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The Lighthouse®

The Lighthouse® is the weekly email newsletter of the Independent Institute.
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Volume 18, Issue 23: June 7, 2016

  1. George Gilder on Our Economic Malaise
  2. Wage Hikes Prolonged the Great Depression
  3. Obamacare Continues to Deliver—but What?
  4. A Handout Is Not a Hand Up
  5. New Blog Posts
  6. Selected News Alerts

1) George Gilder on Our Economic Malaise

Something is wrong with the U.S. economy. Many things, in fact. Previous issues of The Lighthouse have reported on low participation rates in the labor market and the financial hardship facing seniors bled dry by the Federal Reserve’s zero-interest-rate policies. (For more, see Taking a Stand: Life, Liberty, and the Economy, by Independent Institute Senior Fellow Robert Higgs.) Now George Gilder, who will speak Tuesday night at Independent Institute’s headquarters in Oakland, adds his interesting take in an op-ed for the San Francisco Chronicle.

Gilder’s diagnosis is complex, but we can reduce it to a simple metaphor. A healthy U.S. economy, in which Americans of all income levels enjoy a growing prosperity, rests on three stable pillars: Main Street (ordinary businesses and households), Silicon Valley (that is, innovation in general), and Wall Street (meaning investment finance, regardless of geography). In recent years, however, government policies have shaken the structure, leaving cracks in the first two pillars, according to Gilder.

Federal Reserve policies have helped channel investment capital into privately held technology giants (“unicorns” with their billion-dollar valuations), which offer unbelievably huge potential returns for the denizens of Wall Street (or Sand Hill Road, the epicenter of high-tech venture capital). But this diversion, combined with several recent accounting, securities, and environmental restrictions, has all but obliterated initial public offerings (IPOs) of innovative, entrepreneurial companies. This trend stands in stark contrast to the “fat years” of 1983 to 2000, when Wall Street unleashed a wave of IPOs that benefited many ordinary people via their retirement accounts and pension plans. To reverse the trend and thereby help Main Street and Silicon Valley thrive, Gilder argues, we must roll back the regulatory juggernaut and slay the dragons of the Federal Reserve. “Sound money, based on real growth, is the only solution,” Gilder concludes.

The Unicorn Economy and the Disturbing Plight of the Middle Class, by George Gilder (San Francisco Chronicle, 6/3/16)

EVENT: “The Secret to Restoring the American Dream,” featuring George Gilder (Oakland, CA, 6/7/16)

The event will be livestreamed here.


2) Wage Hikes Prolonged the Great Depression

Advocates for raising the minimum wage are dancing in the streets. It wasn’t always so. In July 2009, six months after Democrats gained control of Congress, party leaders scrapped proposals to raise the federal minimum wage above $7.25 an hour. Now, despite years of low price inflation, many states and cities have passed statutes mandating a minimum wage rate of $15 per hour. While most of the push has come from Democrats, former Republican presidential candidate Mitt Romney, as recently as January of this year, said Republicans “were nuts not to raise the minimum wage.” Yet the case against raising the minimum wage is just as strong today as when the New York Times called for abolishing it back in 1987, as Independent Institute Research Fellow Scott Sumner explains in an op-ed for the Orange County Register.

The theoretical case against a minimum wage is well known to readers of The Lighthouse. What Sumner adds to the discussion comes from his unsurpassed research on labor markets during the Great Depression. The author of The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression, Sumner concludes that Federal Reserve policy and higher trade tariffs were not the only causes of the economic malaise that plagued the United States for nearly a decade: government interference in labor markets were a key source. Five times during the Great Depression U.S. government policies pushed up hourly wage rates, and each increase ended an economic recovery.

“The first, and most dramatic, occurred in July 1933, when President Franklin D. Roosevelt ordered an across-the-board 20 percent increase in hourly wages, despite high unemployment,” Sumner writes. “In the previous four months, industrial production had soared by 57 percent. Unfortunately, the dramatic wage increase seems to have aborted the recovery, and industrial production would not reach July 1933 levels for another two years, after the Supreme Court ruled his wage-fixing policy unconstitutional in May 1935.” Today’s advocates for raising the minimum wage are dancing in the streets—but their victims will be shuffling in the unemployment line.

The Curious Rise of the Push for $15 Wage, by Scott Sumner (Orange County Register, 5/13/16)

The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression, by Scott Sumner


3) Obamacare Continues to Deliver—but What?

Obamacare delivered another unwelcome surprise recently, according to Independent Institute Senior Fellow John R. Graham. UnitedHealth Group, insurer to 795,000 consumers, is leaving the health insurance exchanges. Despite the boon that the individual mandate had brought, the insurance giant estimates that it will lose $800 per enrollee in 2016. Its withdrawal may put pressure on the remaining insurers to raise premiums, which have increased 12 percent since 2014.

Some insurers say they’ll try to weather the storm, despite what’s proving to be a surprisingly expensive pool of patients who sometimes drop coverage after they’ve gotten medical care. Some insurers are also gaming the system, designing their Bronze, Silver, Gold, or Platinum plans “to drive enrollees toward plans with the highest share of premium borne by taxpayers,” Graham writes. So much for the equity of “crony capitalism” tax credits.

How to end the charade? “The solution to insurers’ gaming this tax credit is a transparent, fixed-dollar tax credit, defined and appropriated by Congress, which allows individuals to buy insurance that satisfies their health needs, not insurers’ needs to cover their losses.”

Taxpayers Increasingly Victimized in Obamacare Exchanges, by John R. Graham (The Hill, 5/9/16)

VIDEO: Free-Market Alternatives to Obamacare, featuring John R. Graham (Western Conservative Summit, 6/28/15)

A Better Choice: Healthcare Solutions for America, by John C. Goodman

New Bill to Replace Obamacare Draws from Independent Institute Book (5/31/16)


4) A Handout Is Not a Hand Up

Franklin Delano Roosevelt knew nothing about how to end the Great Depression. (Indeed, one might say he actually knew less than nothing, since his New Deal policies did not have merely neutral effects on economic growth, but rather helped stifle it.) But FDR did know something about government relief creating the risk of soul-crushing dependency. He called continued dependence on relief “a subtle destroyer of the human spirit,” and a source of “spiritual and moral disintegration fundamentally destructive to the national fiber.” These are words that social workers and activists should ponder, as Independent Institute Research Fellow James L. Payne explains in a recent op-ed for the Wall Street Journal.

Payne notes that when federal food stamps were issued in 1963, a federal official estimated the program could serve up to 4 million. The number has grown more than tenfold. Moreover, too often government handouts foster despair rather than provide realistic hope for a life of productive self-reliance and positive self-esteem. “Better to establish constructive quid pro quo exchanges,” Payne writes. Habitat for Humanity is one model of assistance that offers a hand up—a home earned with “sweat equity”—rather than a hand out.

“To thrive, human beings need healthy expectations and purposeful challenges,” Payne writes. “In today’s era of trillion-dollar handouts, it’s time to resurrect past wisdom and find ways to offer a hand up instead.”

What FDR Knew About Welfare, by James L. Payne (The Wall Street Journal, 5/19/16)

The Philanthropic Revolution: An Alternative History of American Charity, by Jeremy Beer. Reviewed by Robert M. Whaples (The Independent Review, Spring 2016)


6) Selected News Alerts

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