By G.L.C., on November 14th, 2008
In an attempt to resolve the present credit crisis, the United States government has taken many steps. Since September, it placed Fannie Mae and Freddie Mac, the mortgage giants under conservatorship, taken a majority stake in the American International Group and passed a $700 billion rescue package for the financial sector. The Treasury is injecting $125 billion into the nation’s nine largest banks.
One cannot accuse the government of being a mute spectator. But what everyone wants to know is will these efforts and the rescue plan succeed?
No doubt everyone wants it to succeed. At the heart of the rescue plan is an effort to keep the credit crunch from sending the economy into a tailspin. The economic downturn is going to be much worse if the financial system doesn’t get working again.
Somewhere in all this, one thing seems to be forgotten – the rescue plan and efforts doesn’t directly address the root cause of the crisis: falling home prices. It was the falling home prices that ultimately resulted in the present crisis. According to the National Association of Realtors, home prices are off 12 per cent from their peak and are expected to fall an additional 10 per cent to 15 per cent between now and mid-2009. Much needs to be done to stimulate demand for homes and to reduce mortgage delinquencies and foreclosures.
The steps taken by the government so far does not do anything to stop the spiral in home prices. This is reducing net worth and creating a falloff in consumer spending. To stimulate demand for homes, the federal government could offer low-interest loans to replace 20 per cent of homeowners’ mortgages. It is unlikely that the crisis will be resolved without addressing falling home prices.
Falling home prices leads to an increase in mortgage delinquencies and foreclosure. Many homeowners end up owning more on homes that their current worth. They then default on their mortgage payments causing foreclosures. The rise in foreclosures results in a negative market psychology. It is a vicious cycle.
The supply of homes on the market remains stubbornly high, while demand for those homes remains relatively weak. The $7,500 tax credit passed by Congress in July has failed to jump-start home sales.
Another factor which led to the present crisis is the total breakdown in the integrity of asset valuations. The government efforts do not address this. The government has not yet disclosed the pricing logic on which the US government will purchase bad debt from faltering financial institutions. It now appears that the prices will be determined on a case by case basis.
While some lawmakers want the government to exert influence over private companies in which taxpayer money is invested while some are calling for a ban on lobbying activity, bonuses and perks among the companies that have been bailed out by the government, nobody has suggested taking remedial action to rectify either the impaired status of asset valuation techniques.
Lawmakers are probably aware of the need to revamp asset valuation methodologies but they lack the will and fear the explosive political impact of any efforts that will directly challenge the qualifications of real estate brokers, appraisal specialists, bank managers, certified accountants, project engineers, corporate monitors and financial analysts.
By Mary Nichols, on November 13th, 2008
Around the world, millions of children are engaged in child labor. The International Labour Organization (ILO) has estimated that up to 1 in 5 children globally are working, with the proportion even higher in some regions of Africa and Asia. Recent estimates of the overall numbers involved range from 158 to 246 million, although the true scale is unknown. Studies have revealed that the majority of child workers, around 70% according to recent World Bank research, are employed in agriculture, followed by services and then manufacturing.
The involvement of children in employment per se is not necessarily a problem. As an ILO report observes, many children combine part-time jobs with their education and gain valuable skills or make a useful contribution to family income in the process. For many others, however, child labor means being exploited by unscrupulous employers, exposed to harmful or dangerous conditions or, at the very least, missing out on an adequate education. The ILO has estimated that in 2000, 171 million workers aged between 5 and 17 were involved in work that was “hazardous to their safety, physical or mental health, and moral development,” and that 8.4 million were employed in the most serious forms of child labor, for example as prostitutes, child soldiers and bonded labor.
The United Nations’ Convention on the Rights of the Child requires governments to protect those aged under 18 from economic exploitation, from performing any hazardous work or any work likely to interfere with a child’s education. However, child labor is an intractable problem that is difficult to eradicate due to its perceived economic benefits at the family and household level. In low-income countries or communities, children are often sent out to work when the expected economic benefits to their family are higher than the perceived economic rewards of education, or when schooling their children is unaffordable for the parents.
Child Labor and Poverty
The links between child labor and poverty have been clearly demonstrated in many studies; there is evidence of a consistent negative association between the extent of child labor in a country and its GDP. The problem of child labor is not confined to the developing world, however. Although the vast majority of working children can be found in Africa and Asia, followed by Latin America, developed countries such as the U.S. also have significant numbers of child laborers, particularly among immigrant communities engaged in agriculture, where extra hands mean extra income. Moreover, countries with similar levels of GDP have differing levels of child labor, suggesting that other factors such as cultural traditions or attitudes and the availability of affordable education also play a role in determining the relative importance of child labor within their economies.
Child labor has an adverse affect on the development of human capital through education and skills development and is therefore likely to hamper economic development in the countries or communities concerned, as well as severely damaging the future prospects of the child workers for escaping poverty. There is a strong positive relationship between the proportion of children working in a country and the proportion not attending school, while not surprisingly, children who do attend school but also work long hours outside the home tend to perform poorly in academic examinations, according to World Bank research.
There is little consensus about the most effective policy options for reducing the prevalence of child labor. It is sometimes suggested that trade sanctions should be applied against countries with particularly high numbers of children working, but UNICEF argue this would make little difference since the majority of child laborers are employed in agriculture and relatively few in export sectors.
The preferred option of the ILO is for the introduction by national governments of “income transfer programs,” like those already in use in India, Mexico and Brazil, which offer financial benefits to low-income families whose children leave paid employment in order to attend school. At the same time, there is a need for adequate investment in the educational sector with the aim of making affordable, high quality education available to all. According to ILO research published in 2004, the long-term benefits of such policies for the countries concerned are likely to be significant; it was estimated that although the overall cost of eliminating child labor would be in the region of US$760 billion, the resultant benefits resulting from improved health and education, concentrated in the developing world, would be around US$ 5.1 trillion.
References
Duran, M.P. (2004). Investing in every child: An economic study of the costs and benefits of eliminating child labor. ILO: Geneva.
Fares, J. & Raju, D. (2007). Child labor across the developing world: Patterns and correlations. World Bank Policy Research Working Paper 4119, February 2007. Available from http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALPROTECTION/EXTCL/0,,contentMDK:20254527~menuPK:965612~pagePK:148956~piPK:216618~theSitePK:390553,00.html.
International Labour Organization (1998). Child Labor: Targeting the Intolerable. ILO: Geneva.
International Labour Organization (2002). Every child counts: new global estimates on child labour. ILO: Geneva. Available from http://www.ilo.org/public//english/standards/ipec/simpoc/others/globalest.pdf.
UNICEF (1997). The State of the World’s Children 1997 – Child labour. Available from http://www.unicef.org/sowc97/.
US Department of Labor (1998). By The Sweat and Toil of Children, Vol. VI: An Economic Consideration of Child Labor.
By Cheryl Grey, on November 11th, 2008
When the U.S. government refused to bail out Lehman Brothers and no buyer could be found for the tottering investment bank, traders and investors around the world realized something terrifying: their profits—worse yet, their capital—were at risk, and the Fed’s lack of action proved no one was going to save them.
Results Round One
The result was panic. Faced with massive losses, these international investors yanked their funds from commodities, stocks and other investment vehicles in emerging markets around the globe and bought bonds offered by developed nations. Any investment seen as riskier than a 90-day T-bill was spurned in what has come to be called “the flight to quality.”
The result of that result was the unwinding of carry trades. In that scheme, traders take out loans in nations with low interest rates (such as Switzerland at 2.0%, the U.S. at 1.0% or Japan at 0.3%) and invest the funds in nations with high ones (such as New Zealand at 6.5%, South Africa at 15.5% or Iceland at 18%), thus earning the “spread” between those rates. But currency fluctuations, caused by shifting interest rates or decreasing economic potential in the investment nation, put both profits and capital at risk, and during the flight to quality traders dumped these investments and repaid their loans. In the process, the South Korean stock market collapsed 40%, Ukraine’s 60%, Iceland’s 90% (see chart of the Icelandic index above, October 17). The Russian market ceased trading for two days, hoping for stability to emerge; it didn’t happen.
The next result was the appreciation of the U.S. dollar against every currency in the world with the lone exception of the Japanese yen. Since mid-August, when the unwinding of carry trades began in earnest, JPY has appreciated almost 18% against USD as these international traders “sell” the dollar and “buy” the yen to repay their Japanese loans. The yen rose so high that the affordability of, and therefore the profit from Japan’s exports, slumped, with Toyota’s profits shrinking 69% in the most recent quarter and Sony’s by 72%.
Results Round Two?
And that’s the good news.
With the worst of the flight to quality complete, most major currencies appear to be stabilizing against USD, albeit at lower than anticipated levels. The Euro, which was worth an historic high of $1.60 as late as July 14, lost $0.37 in value by October 28, or 23%. The U.K. pound, which was as high as $2.11 a year ago, currently trades at $1.56, down 26%. These currencies are also shifting in value against each other. The exchange ratio between the Euro and the Swiss franc, another traditional safe-haven currency in times of financial stress, has fallen 12.6% since July 31.
In terms of international finance, these are huge moves, particularly for emerging economies. With the rise of globalization, loans of all varieties—corporate, individual, inter-governmental—are now made across national boundaries and across currencies. As currencies shift into new relative value ranges, the payment terms of these loans shift to follow, meaning that Swiss loans to Euro-funded nations are now 12.6% more expensive than they were three months earlier.
Current estimates place 90% of all Hungarian mortgages written since 2006 in Swiss francs. With the Hungarian forint down 17%, these mortgages are ballooning in cost just as their adjustable-rate counterparts did in the U.S. when the Fed raised the prime interest rate. The financial world already knows the rest of that story. Rather than waiting for the rush of defaults and foreclosures both corporate and domestic, the International Monetary Fund, European Central Bank and World Bank loaned Hungary 20 billion Euros (US$25.5 billion) on October 29. Loans to Ukraine, Pakistan, Iceland and other nations are following quickly.
But similar circumstances in Romania, Bulgaria, Serbia, Lithuania, Latvia, Croatia, Poland, Slovakia, Belarus and the Czech Republic mean the second round of the financial crisis may be happening across the Atlantic. Even worse, the story is repeated in parts of Asia and in Central and South America. All told, a total of US$4.7 trillion in loans cross these international borders, and Western European banks hold three-quarters of those notes, an amount that dwarfs U.S. banks’ exposure in the first round of that crisis. In Austria alone, bank exposure to these notes is 85% of national gross domestic product and in Switzerland it’s 50%.
Steve Forbes may believe the worst is over. Europe doesn’t necessarily agree.
By Evelyn Black, on November 10th, 2008
Can the U.S. economy possibly get any scarier or more complicated?
The short answer is yes, it can. The longer, more complicated answer is that the looming (potential) failures of Ford, GM, and Chrysler present long term sustainability problems for a middle class that is already clamoring for short term, emergency solutions.
Ford recently announced third quarter losses of $129 million but admitted to having burned through $7.7 billion in operating costs during the same period. GM announced a staggering loss of $2.5 billion. Chrysler, by all accounts, will be belly up by the start of 2009 if the government is unable to broker a merger with GM, and all three are begging Washington for a second $25 billion in low-interest loans to keep them all afloat until the current economic crisis passes.
The announcement of these stunning losses and the request of additional federal money came alongside industry announcements of even more lay-offs and possible suspension of the plans for research and development of new, more fuel-efficient American cars. Without a more competitive product than the big trucks and SUVs of the past 15 years, it’s hard to see how and when things will get much better for the U.S. auto industry, but unfortunately the problems go much deeper than that.
Retail sales fell of a cliff in October across the board, with the exception of Wal-Mart, which saw a 2% increase in sales. Even sales of luxury items fell; items which in the past have been fairly recession-proof. Stores like Saks and Bloomingdales posted some of the worst figures of all. Job losses for October came to just under a quarter of a million, bringing the unemployment rate to a 14-year high of 6.5%, and this, by general agreement, is only the beginning of the labor effects of the recent credit crunch.
All of this bad news is hitting right before Christmas, a time when retail stores generally expect to be ramping up for the November and December sales that will carry them through the rest of the year. This year, those sales may not materialize at all. Circuit City is shutting down 120 stores for good, right before Christmas, just to stay solvent, and other big box stores that usually hire extra help for the holidays are actually terminating permanent workers to reduce costs.
The fact is that people are not buying anything right now. Even if the Big Three could produce a car that runs on air and then start shipping it to car lots tomorrow, most Americans would be unable to qualify for loans to buy these magical air cars, even if they had jobs or money to put down on them, which fewer and fewer people do with each passing day. The recession is looking like it will be long and hard, with many analysts seeing a turn-around no sooner than 2010.
When Henry Ford first started to build automobiles in the U.S., he made the radical decision to pay his assembly line workers incredibly well. He did this not out of a sense of altruism or social justice, but rather to expand his business plan so he could market his cars to everybody, thereby making more money for himself. In making this decision, he not only enabled his workers to buy the cars they were building, he also ended up creating a thriving American middle class.
Over the course of the past 30 years several developments have increased profits for U.S. corporations and their stockholders, while at the same time putting downward pressure on the mostly industrial middle class. Changes in U.S. trade agreements allowed industry to flee the U.S. rapidly and dramatically, forcing formerly middle class workers into low-wage jobs in the service sector.
As the good industrial jobs disappeared, corporations also began to eliminate middle-management white color jobs with middle class salaries. Most of the corporate jobs left in the U.S. today are entry level service sector jobs, often in call centers or tech support, with little opportunity for advancement or career development. Not much remains between the bottom of the corporate pyramid and the CEO, and what does remain is under constant pressure to produce more profit for less reward.
In fact, in most of these workplaces (the classic cubicle farms of the ‘Dilbert’ comic strip) a management style designed to turn over employees in one to two years remains firmly in place. While this rapid turnover keeps labor costs low, it also creates a very unstable, low-paid workforce with no special loyalty to any one job and not enough annual income to commit to a four-year auto loan.
In other words, the middle class jobs that created the ‘consumer economy’ are largely gone with the decline of the Big Three and the loss of myriad other U.S. industrial jobs, both related and unrelated. Steel, textiles, electronics, computer chips—all of these items are made overseas now. When people don’t have good jobs and can’t get credit, they can’t spend money. When people can’t spend money, more people lose jobs.
Short term, the U.S. will have to find a way to keep people in their homes, keep them warm and fed, and stabilize housing and financial markets. Those challenges would be daunting in and of themselves for even an economic Mozart. Deficit spending seems unavoidable at a time when the national debt is already completely out of control.
But long term, the U.S. will have to find a stable job base that can support a middle class and do whatever is necessary to keep those jobs here. If that doesn’t happen, if we don’t see something on the horizon to replace the dead industrial base, then all the stimulus packages Congress can dream up won’t prevent a long and painful period of poverty and contraction in America.
Gas prices are finally coming down.
Unfortunately we’re running on fumes and our credit cards are being declined.
What happens next will have long and lasting effects, not just on the economy, but on the health and security of the nation.
 Join the forum discussion on this post - (2) Posts
By J.D. Seagraves, on November 10th, 2008
A few weeks before the election, “Joe the Plumber” asked Barack Obama about his tax plan, and Obama said that he intended to reform the tax code to “spread the wealth.” The McCain campaign seized on this gaffe and ran with it: what Obama was advocating, they said, was tantamount to “socialism.”
The “socialist” charge was repeated many times throughout the remainder of the campaign, and it continues to be levied against President-Elect Obama even after his historic election. Recently, Investor’s Business Daily editorialized that the “change” Obama favors “can only be described as socialistic.” But what does this even mean?
Is “Socialist” Nothing but a Slur?
Kansas City Star editorialist Lewis Diuguid says that “socialist,” in the context used by McCain and his supporters, is nothing more than a thinly veiled racial epithet. After all, Diuguid points out, iconic African-Americans such as Martin Luther King, Jr., W.E.B. Dubois and Paul Robeson were all smeared as “socialists” by their racist opponents. But the inconvenient truth is that King, Dubois and Robeson were socialists.
Dubois and Robeson were long-time members of the Communist Party of America, and Martin Luther King, in just one of many examples, once gave a speech in which he called for a “better distribution of wealth” and opined that “maybe America must move toward a democratic socialism.” Socialism was “not the sum of these men,” says libertarian Lew Rockwell, “but they were all red-blooded socialists.”
Regardless, “socialist” can definitely be used as a mean-spirited slur, but the word also has a legitimate meaning. The question remains: Is Barack Obama a socialist?
What is Socialism?
Socialism is defined as an economic system wherein the means of production and distribution are collectively owned, typically by a monopoly government. Politically, a socialist state can be democratic, dictatorial or anything in between: contrary to popular belief, the method in which leaders are chosen is not an element of socialism.
There is no such thing as “private property” under socialism: production is centrally planned by committees on the basis of what they think people want or need. Theoretically, each individual is expected to produce according to his ability and consume according to his need. It sounds like heaven on earth—or does it?
It is often said that socialism is good in theory but bad in practice. Actually, this is untrue. The Austrian economist Ludwig von Mises proved that socialism is not good in theory and cannot work in practice. Mises’s 1922 work Socialism demonstrated that a pricing system and for-profit ownership of the means of production are necessary to signal to producers what to produce. Mises thus predicted the collapse of the Soviet Union, with great accuracy, almost 70 years before the fall of the Berlin Wall.
Democratic Socialist or Social Democrat?
Even the most paranoid “ditto head” could not seriously think that President Obama will collectivize all U.S. property in the hands of the federal government. Clearly, Obama will not usher in a truly socialist America. He might, however, move us in the direction of greater “social democracy.”
Our national confusion in regard to political taxonomy dates back to the New Deal, when the word “liberal” changed meanings in America. Previously, a “liberal” had been someone who emphasized individual liberty, private property and limited government. These were the ideas that dominated the Democratic Party from Jefferson through Cleveland, and although Woodrow Wilson’s “progressivism” represented a departure, Franklin Delano Roosevelt actually campaigned as a traditional, classically liberal Democrat. Once in office, however, FDR “flip flopped”—and took the term “liberal” with him.
What we now consider “liberalism” in the United States is referred to as “social democracy” throughout the rest of the world, and “social democrats” are often slurred by their opponents as “socialists.” But social democracy differs from socialism in that it leaves at least nominal ownership of industry in private hands, while heavily regulating, subsidizing and managing various sectors of the economy in pursuit of social goals. Key elements of social democracy include government-controlled education and healthcare, a broad economic safety net, environmentalism, protectionism, multiculturalism and a foreign policy that “promotes democracy.”
Dawning of a New Age?
In that same editorial cited earlier, Investor’s Business Daily said Obama “may be guided by principles different from what we’re used to and on which the nation was founded.” Based on his campaign rhetoric, President-Elect Obama certainly sounds like a social democrat, but does he really represent a radical change from our recent history as a nation? After all, George W. Bush signed Sarbanes-Oxley into law, expanded federal funding of education and healthcare and invaded a sovereign nation in order to install a “democracy”—his presidency may not have been textbook social-democratic, but it certainly leaned in that direction.
The truth is that our nation was founded on the classically liberal principles of political decentralism and laissez-faire. Regardless of what right-wing radio says, these founding principles are not at risk of going down the drain under President Obama because they were jettisoned decades ago. So while the Obama administration might represent a modest shift to the “left” (whatever that means), the essential nature of America’s political and economic systems will remain unchanged under his leadership. And that’s unfortunate.
By Bhagwad Jal Park, on November 7th, 2008
Today, we are going to discuss an interesting phenomenon in the world of game theory: namely, adverse selection. Frequently, game theory attempts to isolate and analyze curious phenomena and detect the essential elements that make it work. We can then try and manipulate these element to steer the game in a chosen direction.
The phenomenon of adverse selection occurs when several people are trying to obtain a particular goal, and the criteria which make the person either suitable or unsuitable to obtain that goal from the point of view of the entity and from the person trying to obtain it are diametrically opposite.
Let us take the example of a company who is trying to project to the world that only the most stylish and fashionable people wear their watches. To accomplish this, it decides to selectively sell their watches only to the most fashionable people in the world. From the point of view of the watch company, the people who must wear it must be really stylish and fashionable. However, the people who will most want to wear the watch will be wannabes. The wannabes will benefit most from the watch since, if they have the watch, they will be projected as stylish and fashionable. Hence, the watch company must be very suspicious of anyone who desperately wants to wear the watch.
Those who are really stylish and fashionable will not want to wear the watch so badly since their reputation is already made and they gain little from wearing it.
Adverse selection is characterized by the fact that people who most want to obtain something are typically the least worthy to have it.
Image Credit: stark23x
This manifests itself beautifully in the case of insurance companies. Regardless of what anyone says, insurance is essentially gambling. Insurance students will cut my throat out for saying this, but when all the smoke clears, it’s pretty obvious that when you take out an insurance, you’re hedging your bets.
Since insurance companies want to maximize their profits, they will want to have the odds stacked on their side. This means that they will want to give insurance to people who are least likely to demand a payout from them. On the other hand, those who most badly want insurance will be the people who are most likely to demand a payout.
A person who is old and has several ailments would love to have cheap insurance, whereas a young man in perfect health will have less to gain. However, insurance companies want the young man to sign up for insurance and not the old person. This is adverse selection in its most characteristic form.
It’s actually somewhat tragic. Giving insurance only to those who don’t want it completely defeats the purpose of insurance from the customer’s point of view. What’s the big idea of refusing insurance to those who need it most? That’s like selling pizza to a person who isn’t hungry! However, adverse selection doesn’t apply in the case of pizza.
Since insurance companies don’t play fair by testing people and even excluding some people from insurance based on their riskiness, the people who want insurance are perfectly justified in trying to fool the insurance companies by hiding their ailments. It’s a dance, and the outcome all depends on whether the insurance company can discover the hidden ailments of the person or not.
There is no stable solution to this. In other words, no Nash equilibrium exists. One of the parties will always wish that they had – or didn’t have – insurance, or the insurance company will always wish that they had – or didn’t have – a certain person’s business. A zero sum game. In the end, both parties can be happy only if they assess the situation differently. That is, each thinks that they have outwitted the other.
By Mary Nichols, on November 6th, 2008
This year, unemployment rates among young people in the United States have been increasing to levels not seen since the early 1990s. Youth unemployment rates are usually a good indicator of the overall state of an economy, since young people typically face the greatest difficulties in finding employment in times of recession and, lacking experience, are often the first to be laid off by employers who need to cut back on labor costs. They may also lose out on job opportunities when more experienced older workers decide to defer retirement or return to the labor market, a common phenomenon in the current economic downturn.
The national unemployment rate for all workers in the U.S. has been steadily increasing over recent months, reaching 6.1% in September, according to the Bureau of Labor Statistics. For 16 to 19 year-olds, however, the reported rate of unemployment is more than three times that for all workers, at 19.1% in September. Among ethnic and racial minorities youth unemployment rates are even higher, for example reaching 24.8% in July 2008 for African Americans aged between 16 and 24. The tight employment market is having a harsh impact not only on those looking for permanent, full-time employment, but on students seeking summer jobs, perhaps to help finance their education – it has recently been reported that it was harder to find jobs in summer 2008 than at any other time since the 1940s.
Setting Precedents
Previous studies have documented the serious knock-on effects that youth unemployment has on the individuals affected as well as the economy as a whole. For example, using data from the National Longitudinal Survey of Youth, researchers at the Employment Policies Institute found that early unemployment was associated with lower future earnings as well as repeated spells of unemployment; this was attributed to the delays in the accumulation of employment experience and training while unemployed. The demoralizing effects of prolonged unemployment may also have adverse psychological effects on young people, including depression or low confidence which may further decrease their future likelihood of gaining employment.
For the economy and society as a whole, high unemployment rates among youth also have potentially serious consequences. Unemployment is a factor contributing to social exclusion and disruptive behavior such as crime and drug-taking, which not only increase social unrest but also the overall costs of health, law enforcement and other public services. At the same time, overall economic growth may be hampered by the under-use of a large group of recently-educated people who could potentially make a major contribution not only to overall productivity but to innovation and technological development.
So what can the government do to increase employment rates among young people in the United States, and thus maximize their contribution to the economy?
The Role of Education
International research unfortunately suggests that there are few viable ways of making a difference in the short-term, in the absence of an improved economy and more dynamic labor market. For example, a pan-European study by researchers at the European Central Bank found that direct interventions such as preferential hiring policies and greater wage flexibility have relatively little impact on improving job prospects for young people when markets are generally slow. However, the higher rates of youth employment in countries with apprenticeship systems suggests that the development of education and training programs linked specifically to labor market needs may be a promising longer-term option; there is also evidence from the literature that entrepreneurship and work-related training targeted at particular groups can help to increase employment rates. More generally, it can be hoped that policies intended to increase the academic attainment levels of all students in the United States, notably the No Child Left Behind Act, will help to improve the job prospects of young people in the longer-term, and thus maximize the contribution of this group to economic growth.
References
DeFreitas, G. (Ed.) (2008). Young Workers in the Global Economy: Job Challenges in North America, Europe and Japan. Cheltenham, UK: Edward Elgar Publishers.
Gomez-Salvador, R. & Leiner-Killinger, N. (2008). An Analysis of Youth Unemployment in the Euro Area. European Central Bank Occasional Paper Series No. 89, June 2008.
International Labour Office (2000). Employing Youth: Promoting employment-intensive growth. Geneva.
Kalwiji, A.S. (2004). Unemployment Experiences of Young Men: on the Road to Stable Employment? Oxford Bulletin of Economics and Statistics 66, 2, p. 205.
Mroz, T.A. & Savage, T.H. (2001). The Long-Term Effects of Youth Unemployment. Employment Policies Institute. Retrieved from http://www.epionline.org/studies/mroz_10-2001.pdf
Sum, A., McLaughlin, J., Khatiwada, I. & Palma, S. The Continued Collapse of the Nation’s Teen Job Market and the Dismal Outlook for the 2008 Summer Labor Market for Teens: Does Anybody Care? Boston, Massachusetts: Center for Labor Market Studies. Retrieved from http://www.clms.neu.edu/publication/documents/The_Continued_Collapse_of_the_Nations_Teen_Job_Market.pdf.
Bureau of Labor Statistics (2008). Labor Force Statistics from the Current Population Survey. U.S. Department of Labor. Available online at http://www.bls.gov/cps/.
By J.D. Seagraves, on November 5th, 2008
For the time being, at least, the United States of America is still considered a “capitalist” country. But what does this mean? What would it take to make the U.S. not a “capitalist” nation, but a “socialist” one?
Generally, a country is considered to be more “capitalist” to the extent that it’s societal functions are handled by the private sector (the free market) rather than the public (government) sector. Since the Great Depression and New Deal, the Democratic Party has generally favored more government (i.e., less capitalism) while the Republican Party has, at least in its rhetoric, opposed expansion of the public sphere. But under the Bush administration, the federal government has grown much faster than it did under the Democratic administrations of Clinton and Carter. Americans who performed their “civic duty” and cast their votes on November 4 were thus left with a choice between Bigger Government and Even Bigger Government—with no clear indication of which party represented which.
Taking Capitalism to the Extreme
But under a regime of purely free-market capitalism, we wouldn’t need to have elections at all. That’s because under total laissez-faire, there would be no societal functions handled by the public sector—indeed there would be no public sector at all! Thus, there would be nothing to vote on—at least not politically. Consumers would vote with their dollars, and when 51 percent favored Selection A, the remaining 49 percent of society (which might favor an assortment of Selections B, C and D) would not be consigned to the will of the majority.
We don’t choose a national brand of athletic footwear by popular vote, with everyone having to wear Nikes if the majority (or plurality) prefers Nike to Adidas, so why should we choose our governments this way? This is the radical notion of anarcho-capitalism: the idea that “monopoly government” is not only immoral but also unnecessary and ineffective. So with the 2008 election now behind us, let’s stop and consider whether we need to have elections—or “the government”—at all.
There are lots of areas in which the government interferes now that it didn’t 100 or 200 years ago: education, healthcare, labor relations, marriage, charity (welfare), banking, retirement, etc.—the list could go on and on. When we participate in an election, we are choosing the officials who will manage this growing public sphere. On rare occasions, politicians take actions to cut back government, but even the most libertarian-minded of elected officials would never touch the unholy trinity of government monopolies: the military, the police and the court system. If an argument can be made that even these entities could and should be privatized, than the case for “the state” (territorial-monopoly government) would be without merit. So let’s give it a go!
Imagine an “Anarchist” America
Imagine an America with no federal government or any of its agencies or programs. Your “state” (i.e., Michigan or California, etc.) would refer to a geographic region, but not a state government, for there would be none. And your local government would lack the authority to tax or regulate you in any way without your consent. Indeed, there would be multiple, competing “governments” vying for your business.
When you shop at a department store, they may or may not have great customer service. To the extent that they don’t, they risk losing you as a customer. But even the most unfriendly greeter at Wal-Mart has never tased you or shot you or locked you in a cage for a “crime” you didn’t commit. If Wal-Mart did that, they’d not only lose business, they’d be the subject of massive lawsuits. But police departments can and do do these things precisely because there’s no threat of you shifting your business elsewhere—you are a “customer” of the police via your taxes, whether you like it or not. And if you sue the police department, what do they care? You and your neighbors end up paying the cost via a higher tax rate.
But wouldn’t the streets be running with violent criminals if we didn’t have police to “protect and serve” our communities? Perhaps. But just because we wouldn’t have a coercively financed monopoly police department doesn’t mean we wouldn’t have police! In fact, the streets would be much safer and crime would be much lower if we had multiple police agencies competing for customers in the same geographical area.
How would this work? One model rests on insurance. In fact, it could be said that insurance companies would be the “governments” of an anarchist America.
Instead of paying taxes, you would take out an “anti-aggression” policy with the insurance company of your choice. If you were the victim of a crime, you would receive immediate compensation from your insurance company, which would then have a financial incentive to apprehend the criminals who violated your rights—for it is they, the criminals, who would be made to pay restitution to the insurance company. If the criminals lacked the money to pay the restitution outright, or if they posed a serious threat to society, they could be made to work off their debt in a privately run prison.
How Courts and Defense Would Work without Government
But who would determine whether the criminals were guilty? A private court system. Everyone who had an anti-aggression insurance policy would also agree to have their disputes settled in one of several competing courts. The criminals, in this case, might have insurance policies that stipulate any charges brought against them would be handled in Court A, while you (the victim) might have an agreement through your insurer with Court B. No problem: both of your contracts would state that in such a situation, Court C would be used. The jurors who served on Court C would be vetted just as they are in today’s trials, however, they would not be forced to comply with jury duty. For “volunteering” to be called up, they would receive a discount on their insurance premiums.
The insurance companies would hire police agencies to prevent crime. The expense for this service would be covered by the premiums paid by the insurer’s subscribers. Unlike today’s police, these free-market police would not be allowed to violate the life, liberty, and property of individuals—they would face charges in a private court if they did. In fact, the insurance companies themselves might be held accountable, thus encouraging more responsible policing.
National defense would also be paid for by the insurers. Today, the United States spends over a trillion dollars a year on so-called “defense.” The country with the next highest military expenditure is China, which spends only 10 percent as much—with a population four times the size of ours. We could have the same level of per-capita defense spending for just 2.5% of the cost—and that’s compared to a Chinese military that is expanding. In truth, a purely defensive America—where most households would be armed—could be had for no more than $10 billion a year, or about $33 for every man, woman, and child.
The “What Ifs”
What if the private defense and police agencies went rogue? What if the judges of the private courts were easily bribed? For almost every “what if,” the answer is: we already have those exact problems, along with countless others, with monopoly government—why not give the alternative a try?
There are entire books written on the subject of how justice could function in a stateless society, and limited space prevents me from articulating a more thorough argument here. However, now that the election of ’08 is in the rearview mirror, perhaps you should consider a different “what if”: What if instead of choosing between Big Government and Bigger Government, or even Big Government and Small Government, what if the choice was no choice at all? And what if that choice actually represented true choice, as in choice of government? What could be more democratic than that?
|
|
Most Popular Posts