Why Do We Get Such Bad Leaders?

Why Bad Men Rule
By Hans-Hermann Hoppe

trump-vs-clinton

One of the most widely accepted propositions among political economists is the following: Every monopoly is bad from the viewpoint of consumers. Monopoly is understood in its classical sense to be an exclusive privilege granted to a single producer of a commodity or service, i.e., as the absence of free entry into a particular line of production. In other words, only one agency, A, may produce a given good, x. Any such monopolist is bad for consumers because, shielded from potential new entrants into his area of production, the price of the monopolist’s product x will be higher and the quality of x lower than otherwise.

This elementary truth has frequently been invoked as an argument in favor of democratic government as opposed to classical, monarchical or princely government. This is because under democracy entry into the governmental apparatus is free — anyone can become prime minister or president — whereas under monarchy it is restricted to the king and his heir.

However, this argument in favor of democracy is fatally flawed. Free entry is not always good. Free entry and competition in the production of goods is good, but free competition in the production of bads is not. Free entry into the business of torturing and killing innocents, or free competition in counterfeiting or swindling, for instance, is not good; it is worse than bad. So what sort of “business” is government? Answer: it is not a customary producer of goods sold to voluntary consumers. Rather, it is a “business” engaged in theft and expropriation — by means of taxes and counterfeiting — and the fencing of stolen goods. Hence, free entry into government does not improve something good. Indeed, it makes matters worse than bad, i.e., it improves evil.

Since man is as man is, in every society people who covet others’ property exist. Some people are more afflicted by this sentiment than others, but individuals usually learn not to act on such feelings or even feel ashamed for entertaining them. Generally only a few individuals are unable to successfully suppress their desire for others’ property, and they are treated as criminals by their fellow men and repressed by the threat of physical punishment. Under princely government, only one single person — the prince — can legally act on the desire for another man’s property, and it is this which makes him a potential danger and a “bad.”

However, a prince is restricted in his redistributive desires because all members of society have learned to regard the taking and redistributing of another man’s property as shameful and immoral. Accordingly, they watch a prince’s every action with utmost suspicion. In distinct contrast, by opening entry into government, anyone is permitted to freely express his desire for others’ property. What formerly was regarded as immoral and accordingly was suppressed is now considered a legitimate sentiment. Everyone may openly covet everyone else’s property in the name of democracy; and everyone may act on this desire for another’s property, provided that he finds entrance into government. Hence, under democracy everyone becomes a threat.

Consequently, under democratic conditions the popular though immoral and anti-social desire for another man’s property is systematically strengthened. Every demand is legitimate if it is proclaimed publicly under the special protection of “freedom of speech.” Everything can be said and claimed, and everything is up for grabs. Not even the seemingly most secure private property right is exempt from redistributive demands. Worse, subject to mass elections, those members of society with little or no inhibitions against taking another man’s property, that is, habitual a-moralists who are most talented in assembling majorities from a multitude of morally uninhibited and mutually incompatible popular demands (efficient demagogues) will tend to gain entrance in and rise to the top of government. Hence, a bad situation becomes even worse.

Historically, the selection of a prince was through the accident of his noble birth, and his only personal qualification was typically his upbringing as a future prince and preserver of the dynasty, its status, and its possessions. This did not assure that a prince would not be bad and dangerous, of course. However, it is worth remembering that any prince who failed in his primary duty of preserving the dynasty — who ruined the country, caused civil unrest, turmoil and strife, or otherwise endangered the position of the dynasty — faced the immediate risk either of being neutralized or assassinated by another member of his own family. In any case, however, even if the accident of birth and his upbringing did not preclude that a prince might be bad and dangerous, at the same time the accident of a noble birth and a princely education also did not preclude that he might be a harmless dilettante or even a good and moral person.

In contrast, the selection of government rulers by means of popular elections makes it nearly impossible that a good or harmless person could ever rise to the top. Prime ministers and presidents are selected for their proven efficiency as morally uninhibited demagogues. Thus, democracy virtually assures that only bad and dangerous men will ever rise to the top of government. Indeed, as a result of free political competition and selection, those who rise will become increasingly bad and dangerous individuals, yet as temporary and interchangeable caretakers they will only rarely be assassinated.

One can do no better than quote H.L. Mencken in this connection. “Politicians,” he notes with his characteristic wit, “seldom if ever get [into public office] by merit alone, at least in democratic states. Sometimes, to be sure, it happens, but only by a kind of miracle. They are chosen normally for quite different reasons, the chief of which is simply their power to impress and enchant the intellectually underprivileged….Will any of them venture to tell the plain truth, the whole truth and nothing but the truth about the situation of the country, foreign or domestic? Will any of them refrain from promises that he knows he can’t fulfill — that no human being could fulfill? Will any of them utter a word, however obvious, that will alarm or alienate any of the huge pack of morons who cluster at the public trough, wallowing in the pap that grows thinner and thinner, hoping against hope? Answer: may be for a few weeks at the start…. But not after the issue is fairly joined, and the struggle is on in earnest…. They will all promise every man, woman and child in the country whatever he, she or it wants. They’ll all be roving the land looking for chances to make the rich poor, to remedy the irremediable, to succor the unsuccorable, to unscramble the unscrambleable, to dephlogisticate the undephlogisticable. They will all be curing warts by saying words over them, and paying off the national debt with money no one will have to earn. When one of them demonstrates that twice two is five, another will prove that it is six, six and a half, ten, twenty, n. In brief, they will divest themselves from their character as sensible, candid and truthful men, and simply become candidates for office, bent only on collaring votes. They will all know by then, even supposing that some of them don’t know it now, that votes are collared under democracy, not by talking sense but by talking nonsense, and they will apply themselves to the job with a hearty yo-heave-ho. Most of them, before the uproar is over, will actually convince themselves. The winner will be whoever promises the most with the least probability of delivering anything.”

— Thanks to LRC — 

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How Socialism Corrupts the People

Socialism and the process of socializing the economy does not only impoverish society in basic economic terms. It also corrupts the very “soul” of a society by destroying the natural order that encourages serving our fellow man.

Writes Hoppe:

… a policy of the socialization … affects the character structure of society, the importance of which can hardly be exaggerated. As has been pointed out repeatedly, adopting … socialism instead of capitalism based on the natural theory of property implies giving a relative advantage to nonusers, nonproducers, and noncontractors as regards property titles of the means of production and the income that can be derived from using of these means.

If people have an interest in stabilizing and, if possible, increasing their income and they can shift relatively easily from the role of a user-producer or contractor into that of a nonuser, nonproducer, or noncontractor—assumptions, to be sure, whose validity can hardly be disputed—then, responding to the shift in the incentive structure affected by socialization, people will increasingly engage in nonproductive and noncontractual activities and, as time goes on, their personalities will be changed. A former ability to perceive and to anticipate situations of scarcity, to take up productive opportunities, to be aware of technological possibilities, to anticipate changes in demand, to develop marketing strategies and to detect chances for mutually advantageous exchanges, in short: the ability to initiate, to work and to respond to other people’s needs, will be diminished­, if not completely extinguished.

People will have become different persons, with different skills, who, should the policy suddenly be changed and capitalism reintroduced, could not go back to their former selves immediately and rekindle their old productive spirit, even if they wanted to. They will simply have forgotten how to do it and will have to relearn, slowly, with high psychic costs involved, just as it involved high costs for them to suppress their productive skills in the first place.

But this is only half the picture of the social consequences of socialization. It can be completed by recalling the above findings regarding capitalism’s and socialism’s apparent differences. This will bring out the other side of the personality change caused by socializing, complementing the just mentioned loss in productive capacity. The fact must be recalled that socialism, too, must solve the problem of who is to control and coordinate various means of production.

Contrary to capitalism’s solution to this problem, though, in socialism the assignment of different positions in the production structure to different people is a political matter, i.e., a matter accomplished irrespective of considerations of previous user-ownership and the existence of contractual, mutually agreeable exchange, but rather by superimposing one person’s will upon that of another (disagreeing) one.

Evidently, a person’s position in the production structure has an immediate effect on his income, be it in terms of exchangeable goods, psychic income, status, and the like. Accordingly, as people want to improve their income and want to move into more highly evaluated positions in the hierarchy of caretakers, they increasingly have to use their political talents. It becomes irrelevant, or is at least of reduced importance, to be a more efficient producer or contractor in order to rise in the hierarchy of income recipients.

Instead, it is increasingly important to have the peculiar skills of a politician, i.e., a person who through persuasion, demagoguery and intrigue, through promises, bribes, and threats, manages to assemble public support for his own position.

Depending on the intensity of the desire for higher incomes, people will have to spend less time developing their productive skills and more time cultivating political talents. And since different people have differing degrees of productive and political talents, different people will rise to the top now, so that one finds increasing numbers of politicians everywhere in the hierarchical order of caretakers.

All the way to the very top there will be people incompetent to do the job they are supposed to do. It is no hindrance in a caretaker’s career for him to be dumb, indolent, inefficient, and uncaring, as long as he commands superior political skills, and accordingly people like this will be taking care of the means of production everywhere.

A Theory of Socialism and Capitalism, page 45-47.

Election 2015: How Bad Is the NDP?

In this series CMR will examine the policy proposals set forth by the top three parties in Canada’s 2015 federal election.

PART I: The NDP (current article)
PART II: The Liberals
PART III: The Conservatives

Obviously these parties are all terrible. So the question is simply this: which party will beat you with the biggest stick?

We will refer to the helpful National Post article “Everything you need to know about the parties’ platforms, from taxes to terrorism to the environment.”

In Part I, we will look at the NDP.

We know all the platforms are going to be bad, but intuitively any free market supporter will expect this one to be the worst. We shall see.

Economy

– Balance the budget in 2016.

This is meaningless unless we know how they will balance the budget. Cut spending? This would be good, but unlikely. Raise revenue by increasing taxation, fees, and other forms of plunder? This would be bad. Since it’s the NDP, we can safely assume the latter is more likely.

– Not raise personal income-tax rates.

Well that’s ‘nice’, but a personal income tax cut be better. Still, it’s a pleasant surprise that they don’t want to hike taxes on “the rich.”

– Cancel government’s income-splitting policy for families; says it helps only wealthiest 15 per cent.

This would increase the tax burden on any family to which it applies, and is therefore bad. That it applies mostly to the “wealthiest” is true depending on how you define “wealthy,” but it also applies only to those who have someone with whom they can split their income. So it is rather selective and narrow in its tax relief. This is an interesting matter on its own, and of course tax relief for everyone would be better. But regardless of the fairness issue, added tax relief for some is better than added tax relief for none.

– Reverse changes to TFSA contribution limits; says higher amount helps the wealthy and does little for middle-class Canadians.

The TFSA is one of the only good things the Harper Conservatives have ever done. Reducing the contribution limits means more taxable income and therefore this is an evil NDP policy.

– Increase income-tax rates on Canada’s largest corporations to about the levels that existed before the Conservatives took office.

After the income tax, the corporate tax is probably the dumbest tax possible. It should be eliminated, not raised. Shareholders own corporations. Shareholders are paying the tax. The NDP wants to increase taxes on shareholders of Canada’s largest corporations. Due to the way many people and pension plans invest, this applies to a huge portion of Canadians.

– Cut small-business tax rate to nine per cent from current 11 per cent.

Tax cuts are good. But let’s be serious here: going from 11 to 9 percent is extremely ungenerous. Why don’t they just say “no more corporate income tax on small businesses”? That would significantly change economic behavior and the economy would get a large boost of productivity and job growth.

This NDP proposal reveals a certain cluelessness about how the business world works, which is unsurprising when it comes to the NDP. Most small businesses (less than $500,000 income) having earnings less than $100,000 per year. Most have less than $100,000 in revenues each year. This tax cut amounts to peanuts for a lot of businesses and will rarely make or break hiring decisions.

Furthermore, accountants prepare tax returns with the objective of minimizing the tax of the corporation. Most small businesses companies are “flow-through entities”, meaning it is well understood by tax professionals and the tax collectors that the corporation will minimize its tax, and earnings will “flow through” to the private owner, who is taxed for personal income. So the businesses targeted by this tax cut don’t pay much tax anyway and it really wouldn’t make a whole lot of difference.

But a tax cut is a tax cut, so this is actually good.

– Honour the expanded Universal Child Care Benefit.

This benefit is a mixed bag. For families that are net taxpayers, it amounts to a reduction of tax burden and is therefore good. For families that are net taxconsumers, it amounts to a form of welfare where people with no children are forced to subsidize people with children. This is unfair.

– Create $15-a-day national child care program, and create or maintain one million affordable child care spaces across Canada.

This is really bad. This is a huge tax on people with no children and a huge subsidy to people with children. That is unfair. It is also a huge boon to the the crony capitalists of the child care industry.

A better way to deal with the high prices of child care services would be to remove all associated regulations, licensing, and taxation. Quality and supply of child care would soar.

And what exactly should this national child care program consist of? Because it’s a government program, this will be decided by those with the most political influence — and that will never be the average parent.

– Cancel Conservative decision to increase OAS eligibility age to 67.

Evaluating this is a little more complicated than most proposals. On the one hand, OAS is welfare for old folks. This involves subsidizing old folks (who tend to have more accumulated wealth) by taxing younger people (who tend to have less accumulated wealth). Taking money from poorer people and giving it to wealthier people is a weird policy. On the other hand, old folks who are/were net taxpayers deserve to get all their money back, so the OAS could be considered on the same terms as taking a tax credit. Overall, the OAS is bad and should just be eliminated, and with that in mind increasing the age limit is probably better because the best result would be increasing the age limit to 1000 so no one could get it.

– Increase Canada Pension Plan contributions and benefits for Canadians.

The NDP makes these increased contributions sound compulsory, so that is bad. People should be able to opt out of CPP if they want.

Terrorism, War, and National Security

– End the bombing campaign and pull out all military personnel from Iraq and Syria; boost humanitarian aid to help refugees affected by ISIL as well as investigate and prosecute war crimes.

This is mostly good, as Canada’s role in the war against the Islamic State / ISIL / ISIS should end at immediately. No bombs, no troops, no military support for other countries participating in the conflict. It is a regional conflict between bitter enemies and all outside intervention is merely aggrandizing the situation. ISIS is no threat to our national security. It is certainly no “existential threat” as Harper says, and it is just delusional paranoia to think otherwise. ISIS is a small ragtag army with a few hardcore jihadi veterans and the rest is a bunch of losers. They have no navy, no air force, and they probably can’t even fix their sweet new Toyotas if they break down. This isn’t Nazi Germany or Soviet Russia, people.

However, the federal government should not provide humanitarian aid or help refugees or prosecute war crimes in other countries. It should not prevent Canadians from aiding in any way they see fit, whether that means letting refugees into their homes, sending aid overseas, or traveling to conflict zones to help directly. The government has no business bringing foreigners into the country and giving them welfare.

– Repeal Bill C-51, the anti-terrorism act.

This is a good policy. Bill C-51 is a dangerous law representing an aggressive attack on free speech, habeas corpus, privacy, and other features of the rule of law and civil liberties. All in the name of “security”, of course. It is premised on the bogus “War on Terror” so that automatically makes it awful. Realistically, the government doesn’t need more laws to catch bad guys, and C-51 just removes restrictions that make it harder for the government to punish innocent people.

– Provide more independent review of Canada’s national security agencies.

Independent review is meaningless, because anything in which the government is involved is political. The only way to limit the power of national security agencies is to cut their budgets or simply eliminate them. These proposals about having “better oversight” are useless.

– Support a counter-radicalization program.

I have been unable to find any clarity about that this means, but it is probably something stupid. Does it mean the government interfering with certain religious institutions, or institutions with unsavory political views, or crazy websites?

Actually, it probably involves more welfare to certain people, because there is a silly leftist-liberal notion that if you give people enough money and help from the government they won’t want to become terrorists.

Despite lack of details, it seems impossible that this policy wouldn’t be dumb,

The Environment

– Continue opposing the Northern Gateway pipeline; it initially supported concept of west-east pipeline, but says Energy East can’t be approved without more stringent environmental review process; opposes Keystone XL pipeline.

Why does the NDP have to be so full of jerks? The Northern Gateway pipeline issue can be settled entirely between BC and Alberta — you know, the provinces actually touched by the pipeline route. There is no reason for Ottawa to have a say in the process at all.

Likewise for Energy East. The route touches six provinces and it can be sorted out between those provinces. There is no justification for Ottawa to impose more stringent environmental regulations when the provinces affected can handle that themselves.

One might contend that the Keystone XL pipeline is different because it goes to another country, but international borders are economically arbitrary and there is no justification for Ottawa to interfere here either. The Keystone XL pipeline really has nothing to do with Ottawa at all. It’s Alberta’s oil and the route only touches Alberta and a handful of American states. It should be an issue settled between Albertan and American property owners and the pipeline company.

Ottawa has no business either supporting or opposing any of these pipeline projects. The right choice is simply to decentralize the whole issue. The NDP is terrible on this issue.

– Create a cap-and-trade system with a market price on carbon emissions; revenue from cap-and-trade would be invested in a greener energy sector in regions where dollars are generated.

Horrible. Tax industries the NDP doesn’t like and subsidize politically-connected cronies in industries that the NDP does like. It would encourage people to shift resources out of productive sectors that are being taxed into nonproductive sectors that are being subsidized. This is one of the NDP’s worst policies so far.

– Work with provinces to create a new fund to help Canadians retrofit their homes and offices to save energy and money.

This is a subsidy to people who own homes and office buildings, which tend to be wealthier people. This would be paid for by people who don’t own homes or office buildings. This is a pathetic transfer of wealth from poorer people to wealthier people. Stupid and evil.

– Redirect $1 billion a year from fossil fuel subsidies to investment in the clean energy sector.

The government should not subsidize fossil fuels and it should not subsidize the clean energy sector. The government should simply eliminate the subsidies and let different forms of energy production be determined on their own merits.

– Invest in Sustainable Development Technology Canada – including wind, hydro, solar and geothermal technologies – to create thousands of new jobs for Canadians.

This is truly awful. What does “invest in Sustainable Development Technology Canada” mean? It means subsidizing what the government considers be worthy, so crony capitalism.

And here is a critical point: this doesn’t create jobs! The government has no resources of its own. To spend money to generate jobs in one sector, the government must take money from another sector, thus destroying jobs. This policy would actually leave the country poorer, giving us fewer real productive jobs, and more unproductive jobs. Again, this would encourage people to shift resources out of productive sectors that are being taxed into nonproductive sectors that are being subsidized. Just awful.

Infrastructure and Transport

– Dedicate an additional one cent of the existing 10-cents-per-litre federal gas tax to roads, bridges and other core infrastructure, reaching an additional $1.5-billion annually by the end of an NDP government’s first mandate, on top of almost $2.2 billion in existing annual gas tax transfers to municipalities.

This is a slight improvement all in all. It is better for the province to keep a bit of the money rather than having it all go to Ottawa. If the NDP were serious about their desire to help communities fix their infrastructure, they would just eliminate the federal gas tax completely and have that money stay in those communities. There is no reason why drivers in Nova Scotia should subsidize bridges in British Columbia or vice versa.

– Develop a better transit plan with the provinces and territories and invest $1.3 billion annually over next 20 years for predictable and stable public transit funding for municipalities.

A subsidy to public transit, which only benefits places with public transit. Why should people in rural Saskatchewan subsidize Toronto’s subway system, with Ottawa taking a big cut? Only a real jerk would support this.

Foreign Affairs and Defense

– Increase Canada’s foreign aid to 0.7 per cent of gross national income, or GNI (Canada currently spends 0.24 per cent of GNI on foreign aid).

Foreign aid? FOREIGN AID!? This tends to be the most unpopular form of government spending across the political spectrum, and the NDP wants to increase it? Nay, nearly triple it! Let’s not forget that foreign aid takes money from people in this country, and gives it to corrupt foreign governments that use the money to enrich themselves and their friends. Maybe the lowly people who need help will get a few pennies on the dollar, if they’re lucky. Also, foreign aid frequently comes with the stipulation it be spent on Canadian products, which amounts to a roundabout subsidy to certain politically favored big business.

This proposal is unbelievably stupid. The NDP should be embarrassed over how stupid this policy is.

– Reopen the nine Veterans Affairs regional offices closed by the Conservative government.

The Cons merely shifted resources around. It’s six of one thing or half a dozen of another. This is a non-issue. Veteran Affairs Canada should just be closed down completely, and veterans should automatically be exempt from all forms of taxation.

Social Issues

– Restore the six-per-cent annual increase to health-care transfers to the provinces.

The health care budget should be reduced every year, so this is a step in the wrong direction.

– Restore door-to-door home mail delivery by Canada Post for households that lost it under Conservative government.

This is a social issue? But no, the government should not decide how mail should be delivered. Canada Post should be privatized, all legal restrictions for private mail carriers should be eliminated, and the market should decide how mail will be delivered.

– Reinstate the mandatory long-form census, which the government replaced with the voluntary National Household Survey.

In other words, the government should force people to waste their time providing information that helps the government control their lives better — at gunpoint, if necessary. The long-form census is a disgrace to humanity and should never be reinstated. The short-form census should be completely voluntary.

Democratic Reform and Governance

– Replace the current first-past-the-post electoral system with a mixed member proportional system, which combines proportional representation of parties in House of Commons with direct election of MP in each riding.

Pointless fiddling with the broken system called democracy, and arguably this makes things worse by rewarding more populous provinces with more political influences.

– Abolish the Senate (which requires constitutional talks with the provinces).

Sure, everyone wants to abolish the Senate (except the senators). I don’t think this is a serious proposal, however.

– Strengthen the mandate and independence of the Parliamentary Budget Officer and make the position an Officer of Parliament.

This is pointless and no one cares.

Justice

– Immediately decriminalize marijuana, where users aren’t criminally prosecuted so nobody goes to jail for smoking a joint; party is open to considering legalization, but is calling for a commission to consult Canadians and instruct Parliament on how to carefully regulate non-medical use.

Decriminalizing drug use is an improvement, but it preserves the black market and seemingly all laws about selling drugs. The war on drugs is a stupid failure and there is no reason to continue it.

Setting up a commission is a waste of time that will produce a giant report that no one will ever read. Marijuana should just be legalized without a fuss, along with every other drug, and no regulation or taxation at all.

– Introduce legislation demanding Supreme Court of Canada justices be bilingual.

Bilingualism is a bad government policy and this is a dumb proposal. Basically they are saying all the Supreme Court of Canada justices should be from Eastern Canada.

– Strengthen laws to keep drunk drivers off of streets.

They actually don’t need to strengthen any laws or create any new laws for this. They just need to enforce laws about injuring people or killing people or destroying property. As any drunk driving lawyer will tell you, the current system entails a perverse situation where the best way to kill someone and get a light punishment is to get drunk and hit them with your car.  Therefore, this is a bad proposal.

Aboriginal Issues

– Call a national inquiry into murdered and missing aboriginal women, and act on other recommendations from the Truth and Reconciliation Commission.

The high rate of homicide against Aboriginal women is awful (4.5x higher than other Canadian women), but a national inquiry doesn’t help the situation at all. It’s just a big waste of time and money.

Crimes should be investigated and evildoers should be prosecuted and punished. That’s it. The problem is that the RCMP apparently does a lousy job investigating crimes. What else is new? A national inquiry into the “social context”of murdered Aboriginal women doesn’t help that situation at all, because the RCMP is inherently inefficient.

If you really want “social context” regarding Aboriginal women and homicide, consider this: the government has done incredible damage to the indigenous people of Canada with its bureaucratic, Soviet-style rulership of this political sub-class. Aboriginals are subject to the most socialistic treatment of any Canadians, and unsurprisingly the consequences have been social dysfunction. We actually saw the same pattern in Soviet Russia. When you deny people their most basic, fundamental rights to property and make the state in charge of taking care of them, the result tends to be greater levels of dysfunction such as alcoholism and drug abuse, vagrancy, idleness, illegitimacy, promiscuity, criminal behavior, suicide, and wife-murdering or girlfriend-murdering. Maybe if the government gave some respect to aboriginal property rights their situation would start to turn around. Instead, it is content to maintain the status quo where the Crown owns all native land, and it is administered through a huge, inept bureaucracy and Soviet-like band councils.

– Reduce poverty, improve educational outcomes and increase opportunities for First Nations, Inuit and Métis communities across Canada.

If the NDP really wanted to do this they would abolish the Department of Aboriginal Affairs and Northern Development. We know they aren’t going to do that. Instead, this implies spending more money on a failed system and hurting First Nations, Inuit, and Métis even more. Hasn’t the government done enough to these people? Why does the NDP hate them so much?

– Create a cabinet committee, chaired by the prime minister, to ensure federal government decisions respect treaty rights and Canada’s international obligations.

No. Just… no. Abolish Aboriginal Affairs and Northern Development.  Let aboriginals actually own their land and homestead land currently owned by the Canadian state. Recognize the property rights of aboriginals. Anything else is a waste of time.

One can only infer that the NDP hates the aboriginal people of Canada.

Conclusion

The NDP platform is mostly full of dreadful policies that will make Canada worse. However, to their credit, they have a few policies that are relatively good.

Overal score:

D-

Next time: CMR will look at the Liberal Party’s platform. 

Alberta’s NDP, Unions, and the Minimum Wage

When analyzing public policy, one must typically ignore stated goals and understand the economic incentives that make groups favor certain forms of economic intervention.

Unions, as a group, tend to favor market restrictions that prop up their higher wage rates.

Alberta’s NDP, led by Rachel Notley, favors unions.

evilnotley

This an important factor in the NDP arguing for a 50% increase to Alberta’s minimum wage, despite protests from the business community and anyone with an understanding of basic economic law. NDP goal to hike minimum wage has nothing to do with helping less productive workers make more income, regardless of what their stated objectives are.

Minimum wage laws are a classic form of monopolistic grants of privilege that benefit some groups at the expense of others. Despite the proclaimed objective of minimum wage laws, which is to increase incomes of the most marginal workers, the actual effect is the exact opposite — it makes them unemployable because they are not sufficiently productive to be employed at the legal wage rates. This means that minimum wages will always cause more unemployment than otherwise — any economist who denies this is either a liar or a fool who doesn’t even understand the basic principles of price controls.

Who benefits from such laws? Certainly not the marginal workers, for it becomes illegal to hire them at the wage justified by their productivity. On the other hand, anyone employed above the minimum wage benefits because their competition is reduced. In particular, unions benefit from minimum wage laws. Unions despise cheaper labor competition. Minimum wage laws remove competition of less productive workers by forcing them to be unemployed.

And there is another reason why unions love minimum wage hikes — it is a devious way to increase their own wages. This can work in many ways depending on the labor agreement. Some agreements trigger mandatory wage hikes when statutory minimum wages increase (because wages are based on a percentage above minimum wage). Others have provisions to open wage negotiations if minimum wages go up.

I am not making this up. Economic theory informs us that we should expect nothing less. But consider also a 2004 study in the Journal of Human Resources by economists William Wascher, Mark Schweitzer and David Neumark. They clearly showed that lower-wage union workers usually see a boost in employment and earned income following a mandated wage hike. And those non-union wage workers who are now unemployed or unemployable? Who cares! The union members already have higher wages and protected jobs. So what if this cruel policy leaves in its wake desperate workers who can no longer legally work?

As for the NDP, there should be no doubt that Premier Rachel Notley is a union hack. Most of her career has been in the service of unions. Consider a few facts from her personal history:

She is married to Lou Arab, a communications and public relations staffer for the Canadian Union of Public Employees[2] and a campaign strategist for the party. She lives with him and their two children in the historic district of Old Strathcona located in south-central Edmonton.[17]

After law school, Notley articled for Edmonton labour lawyer Bob Blakely, and went on to work for the Alberta Union of Provincial Employees representing members with Workers’ Compensation cases.

She worked for a short time for the National Union of Public and General Employees (NUPGE),[20] worked at Athabasca University,[21] acted as volunteer co-ordinator for the Friends of Medicare “Romanow Now” campaign, and finally as a labour relations officer for the United Nurses of Alberta.[1]

Can there be any doubt that Notley will seek to benefit her union friends at the expense of other groups in society? Of course not.

Rachel Notley and the NDP are looking to empower unions. They don’t care if they hurt society’s least productive workers, like teenagers, people with disabilities, workers with language barriers, anyone without much experience for any reason, and ethnic or racial groups that may face discrimination.

Some will argue that forcing minimum wages higher makes employers invest in more equipment and develop new technology and this will increase productivity of labor. Therefore, this improves the economy. But this is a silly argument. Capitalists are always seeking ways to increase productivity, so to think they are just sitting around waiting for the government to force price floors on labor to do so is a joke.

But even assuming the employer doesn’t just reduce his quantity of labor demanded, his investment in new capital is limited by savings in the economy. Increasing minimum wage does not increase the total supply of capital available. If anything, capital will merely be shifted from some industries to others in an attempt to offset an artificially higher cost. Capital is not being reallocated because of a market requirement, and so this is not an economic improvement.

Don’t be fooled by anyone who says they want to increase the minimum wage to help the poorest workers. The main concern motivating the NDP to increase the minimum wage is helping unions.

Anyone advocating a higher minimum wage should be ridiculed and shamed out of public office on account of sheer ignorance.

The Price of Oil and the State of the Economy

A large number of people have been asking me about the price of oil and what it means for the economy. Rather than just repeating myself all the time, I am writing this article.

SOME CLARIFICATIONS

I feel it is important to clarify how the law of supply and demand works, because I hear a lot of incorrect analysis from people who should know better. If you understand the law of supply and demand, I recommend that you skip to the next section.

Consider the following statement: “The price of oil is falling, and this is increasing the demand for oil — this will push the price of oil back up!”

This proposition is completely wrong.

Let me show you an ordinary supply and demand graph, like anything you will see in an introductory economics textbook.

supply and demand

The x-axis is quantity, and the y-axis is price. The intersection of the demand curve and the supply curve is where the market clears — everyone can buy the amount they want to buy, and everyone can sell the amount they want to sell. Simple enough.

Now consider the following graph, which depicts a change in demand. Specifically, it shows an increase — the demand curve shifts to the right (D1 to D2).

What is happening here? Demand has increased, and the price goes up. What is not happening here? The increase was not caused by a lower price — instead, it caused an increase in the price. The rise in demand is the cause, the rise in price is the effect.

We know for a fact that the price of oil has fallen dramatically in the second half of 2014. Why? Reduced demand, increased supply, or both?

Much of the world is in economic trouble. China is slowing. Japan is a mess. Europe is a disaster. When much of the world is in recession or heading for recession, we expect the demand for oil to fall. And even in the US, where the economy is stronger, oil consumption has fallen 8% since 2010 (there are many reasons for this, but I will not go into it here). So falling demand is a reasonable explanation for the fall in oil prices.

There is also the issue of increasing supply. OPEC is still pumping, business as usual, even though the price is down. Shale oil producers have been producing in a frenzy. There is a greater supply of oil.

Here’s what it looks like:

The graph shows an increase in supply (the supply curve has shifted to the right). The market clears at a lower price. Less supply (S1) has become more supply (S2). The quantity demanded goes from Q1 to Q2.

The price of oil has been falling in the second half of 2014. It fell very fast. Supplies have not increased much since June. This makes me believe that falling demand is the primary cause in this situation.

Now let’s look at a situation where there is “inelastic” supply (meaning it is not very responsive to price) and a fall in demand.

This is an extremely “non-price-sensitive” supply. The Saudi head of oil production has proclaimed that they will keep pumping even if the price drops to $20 a barrel. The other producers need money, so they will keep pumping. They cannot trim production and influence the price. The Saudis have considerable influence in on the supply-side of the market. That’s why the supply is inelastic.

Let’s return to the initial proposition we considered: the oil price is lower, so there will be increased demand for oil. This is bad analysis. Part of the problem is in the fact that “demand” and “quantity demanded” are often used interchangeably. But essentially it is mixing up the issue in the first and second graphs.

The price of oil is down.  The supply has increased. The demand has not increased — the quantity demanded at the new price is greater than at the higher price. This is not the same as saying a lower price of oil will increase the demand for oil. An increase in demand would — in the language of economics — imply a rightward shift of the entire demand curve.

A falling price does not increase demand, it increased quantity demanded. These things sound similar, but they are analytically different and this is important to understand at an elementary level.

Now with that boring stuff out of the way, let us look at the current situation with the price of oil and the economy.

SHALLOW CONSPIRACY THEORIES

I regularly speak with a lot of presidents and CEOs in the Alberta oil industry. A commonplace view is that price collapse is all the result of the Saudis pushing down the price of oil because [insert reasons here].

There are some amusing conspiracy theories floating around as well, particularly that which avers the US and its Saudi allies are manipulating the oil price to drive down the price of oil to hurt some evil countries, like Russia (America’s archenemy) and Iran (Saudi Arabia’s archenemy).

(I want to quickly point out that this is perhaps the only time in my entire life where people have complained about oil market manipulation driving the price… DOWN! Usually it’s greedy capitalists or crooked OPEC producers manipulating the market to drive the price UP to rip everyone off. But I digress.)

Realistically, how much of the blame rests on the Saudis? Maybe some, sure. But I don’t think it’s that much.

After all, how much does Saudi Arabia have to do with the price of steel, coal, and iron ore?

stell

How much do the Saudis influence the price of copper (which, by the way, is almost as much of a barometer for the world economy as oil)?

copper price

COMMODITY COLLAPSE

We see that oil is not the only commodity with a collapsing price. Maybe instead of market manipulation, it’s a sign that the global economy is not as strong as everyone had hoped.

The phony economic boom of the last two decades is slowing down, exposing what the Austrian business cycle theory refers to as “malinvestment.”

The distortion in commodity prices are the result of central banks collectively expanding their balance sheets from $5 trillion to $16 trillion in the last 10 years.

We also need to think about think about China, which has driven a great deal of the marginal demand for commodities in the last several cycles.

China’s radical growth levels were not going to last forever, and investors should have known better. But I guess that’s why they call it a “mania” and “irrational exuberance.”

China went from $1 trillion GDP to $9 trillion GDP in 13 years — an insane growth level that would be impossible but for printing press finance.

The incredible Keynesian-mercantilism started by Deng in the early 90s resulted in China’s demand for oil quadrupling from 3 million barrels per day to 12 million per day. Before then, the $20 price for a barrel of oil was, all things considered, was pretty much the same as it was 100 years when adjusted for inflation. Which makes sense given the basic balance of harder-to-get oil and improving technological methods over time.

The story is the same elsewhere. In the crackup boom phase of the cycle, iron ore prices hit 9x their historic range at the peak, and copper prices hit 5x their historic range.

copper iron

As with the other industrial commodities, there has been massive investment in petroleum production to feed the world’s unsustainable growth projections. Huge scale undertakings in the Canadian oil sands, US shale, and various deep-sea drilling projects, driven by these consumption forecasts and cheap credit, have resulted in major production increases. The bubble finance hype machine over the “Fracking revolution” in US shale led to a 4x increase in oil production with wells that would be uneconomical in a sane world.

So now there is too much oil production and not enough demand. The market needs to normalize, and that means the price of oil (and other commodities) needs to fall so sanity can be restored.

US shale in particular is a nasty bubble — the next “subprime” crisis.

North Dakota needs an oil price of around $55 per barrel at the wellhead and a fleet of about 140 rigs to sustain production at the current level of 1.2 million barrels per day, the U.S. state’s chief regulator told legislators on Thursday. . . . Breakeven rates for new wells, the level at which all drilling would cease, range from $29 in Dunn county and $30 in McKenzie to $36 in Williams and $41 in Mountrail. These four counties account for 90 percent of the drilling in the state.

Breakevens in counties on the periphery of the Bakken play, which have far fewer rigs, range up to $52 in Renville-Bottineau, $62 in Burke and $73 in Divide.

But Flint Hills Resources’ posted price for North Dakota crude was just $32, Helms said, compared with almost $49 per barrel for WTI. Wellhead prices, which are roughly an average of the two, are around $40 and have been falling since the start of this year.

Even before prices hit these minimum levels, drilling will slow sharply. The number of rigs operating in the state has already fallen to 165, down from 191 in October, according to the department. . . .

To keep output steady at 1.2 million b/d for the next three years, the state’s producers need a price of $55 rising closer to $65 in the longer term to support a fleet of 140-155 rigs.

Helms’ projections confirm North Dakota’s oil output will start to fall by the end of the year unless prices rise from their current very depressed level.

http://www.reuters.com/article/2015/01/09/bakken-oil-breakeven-kemp-idUSL6N0UO2QR20150109?feedType=RSS&feedName=rbssEnergyNews

Unlike conventional projects, shale wells enjoy an extremely short life. In the Bakken region straddling Montana and North Dakota, a well that starts out pumping 1,000 barrels a day will decline to just 280 barrels by the start of year two, a shrinkage of 72%. By the beginning of year three, more than half the reserves of that well will be depleted, and annual production will fall to a trickle. To generate constant or increasing revenue, producers need to constantly drill new wells, since their existing wells span a mere half-life by industry standards.

In fact, fracking is a lot more like mining than conventional oil production. Mining companies need to dig new holes, year after year, to extract reserves of copper or iron ore. In fracking, there is intense pressure to keep replacing the production you lost last year.

On average, the “all-in,” breakeven cost for U.S. hydraulic shale is $65 per barrel, according to a study by Rystad Energy and Morgan Stanley Commodity Research. So, with the current price at $48, the industry is under siege. To be sure, the frackers will continue to operate older wells so long as they generate revenues in excess of their variable costs. But the older wells–unlike those in the Middle East or the North Sea–produce only tiny quantities. To keep the boom going, the shale gang must keep doing what they’ve been doing to thrive; they need to drill many, many new wells.

Right now, all signs are pointing to retreat. The count of rotary rigs in use–a proxy for new drilling–has fallen from 1,930 to 1,881 since October, after soaring during most of 2014. Continental Resources, a major force in shale, has announced that it will lower its drilling budget by 40% in 2015. Because of the constant need to drill, frackers are always raising more and more money by selling equity, securing bank loans, and selling junk bonds. Many are already heavily indebted. It’s unclear if banks and investors will keep the capital flowing at these prices.

http://for.tn/1xLDxc9

I think long-term Canadian oil sand projects will have a stronger future, because they have more fundamental validity and less bubble finance hype (although there is some of that, of course). And while it it doesn’t seem like it to individual market participants, prices ultimately determine costs and so lower prices will push costs down. Rates of return in the market tend to equalize across different industries — there is not legitimate reason why people should forever expect above-market wages and investment returns in the oil business.

CENTRAL BANKS BACKING OFF?

Because I believe the Austrian business cycle theory is correct, I think China’s tightening of monetary policy has been a major factor here.

Likewise the Federal Reserve, with its 7x increase in the size of its balance sheet, culminating with a “taper” and proceeding into deflation mode following the end of QE3. That’s right, deflation mode. They did not just “taper” the rate of growth on the monetary base then hold it steady. The Fed actually sold off 10% of its assets starting in September before jumping back into open market operations with $250 billion in purchases. This kind of behavior is very disorienting for the market, with capital markets adjusting to money being sucked out and then pumped back in. But it helps explain the strengthening of the USD and the bloodshed in the commodities markets.

fed deflation

Then on Jan 15 came the Swiss National Bank’s surprise decision to end its foolhardy 1.20 EUR peg before Drahgi opened the ECB money floodgates. In its Keynesian desperation to diminish CHF purchasing power, the SNB’s balance sheet increased fivefold since the financial crisis and it amassed assets equal to 100% of the nation’s GDP — which is even more extreme than the insane BOJ, if you can believe it. With this development, the franc soared against the Euro and the US dollar and baffled everyone, even destroying a couple of FX firms overnight in one fell swoop.

Things will get crazy as some central banks tighten and others keep printing. These currency dislocations could lead to a currency crisis somewhere, but that is hard to predict. In any case, the insanity meter is in the red.

WHAT ABOUT GOLD?

Gold and oil often move together. And when the US dollar strengthens, gold usually weakens. But we are not really seeing this. Gold has been quite resilient amidst falling commodity prices and is performing well so far in 2015.

gold price

In this case, I’m not entirely sure what this means. On the one hand, it could indicate that a recession is less likely. On the other hand, it could indicate that investors are worried and are hedging against danger, like more aggressive central bank interventions.

CONCLUSION

The “correction” is healthy. It means reallocating resources to their most economical use. But it is painful — like a heroin addict going into detox.

It would be good for the world if oil went down to $20 a barrel and stayed there for 20 years, but I think the “peak oil” thesis is basically correct, and prices will rise again. We might not see a radical swing like in the 2008 crash, where we went from $37 back to $80 within the year.

The timing for all this depends on what happens in the recovery phase. Major readjustments need to occur. These adjustments could be brutal and quick, and the economy could resume a healthy course within a year, so long as the myriad governments take a “laissez-faire” approach. If governments impair economic adjustment with more taxes, spending, and inflation, we’ll just get a huge mess because the economy is straining against maximum debt levels and a huge bounce-back recovery a la 2008-2009 is not going to work this time.

So there you go. Prepare for some trouble. Hold cash.

Why They Never See It Coming

Mainstream economists fail to see why crises occur.

Fed Could Delay Tapering Until After December

Frank Shostak, Mises Institute

Most economists surveyed by Bloomberg News are now of the view that the Federal Reserve will begin tapering asset purchases in December. Contrary to expectations on the 18-19 of September, Federal Reserve policymakers have decided to continue with a very loose monetary stance and postpone the tapering of asset purchases.

Most policymakers are of the view that the U.S. economy is not strong enough to generate self-sustained economic growth. Hence it is held the economy still requires support from the Fed.

If Fed policymakers were to decide to taper bond purchases, most experts are of the view Fed policymakers are likely to announce that the U.S. central bank is going to keep its near-zero interest rate policy for a prolonged period of time. This, it is held, should prevent negative side effects coming from the reduction in bond purchases.

For instance, in 1994 when the Fed started a tightening cycle the federal funds rate rose from 3.05 percent in January 1994 to 6.04 percent in April 1995. This, it is argued, caused a sharp fall in the pace of economic activity. The yearly rate of growth of industrial production fell from 7 percent in December 1994 to 2.7 percent by December 1995.

 

We suggest that it is changes in money supply rather than changes in interest rates that drive economic activity as such. Interest rates are just an indicator, as it were.

A fall in the growth momentum of industrial production during December 1994 to December 1995 occurred on account of a sharp decline in the yearly rate of growth of AMS (our measure of money supply) from 13.7 percent in September 1992 to minus 0.3 percent in April 1995.

This sharp fall in the growth momentum of AMS has weakened the support for various bubble activities that sprang up on the back of the previous rising growth momentum of AMS.

(Even if the Fed would have kept the fed funds rate at a very low level, what would have dictated the pace of economic activity is the growth momentum of AMS.)

Note that a fall in the growth momentum of AMS was in line with the fall in the growth momentum of the Fed’s balance sheet — the yearly rate of growth of the balance sheet fell from 12.7 percent in June 1993 to 4.4 percent by December 1995.

 

Whilst in the 1993 to 1995 period, changes in the Fed’s balance sheet were positively associated with changes in the growth momentum of money supply. This time around this is not the case. (Changes in money supply are not responding to changes in the Fed’s balance sheet.) The key reason for that is bank reluctance to aggressively expand lending notwithstanding the aggressive pumping by the Fed.

So far in September, the growth momentum of the Fed’s balance sheet climbed to 30.6 percent from 28 percent in August. (Despite this massive pumping banks remain reluctant to aggressively expand lending.) In September banks were sitting on massive cash reserves of $2.2 trillion against $2.17 trillion in August and $2.4 billion in January 2008.

 

Consequently, the growth momentum of our measure of money supply AMS has visibly weakened. The yearly rate of growth stood at in September at 6.7 percent against 7.7 percent in August.

We suggest that irrespective of what the Fed is currently doing it will have very little effect on the economy at present and in the immediate future. Given a decline in the yearly rate of growth of AMS from 14.8 percent in October 2011 to 6.7 percent in September this year, we suggest this likely to depress economic activity going forward.

Again, this is likely to happen irrespective of the decision the Fed is going to take with respect to the tapering of assets purchases.

Based on the lagged growth momentum of AMS we expect that the yearly rate of growth of industrial production to fall to minus 1 percent by October from 2.7 percent in August.

 

Given the possibility of a sharp decline in economic activity on account of the fall in the growth momentum of AMS it is quite likely that Fed policymakers will decide to postpone the tapering of asset purchases also in December.

We need to add to all of this the possibility that the pool of real wealth might be currently in difficulties on account of the Fed’s reckless policies.

(The near zero interest rate policy has caused a severe misallocation of scarce real savings — it has weakened the wealth generation process and thus the economy’s ability to support stronger real economic growth.)

If our assessment is valid on this, we can suggest that a stagnant or declining pool of real wealth is likely to put more pressure on banks’ lending. Remember that it is the state of the pool of real wealth that dictates banks’ ability to lend without going belly up.

Conclusion

We can conclude that regardless of changes in the Fed’s balance sheet, it is a fall in the growth momentum of AMS since October 2011 that will determine the pace of economic activity irrespective of the planned actions by the Fed. Given the possibility that the pool of real wealth might be in trouble this could put further pressure on the growth momentum of bank lending and thus the growth momentum of money supply.

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