The Lighthouse^®

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The Lighthouse^® is the weekly email newsletter of the Independent Institute.
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Volume 13, Issue 31: August 2, 2011

1. Deficit Reduction Requires Deep Spending Cuts
2. In Defense of Capitalism
3. Celebrity Chef Gordon Ramsay, Meet F. A. Hayek
4. Norway Terrorist Incident Exposes West’s Double Standards
5. New Blog Posts

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A last-ditch deal that narrowly avoids a potential default on federal obligations is not a cure for America’s fiscal crisis. President Obama and Congress still have much work ahead if they wish to put the country on a sound fiscal footing. The first step should be to reach an accurate assessment of what went wrong. Unfortunately, some politicos attribute the surge of annual budget deficits to decreases in tax revenues (the much maligned “Bush tax cuts”). True, revenues fell after 2007. But the main culprit for the fiscal shortfall is federal spending, which in recent years has grown far more than revenues have fallen, according to Independent Institute Research Fellow Craig Eyermann, creator of the Government Cost Calculator at MyGovCost.org.

Eyermann’s latest piece at MyGovCost.org compares total federal outlays per household and total federal receipts per household, from 1967 to 2010. The gap between the two trend lines shows clearly that, since 2007, increases in federal spending are much larger than the decreases in federal revenue. Translation: Washington’s spending spree is the main cause of America’s financial crisis.

“The key point to understand in the current debate,” Eyermann writes, “is that while the federal government is not capable of precisely controlling the amount of its tax receipts from year to year, it is more than fully capable of controlling the amount of its spending.” In a separate op-ed, Independent Institute Senior Fellow Benjamin Powell argues that the most effective strategy for securing significant reductions of federal spending and achieving a balanced budget would be to let the August 2 deadline pass without an agreement to raise the debt ceiling: the ensuing political fallout would force meaningful reform with long-term economic benefits for taxpayers. “Advocates for smaller government could never hope to broker a better deal than the one they can force by simply not making a deal,” Powell concludes.

U.S. Debt Dilemma: Caused by Excessive Spending or Not Enough Revenue?, by Craig Eyermann (MyGovCost.org, 7/27/11)

Let’s (Not) Make a Deal, by Benjamin Powell, 7/31/11

“Debt Deal” Imminent—Independent Institute Experts React, 8/1/11

Estimate your lifetime federal tax liability. Visit the Government Cost Calculator at MyGovCost.org.

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Opponents of government bureaucracy, central planning, and encroachments on liberty should be defined not by what they oppose, but by what they favor. “More fundamentally, we stand in defense of the greatest engine of material prosperity in human history, the fount of civilization, peace, and modernity: Capitalism,” writes Anthony Gregory in a recent piece.

Gregory, a research editor at the Independent Institute, summarizes the economic benefits of capitalism and implores freedom lovers to embrace the C-word. Real capitalism—a political and economic system that respects an individual’s freedom in property rights and exchange—has lifted masses of people from the depths of poverty and provides the material basis for the advancement of the noblest non-material goods, he argues. By contrast, “state capitalism” or “crony capitalism” does not refer to the free market, but a system with notable exceptions to the free market; it is capitalism in name only.

Some advocates of free markets and the rule of law disown the term “capitalism.” They complain that it originated as a Marxist smear word, or they fear that the term is too closely associated with the corporate status quo, and so they argue that it should be replaced by some other, less “tainted” term. Gregory opposes that strategy, however, and his defense of championing the term “capitalism” is perhaps the most novel point in his essay. “Some libertarians worry that ‘capitalism’ puts too much focus on capital, but this is in truth no problem,” he writes. “Only through deferred consumption can we build civilization, by the amassing of higher order goods and the lowering of our orientation toward the present. This is the essence of the capitalist emphasis. Maybe it takes longer to explain ourselves when we adopt the battle cry of capitalism—it also takes longer to be a capitalist than only a consumer. In the long run, however, it is worth it.”

Why Capitalism Is Worth Defending, by Anthony Gregory (LewRockwell.com, 7/29/11)

Can the Dead (Capitalism) Be Brought Back to Life?, by Robert Higgs (The Beacon, 8/15/10)

Capitalism, Socialism, and the “Middle Way”: A Taxonomy, by Robert L. Bradley Jr. and Roger Donway (The Independent Review, Summer 2010)

Crony Capitalism Is NOT Capitalism, by Dominick T. Armentano (5/10/10)

Capitalism and Economic Growth, by Emily C. Skarbek (4/15/10)

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A book publisher might call it Restaurantonomics: How a Celebrity Chef Exposes Malinvestment in America’s Eateries and Illuminates the Business Cycle. That title would be a mouthful, but it would be accurate. In his Fox television show Kitchen Nightmares, Gordon Ramsay shows what happens when restaurant resources are badly misallocated due to poor choices or inattention to detail. Sometimes an episode suggests that the restaurant’s owners should take up a different vocation. In other words, the bad meals and shoddy business practices depicted in the program are roughly analogous to the maladies that arise when the economic system is plagued by what economists working in the tradition of Ludwig von Mises and F. A. Hayek call “malinvestment,” as Independent Institute Research Fellow Art Carden explains in his latest piece at Forbes.com.

Malinvestment occurs when resources have been invested in the wrong things, according to Carden. When tables, stoves, or staff are misallocated, the results can spell disaster for a restaurant in a competitive market. When capital goods are misallocated throughout the economy, however, the problems are compounded. Malinvestment arises when government policies push interest rates below the levels that would be set in a free market and thereby promote investments in ventures that would not otherwise be undertaken. Malinvestment can occur in any industry that expands because it has obtained credit fostered by government policies—malinvestment in the restaurant industry is merely a helpful illustration of the wider phenomenon.

“Credit expansion is seductive because it looks great at first: businesses are investing, people are getting hired, food is being cooked,” Carden writes. “It isn’t sustainable, though, because an artificially low interest rate creates a tug-of-war for resources between investors and consumers who have been misled…. When prices adjust and the economy recalculates, the malinvestments are revealed and liquidated. This includes a lot of restaurants that don’t have the benefit of Gordon Ramsay’s intervention.”

Gordon Ramsay’s Monetary Nightmares, by Art Carden (Forbes.com, 7/29/11)

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In his latest op-ed, Independent Institute Senior Fellow Ivan Eland assesses the fall out of Anders Behring Breivik’s slaughter of fellow Norwegians. “Although Muslims weren’t his direct target, his manifesto decrying Muslim immigration has reopened a festering wound in Norway and Europe,” writes Eland. “Pressure could very well build to curtail future Muslim immigration so that it will not be a lightning rod for future terrorist attacks by extremists such as Breivik—a classic case of blaming the victim.”

Media coverage of the incident exposes a double standard in the West, according to Eland. Whereas many pundits emphasize the Muslim beliefs of the members of the al-Qaeda terrorist cell, the religious beliefs of Western terrorists are typically downplayed, as has been common in reportage of Breivik. This inconsistency suggests an anti-Muslim bias.

In addition, pundits and press reports often overstate the role of a terrorist’s religious beliefs as a motive for violence. “In the case of al-Qaeda, the root motivation of the attacks is not Islam, but the meddling in and occupation of Muslim lands by the United States and its Western allies,” Eland continues. “So stated religious identification may play some role in the attacks, but not a dominant one.”

The West Has a Double Standard in Terrorism Cases, by Ivan Eland (7/27/11)

The Empire Has No Clothes: U.S. Foreign Policy Exposed, by Ivan Eland

Recarving Rushmore: Ranking the Presidents on Peace, Prosperity, and Liberty, by Ivan Eland

Partitioning for Peace: An Exit Strategy for Iraq, by Ivan Eland

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From The Beacon:

From MyGovCost News & Blog:

The Independent Institute’s Spanish-language blog is available here.

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