Independence Day: Hayek explains Liberty

While America celebrates its day of Independence, people around the world are embracing the dangerous arms of government and giving up freedoms. Throughout history in times of economic upheaval, government has appeared to run to the rescue of economies in verge of collapse only to make matters worse. The Great Depression saw one of the largest expansion of the US Federal Government and yet despite the huge amount of dollars spent, the US fully recovered only after world war II. To add insult to injury, many do not seem to realize that it is government that heavily contributes to economic collapse. While the media rightly exposes on the disgraceful acts of Wall Street titans, it fails to expose the primary role of government in this collapse: the folly of the Federal reserve to inflate bubbles with low interest rates, the folly of the US Govt to inflate the housing markets through subsidized loans (Fannie Mae & Freedie Mac) and the failure of regulators in over a dozen agencies to properly expose abuse. Politicians tell us now that the failure of the market requires more restrictions of economic freedom and the creation of yet more regulators in Washington. Their solution is tie up small & mid-size businesses in regulations while unemployment explodes while bailing out their friends in large corporations despite these very subsidies have already led to collapse of historic firms such as GM & Chrysler, etc. Amidst this nonsense and the rush to curtail economic freedoms, it is valuable to re-evaluate the importance of liberty, the limits of government and power in the word of masters such F.A. Hayek.

Protectionism: How to Bankrupt An Industry

The bankruptcy of Chrysler and especially General Motors (GM) represent a watershed moment in America’s history. These companies and the car industry had such an influence on America’s culture that they became protected by the U.S. government. Unfortunately by protecting its car industry America’s politicians hindered its ability to become efficient and innovative and thus made it vulnerable to nimbler foreign competitors. To be clear the industry’s collapse has nothing to do with the current financial crisis, but started in the 1970s when the car industry rather than compete with incoming Japanese products by making cheaper and better, they hid behind politicians. Rules on fuel economy distorted the market facilitating production of light trucks and SUVs while the government restricted the import of small, efficient Japanese cars. While managers and politicians failed on a grand scale, leveraging their political muscles, the unions contributed quite a bit to this failure fighting against innovation and demanding costly benefits that the industry could not afford. If Detroit had spent less time lobbying for protectionism and more time on improving its products it might have prospered. The great lesson from this failure is that even major industries can become vulnerable when protected from the pressures of competitions and politicians trying to protect them with trade restrictions will do them much more harm than good adding up to a major ripoff for both consumers and taxpayer.

The Aging World and the Coming Storm

Despite the complaints about health care, the reality is that people over the last century have gotten healthier not just wealthier. We are living longer just as the rise of the middle class and women entering the workforce in mass, have led fertility rates to decline. The resulting sustantial increase in the  number of elderly people will create serious problems in coming years as a growing number of them will rely on a smaller labor pool (generally referred to an increase in the old-age dependency ratio). As the chart atop shows by 2050 Japan and major European countries could have a dependency ratio close or above 50% meaning that about 2 workers will have to bear the high cost of supporting social services for the elderly. This will be impossible unless payroll taxes rise to punitive levels or benefits are significantly reduced which may not be politically viable given the large share of the elderly voting in democracies. Although China and the United States are in slightly better shape, the trend is evident worldwide and as emerging countries become richer, the dependency ratio for the world is on the track to more than double to over 25% by 2050. Today it is popular to bash business for the bursting of the financial bubble but when citizens will discover that their highly indebted governments have overpromised benefits that cannot be delivered they may turn on democratic politicians and political parties which thrives on promising gullible voters utopian visions of prosperity for the purpose of gaining power. If you though pandemic flu and economic crisis were enough just wait for the coming storm that may threaten the core of world’s democracies.

Abruzzo Quake Reminds us of our Fragility

Earthquakes are common on planet earth but in the age of abundant internet videos & photos, experiencing these tragedies can aquire a deeper meaning: the web brings people living far away much closer to places and events that are quite distant in reality. As images and news arrived from Italy’s Abruzzo region with over 200 deaths and thousands wounded and homeless, we can almost experience the sadness and awe at the destruction. Crumbled brick buildings remind us of the power of nature always changing through shiting tectonic plates or evolving ecosystems. More powerfully, hands and bodies buried in the rubble remind us that life like earth itself is precious and yet fragile. It takes often tragedies to awaken our minds from the narrow focus of our daily lives and to be reminded that life should be treasured every day. As these images fade in memory unfortunately so does our appreciation for how quickly it could all end and for the simple great things that life offers every day: from the smile of a child to a sunset that fades into a distant and yet stunning horizon line.

A Stimulus to Bury our Kids in Debt

With the credit crisis crippling the global economy, governments are spending like drunken sailors to stabilize the financial system and spur growth once again using Keynesian policies. The United States especially has approved a giant fiscal stimulus, tax cuts and bail-outs that is increasing public debt. The crisis demand action but the problem is that (see IMF chart above) that government debt of rich countries is set to grow from 83.3% of GDP in 2008 to almost 100% in 2010. With aging populations and costly entitlements system these action may spell disaster. In addition while politicians talk about crisis and the majority of economists support the stimulus, some economists are against because government is not able to spend a dollar in a way that it generates a dollar or more in value. In addition for every dollar that the government takes out of the private sector is a dollar the private sector doesn’t have to spend anymore. The key problem here is that in order to finance all this spending, the government has either to raise taxes or print more money which creates inflation and can cause great harm to the average consumer and will place a huge burden on future generations. In other words, new president, same spending policies designed to bury our kids in debt. [On this subject see Stossel's video on Bailouts]

Friedman’s warning for the time

At a time when people look to governments to solve all sorts problems, the cautionary words of Milton Friedman come to mind from this 1979 interview. Even when capitalism, which is no perfect system, seems to fails let’s not fool ourselves that men in politics can save the world. We shall never forget that government contributed to creating this crisis (through bubble inducing monetary policy) and fell to enforce even the regulation on books (Madoff anyone?). Freedom depends on free markets and free-thinking people.

The Middle Class Engine of Growth

One of the greatest achievements of globalization has been the lifting of billions of people out of poverty and into the middle class which is the engine of economic growth. By the 1960s the middle class consisted of about a third of the world’s population, now more than 50% can be counted as middle class according to research by Surjit Bhalla, an Indian economist, with most of the growth coming from China. People in the middle class are generally more open-minded, more concerned about the future of their children, and prefer free markets and democracy which are better to balancing conflicting interests and promote growth. The middle class is also more likely to invest in education, new products and technologies, start new businesses which can generate jobs and are vital to prosperity.  With the economic crisis rolling around the globe and the risk of reversing globalization, the rise of the middle class could stop or reverse leaving the whole of humanity much worse off and a lot poorer potentially leading to instability and conflict.

Darwin’s evolution and humanity’s fate

This year will be the 150th anniversary of the publication of Charles Darwin’s theory of evolution. Evolution suggests basically that all living things are related and ultimately descend from a single common ancestor. This revolutionary theory has troubled many throughout history because it challenges the idea of divine creation. As a result countries where religion is important are least accepting of evolution. Seeing how many people in rich countries, America especially, do not embrace evolution despite mounting evidence is hugely disappointing for humanity. If even people who believe themselves to be living in ‘developed’ countries blessed by higher level of education cannot rid themselves of dogma and embrace the more rigorous discoveries of science, the future of humanity will remain at great risk. The survival of our species depends on our ability to adopt to new environments and use our scarce natural resources to survive natural disasters. This will be impossible if we do not realize that humans of all races and beliefs are part of a shared family whose survival depends on adaptation rather than divine intervention. Let us educate, not pray for, our children about who we truly are.

Dangerous temptations in times of panic

In the annual report published by an American think-tank called Freedom House, freedom in 2008, for the third straight year, appears to be in retreat across the world. The report attempts to rate the freedom of each country according to several measures of political rights and civil liberties. The study finds that freedom was repressed in 34 countries with countries in sub-Saharan Africa seeing the most erosion. The number of electoral democracies fell by two to 119 but 2009 will be a difficult year as economic collapse could put young democracies under extra pressure. History shows that days of rising protectionism and nationalism are fertile times for authoritarian regimes to impose further restrictions on freedom. It would be a tragedy if today’s  economic collapse would allow governments to tempt voters to trade freedoms for the relative security that can be imposed at a great cost with more government controls and powers. Sadly however it would not be the first time and it is a very likely scenario in times of panic and uncertainty. Let us not forget the great cost at which today’s freedoms have been acquired.

An oath in the bleakest of winters

America swore in its 44th president, the first black man to takes charge of the White House, not even a century after black Americans were still living in segregation. In an age where the American dream appears to be fading fast, this day marking another peaceful transition of power in an often bloody world served a powerful reminder about America’s amazing ability to renew itself. Beyond the celebration however this president faces huge challenges that will require tough decisions in order to solve major problems such as failing schools, poor health care, lost jobs and tackling global warming. Accomplishing all of this in a time of economic crisis and soaring public deficits will be an even bigger challenge and Mr. Obama knows this comparing the current crisis to the bleakest winter of the Republic’s history, when George Washington’s battered army lay at bay at Valley Forge. He promised an end to “putting off unpleasant decisions” but we shall see how these good intentions will fare against taking on the well entrenched interests and lobbies that are at the core of this amazing and yet sometimes seemingly doomed modern American Republic.