That is the question on everyone’s mind as we come to grips with the economic carnage caused by global economic shutdowns, supply chain disruptions, and ongoing quarantines of million of people. Do we face another Great Depression, or simply a deep recession more like 2008? And equally important, are soft Americans prepared for either? Have we started to process all of this psychologically? Have we really come to terms with the enormity of the situation, with the unprecedented risk posed by business shutdowns? Are Americans so accustomed to a certain material standard of living that they do not understand how fragile it is?
Here is what we know.
Since February, 30 to 40 million Americans have been thrown out of work. Four or five million file new unemployment claims each week. The real unemployment rate is probably over 20 percent, while the labor force participation rate drops like a stone. In states like Hawaii unemployment may approach 35 percent. Deutsche Bank economists predict an absolutely staggering 40 percent reduction in U.S. GDP for the second quarter of 2020. Meanwhile, millions of American households and businesses simply stopped paying rent or mortgages on March 1, and bankruptcies spread across major American retailers like wildfire. Countless small local businesses, many left out of the running for the new SBA (Small Business Administration) loans recently created by Congress, simply will not reopen regardless of what happens over the next few months.
So although we have a sense of how deep the economic damage runs, we can only guess how long it may last.
Will the virus remain a threat, real or perceived, for months or years? And if so, how long will state governments maintain at least partial business lockdowns? Will the U.S. economy enjoy a vaunted V-shaped bounce-back recovery, as promised by Trump administration cheerleader Larry Kudlow? Will it look more like a U, with months or years of stagnation at the bottom? Or worse still, like an L with no rebound in sight?
Looking back at the 2008 crisis provides a sober argument against a quick recovery later this year.
Consider this analogy: Most roller coasters feature what is known as a “lift hill,” a chain-driven steep ascent at the beginning which takes nervous riders to the top of of a sharp drop-off. Going over this first hill not only creates the most thrilling moments, but also generates energy to propel the coaster cars farther along the path of the ride. How much farther and faster the ride goes depends on the height of the hill and the mass of the coaster train. Bigger and higher make for a more precipitous fall.
Absent some kind of additional mechanical intervention, the coaster never again reaches the height of the initial hill due to simple friction. Congress and the Fed are busy attempting to overcome this friction using government stimulus and central bank “liquidity.” But per our analogy, the coaster’s potential energy is highest during the pregnant pause at the peak of the lift hill; its kinetic energy is highest at the bottom of the first drop. No subsequent hill, twist, or turn quite matches the feeling of that first free fall.
Recall, from those terrible days of 2008, how a crash gathers speed. At first a few cars on the coaster crest the hill, well before the rest of the train plummets. In mid-September of that year, Lehman Brothers was the first car in the coaster to go over the hill into the abyss. It took a few weeks, until September 29, for investors to fully grasp what was happening and send the Dow plummeting in the largest single-day loss in history.
But the Dow did not reach its ultimate low until March 2009. Nine million lost jobs were not recovered until well into the next decade. And US housing prices didn’t bottom out until 2012.
Crashes are fast, like that first hill on a coaster. Recoveries are not, for the simple reason that production is more difficult than destruction.
Although the Great Recession of 2008 “lasted” eighteen months in official terms, its effects lasted far longer and are still felt today. Its scars remain particularly visible on two bookend generations, Millennials and Baby Boomers. In stark terms, many of the former failed to launch and many of the latter found comfortable retirement out of their grasp. Millions of Millennials sought more education and degrees (with resulting debt) to ride out the soft job market; millions of older workers simply gave up and limped along until they were eligible for Social Security. Now both face another crisis just a decade later.
How bad will the Great Crash of 2020 be? Even more unsettling is the question of whether it represents a self-inflicted wound, caused by state-mandated business shutdowns which increasingly appear wildly disproportionate to the actual threat posed by the COVID virus. Economist Daniel Lacalle and I will attempt to answer both during a live webinar later this week, particularly in the context of what governments and central banks have done in recent months.
The first step in addressing a crisis is understanding how severe it really is.
Daniel McCarthy, editor of Modern Age and editor at large for The American Conservative, recently published an essay on the Spectator USA site titled “Why Libertarians are Wrong.” It merits a response because Mr. McCarthy is friendly and sympathetic toward libertarianism, and despite the infirmities of his article ought to be seen as a fellow traveler.
The title misleads us a bit from the beginning, because McCarthy is sound on the single most important libertarian political issue: war and peace. He objected to George W. Bush’s foray into Iraq, he attacks the permanent-war complex and its funding, and he consistently advocates a reasonably non-interventionist US foreign policy far closer to Ron Paul than John Bolton. He also has read Mises and Hayek, and unlike many intellectual conservatives (a dwindling group) McCarthy is not mired in Burke or Buckley or Reagan. He even blogged for the 2008 Paul presidential campaign and has spoken at the Mises Institute on foreign policy. So unlike a Bill Kristol or Sean Hannity, his conservative critique comes without ignorance or malice.
But it doesn’t come without errors, a few of them gross. First and foremost, McCarthy reads political libertarianism and support for free markets far too broadly. He wants answers to the great civilization and cultural questions of our day, from China’s influence to the growth of Islam in Europe to wealth inequality and the rise of a bureaucratic overclass. Consider this sweeping criticism:
If this America without a middle class is more politically stable than I think it will be, I suspect it will nonetheless face insuperable external challenges. China won’t have to fight a war with us; it will just outgrow us. When the differential of power and economic productivity is great enough, China will determine the strategic and economic environment in which we live. The cultural and religious environment will also be strongly influenced, if not determined, by the growth of Islam, particularly if Islam succeeds in dominating sub-Saharan Africa. Europe will have to deal with that to a greater extent than we will, of course.
I’m not sure that Hayek or Mises are the relevant texts for understanding any of this. Does a libertarian even care whether Islam displaces Christianity or China displaces America, as long as there are no tariffs on steel? You might not have freedom of religion or freedom of speech in the post-Western future, and those cheap consumer goods won’t be so cheap any more, but a libertarian will rest content knowing he fought to import as much foreign-subsidized steel as possible. This is why I consider libertarianism to be every bit as much a suicidal ideology as left-liberalism. In some ways it is even more so, as libertarians are more oblivious than left-liberals to the consequences for themselves of hewing to their ideology.
Here is a classic mischaracterization of political liberty, captured so well by Frédéric Bastiat in his famous quote: “every time we object to a thing being done by government, the socialists conclude that we object to its being done at all.” Of course libertarianism per se can’t answer the civilizational questions of our day; of course economics per se can’t make us moral or ethical, much less strategic. Libertarianism is a narrow legal doctrine dealing with the justified use of force in society, a doctrine that makes no exceptions for state actors. Economics is a social science which studies how human actors choose among scarce means to achieve ends.
What liberty and markets can do is get out of the way of civil society and markets. A more libertarian society approaches problems privately, outside the narrow purview of the state, with private property and incentives creating skin in the game. Surely Mr. McCarthy, no grandiose neoconservative, understands the limits of state power to solve existential problems. Surely he understands the inherent problems with vote-seeking politicians, public finance, time preference, and democratic voting. Does he really think a more political society, in an increasingly secular and progressive America, is likely to yield conservative answers to the problems he worries about? Does he not understand that civic, social, religious, and cultural organizations ought to have more power than the state? Does he really want social, culture, and moral perspectives — which drive attitudes and actions on issues like immigration, inequality, race, and religion — driven by centralized politics in DC?
If so he definitely seeks to redefine “conservatism.” And perhaps he must, succumbing as he does to the progressive hubris that our time, place, and technology somehow create a situation unique in history. Mises and Hayek are insufficient for the vaunted 21st century! We need something new new new! McCarthy, like so many pundits today, imagines a third way between politics (force) and markets (cooperation). He acknowledges the libertarian argument that economies are too complex to be directed, that government interventions create unintended consequences and inefficiencies. But he does not acknowledge how decades of government intervention not only failed to prevent our current predicament, but helped create it. The problems he deems libertarianism unsuitable to fix were largely created by government in the first place.
China and the (supposed) loss of manufacturing jobs? Even a slightly more libertarian US economy, with a somewhat lighter regulatory, tax, and tariff monkey on its back, would walk away not only from China but the rest of the world too. Foreign policy and defense spending? Immediate troop withdrawals and radical reductions in military projection, along with real cuts to the military state. Immigration? Private sponsorship and vetting of immigrants, with legal and financial liability residing with sponsors for a term. Rent seeking and cronyism in industries like Big Pharma? Radically slash regulatory and approval processes, eliminate patents, and let generics flourish. Entitlements? Immediate means testing, coupled with a thirty-year phaseout of benefits and immunity from federal payroll taxes for younger workers. As for Islam, why not worry about what’s killing Christianity instead? Is the rise of modern western welfare states and the abject decline of Christianity just a strange coincidence to McCarthy, or does he understand progressive state religion? A robust Christianity, one that serves as a counterbalance to Islam, can’t exist when it’s in direct competition with the state that has far greater control over education, culture, and resources than any Christian group could ever dream of attaining.
Now we can argue about the political chances of these ideas, but McCarthy seems to think libertarian proposals (or more libertarian proposals than we’ve got) simply don’t exist. None of this requires conservative government, or much government at all. None of this requires a New Deal, or some Teddy Roosevelt muscular vision for America, or any kind of robust “policies” favoring the middle class. What it does requires radically shrinking the size and scope of the state in society. But as always this makes conservatives suspicious, because they cannot overcome their mythical homo economicus caricature of libertarianism.
Consider this hypothetical: imagine Mr. McCarthy could increase his income tenfold immediately by selling crack cocaine instead of editing conservative journals, without risk of criminal prosecution. Would he do so? Of course not. But why not? Is he a morally superior being, capable of rising above such an enticement—or is the notion of libertarianism as low-tax liberalism for grasping, deracinated economic actors actually silly? It’s even sillier applied across an entire economy of people.
Of course McCarthy also questions whether libertarianism can ever succeed as a practical matter, insisting that secession and decentralization are mostly pipe dreams. Fair enough; they may well be pipe dreams in the current environment. But it’s one thing to say libertarians likely won’t prevail, it’s another to insist they’re wrong. Incoherent modern conservativism offers no real alternative to the grim, incremental march of progressive political centralization over the past hundred years; only the exceedingly distant hope that someday they’ll control everything and impose their conservative views on blue state America.
But why not focus on reducing political power altogether, especially centralized political power? Social conservatives, even the most well-intentioned and thoughtful, have no answer to the aforementioned collapse of Christianity as an animating force in America. The country is not going to vote its way back into any kind of cultural condition favored by Mr. McCarthy or the Rod Drehers of the world (Mr. Dreher also writes for The American Conservative). Progressivism dominates every sphere of public life in America, and increasingly intrudes into private life as well. So however far-fetched McCarthy might find libertarianism as a political project, the prospects for a President Rand Paul exceed those of a Mike Huckabee or a red state evangelical governor. McCarthy might not see decentralization of state power as a viable strategy, but at this point it’s the only strategy his conservative readers have left, short of expatriation.
Only libertarians offer a critique of centralized power in the current environment, and only libertarians offer “live and let live” as a solution to the cultural rancor and political rancor all around us. Only libertarians propose real money, reality-based economics, and abolition rather than reform of doomed government programs. Only libertarians offer any just or humane approach to the question of what politically-vanquished people might do via decentralization and subsidiarity. Realistic conservatives should acknowledge the role the state has served in destroying the culture they claim to want to conserve.
Colonel Lawrence Wilkerson, speaking at a Ron Paul Institute conference this past weekend, predicted US troops would remain in Afghanistan another 50 years — just as they have in Germany and Korea. He also termed the ongoing US-backed campaign in Yemen the “most brutal war on earth,” a war western media overwhelming ignore.
Colonel Douglas Macgregor at the same conference called Washington DC “the place where good ideas go to die.” His years at the Pentagon, coupled with his experience leading US forces into Iraq during the first Gulf War, caused him to question the DC War Party in the most profound ways. Visiting the parents of an America soldier incinerated in a tank during that foray into Iraq, a foray with few US casualties otherwise, caused him to question not only his own missions but also the larger mission of US armed forces.
Both of these men now pose the same question: what is the goal? Why do seemingly endless military conflicts persist, despite lacking any constituency for their prosecution beyond the DC beltway? And why does US military strategy appear incoherent and counterproductive, when viewed through the lens of peace? Why can’t we do anything about this, no matter whom we elect and no matter how much war fatigue resides in the American public?
The answer is not found in a facile denunciation of the military industrial complex or war profiteers, though both are very serious problems. The answer lies in understanding how the DC War Party operates. Its goals are not ours. It is not democratic; the government is not “us.” It is not political; its architects are permanent fixtures who do not come and go with presidential administrations. It is not accountable; budgeting is nonexistent and gross failures only beget greater funding. It is above all not “economic” — it operates in an artificial “market,” one created and perpetuated by wars and interventions ordinary people don’t want. War socialism, or what former Congressman Barney Frank brilliantly termed “military Keynesianism,” has taken on a life of its own.
Ludwig von Mises saw peace as the key to any liberal economic program, and argued strenuously against the fallacy of war prosperity. Even early in his career, before his horrific experiences as an officer in the Austro-Hungarian Army during World War I, he recognized the critical distinction between economy and war: the former characterized by exchange and cooperation, the latter marked by the worst form of state intervention:
Only one thing can conquer war — that liberal attitude which can see nothing in war but destruction and annihilation, and which can never wish to bring about a war, because it regards war as injurious even to the victors.
For Mises, war was worse than zero-sum. Even the prevailing party suffers, just as the shopkeeper suffers in Bastiat’s “Parable of the Broken Window.” The glazier’s profit does not benefit society, just as the War Party’s success in breaking other countries does not. But the loss is not only economic, it is also cultural and moral. War, the ultimate rejection of reason as a means of navigating human society, reduces our capacity for compassion and makes us complacent about atrocities. Worst of all, it emboldens and strengthens the domestic state — encouraging us to accept absurdities like TSA theater and heavily militarized SWAT teams operating in peaceful small towns.
While US troops remain mired throughout the Middle East, a subsurface political war heats up in the US. This cold civil war creates the kind of hyper-politicized society progressives once only dreamed of. Social media outlets encourage even the most ill-informed and ill-intentioned voices to spread hatred against those with differing views. Goodwill doesn’t translate, so fake bravado hidden behind anonymity or distance are the order of the day. Epithets like “racist,” fascist,” “Nazi” and worse become cheap currency in the new vocabulary of meaningless words. Dissenting voices lose jobs, reputations, and access to popular platforms. Mobs form to attack political opponents in restaurants and shops, shout down campus events, and threaten online disclosure of their perceived enemies’ personal information.
Meanwhile overt socialists like Elizabeth Warren, Bernie Sanders, Keith Ellison, and Alexandria Ocasio-Cortez lead the Democratic Party to demand government health schemes, guaranteed incomes, and “people’s” ownership of corporations. The statist house organ known as the Washington Post calls for the word “socialism” to be “reclaimed” and viewed in positive terms. Ostensible conservatives like William Kristol, Max Boot, and Lindsey Graham follow suit and utterly divorce themselves from any notion of judicious government. They call for the destruction of Iran, escalation of tensions with nuclear-armed Russia, and belligerence toward China and North Korea. Donald Trump, despite some initial antiwar instincts, hunkers down with twitter while surrounding himself with rabidly interventionist advisers like John Bolton.
What can this environment yield other than a rapidly coarsening society and the increasing potential for outright war between nuclear nations?
Just as civilization cannot be divorced from civility in our personal comportment, economics cannot be divorced from war. The most important and immediate action we can take is to expose the gross economic fallacies of our day. The hawkishness of neoconservatives and the “democratic socialism” of progressives both lead in the same direction, toward economic destruction and war. If you think American society is polarized and prone to lashing out abroad now, what happens with a shrinking economy and 40% unemployment?
President Donald Trump has announced that he plans new missile strikes against the Syrian regime in response to an alleged chemical attack on Syrian civilians in a rebel-held suburb of Damascus.
The US has offered no evidence of the attack, since, as the Financial Timeshas admitted, confirmation of any such attack could take weeks. Moreover, confirming the attack took place at all is not the same thing as confirming that the Syrian regime was responsible for it.
The Trump administration, apparently, has little interest in such technicalities, and advocates for immediate military intervention point out that evidence could be lost in the meantime.
So the absence of evidence is evidence.
But, as Tucker Carlson noted in an important segment at Fox News, even if it can be proven that the Syrian regime is responsible for the attack, it’s unclear how a new attack on Syria will “make the US safer.”
But even if none of this were true, the burden is still on the US government to affirmatively demonstrate that Assad’s Syria is a threat to the American voters and taxpayers.
This will not happen, however, because that’s not how foreign policy is made in the US. There will be no meaningful debate in Congress, and nothing more than accusations and innuendo will be issued from the administration and other organs of the executive branch. “Trust us, we wouldn’t lie” will be the central claim of the American war promoters. Americans will, yet again, be told to sacrifice both treasure and freedoms to satisfy the latest schemes of the American military establishment.
Given that only a portion of the population will buy any claims that Americans are in danger, we’ll hear vague platitudes about humanitarian missions, and how the Syrian regime must be stopped for the sake of decency. We heard the same thing in both Iraq and Libya before regime change was effected there in the name of humanitarianism. In both cases, however, the region was only made less stable, and more prone to radical Islamism. The result has been anything but humanitarian or decent. Nor can advocates for war supply any answer to the question of what will replace Assad’s regime. The most likely candidates are radical Islamists. Moreover, so long as the US continues to ignore the humanitarian disaster in Yemen being perpetrated by American ally Saudi Arabia, any claims of “humanitarian” intent are dubious at best.
The real motivation behind the latest drive for war might be found by employing a strategy recently suggested by Lew Rockwell, who notes:
When you hear the words “national security” or “national interest” used by people in Washington, I think it’s important to substitute “imperial” for “national.” So is it in the national interest of the United States to bomb Syria? No. Is it in the imperial interest of the American Empire to do so? Yes.
In other words, the US state and many of its allies stand to benefit significantly from war with Syria. As Randolf Bourne pointed out a century ago, “war is the health of the state,” and yet another war will help the American regime justify larger budgets, larger deficits, more taxes, and more state power in general.
For this reason, there has always been a close connection between the ideology of laissez-faire liberalism, and the ideology of peace. In the 19th century, it was free-market liberals like Richard Cobden and his friend Frédéric Bastiat who regarded economic intervention, slavery, and war as all part of one authoritarian package. This mantle was later picked up by the great liberal economist Ludwig von Mises, and then by his student Murray Rothbard.
Even in the cases where defensive war might have been justified, the costs of war, the liberals understood, have been far more grave than our rulers would have us believe. War is always a disaster for life, for liberty, and for the quality of life for those who survive. The only exception, it seems, are those organs of the state that benefit so handsomely from armed conflict.
But, on the matter of war, the position of the liberals — those we now know as “libertarians” — have long been firmly on the side of peace whenever possible:
But wars are not made by common folk, scratching for livings in the heat of the day; they are made by demagogues infesting palaces. It is not necessary for these demagogues to complete the sale of a war before they send the goods home, as a storekeeper must complete the sale of, say, a suit of clothes. They send the goods home first, then convince the customer that he wants them. … But the main reason why it is easy to sell war to peaceful people is that the demagogues who act as salesmen quickly acquire a monopoly of both public information and public instruction. … The dead are still dead, the fellows who lost legs still lack them, war widows go on suffering the orneriness of their second husbands, and taxpayers continue to pay, pay, pay. In the schools children are taught that the war was fought for freedom, the home and God. — H.L. Mencken
Modern war is merciless, it does not spare pregnant women or infants; it is indiscriminate killing and destroying. It does not respect the rights of neutrals. Millions are killed, enslaved, or expelled from the dwelling places in which their ancestors lived for centuries. Nobody can foretell what will happen in the next chapter of this endless struggle. This has little to do with the atomic bomb. The root of the evil is not the construction of new, more dreadful weapons. It is the spirit of conquest. It is probable that scientists will discover some methods of defense against the atomic bomb. But this will not alter things, it will merely prolong for a short time the process of the complete destruction of civilization. — Ludwig von Mises
Only one thing can conquer war — the liberal attitude of mind which can see nothing in war but destruction and annihilation, and which can never wish to bring about a war, because it regards war as injurious even to the victors. Where Liberalism prevails, there will never be war. But where there are other opinions concerning the profitability and injuriousness of war, no rules or regulations, however cunningly devised, can make war impossible. — Ludwig von Mises
Modern war is not a war of royal armies. It is a war of the peoples, a total war. It is a war of states which do not leave to their subjects any private sphere; they consider the whole population a part of the armed forces. Whoever does not fight must work for the support and equipment of the army. Army and people are one and the same. The citizens passionately participate in the war. For it is their state, their God, who fights. — Ludwig von Mises
The middle and industrious classes of England can have no interest apart from the preservation of peace. The honours, the fame, the emoluments of war belong not to them; the battle-plain is the harvest-field of the aristocracy, watered by the blood of the people. — Richard Cobden
Public opinion must undergo a change; our ministers must no longer be held responsible for the everyday political quarrels all over Europe; nor, when an opposition journalist wishes to assail a foreign secretary, must he be suffered to taunt him with the neglect of the honor of Great Britain, if he should prudently abstain from involving her in the dissensions that afflict distant communities. — Richard Cobden
England, by calmly directing her undivided energies to the purifying of her own internal institutions, to the emancipation of her commerce … would, by thus serving as it were for the beacon of other nations, aid more effectually the cause of political progression all over the continent than she could possibly do by plunging herself into the strife of European wars. — Richard Cobden
The libertarian’s basic attitude toward war must then be: it is legitimate to use violence against criminals in defense of one’s rights of person and property; it is completely impermissible to violate the rights of other innocent people. War, then, is only proper when the exercise of violence is rigorously limited to the individual criminals. We may judge for ourselves how many wars or conflicts in history have met this criterion. … If classical international law limited and checked warfare, and kept it from spreading, modern international law, in an attempt to stamp out “aggression” and to abolish war, only insures, as the great historian Charles Beard put it, a futile policy of “perpetual war for perpetual peace.” — Murray Rothbard
The second Wilsonian excuse for perpetual war … is even more utopian: the idea that it is the moral obligation of America and of all other nations to impose “democracy” and “human rights” throughout the globe. In short, in a world where “democracy” is generally meaningless, and “human rights” of any genuine sort virtually nonexistent, that we are obligated to take up the sword and wage a perpetual war to force utopia on the entire world by guns, tanks, and bombs. — Murray Rothbard
Capitalism is essentially a scheme for peaceful nations. What the incompatibility of war and capitalism really means is that war and high civilization are incompatible. — Ludwig von Mises
Peace is popular.
That was Ron Paul’s message to our audience in Texas earlier this spring, and it has been his consistent message since first running for Congress in the 1970s. So why do seemingly endless wars remain such a stubborn feature of the American presidency, with the shameful complicity of Congress?
Americans who supported Trump did so overwhelmingly because he promised a populist “America First” approach to both domestic and foreign policy. Every poll shows that the domestic economy, culture wars, and immigration were the animating issues of the election — not our ongoing military misadventures in the Middle East. Nobody voted for an escalation of US involvement in Syria, nobody voted to ramp up the never-ending war in Afghanistan by dispatching the Mother of All Bombs, and nobody voted to resurrect an absurd decades-old conflict with North Korea.
Yet President Trump has done all of these things, largely abandoning the noninterventionist promises of Candidate Trump. Perversely, ordering a missile attack on a Syrian air base was the first and only act that earned him praise from his enemies at organs like the New York Times and Washington Post. “He’s finally acting presidential” they gushed.
To understand Trump’s departures from his campaign rhetoric is to understand the very nature of politics and the bureaucratic state. Nobody goes to Washington to “run” the government. Washington runs them.
Trump, ostensibly the biggest outsider to win the presidency in modern American history, cannot overcome the entrenched foreign policy establishment any more than he can overcome gravity. Ninety-five percent of employees at the State Department, Pentagon, CIA, NSA, and the rest of the alphabet soup agencies do not come and go with elections. They, along with the vast apparatus of defense contractors, are not going anywhere.
Permanent war and interventionism requires permanent funding. And like all tax-funded enterprises, war is inherently anti-capitalist. It diverts resources, swells state bureaucracies, and hides the horrific human and economic costs in a cloak of patriotism and platitudes about America’s role in the world. When we hear Vice President Pence talk about “rebuilding the arsenal of democracy,” he really means it.
Ludwig von Mises saw German war socialism up close as a lieutenant in the Austro-Hungarian army during the Great War. Under Wehrwirtschaftslehre, the German doctrine of war economics, the normal calculations of capitalist businessmen go out the window. Costs, quality, demand, and profit become wholly secondary to the overriding goal of preparing the nation for war. Thus war drives the impulse toward autarky (something we’ve seen in Trump) and economic dictatorship: the will and whims of ordinary citizens must yield to war production.
Thus in his darkest moments during the war, Mises resolved to write the definitive refutation of state controlled economies. The result was his 1922 classic Socialism: An Economic and Sociological Analysis, which remains perhaps the most important critique of collectivism ever written. It’s a book everyone should read and share, to understand the fundamental link between war and collectivism.
Dr. Paul’s message of peace and nonintervention is so critical today. It’s a message that is decidedly popular (outside of DC), nonpartisan, and tailor-made for a new century. It resonates with young and old alike, with rich and poor, and across racial lines. It’s popular with the alt-Right and the progressive Left, budget hawks and Greens, Burkean conservatives and tie-dyed peaceniks. We just need to get the message to Mr. Trump.
“From the Publisher” column from the current issue of The Austrian.
Nassim Nicholas Taleb does not suffer fools gladly. Author of several books including The Black Swan and Antifragile, Taleb is known for his incendiary personality almost as much as his brilliant work in probability theory. Readers of his very active Medium page will experience a formidable mind with no patience for trendy groupthink, a mind that takes special pleasure in lambasting elites with no “skin in the game.”
“Skin in the game” is a central (and welcome) tenet of Taleb’s worldview: we increasingly are ruled by an intellectual, political, economic, and cultural elite that does not bear the consequences of the decisions it makes on our (unwitting) behalf. In this sense Taleb is thoroughly populist, and in fact he correctly identified trends behind the Crash of ’08, Brexit, and Trump’s election. He understands that globalism is not liberalism, that identity and culture matter, and most of all that elites don’t understand how randomness and uncertainty threaten the inevitability of a global order.
Thus Taleb argues the intelligentsia are not only haughty when they plan our future, they are also clueless: fragility abounds, and threatens to crash the Party of Davos. Hubris results from unearned wealth and prominence, coupled with a blindness to the Black Swans lying in wait.
Born in Lebanon to a prominent family, educated at the University of Paris and Wharton, Taleb was poised to become part of the cognitive aristocracy he mocks. But he was never one of them. His hard-nosed persona, enhanced by a dedication to rigorous deadlift workouts, is quickly evident in his notorious interviews and very public Twitter brawls. His willingness to delve into history and religion sets him apart from the neoliberals who hope to wish them both away. Taleb writes for the intelligent everyman, and this blue-collar approach also extends to his description of himself as a “private intellectual, not a public one.”
Austro-libertarians will find much to admire in his brilliant takedowns of the “pseudo-experts” he identifies in academia, journalism, politics, and science. But Taleb is no Austrian. While he holds a decidedly jaundiced view of most economists—calling for the Nobel in economics to be cancelled— he does not denounce economics as a field of study per se. Nor does he claim heterodox or reactionary inclinations:
“I am as orthodox neoclassical economist as they make them, not a fringe heterodox or something. I just do not like unreliable models that use some math like regression and miss a layer of stochasticity, and get wrong results, and I hate sloppy mechanistic reliance on bad statistical methods. I do not like models that fragilize. I do not like models that work on someone’s computer but not in reality. This is standard economics.”
While he is not averse to using mathematics and statistics in economics, Austrians share his perspective that both are tools for economists. Statistical models are mostly bunk that provide no value to economic forecasters or investors, despite the highly paid Ivy League quants who produce them. In fact, models often have harmful effect of creating a false sense of relative certainty where none exists. It’s refreshing to see Taleb make this claim so effectively from outside the Austrian paradigm of praxeology. But if his view of economics is mainline, his tone is Rothbard meets Hayek:
“I’m in favour of religion as a tamer of arrogance. For a Greek Orthodox, the idea of God as creator outside the human is not God in God’s terms. My God isn’t the God of George Bush.
We know from chaos theory that even if you had a perfect model of the world, you’d need infinite precision in order to predict future events. With sociopolitical or economic phenomena, we don’t have anything like that.”
Taleb does see a role for government, and supports consumer protection laws against predatory lending as one example. But he also purportedly supported Ron Paul in the 2012 presidential election, and has indeed mentioned Hayek as an influence regarding the dispersal of knowledge in society. He’s also applied special venom to several worthy targets in professional economics, including Paul Krugman, Joseph Stiglitz, and Paul Samuelson. Taleb labels as “Stiglitz Syndrome” the process whereby public intellectuals suffer no financial or career consequences for being spectacularly wrong in their predictions.
This is especially galling to a man who correctly called (and in fact became wealthy as a result of) economic crises in 1987 and 2008. In both instances, Taleb had “skin in the game” as a market trader. His own money and reputation were on the line, unlike the court economists in the New York Times.
For an excellent (albeit indirect) analysis of how Austrians and libertarians can advance their cause from a minority position, Taleb’s recent article The Most Intolerant Wins: The Dictatorship of the Small Minority is a must-read. He reminds us that a small minority with courage—the most important form of skin in the game— can prevail over the slumbering masses. And he also reminds us that courageous individual actors, not 51% mass movements, drive real changes in every society:
“The entire growth of society, whether economic or moral, comes from a small number of people. So we close this chapter with a remark about the role of skin in the game in the condition of society. Society doesn’t evolve by consensus, voting, majority, committees, verbose meeting, academic conferences, and polling; only a few people suffice to disproportionately move the needle. All one needs is an asymmetric rule somewhere. And asymmetry is present in about everything.”
Economics is lost, mired in a quicksand of predictive models that fail to predict and macro-analysis that fails to analyze. Democratic politics is lost, ruined by bad actors with perverse incentives to burn capital rather than accumulate it. And academia is lost, still stuck in a centuries-old model run by hopelessly sheltered PhDs. Taleb gets all of this, and does an admirable job of explaining it. Austro-libertarians would be wise to see him as a valuable ally and voice in the ongoing fight against states, central banks, and planners of all stripes.
Today is Tax Day in America. When April 15th happens to fall on a weekend, the IRS generously permits us to extend the filing ritual until the following Monday. But since Monday was a holiday in the District of Columbia known (without irony) as Emancipation Day, we all enjoyed an extra bonus day to comply. And for the most part, comply we do: the voluntary compliance rate, defined by the IRS as taxes timely paid as a percentage of taxes owed in aggregate, is nearly 82%. Compare this with Italy, for example, where tax evasion is a national pastime. For a nation born out of tax resistance, we Americans tend to grumble but not revolt.
We also tend to view taxes only in terms of personal pain: the financial costs of paying, the compliance costs of dealing with the paperwork, and the psychic costs of worrying about it all. It is precisely this pain, experienced only by individuals, that upends the left-wing rationale for imposing taxes on business entities, estates, and all manner of transactions. Only people pay taxes. When someone talks about raising taxes on “greedy corporations,” they’re really calling for higher consumer prices for those corporations’ goods and services.
But the larger impact of taxation is found in the countless and profound ways it changes human activity. Charles Adams, the great tax historian, devoted his career to examining the enormous sociological and cultural impacts resulting from how states raise revenue. Adams called taxes a “prime mover of history,” from ancient Egypt through the Middle Ages, from Enlightenment Europe to Colonial America and all the way up to our present world of offshore tax havens. Taxes, Adams maintained, are far from the price we pay for civilization. Instead they are mean, petty, and arbitrary, causing existential struggles for the poorest people in societies across history. Taxes not only fund wars and enrich unworthy rulers, but also create crippling distortions in every economy the world has ever known.
The impact of taxes on ordinary people in modern America, including the lengths to which some will go to avoid them, is well-represented in our national psyche. We’ve all heard anecdotal horror stories, usually involving someone’s finances being destroyed by a sudden IRS seizure. Americans also view the IRS as wanton and political in its enforcement actions, which makes sense. Even experts can’t agree how much a hypothetical family owes in any given year.
The distortive impact of taxes on US and multinational businesses is also extraordinary, albeit not as much discussed. While monetary policy causes malinvestment through artificially low interest rates, high tax rates and burdensome complexity similarly cause firms to radically alter their business decisions. And just as interest rates affect the length of production, tax rates (and rules) dramatically affect decisions about the capital structure of companies.
Having spent many years working on the tax aspects of M&A deals, I can attest that far too many business decisions are driven almost wholly by their tax ramifications. Consider just the following:
Bizarre and byzantine legal entity structures. Take a look at the spaghetti-like organizational chart of many corporations and you may be shocked by the number of legal entities that exist as subsidiaries below a parent corporation. Given the non-tax compliance work such a structure requires (e.g., corporate filings, board meetings, and minutes in multiple jurisdictions), the only purpose for such a structure in most cases is tax reduction.
Apple, Google, and Microsoft, for example, have employed infamous structures like the “Double Irish” and the “Dutch Sandwich” to conduct European operations. These structures advance two common goals for tech companies: (i) all European revenue rolls up into a European parent company in a low-tax jurisdiction like Ireland; and (ii) European intellectual property rights are owned by an entity in a tax haven like the Caymans or the Bahamas, which licenses the use of said property to a second European company. The second company ends up with little taxable income after deducting all of its licensing fees. In some cases revenues are funneled through Ireland to the even-friendlier Dutch, who then remit remaining profits to the zero-tax tropical haven.
Capital structures that overwhelmingly favor debt over equity. If you want to know how “leveraged buy-out” entered our lexicon, look no further than the disparate tax treatment afforded to corporate interest payments vs. dividend payments. As a general rule, firms can deduct interest payments made to third-party creditors and bond-holders (there are limitations on the deductibility of high-yield and related party debt, but even these limitations are rife with workarounds). The contractual obligation to pay interest creates a deductible expense which must be paid regardless of whether the corporation is profitable. By contrast, dividends are paid out of earnings and profits rather than accrued as an expense. They don’t decrease corporate net income like an expense, and payment is triggered only in certain situations.
While this makes sense conceptually, it creates an enormous incentive to load firms with debt. Many private equity deals prior to the Crash of ’08 were financed with 7 parts debt to equity or even more. In many instances the debt was sliced into dozens of tranches across multiple co-lenders, which reduces business risk but maintains the tax benefit. By relentlessly applying revenue to debt service, and thus taking a big interest deduction, private equity firms in the boom years were often able to sell companies 3 to 5 years later for many times their purchase price. They also kept their own risk exposure low: if the company tanked, their loss was limited to their equity investment.
Keeping cash overseas. US corporations with multinational operations have little incentive to repatriate foreign earnings, where Uncle Sam will reward them with a 35% hit for their efforts. In an era of cash-rich companies like Apple, it makes far more sense to keep those earnings offshore indefinitely, maybe permanently. A tax deferred is a tax avoided, or at least the next best thing. A very complex anti-deferral regime known as Subpart F was passed by Congress in the 1960s, but many of its rules can be avoided through the kinds of complex structures discussed earlier. And the Trump administration proposal for a tax holiday for dividends from foreign subsidiaries (last tried in 2004) has been met with howls by the Left and relative indifference by the House Ways and Means committee. At present US multinationals have every incentive to keep their allegedly $2.6 trillion in foreign earnings invested overseas indefinitely.
Trafficking in tax losses, sort of. When reports that Trump’s companies had paid no income taxes surfaced, commentators hinted at complex schemes of tax evasion. In fact, Trump’s tax planning simply featured a plain vanilla net operating loss, one of the most common features of US corporate tax law. No “loophole” was involved, but rather a simple calculation whereby his companies incurred tax losses: allowable deductions and credits exceeded taxable income for a given year or years. These losses are permitted to be carried forward and applied against income for (up to) the next 20 years. Carry forward of operating losses has been part of tax law since the 1920s, and absolutely does permit large companies to balance the benefits of leveling out their tax burden over a series of profitable and unprofitable years.
What has changed is the ability of companies to flatten out traffic in tax losses through the acquisition of other companies with existing tax losses. The infamous Section 382 rules, passed in the 1950s, do indeed present limitations on acquisitions that seem to have no business purpose other than inheriting the tax losses of another company. But as usual, Congress created a full-employment act for lawyers and accountants by making things so hellishly complex that some practitioners spend an entire career performing Section 382 “studies.” But to the extent possible, US companies still attempt to use tax losses in one entity or year to balance out taxable income in other entities or years.
Creative transfer pricing. Transfer pricing relates to the rules for pricing goods or services between related companies under common ownership. Imagine Apple owning a subsidiary that makes glass for iPhones, along with another subsidiary that assembles them. The three-way transactions for parts and assembly services are subject to both GAAP and tax transfer pricing rules. In theory, such companies should deal with each other on an arm’s length basis. But as with all things tax-related, complexity yields real financial benefits. In short, multinational companies do everything they can within their complex structures to allocate deductible expenses to high-tax jurisdictions and taxable income to low-tax jurisdiction. How they do so, and whether it’s allowed for audit or tax purposes, has become an enormous industry unto itself that profoundly changes business behavior.
There are countless other examples of how the tax code directly influences firms to make tax-driven decisions. Ultimately, CEOs and CFOs of large multinational companies view taxes as a cost of doing business like any other. They will spend one million dollars on legal and accounting fees for tax planning if it saves two million, and who can blame them? In fact, one can argue they have a duty to shareholders to explore every last loophole. The question is opportunity cost: how much time, manpower, and money are spent finding ways to minimize taxes that could be spent on a company’s core business? And in turn, what are the social and cultural consequences of it all? It’s a question Charles Adams tried to answer, even as we try to ignore it.
Will Grigg, full name William Norman Grigg, passed away today after a series of hospitalizations. He was much too young to leave us.
Will was a dedicated voice for liberty, and a prolific writer and blogger on the subjects of police misconduct and police militarization. An archive of the many articles he wrote for LewRockwell.com is here. He also appeared on our Mises Weekends show discussing the growing police state.
Will was a gentle soul but an indomitable spirit. He will be missed.
Writing in The New York Times Magazineabout last week’s stillborn RyanCare bill, Robert Draper recalls a conversation he had with White House strategist Stephen Bannon earlier this year. Bannon, lamenting the ability of both congressional Democrats and Republicans to get things done, contrasts the identity-obsessed progressives with the one-trick pony conservatives:
What’s that Dostoyevsky line: Happy families are all the same, but unhappy families are unhappy in their own unique ways?” (He meant Tolstoy.) “I think the Democrats are fundamentally afflicted with the inability to discuss and have an adult conversation about economics and jobs, because they’re too consumed by identity politics. And then the Republicans, it’s all this theoretical Cato Institute, Austrian economics, limited government — which just doesn’t have any depth to it. They’re not living in the real world.
There’s quite a lot to consider in these few sentences. For starters, Bannon clearly is not as familiar with the mindset of congressional Republicans as he imagines. They are primarily concerned with how the whole “repeal and replace” debacle plays back home. Bannon seems wholly unaware that incentives matter, that his only carrot or stick with regards to individual members is getting them reelected or un-elected. While Trump is likely to remain popular in deep red counties and states, it’s doubtful Bannon can leverage this to create an effective “enemies list” of GOP recalcitrants. For the majority of congressional Republicans the only existential threat to their jobs comes from their right flank in a potential primary, and supporting a watered-down version of the ACA may well hurt them worse than Bannon’s wrath. The only incentive that matters is reelection, not having “adult conversations or governing.” Is the wizened Bannon, architect of the brilliant Trump campaign, really so naïve about Congress?
Second, Republicans in Congress hardly are under the spell of the Cato Institute or Austrian economics (undoubtedly Bannon sees these two things as synonymous, although they are not). We know Bannon has read Sun-Tzu and Aristotle, but has he read the Austrian literature he dismisses so casually? His notion that the GOP conference is full of ideologues, much less libertarian ideologues, is just flat false. The GOP is the party of trillion dollar military budgets, the party that wants to protect Social Security and Medicare-provided prescription drugs, the party that won’t even kill an openly cronyist program like the Export-Import Bank. The House Freedom Caucus, which arose from the remnants of Ron Paul’s liberty caucus, shows occasional libertarian tendencies. It has a worthy role to play as spoiler for bad bills like RyanCare, but it’s hardly an ideological driver in Congress. And Bannon, like so many political observers in the media, fails to understand how little think tanks influence policy in the Beltway. Organizations like the Brookings Institute, the American Enterprise Institute, and the Heritage Foundation are orders of magnitude larger than Cato, yet few in Congress really read their material more than superficially. The real game in DC doesn’t involve think tanks and public policy, it involves lobbyists quietly putting language into authorization and appropriations bills at the committee level. An anti-establishment maven like Bannon should know this.
Third, Bannon’s use of the word “depth” belies a progressive longing for merging nation with state. And of course he’s right: Austrian economics per se, or any brand of economics, has very little to say about blood, culture, soil, language, and nationhood. Social science, at least honest social science, is not prescriptive. Economics can’t provide a normative system, political science can’t Make America Great Again. But the libertarian response to this is simple and direct — nation is not state. Greatness, even goodness, is outside the purview of government. Culture is beyond the realm of politics. Work, family, markets, and civil society are the foundations of a robust civilization, not the state. The deeper the state, the shallower the civilization — and vice versa. To the extent Bannon sees “limited government” and laissez-faire economics as abstractions that fail to provide a satisfactory worldview, it’s because he sees government as the organizing principle for society. It’s a grandiose view of statecraft that libertarians reject.
Finally, there’s the old “not living in the real world” chestnut. How many times have libertarians heard this one? All around us are the almost unimaginable benefits of markets, cooperation, and technology, yet somehow we’re naïve if we don’t want to funnel human activity through government cattle chutes. The vast material and digital abundance we enjoy every day is provided without any state apparatus, in fact in spite of that apparatus. Is this private world not part of reality? Government is the artifice, and statists are the utopian dreamers who imagine that individuals acting under the magical banner of government can plan, coerce, and coordinate millions of lives. Realpolitik, Bannon’s idea of real-world governance, created a pile of several million bodies in the 20th century. If that’s the real world, perhaps it’s time to give libertarian theory a try.
Say what you will about President Harry Truman, but at least he didn’t leave the White House a suspiciously rich man. He also actually went home, to Independence Missouri, and moved into a modest house he didn’t own. It was the same house belonging to his wife’s family where he had lived with Bess (and his mother-in-law!) decades earlier.
Flat broke, and unwilling to accept corporate board positions or commercial endorsements, Truman sought a much-needed loan from a local Missouri bank. For several years his sole income was a $113 monthly Army pension, and only the sale of a parcel of land he inherited with his siblings prevented him from nearly “being on relief,” as Truman allegedly stated. In the 1950s, perhaps almost entirely to alleviate Truman’s embarrassing financial situation, Congress authorized a $25,000 yearly pension for ex-presidents Truman and the much-wealthier Herbert Hoover.
Contrast this with the luxe post-presidential life of the Reagans in Bel Air, or the still-unfolding saga of the Obama’s jet-setting life between Kalorama, Palm Springs, and Oahu!
But even if Truman’s homespun honesty and common man persona sometime wore thin, he deserves enormous credit for the startling admission that he regretted creating the CIA. Speaking to a biographer in the 1960s, less than 20 years after signing the National Security Act of 1947, Truman expressed a sense of foreboding about what the agency had become, and would become:
Merle Miller: Mr. President, I know that you were responsible as President for setting up the CIA. How do you feel about it now? Truman: I think it was a mistake. And if I’d know what was going to happen, I never would have done it.
This is decidedly not the kind of thing ex-presidents usually say. We won’t expect George W. Bush to announce his regrets over invading Iraq anytime soon. But Truman’s instincts were right, even if he couldn’t have imagined what the CIA and the entire Deep State nexus would become. In Truman’s era, spying and subterfuge were physical endeavors, involving skilled agents and analog technology. Today the covert arts don’t require James Bond, but instead a trained technician who can pull information from a server farm.
The digital revolution gives modern intelligence agencies vastly more power than they had during the Cold War spy days: they simply access existing metadata, from whatever source, rather than collect it in real time. And intelligence gathering is not just a supplementary form of warfare waged against hostile foreign governments, but also a domestic political tool that allows Deep State actors to strike at civilian and political targets. As Mr. Trump has discovered, the “strike” can consist of a coordinated media attacks, leaks from trusted officials, and even bizarre triangulations aimed at pinning his election on Vladimir Putin.
One justification Truman provides for his action is the old bureaucratic unicorn known as “consolidation,” which is often promised by politicians but never delivered. When then-congressman Ron Paul and his staff furiously argued against the creation of the Department of Homeland Security in 2002, GOP congressional leaders assured us that an entirely new department would actually consolidate several different agencies and functions. “It will save money!”, they told us, to bring all of these disparate federal employees under one efficient umbrella. Fast forward to 2017, and DHS is just another failed department with a thousand-page, $42 billion annual budget.
But Truman apparently bought into the consolidation argument:
Truman: the President needed at that time a central organization that would bring all the various intelligence reports we were getting in those days, and there must have been a dozen of them, maybe more, bring them all into one organization so that the President would get one report on what was going on in various parts of the world. Now that made sense, and that’s why I went ahead and set up what they called the Central Intelligence Agency.
Unfortunately it is only in hindsight that Truman came to see the “Iron Law of Oligarchy” at work, which posits that all organizations– particularly government bureaucracies– eventually fall under the control of an elite few. That elite, he came to understand, did not include the president or his cabinet:
Truman: But it got out of hand. The fella … the one that was in the White House after me never paid any attention to it, and it got out of hand. Why, they’ve got an organization over there in Virginia now that is practically the equal of the Pentagon in many ways. And I think I’ve told you, one Pentagon is one too many.
Now, as nearly as I can make out, those fellows in the CIA don’t just report on wars and the like, they go out and make their own, and there’s nobody to keep track of what they’re up to. They spend billions of dollars on stirring up trouble so they’ll have something to report on. They’ve become … it’s become a government all of its own and all secret. They don’t have to account to anybody.
That’s a very dangerous thing in a democratic society, and it’s got to be put a stop to. The people have got a right to know what those birds are up to. And if I was back in the White House, people would know. You see, the way a free government works, there’s got to be a housecleaning every now and again, and I don’t care what branch of the government is involved. Somebody has to keep an eye on things.
And when you can’t do any housecleaning because everything that goes on is a damn secret, why, then we’re on our way to something the Founding Fathers didn’t have in mind. Secrecy and a free, democratic government don’t mix. And if what happened at the Bay of Pigs doesn’t prove that, I don’t know what does. You have got to keep an eye on the military at all times, and it doesn’t matter whether it’s the birds in the Pentagon or the birds in the CIA.
This is a remarkable statement by Truman, even if delivered during a relatively unguarded moment with a trusted biographer. It shows a humility and willingness to admit grave error that is lacking in public life today. It also stands on its own as a inadvertent libertarian argument against state power itself.
Did Truman stand by his statements about the CIA? Yes and no. Speaking to Esquire in 1971, he continued to praise the agency as a needed consolidation:
When I took over the Presidency he received information from just about everywhere, from the Secretary of State and the State Department, the Treasury Department, the Department of Agriculture. Just everybody. And sometimes they didn’t agree as to what was happening in various parts of the world. So I got couple of admirals together, and they formed the Central Intelligence Agency for the benefit and convenience of the President of the United States . . . So instead of the President having to look through a bunch of papers two feet high, the information was coordinated so that the President could arrive at the facts. It’s still going, and it’s going very well.
Hypocritical backpedaling on Truman’s part? Perhaps. But his biographer Merle Miller calls the Esquire quote “pretty faint praise,” and more importantly Truman never ordered the removal of his brief chapter on the CIA from the Plain Speaking biography. His mea culpa still stands, in print. So while he could not have fully imagined what the CIA would become, he knew in his gut he had made a terrible mistake– a mistake we are only beginning to understand today thanks to WikiLeaks.
Coverage of central banks and monetary policy in popular financial media outlets like Bloomberg, Financial Times, Forbes, Wall Street Journal, and The Economist is almost uniformly bad. The reporting and analysis are superficial, and the writers tend to assume facts not in evidence. The same myths repeat themselves ad nauseam: the Fed’s vaunted “independence” must be kept sacrosanct; the obvious and proper purpose of monetary policy is monetary stimulus; Ph.D central bankers hold special technical knowledge which us average folks should not question; and that central bank decisions are wholly unpolitical.
These myths are used to prop up trite and superficial conclusions, always with the implication that “everyone knows” X, Y, and Z are true about central banking. But many times those conclusions are not true, or at least not widely agreed upon. And when they are reported as gospel truth, the financial press effectively become cheerleaders for the Fed. While they may call for tinkering with interest rates or replacing one Governor with another, the presumption that central banks are ever and always benevolent goes unchallenged.
For example, consider this recent article from Bloomberg fretting about “Austrians” taking over the Fed under a Trump administration:
“Trump’s characterization of the current economy as “false” suggests a sympathy for the Austrian school of economics, in which short-term monetary benefits are believed to come with longer-run costs. The “false” economy fosters asset price bubbles that pop and end in an even deeper recession than would otherwise be the case.
“A Fed packed with Austrian economists would likely react slowly to a recession and resist extraordinary policies such as quantitative easing. They would also likely attempt to tighten policy soon after the recession ended. They would, in other words, tend toward a liquidationist approach that risks turning the Great Recession into another Great Depression.”
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