of Fed Chairman Paul Volcker, the prime rate went to over 20%. This was very hard on both business and workers, but inflation was cured and the American economy shed itself of wealth destroying enterprises and became the economic powerhouse of the world once again. The same thing can happen, if only our monetary master get out of the way.

Patrick Barron

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Italy wants other European countries to pay its unemployment bills

From today’s Open Europe news summary:

Italy to propose Eurozone joint unemployment insurance scheme

La Repubblica reports that Italian Finance Minister Pier Carlo Padoan will later this month submit to his Eurozone counterparts a draft plan for a joint unemployment insurance scheme. Eurozone countries would contribute gradually to the tune of 0.5% of their GDP – meaning that the common pot would eventually amount to around €50bn. The scheme could be tapped by any Eurozone country experiencing a sudden increase in unemployment or a slowdown in employment growth compared to the bloc’s average.

The socialists running most governments in Europe (they are all socialists in policy if not in name) keep coming up with more schemes to make all of Europe pay for their destructive economic policies. What reason will Italy or any other Eurozone country have to make its economy more robust and allow its people to work cooperatively with others, if it can draw upon a Europe-wide unemployment fund? I can’t see Germany or some other more economically successful European nations agreeing to this harebrained proposal.

Patrick Barron

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There is no such thing as a negative interest rate

We Austrian economists are used to having terms corrupted, misused and redefined by statists and others who love and advocate strong central control of money and power. The term “inflation” is a prime example. We Austrians refer to “inflation” as creating new fiat money–as in inflation of the money supply. This is in sharp contrast to what we commonly hear in the mainstream media and from all Keynesian influenced economists, who use the term to describe a general increase in prices. Now nearly everyone thinks of inflation in this sense, so much so that we Austrians must always be careful to say “inflation of the money supply” whenever we use the term “inflation”.

 

Those of us of a libertarian political persuasion, which includes many (but not all) Austrian economists, likewise bristle at how modern statists have hijacked and corrupted the term “liberal”. Liberal is a term that is derived from the word “liberty”. Ludwig von Mises even penned a book titled “Liberalism“. Naturally, it contains not one reference to what today’s so-called liberals advocate; i.e., erosion of property rights and statist intervention in almost all aspects of life.

 

However, now we Austrian economists are faced with a term that is new. It is NOT a term that has had a prior meaning and has been corrupted and re-defined.. It is a new, made up and wholly fabricated term– “Negative Interest Rate”.

 

Interest is founded on time preference

 

The rate of interest is founded on an innate trait of the human condition. All other things being equal, humans desire goods and services earlier rather than later. Austrian economists refer to this human trait as “time preference”. Those who desire things sooner rather than later are said to have a high time preference. Likewise, those who desire things later rather than sooner are said to have a low time preference.

 

No two people have the same time preference. In fact, time preference changes within the same individual constantly. So someone with a higher time preference, but without the resources to own the good in the present, may be willing to pay others a higher overall price in the future for access to the good today; they may be willing to pay extra to use someone else’s money in order to have it today. This “extra” is the interest rate that “someone else” will charge the person in order to allow the purchase to happen today.

 

Here you see a basic principle. There are TWO prices for something, a “have it now but can’t afford it now price” and a “I’ll save up to have it later price”. The “have it now but can’t afford it now price” means that the buyer must borrow–or we could call it “rent”–the money in order to buy it now. We call that “renting of money” interest.

 

The difference in price is the interest rate for that transaction at that place and time. One sees that there really is no single “interest rate”. Like any market, what appears to be a price of a good–money, in the most common example–is constantly in flux due to the fact that it is derived from a human trait, time preference, that itself is constantly in flux.

 

Stop abusing our language and insulting everyone’s intelligence

 

What the mainstream media and the public call a “negative interest rate” is an abuse of language. Time preference can never be negative, because that would require a total change in human nature. People will always want something sooner rather than later. It is HARD to save and delay consumption. People have to be disciplined to save and delay gratification. The idea of a “negative interest rate” is an attempt to turn reality on its head. It is another tactic in the Keynesian attempt to refute Say’s Law; i.e., that production must precede consumption and that what one produces becomes the means by which he consumes. One can neither consume nor sell something that was never produced, which is the absurdity that is implied by a negative interest rate.

 

Conclusion

 

It is human nature that no one is willing to give up control of what he possesses now and accept less in the future. Since time preference can never be negative, the interest rate can never be negative. What is called a negative interest rate is merely a deposit charge that is difficult to avoid. Central banks throughout the world are exploiting their ability to charge for reserves held by their bank customers. By calling its charge a negative interest rate, central banks are trying to create the impression that what they are doing is a natural market phenomenon. It is no such thing. Because the central bank has a monopoly on the kind of money that may be used–its own!–and the quantity of money that people and businesses may use within a currency zone, it has the temporary power to force its member bank customers, and by extension its member banks’ own customers, a fee for holding that which they cannot conveniently house anywhere else at the present time. This is nothing more than monetary repression, the purpose of which is to force the banks and their customers to loan, loan, loan, and spend, spend, spend respectively in order to re-inflate moribund economies.

 

The charade of central banking can come to an end. An important first step for all of us is to stop accepting the central controllers’ corrupt definitions of terms that we use to describe reality. Economics is not an opinion; it is a science of reality. Definitions matter.

Patrick Barron

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A wonderful new book about Austrian economics for the layman

Blind Robbery! How the Fed, Banks, and Government Steal Our Money

by Andreas Marquart and Philipp Bagus

Reviewed by Patrick Barron

 

The purpose of this book is nothing less than to foment a revolt against the economic and monetary status quo, which, if continued, will destroy civilization as we know it. Yes, that is a big task, but Misters Marquart and Bagus may have accomplished just that. They have given us, in a relatively short book written in a conversational style for the layman, a comprehensive explanation of how an economy really works and why our current, central bank dominated system is destroying the productive sector of Western economies, transferring wealth from the masses to the politically connected few, and which, if continued, is bound to fail spectacularly so. But Marquart and Bagus are optimistic that the layman can understand the hidden forces at work and lobby to change them for the better. Champions of the Austrian School of Economics, which many economists believe may be too difficult for the layman to understand, these worthy gentlemen have given us a treatise that brings all the elements of that school of thought together in a book that can be read and understood by those completely unversed in economic theory of any kind . They start by employing the device of considering a fictitious town that has no medium of exchange; i.e., it is an economy based on barter. From this humble start, we learn how money arises naturally as part of the market in order to solve the limitations of a barter economy. We learn that only commodity money would be chosen by the market. We learn how bankers collude with governments to destroy commodity money for their own gains, which leads to a marvelous explanation of business cycle theory that arises as a result thereof. The “blind robbery” of the catchy title refers to the inflation of the money supply by government and the banks, which leads not only to the boom-bust cycle but also to the more hidden loss of money’s purchasing power over time. But the loss of money’s purchasing power is a boon for government spending and those who are that spending stream’s recipients, mainly the military, Wall Street insiders, and welfare recipients. Perhaps the most innovative part of the book is the way the authors weave in an explanation of the steady corruption of society’s sober, hardworking culture, a sure fire death by a thousand cuts.

 

Read this book! Pass it along! Donate copies to schools and libraries! Let’s start the revolution!

 

Blind Robbery may be purchased here.

 

Or copy this link into your browser:

 

http://store.mises.org/Blind-Robbery-How-The-Fed-Banks-And-Government-Steal-Our-Money-P11031.aspx

 

 

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