China’s Great Wall of Debt, Dinny McMahon, Houghton Mifflin Harcourt, 288 pp.

by Edward Chancellor*

China’s economy has long defied the doom-mongers. In place of their ominous critique, a more constructive view of economic management in the People’s Republic has surfaced. Beijing, we are told, has found the right balance between state and market forces, and is best positioned to exploit exciting new technologies, such as big data and artificial intelligence. Politically fractured and economically sclerotic Western nations can only look on in envy.

Dinny McMahon, a former financial journalist and mandarin speaker who spent many years reporting on the Middle Kingdom, doesn’t buy this line. In his view, China’s economy has spent years locked in continuous stimulus mode, accumulating bad debts and generating great economic imbalances along the way. This is not an original thesis. But it’s a welcome reality check on the current China hype. Of the many books that have observed the fragility and contradictions of China’s economic model, “China’s Great Wall of Debt” is the best. McMahon writes well, has a fine eye for detail and finds original stories to illustrate his argument.

The Japanese Shinkin Banks Turn Away from the Regional Economy

by Taiki Murai and Gunther Schnabl

Similar to the credit unions in the US, the goal of the Japanese Shinkin banks is the promotion of the sound development of the regional economy. The members of these non-profit cooperatives are small- and medium-sized enterprises as well as natural persons from the respective regions of Japan. The Shinkin banks manage deposits, perform banking operations and make loans. Until the Japanese bubble economy burst in the early 1990s, they were the backbone of the regional economy in Japan. Since then, however, the business model has been gradually changing, driven by the Bank of Japan. The upshot is that the Shinkin banks’ business activities have been gradually turning away from the regions and, therefore, their original aim.

The European Central Bank Drives the Political Polarization in Europe

by Sebastian Müller and Gunther Schnabl

Massive losses for Germany’s former catch-all parties (CDU/CSU and SPD) and record gains for the far-right Alternative for Germany (AfD) have caused turmoil in Germany’s political landscape. The tumbling leaders Angela Merkel and Martin Schulz keep affirming that good policies were simply not explained sufficiently. They blame globalization and refugees to be at the roots of growing political discontent. Meanwhile, a rightward shift in Austria and the Czech Republic has occurred, albeit the number of refugees in the Czech Republic is low and growth is high. Everywhere in Europe far-right parties flourish independently from the level of income and the number of welcomed refugees. What is the common driving factor?

A Critical Appraisal of Network Unbundling

High-speed broadband networks are key to the growth of digital markets as well as most modern forms of communication, and have been subject to far-reaching regulation in many countries. In this piece, we’ll review the rationale behind a cornerstone of the prevailing regulatory paradigm: forced access to incumbent operators’ network infrastructure by alternative operators on regulated terms, so-called “unbundling”.

The Venezuelan Crisis and the Political Costs of Reforms

by Pablo Duarte*

Venezuela is in deep political and economic crisis. According to Reuters – quoting a leaked document from the Venezuelan Central Bank – output fell 19% and prices increased 800% during 2016. Even though the “Socialism of the 21^st Century”, the political program initiated by former President Hugo Chavez, has been losing support in other countries, in Venezuela it is still alive. The government has responded to people’s discontent with violence rather than with economic reforms. One reason for the reluctance to reform can be that the government would have to assume high political costs if it wanted to solve the current economic crisis.

The Socialism of the 21st Century is on its Way out!?

by Andrea L. Tapia-Hoffmann*

Rafael Correa was inaugurated as President of Ecuador in 2007. He joined forces with Chavez to promote the idea of a so-called “Socialism of the 21^st Century” in Latin America. After Chavez’s death in 2013, Correa became the self-proclaimed leader of the movement. Because the new socialism has led to severe problems, it has recently lost support. Latin America is moving to the right. If a majority of Ecuadorians vote against Correa’s ruling socialists on April 2 this year, the entire project should be on its way out. The odds are good. The governments’ authoritarian behavior and the slowdown of the economy have eroded the popularity of Correa’s political party.

The System of Liberty

by Jerry O’Driscoll

I have just completed George Smith’s The System of Liberty: Themes in the History of Classical Liberalism. I recommend it highly to all. It is a tour de force, and an essential read for all those interested in classical liberal ideas. Many of the debates today on the political right have their origin in the debates over classical liberalism.

The book is co-published by the Cato Institute and Cambridge University Press. This is the second book this year jointly published by Cato and Cambridge, and is a coup for Cato. The other one is Richard Timberlake’s Constitutional Money: A Review of the Supreme Court’s Monetary Decisions.

Smith tells us that “’classical liberalism’ refers to a political philosophy in which liberty plays the central role.” A great deal is packed into that definition, and much of the book is devoted to developing and explicating all the issues. These include, among other issues, concepts such as order, justice, rights and freedom. It includes such monumental controversies, some still with us, as natural rights versus utilitarianism.

Quoting Lord Acton in the Introduction, Smith observes that “the true liberal views liberty as an end, not merely as a means; it is a value that is not “exchangeable for any amount, however large of national greatness and glory, of prosperity and wealth, of enlightenment or morality.’” Historically, liberalism developed around concrete issues. “Liberty of conscience” was one such, and was bound up in the struggle for religious freedom. That struggle was played out in Britain, but influenced events in the United States.

Smith takes up many issues or themes, beginning with “Liberalism, Old and New.” What Smith terms the “Lockean paradigm” of natural rights, social contract, consent, property, and the rights of resistance and revolution dominated old liberalism. Even when criticized, the paradigm established the terms of the debate.

I will highlight two chapters. “The Radical Edge of Liberalism” is quite important. In it, he examines the key language of the Declaration of Independence. The Declaration articulates the rights of resistance and revolution embodied in the Lockean paradigm. Smith asks of that paradigm: “Who has the right to judge when revolution is justified?” Locke answered: “’ The People shall be Judge.’”

It is no wonder that liberalism engendered conflicts, even within the tradition. Natural rights were seen as too radical by some, like Jeremy Bentham, and utilitarianism was the outcome. In “Conflicts in Classical Liberalism,” Smith notes that, prior to Bentham, traditional thinking saw no conflict between utility and natural rights. “Thus if social utility is the general goal of legislation, natural rights are the standard, or rule, which must be followed if this goal is to be achieved.” As noted by Smith, “Bentham broke with this venerable tradition.” He made “social utility serve as both the goal and standard of political activity.”
Smith is scrupulously fair to all thinkers, including critics of classical liberalism.

In Bentham’s case, however, he reveals Bentham to be a confused thinker who ultimately failed to make sense of his hedonic calculus. As Bentham came to admit, it was impossible to add up happiness across individuals. That is not to say that utilitarianism as developed by other thinkers was subject to criticisms leveled against the Benthamite calculus. But the problem is that utilitarianism, by undermining natural rights, undermined classical liberalism.

There is a great deal more to this book, and I hope many will read it. Smith is an exceptionally good writer. But the ideas he examines are deep, and the book is not an easy read. Smith does not skip lightly over topics. I have a few quibbles with some of what he writes, but very few. Decide for yourself.

Congress Should Grow a Pair

by Roger Koppl

I was thinking of the NSA scandal while jogging through Rome’s Park of the Aqueducts  this morning. I guess it was that setting that made me think of our new computer-geek overlords as a virtual Praetorian Guard.  Augustus created the original Praetorian Guard about 27 BCE to protect the emperor. It quickly came to exercise independent power, once even auctioning off the empire to the highest bidder.  This outrage led the Roman general Septimius Severus to march on Rome and displace Emperor Julianus who had won the Praetorian bidding war. Severus disbanded the old Preatorian Guard only to set up a new Praetorian Guard, which quickly achieved a similar authority, power, and autonomy. The “intelligence community” of the US government seems to be playing a similar role today.

We now have secret interpretations of public laws  that some members of Congress have obliquely warned of.

Income Inequality Matters

by Roger Koppl

Income inequality matters. Let me say that again so you know I meant it: Income inequality matters. This statement may be surprising coming from a self-described “Austrian” economist and a “liberal” in the good old-fashioned pro-market sense. It shouldn’t be. It should be one of our issues. The surprise should be that we pro-market types have not spoken up more on this central issue, thereby letting it become associated almost exclusively with more or less “progressive” opinion.

This indifference to income distribution is all the more mysterious because pro-market thinkers generally support a theory of politics that tells us to watch out for ways the state can be used to create unjust privileges for some at the expense of others. We should expect the distribution of income to be skewed toward the politically powerful and away from the poor and politically weak. In a representative democracy “special interests” engage in “rent seeking” to get special favors. Those special favors enrich some at the expense of others. That’s what they are meant to do!

THE WILL OF THE PEOPLE

by Mario Rizzo

Some people rest the case for representative democracy on the idea that its decisions express the “will of the people.” Those who believe this have never thought deeply about what they are saying. I am inclined, in response to these believers, to use my favorite paraphrase of Ludwig Wittgenstein, “You can mouth the words, but you cannot think the thought.”

What is the will of the people?  Whatever it is, it is certainly not without contradictions, illusions, misinformation, and wishful-thinking – just like a lot of individual thought. But as an aggregation of individual thought it is a construct used to justify all sorts of things. In some people’s minds, this construct has claim to moral authority.

Protests and Reason

by Chidem Kurdas

In the past week mass protests erupted in different parts of the world. The reasons were diverse. In the Middle East, demonstrations spread across the region following the killing of American diplomats in Libya over an anti-Muslim film. In China, crowds attacked Japanese shops and offices, over the two countries’ competing claims on some small islands in the East China Sea. In Russia, anti-government protestors called for the removal of President Vladimir Putin.

One can sympathize or not with any given protest—I happen to feel for the Russians opposing a corrupt and oppressive regime. But it may be more useful to pose two cool-headed questions. One, why are the organizers doing this? Two, why are the ground-level participants there?

Wisconsin Policy Lab

by Chidem Kurdas

Paul Ryan is said to be influenced by Milton Friedman, Friedrich von Hayek and Ayn Rand. One might add that as the representative for Wisconsin’s first congressional district, he is from a state that has often been in the vanguard of policy thinking.

Mitt Romney is Not a Tax Idiot

by Mario Rizzo

Let us begin with a famous quotation from Judge Learned Hand in a decision affirmed by the Supreme Court:

Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.

Gregory v. Helvering 69 F.2d 809, 810 (2d Cir. 1934), aff’d, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935)

Quite simply, I am really tired of hearing about Mitt Romney’s tax returns. Does Team Obama really want us to believe that if Mitt Romney took advantage of every legal option to lower his tax bill that he is somehow bad, out of touch with the majority of Americans, or unpatriotic (whatever that is supposed to mean)?