Free Markets and Europe

Free Markets and EuropeBy Alex Merced
 When you hear left wing politicians like Bernie Sander and Hillary Clinton argue for policies that require forced transfers of wealth (high taxes with generous welfare programs), they often site European nations as country who have succeeded with these types of policies?
Do these countries truly combines the level of regulations, taxes and welfare that many people think or do they have a more broader mix of these policies with free market friendly stances that many give them credit for. (Which makes the source of their alleged prosperity less clear)
In this new episode of the contra krugman podcast, Tom Woods and Robert Murphy spend time focusing on Denmark which is regarded as the happiest country in the world. The results is a very insightful discussion that makes you question much of the lefts rhetoric which you can listen here:
Here are some other good articles on Europe and economic policy:

Libertarian 101

So over the last few political seasons you’ve had a few questions about this term you’ve kept hearing people mention, “Libertarian”.
Essentially libertarians are those who look at all questions regarding government and policy from the perspective of the golden rule (do unto others as you’d have done unto yourself). Although, libertarian philosophy and tradition runs much deeper.
To understand what is a libertarian and the different categories of libertarianism watch this video:

Now below I’ll link to several videos to address different issues regarding libertarianism:

(Watch all the videos below, I’ll be surprised if you don’t find yourself thinking more libertarian when you done)

The Great Depression


Central Banking


Minimum Wage

Debunking Donald Trump and Bernie Sanders on Trade and Immigration

The Dark Horse candidates for the republican and democrat primaries (Donald Trump & Bernie Sanders respectively) have both expressed skepticism of Immigration and Trade in regard to U.S. Wages and Wealth. To me the ignorance that this exemplifies results in promoting a xenophobic sentiment with hostility towards globalization that I find well… offensive. So below I’ve collected many articles on the topic of Immigration and Trade the benefits they bring the U.S. Economy to settle this debate.
(For those who havn’t noticed Sanders tone on immigration, read this)
(For the record I support Rand Paul for the republican nomination and in the case he does not get the nomination I support Gary Johnson for the Libertarian Party nomination.)

Click to access cea_trade_report_final_non-embargoed_v2.pdf

Why Taxing Wealth is a bad idea?

by Alex Merced

In his new book, “Capital in the 21st Century“, Piketty advocates for a global tax on wealth as a way to curb growing income inequality. Of course, as a libertarian you can probably guess I think this is a bad idea but for good reason. I have discussed income inequality in previous articles I’ve written, and disagree with Piketty that the correlation between the return on capital and income inequality means the capital growth is cause of the inequality (thus taxing it the cure). Instead, I believe my other article on how monetary policy and inflation increase income inequality not only explains the correlation (inflation increases returns to capital and decreases return on wages) but also just makes more sense in explaining the trends discussed by Piketty.

Although in this article I’m less concerned with what is the true cause and cure for income inequality, but with how bad a solution a global tax on wealth would be. Taxing wealth would not only have the effect of reducing and confiscating wealth which of course is abhorrent from a libertarian perspective, but it will also make capital gravitate to more risky investments than they otherwise would, destabilizing the capital structure of the economy.

So why would higher taxes mean riskier investments?

From an investors point of view, you are generally not just looking for a high % return but generally a return after you adjust for inflation and taxes. The higher the taxes and the higher the rate of inflation the higher return needed to survive both.

For example:

Let’s say you have a 10% (which is pretty good) with a tax rate of 35% and inflation rate of 3%

After taxes you will have a 7.5% return (10 – 35%)

Adjust that for 3% inflation (7.5 – 3)

your at a 4.5% return (and this ignores state and other taxes, also ignoring any issues in measuring inflation)

The point being is that as the hazards of inflation and taxes build up, one must seek more return and the name of the game is “more risk, more reward” meaning that higher returns will be found in increasingly risky investments.

Why do riskier investments return more?

Imagine a world where investments of all levels of risk gave you a 10% return, which one would you choose to put your money in?

If you answered the safest, that would be quite rational and would be what many others would do as well. The result is, that everyone wanting the safest investment will bid up the price which in turn reduces the return on investment (your giving up more for the same thing) and the return will continue to go down until the return goes so low it’s not worth it to investors to bid it any higher.

These investors would then do the same with the next safest investment, etc. By the time you start getting to the riskier investments there will be less potential buyers so they won’t be bid as high, and when you get the riskiest of investments they may be bid down (because maybe 10% return is not worth the risk) so a lower price would give you a higher return (giving up less for the same thing).

Bottom line, investments are generally priced heavily based on risk and reward. So more taxes and inflation will just lead to an increased demand for risk, which at some point will create a scenario that bad investments may outweigh good investments and growth turn into a slump.

The Mechanics of the Minimum Wage [Video]

by Alex Merced

Often times when you try to create protections or regulations of the market, the result is to create an undue burden on those least able to bear them. The result is those at the very bottom can seem stuck there, and those who are somewhat to very well off find themselves relieved of a lot of competition, allowing them to take a bigger participation in the ever changing economic pie. The minimum wage is one of the policies that have these results. Although due to the amount of labor that may already be working at bottom of the income ladder can be limited, the result of this policy for good or worse can be hard to truly measured or seen. Yet, understanding the impacts of market intervention on economic disparities and in turn economic tolerance needs to be more part of the economic discussion.

Why Economics, Choice and Tolerance are Inseperable

by Alex Merced

Often times people define issues into two categories, economic and social, as if there is no influence these have on each other. I contend a world with a more robust competitive economy would also be a world of greater tolerance. Many social and caste divides are born out of economic scarcity, out of a demand for a reason to justify taking more of the economic pie for “us” and leave less for “them” because the sentiment is that there isn’t enough for everyone. If anything history, I think, shows pretty clearly that wealth is more abundant when more of us cooperate and compete with each other to provide value (aka the FREE market) instead of competing over limiting market access to others (protectionism/regulated markets/no markets). Although these divisions over time get ingrained in the culture of these arbitrary groups and can lead to generations of resentment, hostility, and sometimes violence which is why a focus on robust free market policy is an imperative for wealth building but also social cohesion (if you are prosperous you’re less likely to resent other people for being prosperous, or try to prevent them from being so).

So, essentially, economic performance will make people more tolerant of each other, which in turn improves economic scale. So, essentially, any discussion of promoting tolerance can’t be separated from people’s quality of life (which is partly determined by the wealth, and in other part determined by internal factors which often come from peoples ability to pursue their interests and attain property). As people’s quality of life drops, whether from losing their economic (wealth) or autonomous (choice) means to pursue their ends (goals), they begin to look for scapegoats to blame.

Bottom line: A libertarian world view which focuses on empowering peoples economic opportunities and individual choices, is the formula to having a more tolerant socially cohesive society.

Monetary Policy and Income Equality

by Alex Merced

In a previous article I discussed that redistribution of income isn’t necessary to create equality, instead you should unleash market forces by reducing barriers into wealth markets. In this article I’d like to make the argument that another culprit in creating growing inequality is not only market controls but monetary policy, especially expansionary policy.

What is Monetary Policy?

Monetary policy is a policy tool, often controlled by central banks, that revolves around the control of a country’s money supply and credit. Monetary policy mechanisms usually consist of interactions with the banking system that make it easier or harder for banks to extend more credit. A couple of major mechanisms include:

Discount Lending: When banks have liquidity or solvency issues they may borrow from other banks to keep things going, but when there isn’t a bank to borrow from they can go to the central bank and borrow against typically high quality assets(“safe” stable liquid assets like government debt). These loans are usually in the form of deposits on the banks balance sheet (record of asset and liabilities).

Open Market Operations: Another way of getting money in and out of financial institutions is to enter short term contracts called Repurchase Agreements (repos for short) where the Central Bank lends money by purchasing an asset today with a contractual promise the bank will repurchase it from the central bank in coming days (the reverse of this is called a reverse repo when central banks need to take money from the banks).

Quantitative Easing: Similar to open market operations without the agreement to repurchase, basically the central bank outright sells or buys assets depending on their goals which can have the largest impact of three mechanisms discussed in this article.

What are contractionary and expansionary policy?

The central bank usually conducts either contractionary policy or expansionary policy:

Expansionary Policy: By increasing the amount of money in the economy (usually in the form of lending to banks) the amount of credit available increases. This is usually done when  central banks are worried about unemployment (due to what I believe is a misguided belief in a trade-off between unemployment & inflation). So by inflating the money supply several things happen such as…

– The lowering of real interest rates (rates after inflation) makes it unwise to hold money, or even relatively safe investments (since the return will still be negative after inflation), encouraging investment in riskier higher return investments

– Lower interest rates will encourage more borrowing (although the lower rates would discourage lending, the low real rates make it even worse not to).

Contractionary Policy: By decreasing the amount of money in the economy you end up with the opposite result.

How does this affect inequality?

While inflating the money supply may not immediately in the short run inflate the price level, it can have several pernicious effects on the distribution of wealth.

1. Drives up the prices of capital goods: the low nominal and real rates will make longer term, capital intensive investments more attractive resulting in driving up the prices of capital (natural resources, property, etc.). The result is that this increase in capital asset values increases return to the owners of capital (often the wealthier portion of the population) and squeezes out the resources available to firms to pay labor even if the purchasing power hasn’t depreciated yet (the low income population depends on wages a bit more).

2. Financial assets will also be driven up in value: Since financial institutions are the mechanism for increasing the money supply, money that isn’t lent will often go into buying financial assets like stocks. One signal that prices of stocks may be drifting away from the real value of the company is rising Price/Earning Ratios (often referred to as expanding multiples on financial television). This means the owners of financial assets (often the wealthy) get a pseudo-free gain on their assets increasing disparities in wealth. This is often justified under the idea of the “Wealth Effect” that people seeing their assets increase in value will spend and invest more.

While there is nothing inherently wrong with consumer prices and asset values rising, the intervention of the central banks creates a one sided arbitrary and regressive redistribution of wealth in the name of financial stability.

Income Equality and Income Mobility – The New Frontier for Libertarians

by Alex Merced

Often times we hear conservative pundits, and the occasional libertarian one, respond to social and economic critiques concerning income equality with a dismissive tone. They will say it doesn’t matter as long as there is mobility or “equality of opportunity.” However, recent studies make it clear that there is a  correlation between economic equality and mobility. So how do you make an argument for the free market in light of this data? Some, such as libertarian philosopher/economist Roderick Long, have already begun attempting to have a deeper libertarian discussion about equality, and at least about what kind of equality libertarians should be concerned with. Libertarians don’t need to shy away from discussing economic equality because there is a compelling case to be made that economic equality has plenty to do with a free, or at least a freer, market.

Before arguing the case one must discuss the causal direction in this relationship between equality and mobility (assuming there is one). Does more equality lead to more mobility? Or does more mobility lead to more equality? The answer to this question should lead to very distinct policy views. Progressives, through their policies of redistribution to create equality, argue that equality will create mobility. I would contend that this is putting the cart before the horse. Increasing mobility would lead to more equality. Thus, policies of redistribution are not needed if mobility can be repaired.

In economics there is a theoretical condition of “Perfect Competition.” This is a situation where so many firms compete over the potential earnings in a particular sector that those firms inadvertently evenly distribute those earnings. Labor markets are similar. Higher wages will attract more participants which, over time, will result in reducing the amount of earnings each individual makes because the total earnings is split among more workers. This result is another sort of equality. The implication is that if wages aren’t being distributed more evenly that must mean something is prohibiting or limiting the participation/competition in that market for wealth (profits from your enterprise, earnings from your investments, or wages from work).

In reality, there can be many societal, geographical, and cultural reasons why certain wealth markets may not be as competitive as we’d like, but some of the strongest barriers come in the form of interventions in the market. Reducing the ability for people to participate reduces an individual of a lower economic condition’s ability to have upward mobility and also reduces an individual of a higher economic condition’s downward mobility. Upward and downward mobility are equally important (you have to be able to lose from bad choices and gain from good ones or the market mechanism loses much of its effect). Let’s take a look at different wealth markets and discuss some of the conditions reducing competition in them.

Wealth Market # 1 – Entrepreneurship

Entrepreneurship is one way people can elevate their economic status. Anything that increases the costs of entrepreneurship in time and money will have a disproportionate effect on small entrepreneurs (as they are less likely to have the time and money to pay these costs). Some of the biggest costs in running a business are the legal and accounting costs. An ever growing complex legal and tax system only make these costs greater regardless of the absolute size of the tax bill or legal fine (because of the amount of billable hours paid to accountants/lawyers to guide through the complexity).

These costs may make some businesses less profitable or slow down their growth, but, most disturbingly, they discourage potential entrepreneurs from throwing their hat in the ring to begin with. The answer is a simple one that people across the board can get behind, simplification. While I’m all for lowering taxes which would make the costs of entrepreneurship lower, simplifying the tax and legal codes so that people can effectively participate without huge legal/accounting overhead would encourage more entrepreneurship. It would also free up the firms resources to be used for things such as improving the product, decreasing prices, or even higher wages for those involved in production of the good or service. Keep it simple stupid.

Wealth Market #2 – Capital Investment

Another way of developing wealth is to take wealth you have from your small business or job and invest it into capital either in equity (owning property or stocks) or via debt (lending money or buying bonds). Buying equity/ownership in companies early in their life cycle is often where some of the largest growth in wealth occurs, and it would be people of a lower economic status who can benefit most from that dynamic (of course more risk, more reward). In an effort to reduce the risks to the common man, laws like Sarbanes Oxley in 2002 were passed to make publicly traded companies more transparent. While access to information to people who are investing their capital can lead to better investment decisions, the costs of preparing this information fell on the company (which is fine, but many of standards can arguably so stringent that the costs increase may be less than reasonable). Essentially, Sarbanes Oxley brought at least an appearance of transparency of public markets in exchange for higher accounting and auditing costs, higher legal costs, and higher cost for executive pay for public companies (more liability is placed on executives so it is sensible that they’d ask to be compensated for the risk).

With these higher costs most new businesses decide to raise money in private markets first (where only wealthy “accredited” investors can participate). As a result, companies that issue IPOs (initial public offerings) are often more mature compared the plethora of IPOs we saw in the 90’s. (While some companies fell prey to the bubble, many people were able to grow their wealth more efficiently since they were able to invest in companies earlier in their life cycle.) The problem is, if companies are not available to the public for investment until later in their life cycle, most of the growth in wealth is made exclusively for the already wealthy while the public is left with the scraps of growth. (Less risk, Less Reward).

To the credit of lawmakers, this has not been ignored and the JOBS act was primarily passed to deal with much of this issue, but layering a complex law over another may result in just increasing legal costs which offsets any savings from simplified accounting costs.

Wealth Market #3 – Skilled Labor

The reality of markets is that the demand for labor is constantly changing, not only the quantity but also the skills and knowledge demanded (Cobblers are of course are still in huge demand still, right?). This can cause what’s often known as structural unemployment (unemployment due to skills of the labor force not matching the skills demanded by firms looking for labor). The people in the most dire circumstances, as previously mentioned, have the least money and time to acquire new skills to enter a changing labor market, so of course increasing costs of attaining skills will disproportionately punish those less able to pay those costs and reward those who can (often people who are “better off”). Here a few of the ways these costs increase:

– Compulsory licensing requirements will often result in months of studying full time to pass exams just to be allowed to work in a particular field (The Institute of Justice has done a lot of work on Compulsory Licensing). While making sure people are qualified to do particular jobs is a good thing, most, if not all, licensing requirements are less about competence and more about making workers aware of the ever expanding regulations of their new field of work (essentially the result of complex laws).

– The cost of higher education is primarily the result of the diversion of credit into the education market. Making it easy to borrow money for education has reduced the incentive for education institutions to rethink the way they price their product (why do you pay the same tuition for all degrees despite the huge variation of potential income they provide?) and for students to think about how they finance their education (there probably is a kickstarter like site for tuition now, but one probably would have existed sooner). Aside from distorting the whole pricing mechanism for education, this diversion of credit also means less credit for other types of investment. This may affect the quantity of work for those graduates with huge debts.The cost is currently so high people don’t get do overs. If education pricing was more sane people could afford to go back if their first program didn’t necessarily offer them the income they expected or hoped for.


The ability for people to be upwardly mobile depends on their ability to participate in wealth markets, and the ability for the wealthy incumbent class to be downwardly mobile depends on the ability for others to compete with them in wealth markets. If wealth markets are more difficult to enter, then those at the bottom fall further behind and those at the top get further ahead. This creates the inequality we see today. So essentially, a more free market, when properly understood, can offer a clear path to a more equal or more “fair” distribution of wealth without the use of intervention and intrusions of government.