Exposing Jerome Powell’s Lies About the Fed and Inequality

Exposing Jerome Powell’s Lies About the Fed and Inequality

If the heads of the Federal Reserve are to be believed, Fed policies do not make wealth inequality worse.

When asked recently if the Fed’s policies widen inequality, San Francisco Federal Reserve President Mary Daly stated without reservation: “Not in my judgment.”

Previously, Fed Chairman Jay Powell at the end of May was less forceful in his response, but nevertheless danced around the question of Fed policy increasing inequality. “Everything we do is focused on creating an environment in which those people will have their best chance to keep their job or maybe get a new job,” was his response.

Of course, we know Powell and Daly are lying.

How the Fed Benefits the Investor Class

Austrian school investor Jesse Colombo writes at his site explainingcapitalism.org, “the Fed and the ‘paper’ dollar are the main reasons for America’s growing economic inequality.”

Why is this so?

“In simple terms,” Colombo explains, “inflation benefits the rich while hurting the middle class and poor due to the way each group’s finances are structured.”

In short, the rich receive a significant share of their income from investments, while the middle class primarily relies on their income from labor, and the poor a combination of labor income and government welfare payments.

When the Fed creates new fiat money out of thin air, it isn’t distributed evenly throughout the economy. Instead, it is inserted at specific points, typically via credit to business investors. As the Fed inflates a bubble, speculation with the new money also increases—which inflates the stock market and other major asset classes like housing, benefitting the investor class.

To see just how acute the rise in asset value for the investor class has been, massive fiat money printing has helped the S&P 500 balloon by more than 360% in the last 30 years, a nearly five-fold increase, and more than doubling in the last ten years alone.

Moreover, median home values have nearly tripled over the last 30 years, far surpassing the rate of inflation.

The overwhelming majority of these benefits accrue to a small group of investors.

This June 2 article on quartz.com reported that the “wealthiest 10% of U.S. households owned about 83%” of stock market wealth, according to a 2016 Federal Reserve Bank of St. Louis report.

“The richest one percent of Americans now account for more than half the value of equities owned by U.S. households, according to Goldman Sachs,” reported this February 2020 Financial Post article. Conversely, the bottom 90 percent of households owned just 12 percent of stock market wealth.

Additionally, rapidly rising home prices puts homeownership out of reach for more and more people. “Homeownership is increasingly out of reach for the typical American,” Redfin Chief Economist Daryl Fairweather said in this 2019 HousingWire.com article. “Over the last few years builders have focused on luxury homes, and there hasn’t been enough construction of affordable starter homes.”

After peaking in 2006 before the Great Recession, overall homeownership rates fell from a high of 69 percent to 63 percent in 2016. Ownership rates have been climbing again in recent years, but nevertheless the gains from housing value increases accrue not only to just those who can afford a home, but even more acutely to those in more expensive houses. Meanwhile, non-homeowners and those with lower-priced homes fall further behind.

Racial Wealth Gap

With a sharper and more critical eye being focused on racial issues—and the racial wealth gap in particular—due to recent events, the Fed is due its fair share of blame in this realm as well.

For starters, the benefits of rising home prices fueled by easy Fed money can only benefit actual homeowners. And, according to this February 2020 Urban Institute paper, “the gap between the black and white homeownership rates in the United States has increased to its highest level in 50 years” in 2017.

The white homeownership rate stood at 71.9 percent, compared to just 41.8 percent for blacks.

Furthermore, Federal Reserve data analyzed at capitalist.com shows that 61 percent of white households own publicly traded stock compared to just 31 percent of black households.

Even in middle and upper class households, the discrepancy persists. A March 2019 Investor’s Business Daily article reported that “A 2015 survey by Ariel asked Americans with household income of at least $50,000 whether they owned stocks or stock mutual funds. Eighty-six percent of whites said they did. For African-Americans, the number was 67%.”

In short, as Fed easy money policies benefit stockholders and homeowners, a disproportionate amount of those benefits are going to white households, further exacerbating the racial wealth gap.

Conclusion

There’s little doubt that the Federal Reserve increases wealth inequality overall, but deepens the racial wealth gap as well. The easy money policies of the last decade as the nation attempted to recover from the Great Recession provide a prime example.

As this 2019 MarketWatch.com article noted, “the Fed lowered interest rates, which had the knock-on effect of pushing easy money into the hands of the already-wealthy.”

As Deutsche Bank’s Securities’ chief economist Torsten Sløk said, “The response to the financial crisis was for the Fed to lower interest rates which in turn pushed home prices and stock prices steadily higher over the past decade.”

Like the old state lottery ads used to say “Lotto: You’ve got to be in it to win it.”

Similarly, to “win” benefits from Federal Reserve easy money policies, you’ve got to already be in the stock and homeownership game, i.e. the investor class.

It’s beyond disingenuous for the likes of Powell and Daly to claim the Federal Reserve doesn’t increase inequality. Any discussion of wealth inequality—be it overall or the racial wealth gap—is incomplete without a discussion of the Fed.

Bradley Thomas is creator of the website Erasethestate.com and is a libertarian activist who enjoys researching and writing on the freedom philosophy and Austrian economics. Follow him on Twitter: @erasestate

If I Were a Racist…

If I Were a Racist…

Protests across the nation following the murder of George Floyd have inspired discussions beyond just police brutality, shining a spotlight on issues like “social justice” and “systemic racism.”

But the divisive rhetoric on racism serves to distract from the statism.

If I were a racist, I would support policies that negatively impact minorities. Anything that winds up making their lives and socioeconomic condition worse off would get my approval. On that score, big government could serve as a shining example with a record of harming minorities any racist would envy.

The Welfare State

For starters, if I were a racist I would look at the results of the huge expansion of the welfare state with glee. It’s rumored that President Lyndon Johnson bragged, “I’ll have those niggers voting Democratic for the next 200 years” as a result of his passage not only of civil rights legislation but his massive ratcheting up of the welfare state known as the “Great Society.”

Whether or not Johnson uttered those actual words is immaterial; they were consistent with his racist tendencies. Much more importantly, however, is that the results have reflected the sentiment behind the alleged quote: a growing dependency of the black community on government programs, leading to a devastating destruction of the black family and in turn a deepening cycle of poverty.

Poor and dependent people will reliably vote for the party promising to continue and increase the flow of benefits.
Welfare programs championed by Johnson and progressives break up families by replacing a father’s paycheck with a government check and benefits. Nationally, since LBJ’s Great Society ratcheted up government welfare programs in the mid-1960s, the rate of unmarried births has tripled.

This effect has been especially acute in black families, as more than 70 percent of all black children today are born to an unmarried mother, a three-fold increase.

According to 2017 American Community Survey data produced by the U.S. Census Bureau, only 5.3% of families with a married couple live in poverty nationally, compared to 28.8% of households with a “female householder, no husband present.”
In other words, single mother households are five times as likely to be in poverty compared to households with both parents. Largely as a result of the breakdown of the black family, 20 percent of blacks live in poverty, more than twice the rate of whites (8%).

As economist Thomas Sowell once wrote, “The black family survived centuries of slavery and generations of Jim Crow, but it has disintegrated in the wake of the liberals’ expansion of the welfare state.”

Indeed, if a group of racist Klan members conspired to develop a plan to impoverish black households, they could have not done much better than the exploding welfare state.

The Minimum Wage

If I were a racist, I would want to see to it that young black people coming from broken, low-income homes have a harder time entering the workforce, making it more difficult to escape poverty.

The minimum wage accomplishes that.

The economic lesson is obvious: artificially increasing the wage employers must pay decreases the demand for low-skilled workers, while drawing more demand from prospective workers to fill these positions. Low-skilled labor is priced out of the workforce as a result.

History has shown that black teenagers are hit the hardest by minimum wage hikes.

Research by Sowell underscores this point: “Unemployment among 16 and 17-year-old black males was no higher than among white males of the same age in 1948. It was only after a series of minimum wage escalations began that black male teenage unemployment rates not only skyrocketed but became more than double the unemployment rates among white male teenagers.”

Indeed, there is ample research showing that the minimum wage’s origin was inspired by racism. Such historic facts led economist Walter E. Williams to label the minimum wage “one of the most effective tools in the arsenal of racists everywhere in the world.”

Putting the first rung of the career ladder out of reach to young blacks is a great way to frustrate them and push them towards either a life of crime or government dependency. Far too many end up hopeless in prison or in the ghetto—right where racists want them.

Gun Control

Seeing to it that more blacks are stuck in a cycle of government dependency and hopelessness, and packed in close quarters in inner cities, I’d be pretty confident that those inner cities would have high rates of violent crime.

So if I were a racist, I’d want to take away the right to legally defend oneself by imposing strict gun control laws. This way, the honest citizens living in the violent inner cities would have no way to defend themselves against the criminals.

As Maj Toure of Black Guns Matter says, “All gun control is racist.”

Research on the history of gun control laws strongly suggests racist motives compelling these restrictions for hundreds of years. According to the website firearmsandliberty.com, “The historical record provides compelling evidence that racism underlies gun control laws—and not in any subtle way. Throughout much of American history, gun control was openly stated as a method for keeping blacks and Hispanics ‘in their place,’ and to quiet the racial fears of whites.”

One of the top priorities of the Ku Klux Klan after the Civil War was to enact laws barring gun ownership by the freedmen, making it all the easier to terrorize them.

Today, however, there’s no need to put on a white hood and lynch anybody, just see to it that blacks are defenseless and let the criminals handle the rest.

School Choice

If I were a racist, I’d want to block any attempt to make better educational opportunities available for minorities. The government indoctrination centers known as public schools are not only systemically incapable of providing high quality education for children, they have especially failed minority kids.

As Walter E. Williams has written, “the average black 12th-grader has the academic achievement level of the average white seventh- or eighth-grader. In some cities, there’s an even larger achievement gap.”

The ultimate goal, of course, is to separate school and state (and eliminate the state altogether). But short of that, we need to shift more control over educational choices out of the hands of politicians and bureaucrats and into the hands of parents and families.

Such policies are highly popular among minority families. Indeed, a 2018 national survey by Education Next found that Hispanic (62%) and black (56%) respondents expressed far higher support for school choice initiatives targeted to low-income families than whites (35%).

Results like this suggest that low-income, minority families recognize the status quo is not working, and they are craving policies that would enable them to access other educational options.

Those opposing policies that would provide minorities such options may not be motivated by racism, but one would be hard pressed to say how their actions would be different if they were.

War on Drugs

If I were a racist, I would no doubt enjoy the results of the government’s failed “war on drugs.” The war on drugs has put thousands of minorities in prison for crimes emerging from the government’s attempt to dictate to citizens what they can or cannot put in their own bodies. According to the Drug Policy Alliance, “Nearly 80% of people in federal prison and almost 60% of people in state prison for drug offenses are black or Latino.”

Moreover, the Drug Policy Alliance notes “2.7 million children are growing up in U.S. households in which one or more parents are incarcerated. Two-thirds of these parents are incarcerated for nonviolent offenses, including a substantial proportion who are incarcerated for drug law violations.” The drug war, like the war on poverty, is a major factor in fatherless homes in the black community.

The war on drugs has devastated minority communities, and its enforcement has greatly increased the number of confrontations between police and minorities; which in turn increases the opportunity for police brutality cases.

Conclusion

Big government has arguably been the biggest enemy of minorities. Indeed, an examination of the results of government control and intervention looks an awful lot like something racists would support.

Instead of pitting white against black to divide us, to achieve more justice for minorities we must instead focus our energy on dismantling the state.

Bradley Thomas is creator of the website Erasethestate.com and is a libertarian activist who enjoys researching and writing on the freedom philosophy and Austrian economics. Follow him on Twitter, @erasestate.

The State’s Priority Is Protecting Itself, Not You

The State’s Priority Is Protecting Itself, Not You

Murray Rothbard pointed out in his book Anatomy of the State how the state is far more punitive against those that threaten the comfort and authority of government institutions and workers than they are against crimes against citizens.

This, according to Rothbard, exposed as a myth the notion that the state exists to protect its citizens.

“We may test the hypothesis that the State is largely interested in protecting itself rather than its subjects by asking: which category of crimes does the State pursue and punish most intensely—those against private citizens or those against itself?” Rothbard wrote.

“The gravest crimes in the State’s lexicon are almost invariably not invasions of private person or property, but dangers to its own contentment, for example, treason, desertion of a soldier to the enemy, failure to register for the draft, subversion and subversive conspiracy, assassination of rulers and such economic crimes against the State as counterfeiting its money or evasion of its income tax.”

Boy how recent events have proven Rothbard right.

For weeks, we saw police aggressively pursuing and punishing peaceful people merely violating arbitrary lockdown orders to go surfing, cut hair, or host a child’s play date.

But in the first nights of the George Floyd protests, police allowed rioters to run amok destroying property, with political leaders dismissing the damage as unimportant.

This stark contrast in police responses dramatically underscores Rothbard’s point.

Take the first nights of rioting in Minneapolis. As reported by the Manhattan Institute’s City Journal, Minneapolis Mayor Jacob Frey, the source of the “police stand-down order that allowed his own city to burn,” merely “shrugged off responsibility and minimized the damage.” Moreover, according to the report, “Frey kept repeating that the destruction was ‘just brick and mortar.’”

And consider the example of Raleigh, North Carolina Police Chief Cassandra Deck-Brown, who said:

When the greater risk is of injury to the officer, and I had five injured last night – a building? A window? A door? The property that was in it can easily be replaced. But for a person who has had officers shot. And more recently than not, I will not put an officer in harm’s way to protect the property inside of a building. Because insurance is most likely going to cover that as well but that officer’s safety is of the utmost importance.

Got that? The officer’s safety is the primary concern, not the property of citizens. Agents of the state whose sole job is supposedly to protect the people and their property instead refuse to do their job at the first hint of danger.

Worse still, as Ryan McMaken pointed out in a recent article at Mises.org, “A failure to protect taxpaying citizens from violence and crime in a wide variety of situations is standard operating procedure for police departments that are under no legal obligation to protect anyone, and where ‘officer safety’ is the number one priority.”

McMaken further notes that it is “now a well-established legal principle in the United States that police officers and police departments are not legally responsible for refusing to intervene in cases where private citizens are in imminent danger or even in the process of being victimized.”

Police absence during riots is nothing new. As McMaken wrote: “During the 2014 riots that followed the police killing of Michael Brown, for example, shopkeepers were forced to hire private security, and many had to rely on armed volunteers for protection from looters. ‘There’s no police,’ one Ferguson shopkeeper told Fox News at the time. ‘We trusted the police to keep it peaceful; they didn’t do their job.”’

As the violence of the riots intensified, mayors instructed police forces in cities across the nation to step up their presence.

But their initial reactions are the most telling.

The contrast between police actions against peaceful lockdown “violators” and the rioters is striking. The instincts of the political class was to haul mothers in parks and hair stylists away in handcuffs, while standing down and allowing private property owned by citizens to burn.

The former involved disobeying a government order, an act which would threaten the perceived authority, no matter how arbitrary, of the state. The latter involved violation and destruction of citizens’ property.

As Rothbard would have predicted, the state was far more interested in preserving the illusion of its authority than the property of its citizens.

Putting a tragic, but fine, point to Rothbard’s point: George Floyd was choked to death by a police officer sent to detain him for the “crime” of using a counterfeit $20 bill to buy cigarettes.

The state is not us. It does not exist to protect our person or property. It exists first and foremost for its own benefit and to exert power and control over its subjects.

Events of the past several weeks should make this crystal clear.

Bradley Thomas is creator of the website Erasethestate.com and is a libertarian activist who enjoys researching and writing on the freedom philosophy and Austrian economics. Follow him on twitter, @erasestate

The Statist Origins of Modern Health Insurance

The Statist Origins of Modern Health Insurance

With roughly 36 million people having filed for unemployment across the country in the last two months in the wake of the coronavirus shutdown, one issue receiving more scrutiny from some quarters is the issue of employer-based health insurance.

With so many laid off temporarily or permanently out of work, there is increasing concern about how many of those will be uninsured because when they lost their job, they also lost their source of health insurance.

About half of Americans receive their health insurance through an employer-sponsored plan, which means the recent layoffs could potentially swell the ranks of the uninsured by 18 million.

Concern over this trend has prompted a growing chorus of those attempting to mount an opposition to America’s heavy reliance on employer-sponsored insurance. For example, Rep. Ilhan Omar’s tweet below which garnered more than 76 thousand likes at the time of this writing.

Ilhan Omar Tweet

This raises the question, however: Why is health insurance tied so closely to employment in the first place?

The answer should come as no surprise to readers of this site: government intervention.

As this 2017 New York Times article describes, when we look back a hundred years ago, “Most insurance in the first half of the 20th century was bought privately, but few people wanted it.”

Few people wanted insurance because there was not much medical care that needed to be insured.

The medical treatment and technology available at the time was very limited. But as doctors learned to treat more illnesses and medical technology advanced, the healthcare industry likewise began to expand which brought increasing procedures and treatments to be paid for.

In response, hospitals formed Blue Cross in 1939 as an insurance pool to help patients pay for treatment, and physicians formed Blue Shield at about the same time.

A gradual increase in insurance coverage followed.

Then, as the Times reported, “Things changed during World War II.”

“In 1942, with so many eligible workers diverted to military service, the nation was facing a severe labor shortage. Economists feared that businesses would keep raising salaries to compete for workers, and that inflation would spiral out of control as the country came out of the Depression.”

In response, President Roosevelt signed Executive Order 9250, establishing the Office of Economic Stabilization. This order, among other things, froze wages. “Businesses were not allowed to raise pay to attract workers,” the Times noted.

Progressives and anti-capitalists would lead you to believe that this situation would be perfect for greedy business owners. The executive order would give them cover for what they want to do anyways—which is to exploit workers and pay them slave wages.

But reality has a way of bursting progressive’s ideological bubbles.

Instead of gleefully colluding to keep worker compensation suppressed, businesses instead “began to use benefits to compete. Specifically, to offer more, and more generous, health care insurance,” the Times reported.

“Then, in 1943, the Internal Revenue Service decided that employer-based health insurance should be exempt from taxation. This made it cheaper to get health insurance through a job than by other means,” the Times continued.

As an employer, if you could choose between paying a worker, say, an additional salary of $10,000 or pay $10,000 for their health insurance premiums tax free, there is significant incentive for the employer to opt for the insurance coverage.

And even if the employer simply provides the option of enrollment in an employer-provided plan, and requires the worker to pay for those premiums, the employee gets to do so with pre-tax income. There is still strong incentive for the employer and employee to accept insurance coverage in lieu of higher salary.

As University of Alabama-Birmingham health economist Michael A. Morrisey explains, “employers and their employees have a strong incentive to substitute broader and deeper health insurance coverage for money wages. Someone in the 27 percent federal income tax bracket, paying 5 percent state income tax and 7.65 percent in Social Security and Medicare taxes, would find that an extra dollar of employer-sponsored health insurance effectively costs him less than sixty-one cents.”

Roosevelt’s order let the employer-sponsored health insurance genie out of the bottle. And employer-sponsored insurance coverage growth was the driving force in a major increase in overall insurance coverage. As the Times reported, “In 1940, about 9 percent of Americans had some form of health insurance. By 1950, more than 50 percent did. By 1960, more than two-thirds did.”

The stronger the tie between employment and health insurance, the more significant becomes the issue of “job lock.”

This is a situation where workers fear losing or leaving their job because it means also losing their health insurance coverage; which in turn could also mean losing access to their preferred doctor.

Which brings us back to the current situation.

The concern about “job lock” and the close connection between employment and health insurance is legitimate, and has certainly been highlighted by the current crisis.

It’s surely not a stretch of the imagination, however, to conclude that progressives like Omar’s solution is to transition to a government-run single payer scheme like Medicare for All.

But as this debate heats up as more lose their jobs, it is important to understand why health insurance is so closely tied to employment in the first place. The fact that leftists desire to ‘fix’ a problem created by government intervention with still further government control is an irony apparently overlooked.

Ludwig von Mises warned us nearly a hundred years ago that government intervention begets more intervention.

As he wrote in 1929, “isolated intervention fails to achieve what its sponsors hoped to achieve. From their point of view, intervention is not only useless, but wholly unsuitable because it aggravates the ‘evil’ it meant to alleviate.”

Once the interventionists realize their interventions made things worse, Mises argued, they are “not inclined” to remove the initial intervention, but rather seek to address the new problems with still more interventions. The new interventions create new problems, and the cycle repeats, ad nauseam.

His words ring true now more than ever. They should not be ignored.

Bradley Thomas is creator of the website Erasethestate.com and is a libertarian activist who enjoys researching and writing on the freedom philosophy and Austrian economics. Follow him on twitter, @erasestate

Coronavirus Lockdown: The Political Versus The Voluntary

Coronavirus Lockdown: The Political Versus The Voluntary

The government lockdown is mandatory. Re-opening is not.

The contrast is stark and worth exploring as it underscores the difference between political and voluntary means of organizing society.

Most states have imposed mandatory “stay at home” or “shelter in place” orders, confining citizens to house arrest, save for ‘essential’ purposes like buying food or prescription medicine. This represents the political means of organizing society. These are typically one-size-fits-all orders from state governors that allow for no leeway based upon each state’s widely diverse population demographics and densities.

Rural, sparsely populated counties are treated the same as highly concentrated big cities. Children, with virtually no risk of catching or suffering any symptoms from the coronavirus, are forced to abide by the same rules as older and much more vulnerable populations with underlying conditions.

Disobedience is punished harshly.

Police, who are trained to “just follow orders” rather than exercise rational discretion, have been caught on video enforcing these rules in ways that would be comical if they weren’t so tragic. Social media has been filled with viral examples like police chasing down an individual surfing at a California beach, a mother being handcuffed for taking her children to a public park, and most recently Wisconsin police harassing a mother for having the gall to allow her child to play outside with a friend at her neighbor’s house.

Bear in mind, in this “democracy” that we live in, nobody had the chance to vote over whether or not we will all be involuntarily confined to our homes and universally assumed to be a threat to the health of others – all without any due process. Our rulers once again unilaterally changed the terms of the alleged “social contract” without so much as the appearance of getting the consent of the governed.

Conversely, those states that are now lifting their restrictions are allowing certain businesses the option of opening back up, and likewise allowing consumers the option of frequenting certain establishments. Granted, certain social distancing guidelines and other restrictions remain in place, but the choice is left to the business owners and consumers – the citizens – to evaluate their risk in so doing.

This represents, albeit far from perfectly, a glimmer of how a society based on voluntary means is organized. Businesses are not forced to re-open. They can make that decision themselves.

Indeed, in the state of Georgia, where the governor has once again allowed restaurants to re-open for dine-in eating, a group of more than 50 restaurant owners in Atlanta and Savannah have publicly announced their decision to remain closed to dine-in customers.

“We agree that it’s in the best interest of our employees, our guest, our community, and our industry to keep our dining room closed at this time,” their statement reads.

Fine for them. It is their property and they are well within their right to keep their dining rooms closed to the public. But it is their choice.

They didn’t have a choice in closing up their dining rooms in the first place, however. That choice was forcibly taken from them by the governor.

Dramatically symbolizing the ideological difference between the political and voluntary means of organizing society was a widely-viewed interview between CNN’s Anderson Cooper and Las Vegas Mayor Carolyn Goodman.

This is certainly not to defend everything Goodman said in the interview, but rather to focus in on one aspect in particular. When asked by Cooper about her desire to re-open her city, and what rules she would impose on the casinos, Goodman responded “That’s up to them to figure out. I don’t run a casino.”

The reaction of Cooper and so many others to the interview was quite telling.

The fact that a politician would publicly proclaim her humility and declare that property owners would know better how to safely run their own property better than the politicians was beyond the pale to the masses of statist worshippers of so-called “experts.”

Cooper did an on-air, double face palm he was so stunned. Social media and others universally condemned Goodman, calling the interview “bizarre,” “lunacy,” and declaring that Goodman “embarrassed herself.”

Of course no politician or cable news host knows better how to best, and most safely, utilize property better than the property owners themselves.

But those that subscribe to the centralized, top-down political means of organizing society simply could not mentally process such a thought, and anybody straying from their doctrine must be ostracized.

The coronavirus health scare and the government’s reaction have helped to highlight the stark contrast between competing ideologies. Namely, the debate between those that favor the political means for organizing society versus those that favor the voluntary means.

The political means involves forcible compliance to mandatory, centralized, one-size-fits all orders, while the voluntary means involves de-centralized options determined by the very individuals best positioned to determine the risks and reward of their freely chosen actions.

The growing number and size of public protests indicates that more and more are beginning to recognize the ugly reality of organizing society by political means and demand instead a free society.

Bradley Thomas is creator of the website Erasethestate.com and is a libertarian activist who enjoys researching and writing on the freedom philosophy and Austrian economics. Follow him on Twitter, @erasestate.

Pandemic Hospital Layoffs Reveal the Prevalence of Wasteful Healthcare Spending

Pandemic Hospital Layoffs Reveal the Prevalence of Wasteful Healthcare Spending

Aside from a few hotspots like New York City or Detroit, hospitals across the country are at such low capacities that many are laying off staff and seeing their bottom lines threatened during the current coronavirus pandemic.

For instance, in my home state of North Carolina it was reported “After hospitals and doctor’s offices across North Carolina canceled nonessential procedures and in-person appointments because of the coronavirus pandemic, many nurses and medical staff were laid off or had their hours reduced.”

“It’s definitely not the situation you might think would happen during a pandemic,” said North Carolina Nurses Association CEO Tina Gordon.

According to an April 14 article in The Guardian, “43,000 healthcare jobs were lost in March 2020” throughout the U.S, and “the HealthLandscape and American Academy of Family Physicians issued a report estimating by June 2020, 60,000 family medical practices will close or scale back, affecting 800,000 workers.”

An April 1 McClatchy article reported that hospitals “are now losing 40% to 50% of their revenue.” Meanwhile, the American Hospital Association, according to the Business Insider, “has sounded the alarm about the industry’s financial difficulties and said that quickly distributing funding from the CARES Act would help facilities keep their doors open.”

It is of course welcome news that hospitals have not been universally overwhelmed during the pandemic.

Some of the downturn in hospital finances is attributable to routine visits being cancelled amid stay-at-home orders along with delays in non-emergent procedures like hip or knee replacement.

The current situation does, however, help underscore a little-discussed cause of the nation’s rise in healthcare costs: unnecessary treatment.

Unnecessary procedures make up one-fourth of healthcare spending

According to the Institute of Medicine, “unnecessary tests, prescription drugs and medication, and extraneous procedures are one of the drivers of healthcare price inflation.”

Just how significant of a factor is unnecessary procedures and testing in the healthcare industry?

More than you may think.

According to a February 2018 report by ProPublica, “The waste is widespread – estimated at $765 billion a year by the National Academy of Medicine, about a fourth of all the money spent each year on health care.”

ProPublica described the waste as “one of the intractable financial boondoggles of the U.S. health care system,” in which tons of patients “get lots and lots of tests and procedures that they don’t need.”

“Women still get annual cervical cancer testing even when it’s recommended every three to five years for most women. Healthy patients are subjected to slates of unnecessary lab work before elective procedures. Doctors routinely order annual electrocardiograms and other heart tests for people who don’t need them,” the article continued.

The ProPublica report referenced a study by the Washington Health Alliance, a nonprofit dedicated to making care safer and more affordable, which found “almost half the care examined was wasteful.”

Shockingly, as reported in this Greenimaging.net article, “85 percent of doctors admitted calling for too many tests, 97 percent agreed to personally ordering unnecessary tests.”

Of the unnecessary procedures, the American healthcare system wastes $200 billion per year on unnecessary medical tests alone, according to the Lown Institute.

The Washington Health Alliance study further noted that much of the waste “comprised the sort of low-cost, ubiquitous tests and treatments that don’t garner a second look.”  But as Susie Dade, deputy director of the alliance and primary author of the report noted “little things add up. It’s easy for a single doctor and patient to say, ‘Why not do this test? What difference does it make?'”

Indeed, this question helps inform us why unneeded procedures and tests are so prevalent.

Rise of third-party payments

To the patient, such unnecessary tests and procedures typically make little or no difference financially.

Steadily rising government intervention into the healthcare industry over the past several decades has created a system in which roughly 90 cents of every healthcare dollar is paid for by a third party.

As noted in this 2017 study by the Mercatus Center at George Mason University, “In 1960, patients controlled how almost 50 cents of each dollar spent on health care was paid. That number is now down to just over 10 cents, with the rest controlled by third-party payers.”

Third-party payers include Medicare, Medicaid and private insurance coverage. Government programs of course require little to nothing financially from enrollees. Meanwhile, government mandates requiring health insurance plans cover an ever-expanding list of providers and procedures drives up premiums while driving down the cost to patients at the point of care. Patients come to view their insurance as a sort of pre-paid medical card. If I am paying $1,000 a month on premiums, I want to get my money’s worth from my doctor. If additional unnecessary procedures and tests cost very little or nothing on the margin, why not go ahead with it?

Moreover, because health insurance benefits are tax exempt for employers, the majority of people receive their health insurance through their job. Rather than individuals negotiating the benefits and premiums of their insurance coverage with their provider, employees are covered by plans negotiated between their company’s HR department and the insurance provider.

As a result of government intervention, patients are largely insulated from bearing any cost for wasteful unnecessary procedures and tests. At most, their out-of-pocket charge will be a nominal co-pay, while many procedures – especially if covered by Medicare or Medicaid – will cost them nothing at all.

And such a situation rises above a simple “better safe than sorry” type scenario, where the unnecessary procedures can provide peace of mind with no downside. As the unnecessary procedures inflate healthcare costs, more people are priced out of the insurance market while others forego more urgent care out of fear of unaffordable bills.

Conclusion

The third-party payer system incentivizes mass amounts of wasteful and unnecessary healthcare spending. It costs the patient very little or nothing, while the doctors and hospitals can help pad their bottom lines by billing the government programs or insurance providers.

The current pandemic has put a halt to much of these unnecessary procedures as hospitals focus on coronavirus preparedness. And now hospitals are seeing their finances suffer significantly, revealing just how substantial a factor unnecessary procedures are to the rising costs of healthcare. The best way to significantly reduce such wasteful spending is to peel back the layers of government intervention that encourage it.

How the CARES Act Will Delay Economic Recovery

How the CARES Act Will Delay Economic Recovery

The economic fallout of the government’s shutdown in response to the coronavirus pandemic has been unprecedented.

Nearly ten million people have filed for unemployment benefits in just two weeks. The 6.6 million claims from the last week of March doubled the previous week, and both weeks smashed the previous one-week record of 700,000 claims in 1982.

To mitigate the damage of this mass level of unemployment, the federal “stimulus” bill, called the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), includes two key provisions that will serve to prolong the negative economic impact of the shutdown: bailouts to big businesses and the $600 a week in unemployment benefits in addition to state level benefits for eligible recipients.

The bailout payments to big businesses, like the airlines, not only rewards risky behavior but will just delay the inevitable restructuring that will need to take place.

For instance, American Airlines and Boeing, rather than building up cash reserves during the past ten years of flush economic times, instead leveraged low-interest rates (courtesy of mad Fed money printing) to engage in billions of dollars worth of stock buybacks to benefit from the stock market bubble. Now, rather than selling their stocks to raise liquidity as the prices tumble, they will rely again on a taxpayer-funded bailout.  

Furthermore, the bailouts will largely just enable big businesses to stay afloat during the remainder of the shutdown, delaying layoffs that will likely be necessary as the travel industry will be slow to recover due to a public remaining uncertain about the health risks of travel. 

So at a time when the economy is attempting to “re-open,” the businesses that had been propped up during the shutdown will need to engage in another round of layoffs, prolonging any recovery efforts. 

Also damaging to the labor market as the economy attempts to re-start will be the enhanced unemployment benefits. 

 “The $600 weekly unemployment compensation boost included in the CARES Act will provide valuable support to American workers and their families during this challenging time,” said Secretary of Labor Eugene Scalia.

Indeed, the financial support will be critical for those laid off through no fault of their own.

Such benefits, however, will significantly hamper any effort to “re-open” the economy once the pandemic fears erode, and may prove to be very difficult to eliminate.

A cursory look at the data shows that many of those out of work will be getting paid more not to work than they did to work.

Examining Bureau of Labor Statistics data, this article in The Street found “the median income for a full-time wage or salary worker on a weekly basis was $936. For a 40-hour work week, this translates to a yearly income of approximately $48,672.”

Comparatively, a 2019 USA Today article evaluating 2018 state unemployment benefits data reported the average national weekly unemployment payout of $347 a week. Add to this the $600 a week from the CARES act, and that comes to $947 per week, or $49,244 on an annualized basis.

In other words, the average unemployed person receiving benefits due to the coronavirus shutdown would be receiving more income than the national median income from working. Granted, these figures are broad aggregates, but still illustrate the point that many will be receiving more income being unemployed than they would if they chose to return to work.

The federal supplements are currently scheduled to last four months – roughly to the end of July.

Now imagine, using an optimistic scenario, most of the nation begins to wind down their economic shutdowns by mid-May or early June, meaning many workers would still have four to six weeks of eligibility to receive the generous unemployment benefits.

Of those businesses seeking to re-hire workers to help ramp up production and services to customers, many will find it difficult to do so. Unemployed workers who can receive more income staying at home instead of returning to work will choose to stay at home as long as the unemployment checks continue to roll in. Most states have waived the requirement to be seeking work to receive unemployment benefits, so there would be no pressure to do so. 

Returning to work for many would make them financially worse off. Some employers would also offer benefits like health insurance, but many jobs in the hospitality industry – where the majority of jobs have been lost – do not. While many would be eager to return to work to regain a sense of purpose, many others would make the economically-rational choice to continue receiving the higher level of income while avoiding the disutility of work. 

And this effect would reach beyond more than just those that could receive more income staying at home. For some, even the opportunity to earn more money working rather than remaining unemployed would not be deemed to be worth it, once we take the marginal benefits and costs into consideration.

Say someone receiving $947 per week in unemployment benefits has an opportunity to return to a job paying $1,000 a week. Obvious choice, right?

Maybe not.

The choice isn’t simply between receiving $947 a week versus $1,000 a week, but also working 40 hours a week versus zero hours. On the margin, this person would be receiving $53 more a week, but having to work 40 hours to earn that marginal benefit. On the margin, returning to work would yield this person about $1.33 per hour. Many would find this unappealing.

The federal government’s paying out of these additional benefits will surely provide a much-needed financial lifeline to millions forced out of work. But it’s also important to acknowledge how they will make it far more difficult to get the economy going again. Many businesses will find it difficult to once again staff their operations while the benefits continue. 

The notion of generous unemployment benefits discouraging work is not some right-wing, or free market ideological talking point. Even the New York Times resident left-wing economist Paul Krugman acknowledges that extended unemployment benefits will likewise extend higher levels of unemployment. In his 2010 economics textbook, Krugman stated “Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect.” He explains that granting more generous benefits “reduces a worker’s incentive to quickly find a new job. Generous unemployment benefits in some European countries are widely believed to be one of the main causes of ‘Eurosclerosis,’ the persistent high unemployment that affects a number of European countries.”

Moreover, these benefits will likely prove to be very politically difficult to end. Indeed, before the first checks have even been cut, Nancy Pelosi has been promoting the idea of extending the benefits through September. 

Imagine if unemployment remains high, perhaps in or near double digits, and Congress finds itself debating whether or not to cut millions of out of work American off from these federal benefits just two months before a national election.

Any guesses how that turns out?

The government has shut down the economy, forcing millions out of work. It’s understandable for them to also take measures to cushion the financial blow dealt to those made unemployed because of their decision.

What’s also important is to understand that these actions will most likely prolong any desired “re-start” of the economy, and these supposedly temporary unemployment benefits will prove to be very difficult to eliminate in an election year. 

Panic Buying, Medical Rationing Underscore Importance of Free Markets

Panic Buying, Medical Rationing Underscore Importance of Free Markets

The recent coronavirus panic has provided a stark reminder about the scarcity of economic goods. From people hoarding and stockpiling common household items like toilet paper and hand sanitizer to the downright morbid reports of doctors in Italy and Spain having to pick and choose who should receive medical care, the issue of resource scarcity has been thrust front and center.

To be clear, when economists refer to scarcity, it doesn’t just refer to empty shelves or a general lack of supply of something. Instead, we mean that goods are objects of choice: its use for one purpose or user precludes it from use for another purpose or user.

A bottle of hand sanitizer is scarce because when one person uses it for his hands, it is not available for another person’s use. Ventilators and hospital beds are also scarce; if Jane is using a bed and ventilator, it is not available for John’s use.

This leads us to conclude a key economic truth: all goods must be rationed. How a society overcomes this issue of scarcity and the method of rationing scarce goods determines that society’s well-being and standard of living.

 When the method of rationing facilitates efficient allocation of resources toward society’s most urgent needs, while encouraging productive behavior, the economy will flourish. If an inefficient means of resource allocation is used, poverty and shortages follow. 

Moreover, the issue of scarcity gives rise to the dilemma of multiple people desiring to lay claim to the same resource. Therefore, the method by which scarce goods are allocated will determine how people compete to obtain that good. 

So, what are some methods by which scarce goods are allocated, and what does the current crisis reveal about each one?

First come, first served: Under this method, whoever is first to claim or physically obtain the good gets to keep it. Time becomes a currency of sorts in this method, as those willing to forego other uses of their time in order to be among the first in line will be rewarded. It may also involve a little luck as well, with those who happen to be closest to some valuable good having the greatest ease of getting to it first. 

We’ve witnessed this method emerge with the panic buying of toilet paper and hand sanitizer because prices have not been not allowed to adjust due to anti-price gouging laws. Those willing and able to get to the front of the line clear out the shelves, leaving nothing for everyone else. 

When freely adjusting prices aren’t allowed to work, and instead a method of first come, first served emerges, the cost to consumers is time. Those willing to pay the highest cost in terms of time (i.e. spend hours waiting for a store to open so they are first in line) acquire the most goods.

Unfortunately, this method does not allow prices to reflect relative demand and scarcity, preventing valuable signals to guide producers to direct goods where they are most urgently needed.  And this method does not encourage productive behavior, as those consumers who spend more time waiting in lines rather than working are rewarded.

Critics claim that allowing prices to rise rapidly during emergencies may price some completely out of the market for a much-needed product during a time of distress. But empty shelves created by shortages also force many to go without. And the only way to bring prices back down without causing shortages and heavy time costs on consumers (via long lines) is to allow for prices to signal to producers to direct current supplies to where they are in most short supply, and incentivize them to produce more of the good in question. Freely adjusting prices can rapidly enable supply to surge and meet demand, and bring prices back down.  

An authority distributes goods based on “need”: Under this method an authority figure decides who gets what, by determining who is in most desperate need. Concentrating so much power over scarce goods into the hands of a single person or committee invites corruption. As such, people are incentivized to bribe or threaten the decision-makers to obtain what they desire. Lobbying becomes more rewarding than investments in productivity.

Moreover, attempting to distribute by “need” subjects distribution to the arbitrary definition of “need” by the authority figure. Potential consumers are incentivized to remain “needy” according to the definition of the authorities in order to gain access to goods and services. Think of the poverty trap created by the welfare state.

This also gives rise to the rationing of medical care we’ve seen emerge in countries like Italy and Spain, where the authorities are determining that young people are more worthy of scarce medical care during the coronavirus pandemic than older people who have fewer quality years of life left. 

This method also removes crucial price signals that would both incentivize increased production of those goods and services in most urgent demand, and the distribution of these goods to where they are most urgently needed. The costs can be fatal.

People have little incentive to be productive out of fear of losing access to goods and services because the authority may not deem them “needy” enough. 

Neither of those options seems like a particularly efficient (or fair) means by which to allocate scarce resources. Which brings us to:

Exchange of private property with freely adjusting prices: Private property implies that goods have an owner, and that owner is the one with just and legal authority to determine how that good is used. The owner can consume it, use it for productive purposes, stockpile it or trade it. One acquires rights over (already owned) property thru voluntary exchange, whether those exchanges involve goods for goods, goods for money, or money for labor.

Under such a system, in order to compete for desired goods, one must offer something of value in exchange, unlike the other previously mentioned methods. This incentivizes greater productivity – the key to improving the standard of living for a society.

Furthermore, not only does this system create a greater abundance of goods and services desired by society, but it more efficiently allocates them to their most urgent uses. 

Price signals provide valuable information and incentives to market participants. High prices of relatively scarce goods incentivize consumers to economize on the more expensive goods, while also encouraging producers to create more of that good in pursuit of higher revenue and profits. Shortages vanish.

Low prices encourage consumers to buy more, while telling producers that their productive resources are more urgently needed elsewhere. Surpluses are eliminated. 

The method society chooses for how scarce resources are allocated will generate very different types of behavior, and results.

The coronavirus panic has revealed that when government interferes with market prices and the exchange of private property, other means of distribution will emerge. These other methods, however, are far less efficient and more unfair. 

A system based on private property rights and free exchange based on freely adjusting prices provides the framework for the most efficient and fair allocation of scarce resources, while also encouraging more productive activity. The result is a more prosperous society, one far better equipped to meet society’s most urgent needs, especially so during times of emergency.

 

Bradley Thomas is creator of the website Erasethestate.com and is a libertarian activist who enjoys researching and writing on the freedom philosophy and Austrian economics.

Follow him on twitter: Bradley Thomas @erasestate

 

 

The Unseen Consequences of the Coronavirus Response

The Unseen Consequences of the Coronavirus Response

While sicknesses and death mount from the coronavirus pandemic, the responses by all levels of government have been overwhelming. 

School closings, business closings, cancellations of sporting events and concerts, “stay in place” orders, hysterical panic spread by the corporate press, and massive government “stimulus” and bailout plans have all been justified as a means to save lives and “flatten the curve” of the spread of the virus so the healthcare system isn’t overwhelmed.

These efforts have been made in an attempt to head off what some are predicting would be a historic mass pandemic resulting in hundreds of thousand or possibly a million deaths in the U.S., according to some preliminary, worst-case scenario projections

No doubt such a result would spur sizeable social and economic upheaval. Such a momentous number of deaths and illnesses would cause mass panic and grind the economy to a halt. In strictly economic terms, to the extent that the workforce is reduced (most deaths would be to the elderly population), a supply shock would diminish productivity for a noticeable duration. Supply chains would be disrupted and need to adjust to the new labor market. 

During the outbreak, non-specific capital goods would be converted to the production of medical supplies to address the virus, similar to how factories were converted to producing tanks and guns during WWII. 

There would be at minimum a significant economic downturn during the crisis, and depending on the government’s response, it would take a considerable amount of time for the economy to shift back to normal once the virus subsided. 

The coronavirus’ threat to health and the economy is indeed serious, and the trade-offs of “doing nothing” have been often discussed to justify the unprecedented response.

What seems to be missing from the discussion, however, is the notion of any trade-offs coming from the government’s actual response. The government’s measures are positioned as but temporary inconveniences needed to stave off mass illnesses and save lives. Better to be safe than sorry, goes the justification.

But what if trying to “be safe” comes with dramatic costs as well? Why is nobody talking about those costs?

As Mises Institute Research Fellow Peter G. Klein tweeted:

“I hear ‘lives vs. livelihoods’ as if the cost of shutting down economies to flatten the curve is inconvenience and reduced economic growth. But what about the immediate and long-term public health harms from shutdown?”

To drive the point further home, Mises Institute President Jeff Deist wrote in a Facebook post

“A broken economy, crazed fiscal/monetary responses by Congress and the Fed, not to mention egregious & illegal violations of liberty, are not all justified by this virus. Our actions will kill & impoverish people, perhaps far more people than the virus. The lesson of Bastiat’s seen and unseen remains unlearned.” 

Indeed, it’s easy to see the government’s response and attribute a slowed infection growth rate and lower mortality figures from the virus to those measures.

But what of the negative impacts the government’s response will have? These “unseen” impacts, as Bastiat would frame them because they are much harder to detect, will be numerous and possibly more deadly the coronavirus itself.

Massive job losses may increase suicide, depression, substance abuse

Due to the mass panic being spread by governments and media (not to mention government edicts shuttering the doors of many businesses), many industries are being devastated. Especially harmed is the hospitality industry. Sadly, panic is a result of the government’s response to head off the panic that would result if government failed to act to prevent the spread of the virus.

Some estimates are predicting more than 2 million people will apply for unemployment this week, which would be the highest one-week figure on record. 

The stress and uncertainty of joblessness has numerous negative consequences, some of them deadly. 

A study published by The Lancet found “the relative risk of suicide associated with unemployment was elevated by about 20–30%” in their study period. 

The study further attributed roughly 45,000 suicides per year worldwide to the mental and psychological toll of unemployment.

The hope for many laid-off workers is that their unemployment will be temporary, but there remains great uncertainty just how long this will last. The longer this economic shutdown and its consequences last, the more suicides there will be. 

Moreover, as the substance abuse rehab clinic Recovery Ways notes, “One study from 2017 found that every time unemployment rises by one percentage point in a given county, the rate of opioid deaths increases by 3.6 percent and the rate of emergency room visits increases by seven percent.” 

In sum, research has shown the anxiety of joblessness leads to increased rates of suicide and drug abuse. 

Furthermore, a study published by the National Institute of Health concluded: “Results suggest that unemployment is associated with young adults’ heavy episodic drinking,” This is of particular concern given that the hospitality industry workforce tends to be younger. 

Another NIH study found “Unemployment increases the risk of relapse after alcohol and drug addiction treatment,” and that “Unemployment is a significant risk factor for substance use.”

Shutdown will have much broader economic impact, exacerbate other health problems

The current shutdowns and mass hysteria are having first order effects largely on the travel and hospitality industries. But the negative financial consequences will not be contained.

As economist and financial advisor Doug Casey said in an interview published at LewRockwell.com:

A restaurant closes down, but the owner still has to pay his mortgage. And the staff mostly lives on tips. How are they going to pay the rent—and if they don’t, then how’s the landlord going to pay his mortgage? The consequences of businesses shutting down, and going bust, are just huge.

The economic contagion and domino effect could indeed be very significant. Recall how the bursting of the housing bubble triggered the Great Recession. We may now be facing similar effects, as small businesses struggle to pay their rents and laid-off workers struggle to make rent and mortgage payments. As debt defaults mount, banks lose their cash flow and become extremely cautious about creating new loans. Liquidity freezes and grinds the economy to a halt.  

There is a very real chance that the orchestrated economic shutdown can trigger a much broader economic collapse. Keep in mind, of course, that prior to the virus outbreak the economy was largely propped up by fiat Fed money printing, and that bubble was bound to burst eventually.

The hysterical response to the virus is serving as the pin to pop that bubble, and make things worse.

We’ve already seen how unemployment leads to severe health consequences. Full-blown recession serves to double down on them, and then some.

One study found that the Great Recession was linked to an additional 260,000 cancer deaths in OECD countries alone, with the authors suggesting “increased joblessness during the economic crisis may have limited people’s access to health care, leading to late-stage diagnoses and poor or delayed treatment.”

Moreover, with the stock market taking a major hit, it’s not just Wall Street fat cats taking a haircut. Thanks to decades of absurdly low interest rates driven down by Federal Reserve policy, average workers can no longer set aside their retirement savings into safe, interest-bearing savings accounts. Instead, they have been driven to invest retirement savings into the stock market. The economic shutdown has caused current retirees and those nearing retirement to lose a significant share of their retirement nest egg. Senior citizens facing such high levels of stress will be more likely to suffer ill health effects, like stroke or heart attack. 

Anxiety from mass hysteria weakens immune systems

Politicians and the corporate media are in 24/7 mass hysteria mode. There is no way to avoid constant chatter about the impending doom of coronavirus. 

The most visible signs of this ginned up mass panic can be found in retail stores across the country with empty shelves. Panic-buying of hand sanitizer and toilet paper has been well publicized.

But there is a more serious consequence of spreading mass panic among the populace. In a very bitter case of irony, the anxiety and stress caused by the reaction to fight the spread of the coronavirus can actually weaken your immune system and make you more vulnerable to the spread of viruses. As reported at Healthline.com

But if you repeatedly feel anxious and stressed or it lasts a long time, your body never gets the signal to return to normal functioning. This can weaken your immune system, leaving you more vulnerable to viral infections and frequent illnesses. Also, your regular vaccines may not work as well if you have anxiety.

Panic can also drive up suicides, while panic-stricken grocery shoppers gather in long lines in close proximity to each other holding shopping cart handles that are likely riddled with germs and bacteria

 

Long-term impacts

The federal government’s fiscal response to the coronavirus pandemic and subsequent economic shutdown has been unprecedented. 

The Federal Reserve has slashed interest rates to near zero, while pumping $1.5 trillion of fiat money in an attempt to prop up the economy. A “stimulus” bill to bail out affected industries and send money to households is being negotiated, and seems to grow by the day, with latest reports indicating it could top $2 trillion. With the federal government already $23 trillion in debt and running trillion-dollar deficits, most – if not all – of this stimulus spending will need to be funding by newly-printed fiat money.

By comparison, President Obama’s stimulus package to combat a global financial meltdown was estimated to be less than $900 billion. 

While households will no doubt welcome the financial relief of government checks, this level of new money printing will have dire effects. The new money may help temporarily prop up some industries, but it will ultimately wreak havoc on the economy and hurt low-income households the hardest.

With so much newly-created money sloshing around the economy, price inflation is sure to follow the current shutdown. Price increases will impact low-skilled, low-income workers and those on fixed incomes the hardest, as they will not be able to keep pace with the rising cost of living. More people will fall further behind, exacerbating the mental and physical health consequences mentioned above.

Finally, the mad money printing by the Fed will at best temporarily re-inflate the economic bubble. But it’s during the bubble that the seeds for the next recession are planted, and the current massive money printing will serve to deepen the next recession.

The deeper the next recession, the more deaths from suicide, anxiety and substance abuse there will be.

Conclusion

Bastiat’s warnings about the seen vs. the unseen continue to be ignored. The negative consequences of the government’s hysterical response to the coronavirus stretch far beyond a temporary economic disruption. Higher rates of suicide and substance abuse, anxiety-induced illnesses, and a deeper recession that worsens these public health issues will be among the steep price we pay. 

It may be time for more to question if the cure will be worse than the disease. 

 

Bradley Thomas is creator of the website Erasethestate.com and is a libertarian activist who enjoys researching and writing on the freedom philosophy and Austrian economics.

Follow him on twitter: Bradley Thomas @erasestate

 

Direct Payments From Government is Not the Way to Stimulate the Economy

Direct Payments From Government is Not the Way to Stimulate the Economy

The latest in the Federal government’s response to the coronavirus pandemic is President Trump’s announcement of a “stimulus package” estimated between $850 billion to $1 trillion. The plan reportedly includes $50 to $100 billion bailouts to the airline industry, $200 to $300 billion in small business assistance, and at least half a trillion in “direct payments or tax cuts.” 

On that last option, it is further reported that potentially $250 billion would go toward direct payments to citizens, a form of a “rebate check” of sorts. As cnbc.com reported, “Treasury Secretary Steven Mnuchin said earlier Tuesday that the administration wants to get emergency funds in Americans’ pockets ‘immediately.’” Mnuchin added “Americans need cash now. I mean now in the next two weeks.”

There were few details yet available for Trump’s proposal, and it would still need to be negotiated in Congress.  One idea picking up steam, supported by Sen. Mitt Romney and others, is to send every American adult a check for $1,000.

Naturally, that would provide welcome and needed financial relief during very stressful times, and returning stolen money to the people it was stolen from is a good thing. 

The notion, however, that the government sending money to people will somehow “stimulate” the economy in this, or any other crisis, is wrongheaded.

We do have some fairly recent precedent for this, specifically the 2008 George W. Bush tax rebates of up to $300 in 2008 at the onset of the Great Recession. As Sheldon Richman wrote at the time, however, “Those checks transferred money from the capital markets to consumers, distorting economic decisions and doing nothing to improve the incentives for wealth creation.”

Applying basic economics to today, mailing government checks will be equally impotent in terms of economic stimulus, if not more so. 

For starters, the shock to the economic system is coming from the supply side. Putting government checks into the hands of consumers will do nothing to address the significant hit to production caused by closed factories and companies suffering from high worker absences due to workers staying home.

To the extent that people will spend part of their government check, there will be more money chasing fewer goods and services, the result will be price inflation. 

And that artificial price inflation will interfere with the market’s price system that sends important signals to both producers and input suppliers. Increasingly scarce resources should be allowed to flow to those items that are genuinely in highest demand, not propped up by government checks.

Moreover, as Richman alluded to, is the fact that these government checks aren’t manna from heaven. The money must come from somewhere, be it taxes, borrowing or new money printing.

With the federal government running trillion dollar deficits, the rebate checks will need to come from borrowed funds, and the Federal Reserve stands at the ready to monetize this new debt. But the creation of more fiat dollars does not magically put self-quarantining workers back to work. 

Instead, it just further erodes the purchasing power of the very same dollars the government will be sending you in the mail. And with more money being diverted into consumers’ hands, there is less money in the capital markets for struggling businesses to borrow to help make payroll and otherwise weather the current storm. As Richman noted, “If the government increases some people’s ability to spend by decreasing other people’s ability to spend, where’s the stimulus?”

Naturally, rising prices will impact low-income, low-skilled people the hardest, because they are least equipped to see their wages rise along with the cost of living. 

The government’s policy to mail out checks will not only not stimulate the economy, but in the end may make workers worse off.


Bradley Thomas is creator of the website Erasethestate.com and is a libertarian activist who enjoys researching and writing on the freedom philosophy and Austrian economics.

Follow him on twitter: Bradley Thomas @erasestate

Why ‘Price Gouging’ Actually Helps During a Crisis

Why ‘Price Gouging’ Actually Helps During a Crisis

As the coronavirus panic heightens, the price of items like hand sanitizer and medical face masks – to the extent they are still available – are skyrocketing.

CBS News reported last week that “Online, sales of virus protection products have skyrocketed, up 817% in the last two months.

Two large bottles of Purell hand sanitizer were on sale for $299 on Amazon. That size normally sells for about $9 a bottle. Another listing, for four boxes of masks, is usually about $20 — it was being sold for more than $1,000.”

In response, some state governments have already vowed to punish “price gouging.”

“California’s attorney general told businesses that if they violated price gouging laws, ‘You’d better be prepared to pay the price for your lawbreaking.’ New York City is issuing $500 fines to any stores found price gouging, starting this week,” CBS reported.

Indeed, even the Department of Justice issued a warning that they “stand(s) ready to make sure that bad actors do not take advantage of emergency response efforts, healthcare providers, or the American people during this crucial time.”

The trade group The Consumer Brands Association praised the DOJ’s response, saying “We appreciate the Department of Justice’s swift response to Consumer Brands’ request to combat price gouging and ensure American consumers have access to critical products at affordable prices.”

But does preventing ‘price gouging’ during times of distress actually help ensure that critical products will remain available at affordable prices?

Basic economics tells us no.

Price controls in times of emergency have negative consequences, just as they do during normal times. When prices aren’t allowed to move in response to changing economic conditions, those who most urgently need these critical items will likely find the shelves empty.

In the current situation, fear of the spread of the coronavirus has caused demand for virus protection items to skyrocket.  

But if the sellers of these items are not allowed to raise their prices out of fear of government punishment, the result will be that the first wave of customers will clear out all the available supplies.

During times of distress like this, people’s demand curves shift. They are now willing to buy more of a good (like hand sanitizer) at any given price. Without a higher price, the first buyers will stock up, leaving no supplies for others in need. There is no incentive to economize; in fact there is incentive for those first in line to buy up more than they actually need to potentially take advantage of shortages and make a profit by selling to those willing to pay a higher price in the black market. 

If prices are allowed to rise to reflect the greater urgency of demand, however, consumers will limit their purchases to just what they truly need. Those first in line will be far less likely to clean out the shelves, but rather buy the minimum amount needed to ride out the virus scare.

As a result, more people will be able to acquire at least some of the highly-valued products, and supplies are more likely to be available to those who most urgently need the product. 

As Robert Wenzel at EconomicPolicyJournal.com wrote, “If someone wants to buy a mask to travel by subway to go to a movie and the mask is $200, the consumer might think twice and not buy the mask, thus leaving it for someone else. At the same time, a heart surgeon may want to buy a mask to travel the same subway to perform heart surgeries. He might be very willing to pay $200 for a mask.”

Moreover, freely adjusting prices send important signals to producers about the intensity of demand, providing incentive to suppliers to devote more resources to the production and distribution of the critical items in such high demand.

Manufacturers of masks and hand sanitizer will be willing to outbid manufactures of other products for the inputs they need to produce the finished product. They may also be willing to invest in more speedy delivery mechanisms to more quickly acquire their needed inputs so that they can increase supplies in a shorter time frame. 

Allowing for prices to freely adjust to market conditions sends vital signals both to consumers to economize and producers to marshal resources to increase supply. Shortages will be avoided and the most urgent needs will be met. 

Emotions are running high during the current panic. Part of the emotional response is directed at sellers of critical items like hand sanitizer and medical masks, who are seen as exploiting the desperation of the situation. But government price controls will create shortages, causing those who most urgently need such products, like medical personnel, to do without. 

As usual, when the government interferes in the market, they can only make a bad situation worse. 

Bradley Thomas is creator of the website Erasethestate.com and is a libertarian activist who enjoys researching and writing on the freedom philosophy and Austrian economics.

Follow him on twitter: Bradley Thomas @erasestate

The “F” Word

The “F” Word

There’s a four letter word beginning with ‘f’ that’s on a lot of people’s lips these days.

I’m talking about “free.”

Free just might be the most powerful word in the English language. It drastically alters people’s behaviors and can short-circuit mental reasoning like few other words can.

I can vividly remember many years ago when I worked events for a major league baseball franchise. The team would occasionally have “giveaway” nights in which the first 1,000 or 5,000 fans would receive a free souvenir gift.

Mind you, these gifts were typically low-quality, cheap trinkets that most folks would otherwise either never buy or not pay more than a couple bucks for. Valuable memorabilia autographed by star players these most definitely were not.

But because they were advertised as “free,” people lined up an hour or more before games to ensure their spot in line to get one. And the panicked and outraged looks on people’s faces after we ran out of the souvenirs struck me as completely irrational. Why do people get so worked up over something so cheap, just because it’s “free”?

It’s this experience that sticks with me as I see the groundswell of support for politicians like Bernie Sanders promising voters “free” stuff like healthcare, college and daycare. If people got that excited over a cheap souvenir given away for free at a baseball game, just imagine how downright hysterical people will get over the thought of getting such vital and expensive services like healthcare and college for “free.”

 There’s just something about the idea of getting something for free that makes people lose their minds.

And don’t dare try to convince the average Bernie supporter that nothing in life is free. Just like the lottery player wouldn’t care how his winnings would be paid for, Bernie bros can’t be bothered with the notion that all this “free” stuff actually comes with a cost.

And when pressed for a price tag, Bernie himself can’t seem to be bothered to come up with an answer.

Witness his February 60 Minutes appearance, when Sanders unapologetically answered, “No, I don’t” when directly asked if he had a price tag for all his programs. 

Nothing in life is free

As the old saying goes, “there’s no such thing as a free lunch.”

When politicians promise free stuff, what they really mean is that it would be free at the point of exchange for the user.

But University lecture halls don’t organically sprout from the ground, they need to be constructed. Hospitals and day cares need to be built. Doctors, nurses, daycare providers and professors need to get paid. 

When the government provides goods and services for “free,” it really means they are shifting their costs onto others, by force.

A Yahoo News headline was quickly seized on by social media and made into a meme exposing the reality of supposed “free” government programs.

It’s always amusing when the mask slips.

Third party payments make goods and services more costly

When a third party is paying the bill for something, that’s when costs explode. Because it’s free at the point of service, demand will rise. In a free market, when demand rises, prices will typically rise and both tamp down demand and encourage more supply. Market forces would push the price for this product toward equilibrium.

When the government is paying, however, the market forces are absent. Prices won’t rise, because they remain free at the point of service. Demand will continue to climb. 

But because payment is made by the government, and reimbursements paid to providers do not increase along with demand, there is no incentive in place to encourage supply to increase. Moreover, because the consumer is not the one actually paying, there’s little incentive for providers to compete for customers. Producers will have virtually no incentive to economize production in order to offer their product at a lower price, or improve quality to capture a larger share of the market. 

Non-price factors become more influential in the rationing of the goods and services. Costs in the form of shortages, long wait times and lower quality are forced upon consumers in lieu of prices. 

Meanwhile, demand for the “free” goods and services remains unchecked, so the amount of goods and services being consumed rises beyond government bureaucrats’ expectations. This process then mainly serves as an excuse for government to dig deeper into taxpayer wallets forcing them to subsidize more and more people desiring to acquire goods at someone else’s expense.

Why politicians love the F word

Politicians exploit the power of the F word to gain votes and power. Their political calculus is this: “If I can convince enough voters that they will get free stuff paid for by a small group of ‘rich’ others, I’ll secure enough votes to win the election.”

And because their time horizon of concern is the next election, any long-term consequences don’t concern them. When the bill comes due and the system begins to collapse, they’ll be out of office and the current officeholders will get the blame while they enjoy a cushy retirement or lobbying career.

The siren song of “free” is incredibly alluring, especially to the young. Voting is such a small price to pay for the potential of free college or healthcare. 

But “free” comes with a steep price. Society must choose: free stuff, or free people.

Bradley Thomas is creator of the website Erasethestate.com and is a libertarian activist who enjoys researching and writing on the freedom philosophy and Austrian economics.

Follow him on twitter: Bradley Thomas @erasestate

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