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Order and Liberty


From Barron’s, Chinese Puzzle by Thomas Donlan:

Worldly wise investors and sophisticated geopoliticians sometimes forget that Chinese markets reflect the power of the country’s government more than its economy. The price of stocks in state-owned and state-funded corporations has too little to do with their profits and too much to do with their political connections.

Just as admirers of Maoist communism ignored murder and starvation on a scale that overwhelmed the evils of Hitler and Stalin, admirers of Chinese economic reform have often ignored the chain-mail authoritarian fist inside the velvet economic glove.

In a famous comment in 2009, Thomas Friedman of the New York Times acknowledged the fist and ignored it: “One-party autocracy certainly has its drawbacks,” he said. “But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages.”

Growth and prosperity in China have been handed down from governmental heaven through the diktats of central planners, and financed through manipulation of money and exchange rates.

Central planning that is intended to eliminate chaos eventually creates it. As Friedrich Hayek wrote in The Road to Serfdom, state economic planning is unavoidably arbitrary: “The more the state plans, the more difficult planning becomes for the individual.”

Among many examples of this principle: If a government tweaks money supply to hit targets for interest rates and exchange rates, it will provide stability in those things, but the economy will fluctuate. Or, if the government tries to guarantee general economic growth, as measured by employment, gross domestic product, consumer confidence, business investment, or all of them, rates of interest and exchange will fluctuate. Either way, the economy will be under control of an unstable, unpredictable thing that seeks order instead of liberty, and so can deliver neither.

All over the world, there are people who imagine themselves to be masters of the material universe. They are the greatest threat to liberty and prosperity.


Read the entire Donlan link.

Historian Paul Johnson laments the history of trying political solutions to economic problems.  (I would add the poor record of trying political and economic solutions to cultural deficiencies.)

In today’s Wall Street Journal, Ben Bernanke reviews the success of the Fed in managing the 2008 collapse.  How The Fed Saved the Economy.  I agree that he deserves much credit, but managing a crisis is distinct from managing an economy. The problem with the use of many Keynesian concepts lies in  making that distinction.  Bernanke also notes the limits of Fed policy; at some point fiscal policy clearly matters.

For years the Fed has bailed out poor fiscal policy. Faced with zero interest rates they are out of ammo. It makes one shudder when one of the justifications for raising rates is being able to cut them again in case we lapse back into a recession.

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A Culture of Non Productivity

From Scott Grannis at Calafia Beach Pundit,  The Problem is The Lack of Productivity

That it has not grown faster despite extremely low interest rates and very accommodative Fed policy is not evidence of the failure of monetary policy or the need for yet more Quantitative Easing. No, the failure to grow faster is rooted in weak productivity, which in turn is the result of weak investment, a general aversion to risk-taking, and a general unwillingness to work. Those problems are not the sort that respond to the Fed’s ministrations, nor can they be fixed by more money; instead, they respond to changes in the after-tax incentives to work, invest and embrace risk.

 For the past 5 years, productivity has increased by a miserably slow 0.54% per year on average. In the past 70 years, productivity growth was weaker only in the 1976-82 period—a period notorious for its high and rising inflation and a general malaise among the population.

 One enduring problem of the current business cycle expansion is the very slow growth of the civilian labor force. Lots of people—about 10 million—have simply “dropped out” and are no longer looking to work, for a variety of reasons. Hint: transfer payments now make up almost 20% of disposable personal income, up 20% from 2007 levels and up 300% from the 5% that prevailed in 1951.

 This is a sluggish recovery desperately in need of better incentives to work, invest, and take risk. Cutting marginal tax rates would help tremendously, as would a reduction in regulatory burdens.


Population growth is normally conducive to increases in productivity , but not when transfer payments are substituted for work and not when the marginal tax rate for those receiving these payments are effectively 100% (the costs of lost benefits when you earn X)

I add one factor almost all such analysis omit. The frequency of change in the tax code and regulations (friction costs) is so high that minor changes or improvement will not be trusted to last long enough to have any impact. Because of this lack of trust, the incentive/ change would have to be more significant.

The longer these transfer payments and friction costs last the more socially disruptive and politically unpalatable they become. Policy is much easier to change than culture.


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Reason on Uber

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Guilded Colleges


from The New York Times, Stop Universities From Hoarding Money by Victor Fleischer


SAN DIEGO — WHO do you think received more cash from Yale’s endowment last year: Yale students, or the private equity fund managers hired to invest the university’s money?

It’s not even close.

Last year, Yale paid about $480 million to private equity fund managers as compensation — about $137 million in annual management fees, and another $343 million in performance fees, also known as carried interest — to manage about $8 billion, one-third of Yale’s endowment.

In contrast, of the $1 billion the endowment contributed to the university’s operating budget, only $170 million was earmarked for tuition assistance, fellowships and prizes. Private equity fund managers also received more than students at four other endowments I researched:Harvard, the University of Texas, Stanford and Princeton.

Endowments are exempt from corporate income tax because universities support the advancement and dissemination of knowledge. But instead of holding down tuition or expanding faculty research, endowments are hoarding money. Private foundations are required to spend at least 5 percent of assets each year. Similarly, we should require universities to spend at least 8 percent of their endowments each year.

Despite the success of its endowment, in 2014 Yale charged its students $291 million, net of scholarships, for tuition, room and board.

In 2012, Harvard spent about $242 million from its endowment on tuition assistance; in 2014, it paid $362 million in private-equity fees, and nearly $1 billion in total investment management fees.

Smaller institutions aren’t any better. The University of San Diego, where I teach, spent about $2 million from the endowment on tuition assistance in 2012, compared with $5 million in private-equity fees in 2014 and $13 million in overall investment management fees.

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Why Intellectuals Hate Capitalism