Walter Block on Why the Minimum Wage Law is a Stab on the Back of the Poor

Austrian economist Walter Block’s take on the baneful invisible effects of the minimum wage law (sourced from lewrockwell.com, with permission of Professor Block) [bold mine, italics Professor Block]

The minimum wage on its face is an unemployment law, not an employment law. It does not compel anyone to hire anyone else. It only stipulates who CANNOT legally be employed: no one may be hired for less than the amount stipulated by law. If the minimum wage law is set at $10 per hour, the law does not require any employer to hire any employee at that wage level. It only FORBIDS employment contracts set at $9.99 or below. This is not a matter of empirical evidence, not that there can be any such thing in proper, e.g., Austrian economics; this conclusion is a matter of pure logic. We repeat: the minimum wage on its face is an unemployment law, not an employment law.

What about empirical studies (economic history, for praxeological economists)? Here, economists disagree. Some say there will be no unemployment effects whatsoever. That is, a person with a productivity level of $6 per hour will still be hired and paid $10 per hour, even though any such firm that does so will lose $4 per hour. Such “economists” are in a distinct minority. Other dismal scientists opine there will be very slight unemployment effect; some few unskilled workers will lose their jobs or not attain them in the first place; but a large number will retain their jobs and be paid more. Then there is a third or majority view: most economists conclude that this law will boost unemployment for those with low productivity, and will only raise wages for them temporarily, until employers can substitute away from the factor of production (unskilled labor) now priced out of the market.

What is the Austrian take on all of this? The praxeological view is that the minimum wage law will raise unemployment higher than it would otherwise be, in the absence of this law, other things equal, provided only that it is set above the level of productivity of at least one worker. This is an apodictic claim, not subject to refutation, falsification or testing. This claim is necessarily true, and yields knowledge about real world effects. Austrian economics is causal – realist, unlike the economics of the mainstream logical positivists, who recognize no economic law, only hypotheses to be tested, and if not falsified, then provisionally accepted.

Some economists who have recently signed this open letter in support of the minimum wage law have published introductory and intermediate economics textbooks. In those publications, they take the usual position that minimum wage legislation unemploys laborers with low skills. Thus, their textbooks blatantly contradict the open letter they signed.  I take great joy in listening to and reading their responses to this charge that they are contradicting themselves. Talk about talking without saying anything.

What of the ethics of the matter? Here, again, there can be no controversy. The minimum wage law violates people’s rights to engage in consenting adult behavior. An employer and an employee agree to a wage contract of, say, $5 per hour. Both are considered criminals under this pernicious legislation. But it is a victimless “crime” to pay someone $5 per hour for his labor services, and/or to receive such an amount of money for working. Both parties agreed to this contract! Our society is now in the process of legalizing other victimless crimes, such as those concerning prostitution, drugs, gambling, etc. Many people favor “choice” when it comes to adult behavior without victims. The minimum wage law is a step backwards from these moves in a moral direction.  And, yet, paradoxically, it is to a great degree precisely those people who advocate the legalization of these victimless crimes who are the staunchest supporters of the minimum wage law.

Posit that the “moderate” economists were right. A few people will lose their jobs, but the overwhelming majority would either find or keep their employment slots, at higher compensation rates. Suppose I were to go to the inner city (which contains a disproportionate number of the unskilled), and did the following. I went to one in every 20 people I met, and, at the point of a gun, I relieved them of, oh, $10,000 (40 hours per week time 50 weeks multiplied by $5 per hour). Whereupon I turned to the other 19 out of 20 people and dispersed these stolen funds amongst them. If I did so, I would be promoting the precise effects that the moderate members of the economics profession who are supporters of minimum wage claim will occur. Namely, this law, they contend, they concede, will hurt very few but benefit the many. But how would my excursion into the inner city, and my wealth transfer, be considered by law? Of course, I would be considered a criminal, and very properly so.

For reasons we need not discuss right now, the productivity of whites is higher than that of blacks. It is for this reason that the unemployment of the latter is higher than that of the former, actually, as an empirical finding, about twice as high. For reasons we need not discuss right now, the productivity of middle aged workers is higher than that of young employees, who are just starting out. . It is for this reason that the unemployment of the latter is higher than that of the former, actually, as an empirical finding, about twice as high. It is for this reason that the unemployment rate of black teens is roughly quadruple that of whites of mature years. All this stems from the minimum wage law serving as a barrier to entry, a hurdle, and not a floor raising wages. Supporters of the minimum wage, who just LOVE statistics, tend to shy away from this revealing data.

Who are the beneficiaries of the minimum wage law?  Quo bono?  This will come as a shock to some people, but the people who gain the most from this legislation are skilled workers, typically organized into labor unions. When they demand a boost in their own wages, the immediate response of the employer is to want to substitute away from this suddenly more expensive factor of production, skilled labor, and into a substitute for it; that is unskilled labor. There is more than one way to skin the cat. The same number of widgets might be able to be produced with 100 skilled and 100 unskilled workers, as with, for example, 50 of the former and 200 of the latter.  If there is any such thing as fixed proportions in manufacturing and production, it must be a great rarity. How best to fight such an eventuality from the point of the labor union? One way to do so is to castigate as scabs” (why this is not an example of “hate speech” similar to the use of the “N” or “K” word is beyond me; well, not really) the unskilled laborers hired in response to the union’s demand for higher wages. But there are problems here. For one thing, these newly hired employees would be disproportionately minority group members. It really looks bad for liberals, “progressives,” to be fighting this particular demographic. For another, these people can fight back. If you slash their tires, and hit them over the head with a baseball bat, they can reciprocate. No; this will not do. Organized labor has come up with an ingenious counterattack. Are you ready for this? Please take a seat, for you are now in danger of keeling right over. Yes: the minimum wage law; that is the solution to this quandary for organized labor. There is perhaps no better way to eliminate competition than to price it out of the market. (Hint, to burger providers; if you want to adopt crony capitalism, try to get a law passed compelling the prices of competitive products such as pizza, hot dogs, to be raised ten-fold. You can claim it is for health reasons.)

Who else benefits from the minimum wage law? This is like asking, who gains from high unemployment rates of young people, and unskilled workers? When looked at in this manner, several candidates immediately come to mind, given that unemployment breeds boredom and criminality: social workers, psychologists, psychologists, prison guards, policemen, etc. I don’t say that all of these people favor the minimum wage law because it will feather their nests. I only say their financial situation improves from its passage, and therefore empirical research into this possibility might be fruitful.

Why do we have this law on the books if it is so evil, so pernicious? One reason, already discussed, is that there are beneficiaries: organized labor, and our friends on the left who support them. Another is of course monumental economic illiteracy. Obdurate economic illiteracy. I teach freshman economics at Loyola University, and I usually take a survey of my students on opening day. Typically, a large majority favors the minimum wage law, and they do so not out of malevolence. Rather, they really think that this law will raise wages and help the poor. My students think this law is like a floor rising, and thus raising everyone with it. They do not realize that a better metaphor is a hurdle, or high jump bar: the higher the level stipulated by the minimum wage law, the harder is it to “jump” into employment. This law eliminates the lowest rungs of the employment ladder, where especially young people can gain valuable on-the-job training, which will help raise their productivity. If this legislation were of such great help to the poor, I ask my students, why are we so niggardly about it? Why limit the raise to $10, or $12 or even $15, as some radicals favor? Why not really help the poor, and raise the minimum wage level to $100 per hour, or $1000 per hour, or maybe $10,000 per hour. At this point they can see that virtually the entire population would be unemployed, because it is a rare person who has such high productivity. But, then, hopefully, then can begin to see that a minimum wage of a mere $7 per hour is an insuperable barrier to employment for someone whose productivity is $4 per hour.

When the minimum wage was raised from $.40 to $.70 cents per hour (the largest percentage increase so far) we went from manually operated elevators to automatic ones, helping high skilled engineers at the expense of the unskilled manual operators. This transition took a few years, but that was the cause. Initially, before anyone could be fired, wages did indeed rise. If the present minimum wage goes from $7.25 to, horrors!, $15.00, people who ask if you want “fries with” that will be supplanted by self serves and automatic machinery which will then be competitive with labor, but cannot now compete with low skilled people. Those jobs will go the same place, namely, booted out of existence, as the ones that used to exist at gas filling stations.

What should be done? We should not raise the present national minimum wage from its present $7.25. Nor should we maintain it at that level. Nor should we decrease it (some politicians advocate a lower minimum wage, for example, $4 per hour, just for the summer and only for high school kids to help them get jobs; but to counsel such a course of action is to admit that the law is a hurdle which must be jumped over, not a floor supporting rises). We should instead eliminate it entirely, and sow salt where once it stood. More than that. We should criminalize passage of this law. That is, we should throw in jail, or deal with these miscreants as we would other criminals, all those responsible for the passage of this law and for its implementation, such as the legislators who passed such a law, the police who enforced it and the judges who gave it their seal of approval. After all, is this not the way we would treat a person who unemployed other people at the point of a gun? Suppose there were a law that explicitly did consign people to involuntary unemployment, not implicitly and indirectly as does the minimum wage law, but direcetly. That is, an enactment such as this: It shall be illegal to employ black people. It shall be illegal to employ white people. It shall be illegal to employ young people. It shall be illegal to employ old people. It shall be illegal to employ Jews. It shall be illegal to employ Christians. It shall be illegal to employ gays.  It shall be illegal to employ heterosexuals. It shall be illegal to employ men. It shall be illegal to employ women. How would we treat all those responsible for the passage of such laws and for their implementation such as the legislators who passed such a law, the police who enforced it, the judges who gave it their seal of approval? Precisely, we would throw the book at them. We would penalize them to the fullest extent of the law.  Why should we do any less for those responsible for the minimum wage law?

I may add that the recent trends in globalization particularly outsourcing [as this 2010 yahoo article points out “The United States has one of the highest rates for minimum wage. In fact, there are some countries that do not set minimum wage rates. As of 2008, minimum wage in China was $ .60 (US Dollars), while in India it was $2.15 (US Dollars), and it was $2.46 (US Dollars) in Mexico.* Besides higher minimum wage in the United States, companies must contribute to Social Security, Medicare, FICA and unemployment insurance. These payments do not have to be made for foreign employees, and therefore the American companies save on payroll and costs for payroll.”]…as well as China’s export boom via “cheap labor” may partly have been one of the unseen consequences of the US minimum wage law.

Behind the 2013 Philippine Statistical Economic Growth of 7.2%

The Philippine statistical economy reportedly grew by 7.2% in 2013. 

As a side note, in my opinion, this news release has been timed to temper down on the renewed selling pressure from the "taper"

Question is what’s been driving the so-called growth?

The following graphs are from the National Statistical Coordination Board

Aside from the non-bubble manufacturing, the gist of the growth on a per industry basis comes from the usual base: construction, financial intermediation and real estate.

These are areas where most of the credit growth from the banking sector can be seen (data from the BSP updated November 2013).

One would note that financial intermediation soared by 40% in January of 2013 but turned lower and grew by less than 10% at the latter semester. The growth during the early half basically offset the slower growth at the second semester. This led to the annualized considerable growth figure.

Meanwhile credit expansion in construction, and real estate growth remains significantly above statistical economy.

On the per expenditure basis, growth mainly came from Intellectual Property Products (IPP) 15.4%, Durable equipment 14.4%, construction 10.9%, government expenditure 8.6% and household consumption 5.6%

Note the demand side (HFCE) has been growing 5.6% slower than the growth in the supply side.

Also IPP represents only 2.6% share of the fixed capital. The bulk of the distribution of fixed capital comes from construction with a 40% share and durable equipment at 50% share. 

And where is the growth in the durable equipment?

Largely in air transports. Whoever has been buying those planes. Could it be the government? Transports account for 44% share of the durable equipment. Road vehicles which has the largest share (in terms domestic currency at constant 2000 prices) have shown little growth at 5.5%. As a side note I used the constant 2000 as measure to be consistent in all of the above.

The other growth areas are ‘other general industrial machineries’ which accounts for about a third of the General Industrial Machinery, the latter category holds a 14.5% share of durable equipment.

Another ‘other misc durable equipment’ which accounts for 88% of miscellaneous ‘equipment’. The last category has an 18% share of the durable equipment data.

I wonder what constitutes the “other” categories in the durable equipment data which are derived from surveys: Annual Survey of Establishments (ASE) and the Census of Establishments (CE). The NSCB admits that “the estimates are affected by the limitations of these surveys.”

The bottom line: Whatever statistical growth the Philippine economy in 2013 has registered has largely been based on credit inflation. This means that for such rate of statistical growth to be sustained, credit inflation in these sectors would have be maintained; this via zero bound rates and a stable currency, something which unfortunately, the current market environment has been pushing back. The USD- Philippine Peso seems back at 45.30s level as of this writing and yields of 10 year Philippine treasuries have hardly gone down.

Second, yet growth in these sectors have largely emanated from those entities with access to the banking sector which means statistical growth has been concentrated to few. 

This also leads us to the third issue, the current statistical growth has largely been representative of the formal economy and hardly the overall economy where the informal economy has a big presence. The fact that the banking system has low penetration levels exhibits on the structural inefficiencies of the Philippine economy which means that savings have hardly found its way into productive undertakings. Thus the bellyaching by the mainstream of the lack of investments.

So the domestic central bank (BSP) instead resorts to implementing bubble blowing policies while the executive branch wants to spend its way just to generate statistical growth (thus benefiting cronies).

And signs of unproductive credit based spending can be seen from the sustained deficits in the Philippine trade balance. 

Real growth comes only from real savings and not from credit expansion

This also means that the Philippine GDP have been prone to significant statistical errors.

Fourth, supply side growth continues to substantially surpass demand side growth. And this means no imbalances (as alleged by the mainstream and those obsessed with impeccability of statistics)? Whatever happened to the law of supply and demand? 

Lastly all these cheerleading of the statistical growth (really a legacy of the mania phase from last year) reminds me of the warnings of the the great Austrian economist Ludwig von Mises (bold mine)

Public opinion is utterly wrong in its appraisal of the phases of the trade cycle. The artificial boom is not prosperity, but the deceptive appearance of good business. Its illusions lead people astray and cause malinvestment and the consumption of unreal apparent gains which amount to virtual consumption of capital. The depression is the necessary process of readjusting the structure of business activities to the real state of the market data, i.e., the supply of capital goods and the valuations of the public. The depression is thus the first step on the return to normal conditions, the beginning of recovery and the foundation of real prosperity based on the solid production of goods and not on the sands of credit expansion.

Pension Confiscation: US Edition

Resource starved governments from different parts of the world have either nationalized (at various degrees) or raided the pension industry in order to finance budget deficits or to attain various political goals. Some examples: Poland, Hungary, Ireland, Bulgaria and Ireland, Argentina (fully nationalized), in Spain retirement funds had been used to buy Spanish government debts, and in the Philippines where government pension have been used to prop up the stock market

Well, the US government seems likewise headed in that direction. This via President Obama’s “new retirement-savings vehicle aimed at workers who don't have access to traditional retirement accounts” through his new "myRAs" which he announced during his latest State of the Union address

Sovereign Man’s prolific Simon Black explains further

This is his new “MyRA” program. And the aim is simple– dupe unwitting Americans to plow their retirement savings into the US government’s shrinking coffers.

We’ve been talking about this for years. I have personally written since 2009 that the US government would one day push US citizens into the ‘safety and security’ of US Treasuries.

Back in 2009, almost everyone else thought I was nuts for even suggesting something so sacrilegious about the US government and financial system.

But the day has arrived. And POTUS stated almost VERBATIM what I have been writing for years.

The government is flat broke. Even by their own assessment, the US government’s “net worth” is NEGATIVE 16 trillion. That’s as of the end of 2012 (the 2013 numbers aren’t out yet). But the trend is actually worsening.

In 2009, the government’s net worth was negative $11.45 trillion. By 2010, it had dropped to minus $13.47 trillion. By 2011, minus $14.78 trillion. And by 2012, minus $16.1 trillion.

Here’s the thing: according to the IRS, there is well over $5 trillion in US individual retirement accounts. For a government as bankrupt as Uncle Sam is, $5 trillion is irresistible.

They need that money. They need YOUR money. And this MyRA program is the critical first step to corralling your hard earned retirement funds.

Pensions first? Bank deposits and rigid capital controls next? Will gold be banned too?

Bernanke Tapers Anew, Emerging Market Rout Resumes

The US Federal Reserve announced a second round of “tapering” or the reduction in their asset purchasing (money printing).

From Reuters:

The Federal Reserve on Wednesday decided to trim its bond purchases by another $10 billion as it stuck to a plan to wind down its extraordinary economic stimulus despite recent turmoil in emerging markets.

The action was widely expected, although some investors had speculated that the U.S. central bank might put its plans on hold given the jitters overseas.

Fed Chairman Ben Bernanke, who hands the Fed's reins to Vice Chair Janet Yellen on Friday, managed to adjourn his last policy-setting meeting without any dissents from his colleagues. It was the first meeting without a dissent since June 2011 - a sign of how tumultuous Bernanke's tenure has been.

It is the epilogue of Bernanke reign at the Fed, so it would seem that he would like to be remembered as having the discipline to rein or reverse his lavish monetary policies. Like Pontius Pilate, he "washes his hand" via the taper

And as I warned yesterday “It's even more interesting for Emerging Markets and for Asia to pray that the US Federal Reserve, whom are meeting today, won't add to their woes by increasing the "taper"

EM and Asia's prayers were apparently not answered. And signs are that the EM nightmare will continue. 

The soothing effect by Turkish central bank’s ‘shock and awe’ seems to have been neutralized by the Fed’s “taper”.

Fun for a day. The Turkish lira’s sharp one day rally (green ellipse) has been fully erased (red arrow). Such one day tryst spread to Asia yesterday

The currency rout can also be seen in the other members of the so-called fragile five

The Brazilian real

The South African Rand

We will see how the taper will impact the Indian rupee and the Indonesian rupiah later.

Nonetheless, the Russian ruble has also been slammed.

It’s not just EM currencies. It appears that US stocks have likewise been hammered last night.

The flow of events will go from intensifying market distress to liquidity squeezes to real economic issues via crises. This is the periphery-to-the-core dynamics. The question is will EM and developed economy policymakers be able to prevent the cycle from materializing? And will policymakers be able to forestall a contagion? Will a Black Swan event occur in 2014? By the way, it’s just the end of January and progression of events appear to be headed in the direction of the Black Swan.

Don’t we live in interesting times?

Turkey’s Central Banks Surprises With Huge Interest Rate Increases

Turkey’s central bank just made a stunning “shock and awe” move in order to calm her mercurial financial, particularly the currency market. The central bank substantially raised interest rates by 400-500 basis points

From Bloomberg:

Turkey’s central bank raised all its main interest rates at an emergency meeting, resisting political pressure and reversing years of policy, after the lira slid to a record low.

The bank in Ankara raised the benchmark one-week repo rate to 10 percent from 4.5 percent, according to a statement posted on its website at midnight. It also raised the overnight lending rate to 12 percent from 7.75 percent, and the overnight borrowing rate to 8 percent from 3.5 percent. The lira extended gains after the announcement, adding 3 percent to 2.18 per dollar at 1 a.m. in Istanbul.

Turkey is one of the supposed member of the emerging market Morgan Stanley coined “fragile 5”—along with Brazil, South Africa, India and Indonesia.

Some have cheered that Turkey’s central bank’s surprising move may have contained the emerging market contagion, but such optimists may be overlooking the possible impact of these rate increases on the real economy.

The central bank’s action has been meant to stabilize the Turkish lira which has been in a collapse mode vis-à-vis the US dollar.

This is the historical performance of Turkey’s interest rates. Like everywhere else, Turkey rates has been zero bound since 2008. Yet the recent rate hike is still far from the highs of the 2008 crisis

What has been the outcome of the zero bound rates?

Again like everywhere else, the short answer is a Credit Bubble.

Loans to the private sector spiraled to the firmament. Turkey’s credit backed spending spree has led to massive deficits in her trade and current account balances. This means that her lavish debt financed spending depended also on foreign money to plug these holes. This is another symptom of the Credit Bubble.

Moreover Turkey government continues to spend more than she collects thus sustaining a budget deficit.

And this gap has been financed by external borrowing which has leapt since 2010. External debt has grown by about 40% from the 2010 lows.

So zero bound rates promoted debt financed spending of the private sector and of the government which had been funded by banks and by foreign money. 

This is very interesting because there are about $160+ billion short term external debt due this year according to Turkey’s Central Bank, mostly held by private banks and by the other sectors.

And the other concern is of the external financing requirements excluding short term debt.

Another point of concern is of the $350 billion worth of foreign banking exposure on Turkey. Should there be any default/s will these foreign banks not be affected?

Interesting no?

Some questions

Will the current shock and awe be enough to stabilize Turkey’s financial system? Or will this just have a short term effect, where the current hike could be the first of the series of many more rate hikes to come?

How will the current dramatic rate hike impact the real economy (private sector and the government)? Importantly how will the current interest policy affect Turkey’s government and the private sector’s capacity to service debt? 

The markets have already been pricing in higher probability of Turkey’s debt default via higher CDS spreads

Mind you, for all those singing hosannas that forex reserves serve as talisman from a crisis, so far Turkey’s massive record foreign exchange reserves has done little to contain the financial upheaval.

It’s very interesting because Turkey could function as a paradigm to a possible crisis contagion or ‘domino effect’ in emerging markets.

It's even more interesting for Emerging Markets and for Asia to pray that the US Federal Reserve, whom are meeting today, won't add to their woes by increasing the "taper" 

China Rescues Troubled Trust Product

Like her Western contemporaries, the Chinese government has decided to delay the day of reckoning by bailing out a troubled trust product.

Reports the Bloomberg:

China’s eleventh-hour rescue of wealthy investors in a high-yield trust threatens to drive more money into the nation’s $6 trillion shadow-banking industry, undermining regulators’ efforts to deter excessive risk-taking.

Industrial & Commercial Bank of China Ltd., the nation’s largest lender, yesterday told customers who had invested in the 3 billion-yuan ($496 million) trust product that they can sell their rights to unidentified buyers to recoup the principal. Some clients plan to visit ICBC branches to demand more interest ahead of tomorrow’s 5 p.m. deadline for accepting the offer, according to Du Ronghai, a Guangzhou-based investor.

Averting the nation’s biggest trust default may reinforce investors’ belief in implicit guarantees and the government’s backing of such risky products, stoking their appetite for products in the $1.67 trillion trust market. The bailout underscores the pressure on authorities to maintain financial and social stability even as they aim to prune the government’s role in the world’s second-largest economy and curtail debt.

This shows how government’s today fervidly dreads short term pain by undertaking measures that will even be more agonizing in the future.

Yet the article rightly puts into spotlight the risks of moral hazard from the bailout. Local governments, whom has used shadow banks as a main conduit for financing, along with other private sector borrowers will likely pile into the shadow banking sector since the government has placed an implicit guarantee via today’s actions.

China’s shadow banks—which includes wealth management products (WMPs) or a pool of securities like trust products, bonds and stock funds that offer higher yields than the bank deposits—have grown significantly.

And according to a report from Businessinsider, WMPs soared by 47.4% in the third quarter of 2013 from a year ago. Trust products, which are part of WMPs, jumped by 60.3% over the same period while LGFV loans rose sharply by 59.7% as interest rates for these products rise. The diagram above shows of the WMPs issued in 2013.

Moreover, according to the same Bloomberg report above, there are about 5.3 trillion yuan of trust products that will be due this year compared with 3.5 trillion yuan in 2013. However shareholder equity backing these has been estimated only at 236 billion yuan. This extrapolates to a higher likelihood of a wave of defaults.

Will the Chinese government bailout all problematic WMPs?  At what costs will any succeeding bailout/s bring about? How long before the next debt problem surfaces?

It’s odd that today’s rescue efforts has not spurred a celebration in China’s financial markets. 

Yields of Chinese 10 year and 5 year treasuries while down from recent highs remains elevated at 4.52% and 4.44%. Recent highs were 4.71% for the 10 year and 4.6% for the 5 year.

Chinese equities via the Shanghai Index, rose modestly by .26%.

And what’s more peculiar has been that Shibor (interbank) rates seem to have surged (green ellipse), particularly from overnight to 1 month maturities. This seem to indicate signs of a squeeze. Although it's not clear whether the above rates reflected before or after the bailout.

As I previously asked will China be a trigger to 2014’s possible Black Swan event?

2014 is certainly proving to be interesting times.

Walter Block: Why 'Social Justice' Should Not Be Thought in Schools

[update: I changed the title of this post]

I have communicated with the great Austrian economist Walter Block, I offered to publish some of his works here to help spread Austrian economics and libertarianism.

So I will start with Mr. Block’s take on academia's promotion of Social Justice. The following article is from Mr. Block’s Building Blocks for Liberty p. 235-237 (Thanks Professor Block)

On many university campuses, there is a push on to promote Social Justice. There are two ways to define "Social Justice."

First, this concept may be defined substantively. Here, it is typically associated with left wing or socialist analyses, policies and prescriptions. For example, poverty is caused by unbridled capitalism; the solution is to heavily regulate markets, or ban them outright. Racism and sexism account for the relative plight of racial minorities and women; laws should be passed prohibiting their exercise. Greater reliance on government is required as the solution of all sorts of social problems. The planet is in great danger from environmental despoliation, due to an unjustified reliance on private property rights. Taxes are too low; they should be raised. Charity is an insult to the poor, who must obtain more revenues by right, not condescension. Diversity is the sine qua non of the fair society. Discrimination is one of the greatest evils to have ever beset mankind. Use of terminology such as "mankind" is sexist, and constitutes hate speech.

Secondly, Social Justice may be seen not as a particular viewpoint on such issues, but rather as a concern with studying them with no preconceived notions. In this perspective, no particular stance is taken on issues of poverty, capitalism, socialism, discrimination, government regulation of the economy, free enterprise, environmentalism, taxation, charity, diversity, etc. Rather, the only claim is that such topics are important for a liberal arts education, and that any institution of higher learning that ignores them does so at peril to its own mission.

So that we may be crystal clear on this distinction, a Social Justice advocate of the first variety might claim that businesses are per se improper, while one who pursued this undertaking in the second sense would content himself by merely asserting that the status of business is an important one to study.

Should a University dedicate itself to the promotion of Social Justice? It would be a disaster to do so in the first sense of this term, and it is unnecessary in the second. Let us consider each option in turn.

Should an institution of higher learning demand of its faculty that they support Social Justice in the substantive left wing sense, it would at one fell swoop lose all academic credibility. For it would in effect be demanding that its professors espouse socialism. But this is totally incompatible with academic freedom: the right to pursue knowledge with an open mind, and to come to conclusions based on research, empirical evidence, logic, etc., instead of working with blinders, being obligated to arrive only at one point of view on all such issues.

This would mean, for example, in economics, the area with which I am most familiar, to be constrained to conclude that the minimum wage law is the last best hope for the unskilled, and that continually raising it is both just and expeditious; that free trade is pernicious and exploitative. It is more than passing curious that those in the university community who are most heavily addicted to diversity cannot tolerate it when it comes to divergence of opinions, conclusions, public policy prescriptions, etc.

What about promoting Social Justice in the second sense; not to enforce conclusions on researchers but merely to urge that questions of this sort be studied?

This is either misguided, or unnecessary.

It is misguided in disciplines such as mathematics, physics, chemistry, music, accounting, statistics, etc., since these callings do not typically address issues related to Social Justice. There is no "just" or "unjust" way to deal with a "T" account, a quadratic equation or an econometric regression; there are only correct and incorrect ways to go about these enterprises. To ask, let alone to demand, that professors in these fields concern themselves with poverty, economic development, wage gaps or air pollution is to take them far out of their areas of expertise. It is just as silly as asking a philosopher to teach music, or vice versa.

And it is totally unnecessary, particularly in the social sciences but also in the humanities. For if members of these disciplines are not already conducting studies on issues germane to Social Justice (and, of course, to other things as well) then they are simply derelict in their duty. If historians, sociologists, anthropologists, economists, philosophers are ignoring poverty, unemployment, war, environmentalism, etc., no exhortations to the contrary are likely to improve matters.

Colleges and universities therefore ought cease and desist forthwith from labeling themselves in this manner, and from promoting all extant programs to this end. It is unseemly to foist upon its faculty and students any one point of view on these highly contentious issues. It would be just as improper to do so from a free enterprise, limited government private property rights perspective as it is from its present stance in the opposite direction. For additional material critical of these initiatives, see Michael Novak and Walter Williams.

Of course, social justice may be defined in yet a third manner: as favoring justice in the "social" arena, as opposed to other venues. Here, all intellectual combatants would favor the promotion of this value; the only difference is that leftists, for example, mean by this some version of egalitarianism, while for libertarians justice consists of the upholding of private property rights. For a college to uphold social justice in this sense would be highly problematic, in that two very different things would be connoted by this phrase.

Quote of the Day: The typical way tyrants gain power

The strategy for want-to-be tyrants is to demonize people whose power they want to usurp. That’s the typical way tyrants gain power. They give the masses someone to hate. In 18th-century France, it was Maximilien Robespierre’s promoting hatred of the aristocracy that led to his acquiring dictatorial power. In the 20th century, the communists gained power by promoting public hatred of the czars and capitalists. In Germany, Adolf Hitler gained power by promoting hatred of Jews and Bolsheviks

This is from economist, author and professor Walter E. Williams at the lewrockwell.com

Signs of Emerging Bank Runs?

One can sense trouble when banks impose limits on depositors withdrawal (or even ask depositors reasons why the have to withdraw large amounts of their own money) as with the recent case of HSBC.

More from Simon Black of the Sovereign Man.

It’s happening again. This time HSBC branches in the UK are putting limits on customer withdrawals.

Bank employees there have been telling customers that they first must demonstrate to the bank’s satisfaction WHY they want to withdraw their own money. The bank has simply decided in its sole discretion that it won’t give people their own money back.

This is positively revolting– a breach of a most sacred form of trust between a bank and its customers. It would have been unthinkable just 10-years ago. But today it’s par for the course.

Banks across most of the ‘developed’ world have razor thin liquidity and capitalization ratios—meaning that their margins of safety are extremely low.

If just a small percentage of their assets lose value, they’ll go under. Or, if just a small percentage of their customers want their deposits back, they won’t be able to pay up.

This is ultimately what’s happening to HSBC. It turns out their UK operations are in severe financial trouble, posting a major capital shortfall of over $100 billion.

This should come as no surprise. Less than a year ago, in response to how poorly capitalized British banks were, the banking regulators announced that it would allow banks to use creative accounting to boost their numbers.

In one method that was explicitly condoned by regulators, banks were authorized to count FUTURE earnings (i.e. profit that they may or may not earn in years to come) towards their capital TODAY.

It’s like calculating your net worth based on how much you -think- you might be earning 20-years from now.

This is fraud, plain and simple. And I wrote about this numerous times last year.

Of course HSBC is not alone. With few exceptions, most banks across Europe are in a similarly precarious position– highly illiquid and thinly capitalized.

This isn’t rocket science– it’s what broke banks do. We saw what happened in Cyprus last year when banks got “bailed-in” by their customers.

Read the rest here

In a world of central banking fractional banking system, only a fraction of reserves are held by banks to service depositor’s demand for cash. 

If or when there will be a surge of (simultaneous) withdrawals, banks with insufficient funds either resort to imposing limits or turn to their respective central banks for assistance. If the public senses the latter then this would only aggravate public’s demand to access their deposits. This happened to UK's Northern Rock in 2008 which led to the firm's bankruptcy and eventually was nationalized. 

HSBC’s actions, thus, reveal of possible signs of renewed banking distress via a “quasi” bank run.

Yet the common notion that depositors own or has full access to their money deposited with banks are mistaken. As economics Professor David Howden explains at the Mises Blog

Option clauses, for example, were widely used in the Scottish “free banking” era as a way to get depositors to stop asking for their money. A bank could elect not to hand over a deposit when asked, but would at least remunerate the customer for this inconvenience. At the time this was widely seen as problematic, as it drove a wedge between the motivations of depositors (have their cash safe and available) and bankers (use depositor funds and remain solvent).

Today’s banks don’t even do this – they just change the rules of the game half-way through. Depositors think they have full access to their money when they make a deposit. Not only that, they think they are the owners of their money. Wrong on both counts. According to the law of most lands, when you deposit your money in a bank it becomes property of the bank

(bold mine)

More signs of periphery to core dynamics?

ASEAN Crisis Watch: Indonesia’s bond market selloff accelerates

A few days back I wrote

Indonesia’s first successful offering at the start of the year represents the initial tranche of the “record IDR 357.96 trillion (USD $29 billion)” bond sales it plans to conduct “from both international and local debt capital markets in 2014”.

The question is what if the current emerging market turmoil spreads to ASEAN, will the Indonesian government be able to raise money from her targeted bond sales? If yes, at what level of rates? If not will she resort to bigger taxes or more inflation by her central bank? Yet how much increase in coupon yields in the bond markets can the Indonesia’s government afford to finance the new round of debt? How will higher rates impact the political and the economic landscape?

Here are more signs of the periphery to the core dynamic where turmoil in emerging markets seem to have spread to ASEAN.

As of this writing Indonesia’s bond market rout at the long curve appears to be accelerating:

Yields of Indonesia’s 10 year rupiah bonds soar back to the levels during the 1st week of the year prior to the government’s global bond sales

So with the yields of 20 year bonds.

Albeit yields of 5 year treasuries have risen they are far from pre bond sale level

The currency the Indonesian rupiah has also been plummeting

Indonesia’s stock market benchmark the JCI’s recent advance appears to have been foiled following the switch to a risk OFF mode. Easy come, easy go.

Indonesia’s CDS spreads have been on an uptrend while the recent EM ruckus seem to have incited a renewed spike.

Indonesia's financial markets have been signaling increasing signs of distress such that the current interest rate levels have not been enough to stanch the stream of outflows. Yet how much hike in interest rate levels can the Indonesian economy sustain before bond market rout transforms into a liquidity squeeze that eventually morphs into a crisis? And will Indonesia's problems remain isolated?

For those who think these are bullish stocks, then good luck to you.

Quote of the Day: Measuring nothing (with great accuracy)

The weight of a television set has nothing at all to do with the clarity of its picture. Even if you measure to a tenth of a gram, this precise data is useless.

Some people measure stereo equipment using fancy charts and graphs, even though the charts and graphs say little or nothing about how it actually sounds.

A person's Klout score or the number of Twitter followers she has probably doesn't have a lot to do with how much influence she actually has, even if you measure it quite carefully.

You can't tell if a book is any good by the number of words it contains, even though it's quite easy and direct to measure this.

We keep coming up with new things to measure (like processor speed, heat output, column inches) but it's pretty rare that those measurements are actually a proxy for the impact or quality we care about. It takes a lot of guts to stop measuring things that are measurable, and even more guts to create things that don't measure well by conventional means.

This splendid quote is from marketing guru Seth Godin at his website.

Even from the marketing perspective, it is the relevance and the quality of measurement (statistics) that matters. Importantly, measurements have inherent limitations.