Great letter to the editor of the Michigan Daily by SFE student Vincent Patsy:

U.S. capitalism fails because it isn’t really capitalism

The most important word in the phrase “free market capitalism” is free. Freedom, I believe, can only be defined as the absence of coercion. Free market capitalism is the economic system where all property (and therefore means of production) is privately held and all exchanges are voluntary.

Recently, much disdain and derision has been directed at free market capitalism. But we don’t have a purely capitalist system. To blame capitalism for the latest economic crisis is like blaming the spread offense for Michigan’s losses this year. Whether it’s a monetary manipulation, price controls or the lack of a running quarterback, it is clear that the idealized system can’t be blamed if it doesn’t exist.

What is often called capitalism today is actually closer to corporatism or fascism. We have a market, but due to a manipulation of prices, we have influenced the allocation of goods away from what consumers want. In a free market system, there would be no Federal Reserve, no Department of Energy or Education and certainly no World Trade Organization or International Monetary Fund. When I was reading the Daily’s review yesterday of the film “Battle in Seattle,” it wasn’t clear if the author was able to make this distinction (Seattle calling, 10/14/2008). This is a common error. People from the right like Larry Kudlow and those from the left like Eleanor Clift have presented our system as free market capitalism.

Free market capitalists would protest and fight alongside whoever wanted to abolish the WTO or the IMF. Add the Federal Reserve to this list, and I will drive the tank.

Great article from Mises.org on how absolutely stupid it is to claim that laissez faire caused the credit crisis.

A fundemental rule of sound argument is to define your premises.  In this statement, “laissez faire caused the crisis”, one of the premises is that we currently live under a system of laissez faire.  This requires a definition of laissez faire, which is seldom given by those making the claim, yet the phrase gets defined de facto in the context of the article in which the statement appears.  And it ussually comes to mean completely unleashed free-market capitalism - a definition which would destroy the original statement, since we do not live under such a system.

Read the article.

From townhall.com:

The bailout passed!

Too bad.

When so many politicians speak with one voice in support of the biggest act of government intervention in the economy in generations, I cringe.

Everybody talked about the “freeze” in the credit markets, but why, I wonder, were the cable news programs that repeated the credit-freeze mantra pausing for commercials from companies trying to lend me money? Ditech and LendingTree still hawk mortgages at under 6 percent. Some credit freeze.

Economist Robert Higgs of the Independent Institute looked at the credit numbers kept by the Federal Reserve. He writes: “Although certain financial institutions are undeniably in deep trouble — difficulties of their own making … — credit markets in general have not ceased to operate. Moreover, lenders are extending credit in historically great amounts“.

Maybe this is why CNN business reporter Ali Velshi broke ranks when reporting on “dried up” credit and said, “When I say ‘dried up,’ I don’t mean there’s no money. But you’d better have good collateral and good credit.”

What’s wrong with that?

To those who say that without banks nobody can borrow, economist Steven Landsburg offers this response: “Banks don’t lend their own money; they lend other people’s (their depositors’ and their stockholders’). Just because the banks disappear doesn’t mean the lenders will. Borrowers will still want to borrow, and lenders will still want to lend. The only question is whether they’ll be able to find each other [A]s any user of Match.com can tell you, the technology for finding partners has improved since [the 1930s]. When a firm wants to raise capital, why can’t it just sell bonds over the web? Or issue new stock? Or approach one of the hedge funds that seem to be swimming in cash? Or borrow abroad?”

I suspect that the bailout will do more harm than good, like “aiding” an alcoholic by giving him booze. It perpetuates the moral hazard produced by government guarantees that created the problems in the first place. It acts as an enabler by giving more money to opportunistic lenders who assumed they’d be bailed out. And of course the politicians made a bad bailout bill worse by adding in tax breaks for stock-car racers, movie producers, “alternative” energy, etc. Then they insisted that all health insurance must cover mental illness, a requirement that will launch an orgy of fraud and make health insurance unaffordable for millions. The conceit of the anointed knows no bounds.

After the bailout passed, the stock market turned lower. Was it because investors then thought harder about how the politicians will misspend our $700 billion? All government can do is move money from one part of the economy to another. What makes anyone assume the government knows best where the money should be?

Steven Horwitz, an economics professor at St. Lawrence University, got it right when he wrote, “There will be short-term pain if we don’t bail out these firms, but that is the hangover price we pay for 15 years or more of binge lending. The proposed bailout cannot prevent the pain of the hangover; it can only conceal it by shifting and dispersing it among the taxpayers and an economy weakened by the borrowing, taxing and/or inflation needed to pay for that $700 billion. Better we should take our short-term pain straight up and clean out the mistakes of our binge and then get back to the business of free markets without creating an unchecked executive branch monstrosity trying to ’save’ those who profited most from the binge and harming innocent taxpayers in the process“.

Sure, without the bailout, there might have been a severe recession. Bubbles must pop. But it’s important that we let bubbles pop. Markets would then find a floor and recover.

Now the politicians are blowing some new air into the bubble, but we may have a recession anyway. And with more intervention, regulation and ambiguity about what the real market prices for those government-supported securities are, investors won’t know where the real bottom is.

So any recession will last longer. And the moral hazard the bailout perpetuates will lead to new bubbles … and then demands for another bailout.

Free enterprise sounds nice. We should try it sometime.

A study by Dr. Michael J. Hicks for the Ball State University Bureau of Business Research finds what economic theory predicts - minimum wage hikes increase unemployment.

The study, released just today, begins with a summary of the findings on the impact of the Federal minimum wage increase enacted in July:

"Our analysis concludes that a 10 percent increase in the minimum wage would result in a roughly 0.19 percent increase in unemployment. Applied to the U.S. labor market in July, this results in a one-time decrease in employment of approximately 160,000 workers."

Who are those workers?  Likely those on the very bottom of the economic ladder.  Forcing employers to pay them more than thier productivity warrants eliminates an opportunity for them to enter the labor market and improve their value and skills.  It essentially cuts of the bottom rung of the economic ladder, letting those who are holding onto it fall.

From the Shotgun Blog, where they are spending this week celebrating free speech…

People who wholeheartedly support free speech and other social or “civil” liberties often have no problem opposing free markets. Unfortunately for them, social freedom and economic freedom are inexorably intertwined.

If government has the power to regulate economic activity – grant licenses to businesses or tradesmen, regulate accounting practices, implement workplace safety regulations, etc. – then they inevitably have the power to restrict social freedoms, not least of which is free speech.

I have personally met many business owners who have strong opinions on issues, but who would never voice them or fund organizations that advocate their position because they fear having their license revoked, or being denied a permit. These are not stories of people in the former Soviet Union, these are actual everyday citizens the U.S.

In Michigan, the Department of Environmental Quality is particularly troublesome and has extremely broad discretion in granting licenses and stopping businesses from engaging  in peaceful activity. They can classify literally any piece of land as a “wetland”, and prohibit development. They can arbitrarily require hundreds of thousands of dollars in changes to septic systems, parking lots, seawalls, and more. Many of these decisions are made entirely by field agents and can be decided by nothing more than his or her mood. Others come from the top of the department down.

Tax laws are also notoriously complex and nearly impossible to comply with. I’ve spoken to accountants who tell me that if ten different accountants ran the typical business tax return they would come up with ten different results. I’ve even been told if the same accountant ran the same return ten times he would likely come up with ten different results. When the laws are this complex, it means that at any given time nearly every citizen is likely to be in violation of some tax law or another. State treasury departments or the IRS, if they really wanted to, could find some way in which everybody was out of compliance.

What does this mean for free speech? It means that at any time government agents or their bosses in the executive or legislative branches can, if they so choose, deny licenses, impose costly requirement and find out of compliance anyone that voices opinions they dislike. This is a reality, not a worst case or slippery slope argument. Thousands of business owners find themselves in trouble with regulatory bodies when they stick their neck out to oppose government. As I said before, I have met dozens of business owners who refuse to get involved in political issues, at least not while they are in the middle of some ridiculously long licensing or inspection process.

Remember that every new regulation on the market is another tool in the chest of those who wish to restrict free speech.