Author Archives: chero

Writer, investment banker, economist, a real cowboy who owns a big cattle ranch in Mexico. Born in Mexico graduated from the school of business and economics of Monterrey Institute of Technology. MBA from University of Mexico and MA Economics from George Mason University.

Marxist Dreams and Soviet Realities

Marxist Dreams and Soviet Realities


The sharp contrast that Alexis de Tocqueville drew in 1835 between the United States and Tsarist Russia — “the principle of the former is freedom; of the latter, servitude”[1] — became much sharper after 1917, when the Russian Empire was transformed into the Soviet Union.

Like the United States, the Soviet Union is a nation founded on a distinct ideology. In the case of America, the ideology was fundamentally Lockean liberalism; its best expressions are the Declaration of Independence and the Bill of Rights of the U.S. Constitution. The Ninth Amendment, in particular, breathes the spirit of the worldview of late-18th-century America.[2] The Founders believed that there exist natural, individual rights that, taken together, constitute a moral framework for political life. Translated into law, this framework defines the social space within which men voluntarily interact; it allows for the spontaneous coordination and ongoing mutual adjustment of the various plans that the members of society form to guide and fill their lives.

The Soviet Union was founded on a very different ideology, Marxism, as understood and interpreted by V. I. Lenin. Marxism, with its roots in Hegelian philosophy, was a quite conscious revolt against the individual rights doctrine of the previous century. The leaders of the Bolshevik party (which changed its name to Communist in 1918) were virtually all revolutionary intellectuals, in accordance with the strategy set forth by Lenin in his 1902 work What Is to Be Done?[3] They were avid students of the works of Marx and Engels published in their lifetimes or shortly thereafter and known to the theoreticians of the Second International. The Bolshevik leaders viewed themselves as the executors of the Marxist program, as those whom History had called upon to realize the apocalyptic transition to Communist society foretold by the founders of their faith.

The aim they inherited from Marx and Engels was nothing less than the final realization of human freedom and the end of the “prehistory” of the human race. Theirs was the Promethean dream of the rehabilitation of Man and his conquest of his rightful place as master of the world and lord of creation.

Building on the work of Michael Polanyi and Ludwig von Mises, Paul Craig Roberts has demonstrated — in books that deserve to be much better known than they are, since they provide an important key to the history of the 20th century[4] — the meaning of freedom in Marxism. It lies in the abolition of alienation, i.e., of commodity production, production for the market. For Marx and Engels, the market represents not merely the arena of capitalist exploitation but, more fundamentally, a systematic insult to the dignity of Man. Through it, the consequences of Man’s action escape from his control and turn on him in malign ways. Thus, the insight that market processes generate results that were no part of anyone’s intention becomes, for Marxism, the very reason to condemn them. As Marx wrote of the stage of Communist society before the total disappearance of scarcity,

freedom in this field can consist only in socialized man, the associated producers, rationally regulating their interchange with Nature, bringing it under their common control, instead of being ruled by it as by the blind forces of Nature.[5]

The point is made most clearly by Engels:

With the seizure of the means of production by society, production of commodities is done away with, and with it the dominion of the product over the producers. Anarchy of social production is replaced by conscious organization according to plan. The whole sphere of the conditions of life which surround men, which ruled men up until now comes under the dominion and conscious control of men, who become for the first time the real, conscious lords of nature, because and in that they become master of their own social organization. The laws of their own social activity, which confronted them until this point as alien laws of nature, controlling them, then are applied by men with full understanding, and so mastered by them. Only from then on will men make their history themselves in full consciousness; only from then on will the social causes they set in motion have in the main and in constantly increasing proportion, also the results intended by them. It is the leap of mankind from the realm of necessity to the realm of freedom.[6]

Thus, Man’s freedom would be expressed in the total control exercised by the associated producers in planning the economy and, with it, all of social life. No longer would the unintended consequences of Man’s actions bring disaster and despair — there would be no such consequences. Man would determine his own fate. Left unexplained was how millions upon millions of separate individuals could be expected to act with one mind and one will — could suddenly become “Man” — especially since it was alleged that the state, the indispensable engine of coercion, would wither away.

Already in Marx and Engels’s day — decades before the establishment of the Soviet state — there were some with a shrewd idea of just who it was that would assume the title role when the time came to perform the heroic melodrama, Man Creates His Own Destiny. The most celebrated of Marx’s early critics was the Russian anarchist Michael Bakunin, for whom Marx was “the Bismarck of socialism” and who warned that Marxism was a doctrine ideally fitted to function as the ideology — in the Marxist sense: the systematic rationalization and obfuscation — of the power urges of revolutionary intellectuals. It would lead, Bakunin warned, to the creation of “a new class,” which would establish “the most aristocratic, despotic, arrogant, and contemptuous of all regimes”[7] and entrench its control over the producing classes of society. Bakunin’s analysis was extended and elaborated by the Pole Waclaw Machajski.[8]

Despite this analysis — or perhaps as a confirmation of it — the Marxist vision came to inspire generations of intellectuals in Europe and even in America. In the course of the vast, senseless carnage that was the First World War, the Tsarist Empire collapsed and the immense Imperial Russian Army was fragmented into atoms. A small group of Marxist intellectuals seized power. What could be more natural than that, once in power, they should try to bring into being the vision that was their whole purpose and aim? The problem was that the audacity of their dream was matched only by the depth of their economic ignorance.

In August 1917 — three months before he took power — this is how Lenin, in State and Revolution, characterized the skills needed to run a national economy in the “first phase” of Communism, the one he and his associates were about to embark upon:

The accounting and control necessary for this have been simplified by capitalism to the utmost, till they have become the extraordinarily simple operations of watching, recording and issuing receipts, within the reach of anybody who can read and write and knows the first four rules of arithmetic.[9]

Nikolai Bukharin, a leading “Old Bolshevik,” in 1919 wrote, together with Evgeny Preobrazhensky, one of the most widely read Bolshevik texts. It was The ABC of Communism, a work that went through 18 Soviet editions and was translated into 20 languages. Bukharin and Preobrazhensky “were regarded as the Party’s two ablest economists.”[10] According to them, Communist society is, in the first place, “an organized society,” based on a detailed, precisely calculated plan, which includes the “assignment” of labor to the various branches of production. As for distribution, according to these eminent Bolshevik economists, all products will be delivered to communal warehouses, and the members of society will draw them out in accordance with their self-defined needs.[11]

Favorable mentions of Bukharin in the Soviet press are now taken to be exciting signs of the glories of glasnost, and in his speech of November 2, 1987, Mikhail Gorbachev partially rehabilitated him.[12] It should be remembered that Bukharin is the man who wrote, “We shall proceed to a standardization of the intellectuals; we shall manufacture them as in a factory”[13] and who stated, in justification of Leninist tyranny:

Proletarian coercion, in all its forms, from executions to forced labor, is, paradoxical as it may sound, the method of molding communist humanity out of the human material of the capitalist period.[14]

The shaping of the “human material” at their disposal into something higher — the manufacture of the New Soviet Man, Homo sovieticus — was essential to their vision of all the millions of individuals in society acting together, with one mind and one will,[15] and it was shared by all the Communist leaders. It was to this end, for instance, that Lilina, Zinoviev’s wife, spoke out for the “nationalization” of children, in order to mold them into good Communists.[16]

The most articulate and brilliant of the Bolsheviks put it most plainly and best. At the end of his Literature and Revolution, written in 1924, Leon Trotsky placed the famous, and justly ridiculed, last lines: Under Communism, he wrote, “The average human type will rise to the heights of an Aristotle, a Goethe, or a Marx. And above this ridge new peaks will rise.” This dazzling prophecy was justified in his mind, however, by what he had written in the few pages preceding. Under Communism, Man will “reconstruct society and himself in accord with his own plan.” “Traditional family life” will be transformed, the “laws of heredity and blind sexual selection” will be obviated, and Man’s purpose will be “to create a higher social biological type, or, if your please, a superman.”[17] (The full quotation can be found in the article on Trotsky in this volume.)

I suggest that what we have here, in the sheer willfulness of Trotsky and the other Bolsheviks, in their urge to replace God, nature, and spontaneous social order with total, conscious planning by themselves, is something that transcends politics in any ordinary sense of the term. It may well be that to understand what is at issue we must ascend to another level, and that more useful in understanding it than the works of the classical liberal economists and political theorists is the superb novel of the great Christian apologist C. S. Lewis, That Hideous Strength.

Now, the fundamental changes in human nature that the Communist leaders undertook to make require, in the nature of the case, absolute political power in a few directing hands. During the French Revolution, Robespierre and the other Jacobin leaders set out to transform human nature in accordance with the theories of Jean-Jacques Rousseau. This was not the only cause but it was surely one of the causes of the Reign of Terror. The Communists soon discovered what the Jacobins had learned: that such an enterprise requires that Terror be erected into a system of government.[18]

The Red Terror began early on. In his celebrated November 1987 speech, Gorbachev confined the Communist Reign of Terror to the Stalin years and stated:

Many thousands of people inside and outside the party were subjected to wholesale repressive measures. Such, comrades, is the bitter truth.[19]

But by no means is this the whole of the bitter truth. By the end of 1917, the repressive organs of the new Soviet state had been organized into the Cheka, later known by other names, including OGPU, NKVD, and KGB. The various mandates under which the Cheka operated may be illustrated by an order signed by Lenin on February 21, 1918: that men and women of the bourgeoisie be drafted into labor battalions to dig trenches under the supervision of Red Guards, with “those resisting to be shot.” Others, including “speculators” and counter-revolutionary agitators, were “to be shot on the scene of their crime.” To a Bolshevik who objected to the phrasing, Lenin replied, “Surely you do not imagine that we shall be victorious without applying the most cruel revolutionary terror?”[20]

The number of Cheka executions that amounted to legalized murder in the period from late 1917 to early 1922 — including neither the victims of the Revolutionary Tribunals and the Red Army itself nor the insurgents killed by the Cheka — has been estimated by one authority at 140,000.[21] As a reference point, consider that the number of political executions under the repressive Tsarist regime from 1866 to 1917 was about 44,000, including during and after the Revolution of 1905[22] (except that the persons executed were accorded trials), and the comparable figure for the French Revolutionary Reign of Terror was 18,000 to 20,000.[23] Clearly, with the first Marxist state something new had come into the world.

In the Leninist period — that is, up to 1924 — fall also the war against the peasantry that was part of “war communism” and the famine conditions, culminating in the famine of 1921, that resulted from the attempt to realize the Marxist dream. The best estimate of the human cost of those episodes is around 6,000,000 persons.[24]

But the guilt of Lenin and the Old Bolsheviks — and of Marx himself — does not end here. Gorbachev asserted that “the Stalin personality cult was certainly not inevitable.”

“Inevitable” is a large word, but if something like Stalinism had not occurred, it would have been close to a miracle. Scorning what Marx and Engels had derided as mere “bourgeois” freedom and “bourgeois” jurisprudence,[25] Lenin destroyed freedom of the press, abolished all protections against the police power, and rejected any hint of division of powers and checks and balances in government. It would have saved the peoples of Russia an immense amount of suffering if Lenin — and Marx and Engels before him — had not quite so brusquely dismissed the work of men like Montesquieu and Jefferson, Benjamin Constant and Alexis de Tocqueville. These writers had been preoccupied with the problem of how to thwart the state’s ever-present drive toward absolute power. They laid out, often in painstaking detail, the political arrangements that are required, the social forces that must be nurtured, in order to avert tyranny. But to Marx and his Bolshevik followers, this was nothing more than “bourgeois ideology,” obsolete and of no relevance to the future socialist society. Any trace of decentralization or division of power, the slightest suggestion of a countervailing force to the central authority of the “associated producers,” ran directly contrary to the vision of the unitary planning of the whole of social life.[26]

The toll among the peasantry was even greater under Stalin’s collectivization[27] and the famine of 1933 — a deliberate one this time, aimed at terrorizing and crushing the peasants, especially of the Ukraine. We shall never know the full truth of this demonic crime, but it seems likely that perhaps ten or 12,000,000 persons lost their lives as a result of these Communist policies — as many or more than the total of all the dead in all the armies in the First World War.[28]

One is stunned. Who could have conceived that within a few years what the Communists were to do in the Ukraine would rival the appalling butcheries of World War I — Verdun, the Somme, Passchendaele?

They died in hell,
They called it Passchendaele.

But what word to use, then, for what the Communists made of the Ukraine?

Vladimir Grossman, a Russian novelist who experienced the famine of 1933, wrote about it in his novel Forever Flowing, published in the West. An eyewitness to the famine in the Ukraine stated,

Then I came to understand the main thing for the Soviet power is the Plan. Fulfill the Plan.… Fathers and mothers tried to save their children, to save a little bread, and they were told: You hate our socialist country, you want to ruin the Plan, you are parasites, kulaks, fiends, reptiles. When they took the grain, they told the kolkhoz [collective farm] members they would be fed out of the reserve fund. They lied. They would not give grain to the hungry.[29]

The labor camps for “class-enemies” had already been established under Lenin, as early as August 1918.[30] They were vastly enlarged under his successor. Alexander Solzhenitsyn compared them to an archipelago spread across the great sea of the Soviet Union. The camps grew and grew. Who were sent there? Any with lingering Tsarist sentiments and recalcitrant members of the middle classes, liberals, Mensheviks, anarchists, priests and laity of the Orthodox Church, Baptists and other religious dissidents, “wreckers,” suspects of every description, then, “kulaks” and peasants by the hundreds of thousands.

During the Great Purge of the middle 1930s, the Communist bureaucrats and intellectuals themselves were victims, and at that point there was a certain sort of thinker in the West who now began to notice the camps, and the executions, for the first time. More masses of human beings were shipped in after the annexations of eastern Poland and the Baltic states; then enemy prisoners of war, the internal “enemy nationalities,” and the returning Soviet prisoners of war (viewed as traitors for having surrendered), who flooded into the camps after 1945 — in Solzhenitsyn’s words, “vast dense gray shoals like ocean herring.”[31]

The most notorious of the camps was Kolyma, in eastern Siberia — in actuality, a system of camps four times the size of France. There the death rate may have been as high as 50 per cent per year[32] and the number of deaths was probably on the order of 3,000,000. It goes on and on. In 1940 there was Katyn and the murder of the Polish officers; in 1952, the leaders of Yiddish culture in the Soviet Union were liquidated en masse[33] — both drops in the bucket for Stalin. During the Purges there were probably about 7,000,000 arrests, and one out of every ten arrested was executed.[34]

How many died altogether? No one will ever know. What is certain is that the Soviet Union has been the worst reeking charnel house of the whole awful 20th century, worse even than the one the Nazis created (but then they had less time).[35] The sum total of deaths due to Soviet policy — in the Stalin period alone — deaths from the collectivization and the terror famine, the executions and the Gulag, is probably on the order of 20,000,000.[36]

As glasnost proceeds and these landmarks of Soviet history are uncovered and explored to a greater or lesser degree, it is to be hoped that Gorbachev and his followers will not fail to point an accusing finger at the West for the part it played in masking these crimes. I am referring to the shameful chapter in 20th-century intellectual history involving the fellow travelers of Soviet Communism and their apologias for Stalinism. Americans, especially American college students, have been made familiar with the wrongs of McCarthyism in our own history. This is as it should be. The harassment and public humiliation of innocent private persons is iniquitous, and the U.S. government must always be held to the standards established by the Bill of Rights. But surely we should also remember and inform young Americans of the accomplices in a far different order of wrongs — those progressive intellectuals who “worshiped at the temple of [Soviet] planning”[37] and lied and evaded the truth to protect the homeland of socialism, while millions were martyred. Not only George Bernard Shaw,[38] Sidney and Beatrice Webb, Harold Laski, and Jean-Paul Sartre, but, for instance, the Moscow correspondent of the New York Times, Walter Duranty, who told his readers, in August 1933, at the height of the famine:

Any report of famine in Russia is today an exaggeration or malignant propaganda. The food shortage which has affected almost the whole population in the last year and particularly in the grain-producing provinces — the Ukraine, North Caucasus, the lower Volga region — has, however, caused heavy loss of life.[39]

For his “objective” reporting from the Soviet Union, Duranty won a Pulitzer Prize.[40]

Or — to take another fellow traveler virtually at random — we should keep in mind the valuable work of Owen Lattimore of Johns Hopkins University. Professor Lattimore visited Kolyma in the summer of 1944, as an aide to the Vice President of the United States, Henry Wallace. He wrote a glowing report on the camp and on its chief warden, Commandant Nikishov, for the National Geographic.[41] Lattimore compared Kolyma to a combination of the Hudson’s Bay Company and the TVA.[42] The number of the influential American fellow travelers was, in fact, legion, and I can think of no moral principle that would justify our forgetting what they did and what they did it in aid of.

In his speech of November 2, Gorbachev declared that Stalin was guilty of “enormous and unforgivable crimes” and announced that a special commission of the Central Committee is to prepare a history of the Communist party of the Soviet Union that will reflect the realities of Stalin’s rule. Andrei Sakharov has called for the full disclosure of “the entire, terrible truth of Stalin and his era.”[43] But can the Communist leaders really afford to tell the entire truth? At the Twentieth Party Congress in 1956, Nikita Khrushchev revealed the tip of the iceberg of Stalinist crimes, and Poland rose up and there took place the immortal Hungarian Revolution, when they did

high deeds in Hungary
To pass all men’s believing.

Lewis, Hunter

What would it mean to reveal the entire truth? Could the Communist leaders admit, for instance, that during World War II, “the losses inflicted by the Soviet state upon its own people rivaled any the Germans could inflict on the battlefield”? That “the Nazi concentration camps were modified versions of Soviet originals,” whose evolution the German leadership had followed with some care. That, in short, “the Soviet Union is not only the original killer state, but the model one”?[44] If they did that, what might the consequences not be this time?

But the fact that the victims of Soviet Communism can never be fully acknowledged in their homelands is all the more reason that, as a matter of historical justice, we in the West must endeavor to keep their memory alive.


Did Bernanke Prevent Another Depression?

Did Bernanke Prevent Another Depression?



In a lecture given at George Washington University on March 27, 2012, the chairman of the Fed said that the US central bank’s aggressive response to the 2007–2009 financial crisis and recession helped prevent a worldwide catastrophe. Various economic indicators were showing ominous signs at the time. After closing at 3.1 percent in September 2007, the yearly rate of growth of industrial production fell to minus 14.8 percent by June 2009. The yearly rate of growth of housing starts fell from 20.5 percent in January 2005 to minus 54.8 percent in January 2009.

Figure 1
Figure 2

Also, retail sales came under severe pressure — year on year, the rate of growth fell from 5.2 percent in November 2007 to minus 11.5 percent by August 2008. The unemployment rate jumped from 4.4 percent in March 2007 to 10 percent by October 2009. During this period, the number of unemployed people increased from 13.389 million to 15.421 million — an increase of 2.032 million.

Figure 3
Figure 4

In response to the collapse of the key economic data and a fear of a financial meltdown, the US central bank aggressively pumped money into the banking system. As a result, the Federal Reserve balance sheet jumped from $0.884 trillion in February 2008 to $2.247 trillion in December 2008. The yearly rate of growth of the balance sheet climbed from 1.5 percent in February 2008 to 152.8 percent by December of that year. Additionally the Fed aggressively lowered the federal-funds rate target from 5.25 percent in August 2007 to almost nil by December 2008.

Figure 5
Figure 6

Despite this pumping, the growth momentum of commercial-bank lending had been declining with the yearly rate of growth falling from 11.9 percent in January 2007 to minus 5.3 percent by November 2009. As a result of the fall in the growth momentum of lending, the growth momentum of the money supply would have followed suit if not for the Fed’s aggressive pumping to the commercial paper market. This pushed the yearly rate of growth of our measure of US money supply from 1.5 percent in April 2008 to 14.3 percent by August 2009.

Figure 7
Figure 8

In his speech Bernanke blamed reckless lending in the housing market and financial engineering for the economic crisis. He also acknowledged that the supervision by the Fed was inadequate. According to Bernanke, once the crises emerged the Fed had to act aggressively in order to prevent the crisis from developing into a serious economic disaster. The Fed chairman holds that a highly accommodative monetary policy helps support economic recovery and employment.

We hold that various reckless activities in the housing market couldn’t have emerged without the Fed’s previous reckless policies. After closing at 6.5 percent in December 2000, the federal-funds rate target was lowered to 1 percent by May 2004. The yearly rate of growth of our monetary measure, AMS, jumped from minus 0.9 percent in December 2000 to 11.5 percent by December 2001. In short, the strong increase in the growth momentum of money supply coupled with an aggressive lowering of interest rates set the platform for various bubble activities, or an economic boom.

Figure 9
Figure 10

A reversal of the Fed’s loose stance put an end to the false boom and put pressure on various bubble activities. The federal-funds-rate target was lifted from 1 percent in May 2004 to 5.25 percent by June 2006. The yearly rate of growth of AMS plunged from 11.5 percent in December 2001 to 0.6 percent in May 2007. As it happened, the effect of this tightening was felt in the housing market first before it spilled over to other bubble sectors. (A tighter monetary stance slowed down the diversion of real savings toward bubble activities from wealth-generating activities.)

Figure 11
Figure 12

Contrary to Bernanke, we suggest that his loose monetary policy of August 2007 didn’t save the US economy but saved various bubble activities that had come under pressure from the previous tighter monetary stance.

Note the loose monetary stance has been aggressively diverting real funding from wealth generators towards bubble activities, thereby weakening the wealth-generation process. The only reason why loose monetary policy supposedly “revived” the economy is because there are still enough wealth generators to support the Fed’s reckless policy. Also, note that all the gains from the previous tighter stance have now been wasted to support bubble activities.

As long as the pool of real savings is still growing, Fed policy makers can get away with the illusion that they have saved the US and the world economies. Once the pool of real savings starts stagnating, or worse, declining, the illusory nature of the Fed’s policy will be revealed — note that the economy follows the state of the pool of real savings. Any aggressive monetary policy in this case is going to make things much worse.

The actions of Bernanke to revive the economy run contrary to the basic principles of running a company. For instance, in a company of 10 departments, 8 departments are making profits and the other 2 losses. A responsible CEO will shut down or restructure the 2 departments that make losses — failing to do so will divert funding from wealth generators toward loss-making departments, thus weakening the foundation of the entire company. Without the removal or restructuring of the loss-making departments, there is the risk that the entire company could eventually go belly up. So why then should a CEO who decides to support nonprofitable activities be regarded as a failure when Bernanke and his central-bank colleagues are seen as heroes who saved the economy?

Bernanke is of the view that by pumping money he has provided the necessary liquidity to keep the financial system going. We suggest that this is false. What permits the financial sector to push ahead is real savings. The financial sector does not have a life of its own; its only role is to facilitate the real wealth that was generated by the wealth producers. Remember that banks are just intermediaries; they facilitate real savings across the economy by means of money (the medium of exchange).

By flooding the banking system with money, one doesn’t create more real savings but, on the contrary, depletes the pool of real funding. Most commentators are of the view that in some cases when there is a threat of serious damage to the financial system the central bank should intervene to prevent the calamity, and this is precisely what Bernanke’s Fed did.

We suggest the severe threat here is to various bubble activities that must be removed in order to allow wealth generators to get on with the job of creating wealth. If a lot of bubbles must disappear, so be it. Any policy to support bubbles, be it large banks or other institutions, will only make things much worse. As we have seen, if the pool of real savings is not there, a central-bank policy to prop up bubbles will make things much worse. After all, the Fed cannot generate real wealth.

Bernanke’s policy — which amounts to the protection of inefficiency, i.e., bubble activities — runs the risk of generating a prolonged slump with occasional rallies in the data. It could be something similar to the situation in Japan (which Bernanke has in the past criticized).

Summary and Conclusion

We can conclude that, contrary to Bernanke, his loose policies didn’t save the US economy from a depression but have instead damaged the process of real wealth generation.

Bernanke’s loose policies have provided support to bubble activities, thereby destabilizing the economy. So in this sense his policies have saved the bubbles, thus undermining wealth generators.

We suggest that the more forceful the Fed’s response to various economic indicators is, the more damage this does to the pool of real savings. This runs the risk that at some stage the United States could end up having a stagnating or worse, declining, pool of real savings.

Ludwig von Mises Institute

If this were to occur, then we could end up of having a severe economic slump. If anyone needs examples in this regard, have a look at countries such as Greece, Spain, and Portugal.

Over a prolonged period of time the policies of these countries (an ever-growing government and central-bank involvement in the economy) have severely damaged the heart of economic growth — the pool of real savings.

Again, if the pool of real savings is to become stagnant, or worse, starts declining, any attempt by the Fed to make things better is going to make things actually much worse by depleting the pool of real savings or funding further. If the pool of real funding is stagnating, then no matter how much pumping the Fed does, banks will not be able to lift lending. Remember: without expanding real funding any expansion in credit could lead to financial disaster.


Is There No Escape from the Euro?

Is There No Escape from the Euro?

As I discussed recently, the costs and risks of maintaining the eurozone system are already immense and rising. So is an exit possible? Intuitively, the exit from the euro should be as easy as the entrance. Joining and leaving the club should be equally simple. Leaving is just undoing what was done before. Indeed, many popular articles discuss the prospects of an exit of countries such as Greece or Germany.[1] However, other voices have rightly argued that there are important exit problems. Some authors even argue that these problems would make an exit from the euro virtually impossible. Thus, Eichengreen (2010) states, “The decision to join the euro area is effectively irreversible.” Similarly, Porter (2010) argues that the large costs of an exit would make it highly unlikely. In the following we address the alleged exit problems.

Legal Problems

The Maastricht Treaty does not provide for a mechanism to exit the European Monetary Union (EMU). Thus, several authors maintain that an exit from the euro would constitute a breach of the treaties (Cotterill 2011, Procter and Thieffry 1998, Thieffry 2011, Anthanassiou 2009).[2] In an ECB working paper from 2009 Anthanassiou claims that a country that exits the EMU would have to leave the EU as well. As the Lisbon Treaty allows for secession from the EU, withdrawal from the EU would be the only way to get rid of the euro.

The solution to this legal problem could be an exit from both the EMU and EU with an immediate reentering of the EU. This procedure could be negotiated beforehand. In the case of a net contributor to the EU budget such as Germany, the country would probably not face any problem getting immediately readmitted to the EU.

In any case, the referral to the Maastricht Treaty when discussing the legal possibility of exit is intriguing, because the Maastricht Treaty, especially the “no-bailout clause,” has been violated through the bailouts of Greece, Ireland, and Portugal. The European Financial Stability Facility effectively serves to guarantee debts of other nations, not to mention the plans to introduce eurobonds.

In addition, the European Central Bank has violated the spirit of the Maastricht Treaty by purchasing debt of troubled nations. It seems to be a justification, if not an obligation, to leave the euro after the conditions for its existence have been violated.[3] Indeed, the German Constitutional Court ruled in 1993 that Germany could leave the euro if the goals of monetary stability were not attained (Scott 1998, p. 215). After the last couple of years, it is clear that the eurozone and the euro are far from stable. Apart from these considerations it should be noted that a sovereign state can repudiate the treaty (Deo, Donovan, and Hatheway 2011).

Another legal problem results from the possible redenomination of contracts in the wake of an exit from the euro. A government may redenominate euro contracts into the new currency (applying lex monetae — the state determines its own currency). It may do so without problems if the contracts were contracted in its territory or under its law. But what about private and public bonds issued in foreign countries? How would foreign courts rule (Scott 1998, p. 224)?

Imagine a German company that sold a bond in Paris. Will the bond be paid back in euros or in the new currency if Germany leaves the euro? The French court would probably decide that it can or must be paid back in euros.[4] Possibly also the European Court of Justice would rule on such issues. Thus, in the case of an exit, there would be some uncertainty caused by court settlements. There may be one-time losses or profits for the involved parties. However, it is hard to see why these court rulings would constitute important disturbances or insurmountable obstacles for a euro exit.[5]

Introduction Costs

An exit from the euro may imply the issuing of a new national currency. This involves the costs of printing new notes, melting new coins, exchanging vendor machines, etc. There are also logistic costs exchanging the new currency against the old one. These costs are not higher than the costs of introducing the euro. The costs for introducing the euro in Austria have been estimated at €1.45 billion euros or around 0.5 percent of GDP.[6]

Wage Inflation and Higher Interest Rates

Sometimes it is argued that peripheral countries with uncompetitive wages could just exit the euro and magically solve all their problems. Greece, for instance, suffers from too-high wages mainly because there is no free labor market. Labor unions have caused wages to be too high. The resulting unemployment had been attenuated by government deficit spending and debt accumulation made possible by the Eurosystem. The Greek government employed people at high wages, paid unemployment benefits and retired people early with high pensions.

As strong labor unions prevent wages from falling to recuperate competitiveness, some people recommend that Greece exit the euro, depreciate the currency, and thereby increase competitiveness. This argument contains a problem. If labor unions remain strong, they may simply demand wage increases to compensate for higher import prices (Eichengreen 2010, p. 8). Such a compensatory increase in wages would eliminate all advantages from depreciation.[7] The exit would have to be accompanied by a reform of the labor market in order to improve competitiveness. In any case, after an exit from the EMU, the Greek government could no longer use EMU monetary redistribution and deficit spending to push up wages artificially.

Similarly, an exit without further reforms could lead to a repudiation of government debt. This would imply higher interest rates for the government in the future (Eichengreen 2008, p. 10). An accompanying reform of fiscal institutions such a constitutional limits for budget deficits could alleviate this problem.

The End of Monetary Redistribution between Countries

Some countries benefit from the monetary setup of the EMU. They pay lower interest rates on their debts than they otherwise would. If a country like Greece exits the euro and repays its debts with a devalued new currency, it will have to pay higher interest rates for its debts.

In addition, countries such as Greece could no longer benefit from the monetary redistribution. The Greek government, and indirectly part of the Greek population, benefits from the high Greek deficits and the flow of new money into the country. This process allowed Greece to finance an import surplus and standard of living it would not have achieved otherwise. At least in the short term, an exit from the euro would, ceteris paribus, mean a deterioration of artificially high living standards. In other words, after an exit from the EMU, the size of its public sector and standard of living would likely fall as the EMU subsidies end. These redistribution costs only apply to countries that have been on the receiving end of the redistribution. For fiscally sounder countries, the opposite reasoning applies.

Trade Losses

Some authors argue that European trade would collapse in the wake of a euro exit. Trade barriers would be re-erected. In any case there could be an appreciation of the new currency like a new deutschemark (DM). In a UBS research paper, Flury and Wacker (2010, p. 3) estimate that the new DM would appreciate about 25 percent.

In contrast to another UBS research paper (Deo, Donovan and Hatheway 2011) that comes up with horrific costs of a euro break up,[8] we do not regard such trade barriers as very likely for several reasons. First, such barriers would be an economic disaster for all involved parties and would lead to a severe and long depression and a reduction of living standards. Second, net contributors to the EU, such as Germany, could still use their contributions to the EU budget as a negotiating card to prevent such barriers. Third, trade barriers are a blatant violation of EU treaties. Fourth, tariffs could provoke severe tensions between nations, possibly leading to war.

Political Costs

Sometimes it is maintained that an exit implies high political costs. Most importantly, an exit could trigger the dissolution of the euro.[9] The disintegration of the EMU could endanger the development of a federal European state. At least, it would mean an important blow to the “European project.” It could mean the end of the EU as we know today. The EU could “degenerate” into a free-trade zone.

Politicians of the exiting country would lose influence on the policies of other EMU countries. The politicians of the exiting country would also lose appreciation of other EMU politicians and in the mainstream media that has supported the euro staunchly. However, for supporters of a free-trade zone in Europe, these political costs imply immense benefits. The danger of a federal European state would disappear for now.

Procedural Costs and Capital Flows

An exiting nation has to print new notes, mint new coins, reprogram automatic teller machines, and rewrite computer code (Eichengreen 2008, p. 17).[10] This takes time. The case of machines may not be tragic, because, during the transition period, old machines may be in use without chaos. A public parking place using euro coins will not bring the economy down.

The notes-and-coins problem has a fast solution, because on both the country’s origin is visible. Coins have a country-specific image and notes bear a country-specific letter. In a German exit from the euro, all German coins and notes would be redenominated into the new currency and later gradually exchanged into the new notes and coins.[11] Of course, the transition period would involve some checking costs as people have to look at the symbols when transacting in cash.

The most severe problem of a euro exit — one that according to Eichengreen (2010) would pose “insurmountable” barriers — is capital flows when the option of exiting is discussed.[12] Such a discussion takes time in democracies. During this time there may be important capital inflows and outflows.[13]

Let us first discuss the problem of capital outflow such as in the case of an exit of Greece with no accompanying reforms. If Greek senior politicians seriously discuss an exit from the euro, Greek citizens will expect a depreciation of the new currency, a new drachma. Greek citizens will transfer their euros held at Greek banks to accounts in other EMU countries. They will probably not turn in their euro notes to be exchanged for the new drachmas voluntarily.

Greek citizens may also acquire other currencies such as Swiss francs, US dollars, or gold to protect themselves from depreciation. In this way Greece could practically be immunized against the new drachma even before its introduction. As a consequence, the Greek banking system may get into liquidity and solvency problems. Meanwhile, Greek citizens would continue to transact in euros held outside Greek jurisdiction.

This is the so-called “problem” of capital outflows. Yet these outflows are not a problem for ordinary Greek citizens. For them these outflows are a solution to the problem of an inflationary national currency. Moreover, capital outflows are already occurring. The discussion in parliament of a Greek exit would only speed up what is happening already.

The opposite reasoning applies when a more solvent country like Germany discusses an exit from the eurozone. If people expect an appreciation of a newly introduced currency, there would be capital inflows into Germany. The money supply of euros within Germany, which would later be converted into a new currency, would increase. Prices of German assets (e.g., housing and stocks) would increase in advance of the actual German exit, benefitting the current owners of such assets.

A Systemic Banking Crisis

Finally, there may be negative feedback for the banking system as there will most likely be losses for banks both domestic and foreign.[14],[15] Eichengreen (2010) fears the “mother of all financial crises.” Due to connectivity, it does not matter if Germany or Greece leaves the euro. If Greece leaves the euro and pays back its government bonds in a depreciated new currency or defaults outright, there will be losses for European banks that could get into solvency problems. Similarly, if Germany leaves the euro, the implicit guarantee and support to the Eurosystem will disappear. The result may be a banking crisis in Greece and other countries. The banking crisis might negatively affect German banks.[16] The banking crisis would also negatively affect sovereigns, due to possible bank recapitalizations. Other countries may be regarded as possible defaulters or exit candidates leading to higher interest rates on public debts. A systemic financial crisis infecting weak governments would be likely (Boone and Johnson 2011).

Recently, the IMF suggested that European banks face €300 billion in potential losses and urged the banks to raise capital.[17] We should emphasize that the problem of bank undercapitalization and bad assets (most importantly, peripheral government bonds) does already exist in the EMU and will deteriorate without an exit.

It is almost impossible to leave the euro without already-unstable structures collapsing. Yet this collapse would have the beneficial effect of quickly purging unsustainable structures. Even if there are no exits from the euro, the banking problem exists and will have to be solved sooner or later. Potential bank insolvency should therefore be no argument against an exit.[18] In the EMU taxpayers (mostly German) and inflationary measures by the ECB are momentarily containing the situation. An exit would speed up a restructuring of the European banking system.

At this point I would like to give the following recommendation for a solution of the banking crisis. There are important free-market solutions to bank-solvency problems.[19]

  1. Banks with nonviable business models should be allowed to fail, liberating capital and resources for other business projects.
  2. A debt-to-equity conversion may put many banks on a healthy basis.[20]
  3. Banks may collect private capital by issuing equity, as they are already doing.

A free-market reform has important advantages:

  1. Taxpayers are not hurt.
  2. Unsustainable banking projects are resolved. As the banking sector is oversized, it would shrink to a more healthy and sustainable level.
  3. No inflationary policies are used to sustain the banking system.
  4. Moral hazard is avoided. Banks will not be bailed out.

The Problem of Disentangling the European Central Bank

The Eurosystem consists of the ECB and national central banks. The task of disentangling is facilitated because national central banks still possess their own reserves and have their own balance sheets. Scott (1998) argues that this setup may have been intentional. Countries wanted to retain the possibility of leaving the euro if necessary.

On January 1, 1999, the ECB started with capital of €5 billion. In December 2010 the capital was increased from €5.76 billion to €10.76 billion.[21]

Only part of all EMU reserve assets have been pooled in the ECB, making a disentangling easier. On January 1, 1999, national central banks provided €50 billion in reserve assets pro rata to their capital contribution (Procter and Thieffrey 1998, p. 6). National central banks retained the “ownership” of these foreign reserve assets and transferred the management of the reserves to the ECB. (Scott 1998, p. 217). In the case of an exit, both the return of the contribution to the ECB’s capital and the foreign assets transferred to the Eurosystem had to be negotiated (Anthanassiou 2009).

Similarly, there is the problem of TARGET2 claims and liabilities. If Germany had left the EMU in March 2012, the Bundesbank would have found TARGET2 claims denominated in euros of more than €616 billion on its balance sheet. If the euro depreciated against the new DM, important losses for the Bundesbank would result.[22] As a consequence, the German government may have to recapitalize the Bundesbank. Take into account, however, that these losses would only acknowledge the risk and losses that the Bundesbank and the German treasury are facing within the EMU. This risk is rising every day the Bundesbank stays within the EMU.

If, in contrast, Greece leaves the EMU, it would be less problematic for the departing country. Greece would simply pay its credits to the ECB with the new drachmas, involving losses for the ECB. Depositors would move their accounts from Greek banks to German banks leading to TARGET2 claims for the Bundesbank. As the credit risk of the Bundesbank would keep increasing due to TARGET2 surpluses, the Bundesbank might well want to pull the plug on the euro itself (Brookes 1998).[23]

Intellectual honesty requires us to admit that there are important costs to exiting the euro, such as legal problems or the disentangling of the ECB. However, these costs can be mitigated by reforms or clever handling. Some of the alleged costs are actually benefits from the point of liberty, such as political costs or liberating capital flows. Indeed, other costs may be seen as an opportunity, such as a banking crisis that is used to reform the financial system and finally put it on a sound basis. In any case, these costs have to be compared with the enormous benefits of exiting the system, consisting in the possible implosion of the Eurosystem. Exiting the euro implies ending being part of an inflationary, self-destructing monetary system with growing welfare states, falling competitiveness, bailouts, subsidies, transfers, moral hazard, conflicts between nations, centralization, and in general a loss of liberty.


Twitter Buzzes With Talk of Zimmerman Riots

Twitter Buzzes With Talk of Zimmerman Riots

There is a good amount of discussion on Twitter this morning about killing George Zimmerman now that he’s out on bail. But that hasn’t been the only action on Twitter calling for violent action. Since Friday, there has been an explosion of tweets surrounding the possibility of rioting if Zimmerman is acquitted – or even because he was released on bail:

It’s not just Tweeters picking up this theme. Mansfield Frazier of The Daily Beast suggested last week, “As George Zimmerman faces murder charges for shooting Trayvon Martin, it’s worth asking if America is in danger of facing Rodney King, Part II? That’s what I see down the tracks: If this case goes all the way to trial, it’s a train wreck waiting to happen … America can only dodge so many racial bullets, and a not-guilty verdict in this case could very easily turn the racial cold war into a very hot one.”

This is a trend that bears watching seriously by law enforcement. And watch also for more and more politicians echoing this message:

Steve Bannon’s ‘Occupy Unmasked’ Previews to BlogCon Standing Ovation

Steve Bannon’s ‘Occupy Unmasked’ Previews to BlogCon Standing Ovation

Bloggers from all over the country met in Charlotte, North Carolina, over the weekend for a two-day conference sponsored by FreedomWorks and the Franklin Center. It was a time to catch up with old friends, make new ones, exchange ideas and pay tribute to Andrew Breitbart.

Appropriately, part of Friday’s tribute featured the first 30 minutes or so of Breitbart News Chairman Stephen K. Bannon’s upcoming documentary, “Occupy Unmasked,” a work in progress that unspooled before a packed house.

The documentary was not only one of Breitbart’s passion projects, but he is prominently featured on-camera throughout as one of the primary narrators taking you through the history of the Occupy movement. It’s another opportunity to see Andrew do what he did best: connect the narrative dots. In the case of Occupy, those dots connect from the movement’s origins straight through the mainstream media and up to the White House and Barack Obama.

Though still a rough cut, and only the first-act of what will be a full-length feature, the preview showing Occupy in all of its anti-American, socialist, and violent left-wing glory was enough to bring a packed house to its feet for a long standing ovation.

Here’s the trailer:

While the first round of the Occupy movement pretty much fizzled, thanks to the efforts of Andrew Breibart and New Media, “Occupy Unmasked” will be a vital document when Occupy reconstitutes this spring — which it has promised to do.

Haitian Daughter Tea Party Favorite Grabs UT Congressional Nomination

Haitian Daughter Tea Party Favorite Grabs UT Congressional Nomination

Mia Love, the 37-year-old daughter of Haitian immigrants, has nabbed the Utah GOP nomination for a new Congressional seat. As John Fund reports, “Utah selects its candidates at party conventions with primaries only occurring if no one wins 60 percent or more of delegates. Love won the nomination on the final ballot when she beat former state legislator Carl Wimmer with 70 percent of the vote.”



Love is heavily conservative, and she’s perfectly willing to take on the liberal elite so threatened by her very existence. Daily Kos recently called her “one of only two African-Americans living in Utah not currently playing for the Jazz.” They also called her a “token black Republican.”



Love isn’t taking that nonsense, though. “Game On,” she says. “I had a front-row seat for two people living the American dream,” she said at the Conservative Political Action Conference. “I will not stand by as we leave our children a legacy of debt and dependency.” Love is Mormon, married with three children; she’s a graduate of University of Hartford with a degree in fine arts.

Investigate IRS Harassment of Tea Party Groups

Investigate IRS Harassment of Tea Party Groups

A defining aspect of the American tradition is that groups of citizens band together for a wide variety of civic purposes.  They recruit volunteers, raise funds and spend those funds to promote whatever project or cause brings them together.

For more than a century, our tax laws have recognized that such voluntary associations – non-profits, we call them today – should not be taxed, because their proceeds are devoted entirely to improve our communities through education, advocacy, and civic action.  Section 501 of the Internal Revenue code recognizes them today, and civic groups like, the League of Conservation Voters, the ACLU, the National Rifle Association and various taxpayer groups have always been included in this definition.

We don’t apply a political test to these civic groups – we recognize the fundamental right of Americans to organize and to pool their resources to promote whatever causes they believe in – left or right.  Indeed, whatever their political persuasion, these civic groups perform an absolutely indispensible role in our democracy by raising public awareness, defining issues, educating voters, promoting reforms, holding officials accountable and petitioning their government to redress grievances.   Abolition, Women’s Suffrage, the Civil Rights movement – all would have been impossible without them.

In order to be recognized as non-profit groups, these organizations must register with the IRS – a purely ministerial function that has, in the past, been applied evenly and without regard to their political views.

At least until now.

It seems that Tea Party groups are now being treated very differently than their counterparts on the political Left.  For the last two years, many have been stone-walled by the IRS when they have sought to register as non-profits and most recently, they have been barraged with increasingly aggressive and threatening demands vastly outside the legal authority of the IRS.  Indeed, the only conceivable purpose of some of these demands could be to intimidate and harass.

A Tea Party group in my district is typical of the reports we are hearing from all across the country.  This group submitted articles of incorporation as a non-profit to the state of California, and received approval within a month.  Then, they tried to register as a non-profit with the IRS.  Despite repeated and numerous inquiries, the IRS stonewalled this group for a year and a half, at which time it demanded thousands of pages of documentation – and gave the group less than three weeks to produce it.

The IRS demanded the names of every participant at every meeting held over the last two years, transcripts of every speech given at those meetings, what positions they had taken on issues, the names of their volunteers and donors, and copies of  communications they had with elected officials and on and on.

Perhaps most chilling of all, the organizer of this particular group soon found herself the object of a personal income tax audit by the IRS.

These are groups of volunteers who pass the hat at meetings to pay for renting the hall.  They give of their own time to research issues and pay out of their own pockets for printing fliers.

The donations made to them aren’t tax deductible, so there is no legitimate purpose for asking the names of their donors, let alone of their volunteers – unless – and this is the fine point of it – unless the intention is to harass and intimidate.

Ironically, the same tactics we now see used by the IRS against the tea parties were once used by the most abusive of the southern states in the 1950’s to intimidate civil rights groups like the NAACP.

No such tactics have been reported by any similar civic groups on the political left, so the conclusion is inescapable – that this administration is very clearly, very pointedly and very deliberately attempting to intimidate, harass and threaten civic minded groups with which they disagree using one of the most feared and powerful agencies of the United States Government to do so.

These facts speak for themselves and need no embellishment or interpretation.  They should alarm every American of good will regardless of political philosophy, for if this precedent is allowed to stand, no one’s freedom is safe.  I bring these facts to the attention of the House today and ask that they be rigorously investigated; and if found accurate that those officials responsible be exposed, disgraced, dismissed and debarred from any further position of trust or power within our government.

Britain’s Future Lies With America, Not Europe

Britain’s Future Lies With America, Not Europe

Welcoming Britain back into the North Atlantic economic community would be a win-win for all involved.


In 1952, then-U.S. Secretary of State Dean Acheson said that “Britain has lost an empire but has failed to find a role.” Sadly for Britain, it decided to renounce its longstanding global cultural, legal and philosophical links to North America and instead looked for that role in Europe. Despite its geographic proximity to Britain, the Continent is nevertheless home to a host of cultures, legal systems and governing philosophies very different from those of traditionally liberal Britain. The consequences from that bad choice have bedeviled Britain for decades.

Now, as a result of Prime Minister David Cameron’s stance at the recent EU summit, Britain and Europe are at a crossroads. America could help Britain make the right choice, to both countries’ mutual benefit.

French President Nicolas Sarkozy helpfully summed up the results of this month’s summit. He told Le Monde that there are now two Europes, one that “wants more solidarity between its members and regulation, the other attached solely to the logic of the single market.” The Europe of regulation wants to press forward with deeper integration, stringent budget rules and a transition away from nation-state democracy.

The problem is that no one asked the peoples of Europe whether they wanted this. Nationalism is on the rise. Budget rules have been flagrantly ignored in the past, and the Franco-German plan does nothing to deal with the euro’s structural problems, which make southern European countries grossly uncompetitive.

It is obvious to most outsiders that the euro zone’s problems remain. The rating agencies have been unimpressed, and downgrades of most euro-zone members and their banks are now more likely than ever. This meant that Mr. Cameron was left with two choices: strike out for the shore or drown with the rest.

Perhaps the most interesting thing about Mr. Cameron’s decision is the way he made it. It is now clear that he made an attempt—as he had promised British voters—to repatriate powers away from Brussels. This attempt was rebuffed with some prejudice. Given the outright hostility to Britain now evident in the European Union establishment, any further attempt at repatriation will be a non-starter. The implications are considerable.

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British Prime Minister David Cameron, left, with U.S. President Barack Obama.

The European Economic Community (EEC) for which the British signed up in a 1975 referendum—a community of free trade and cooperation, not supranational bureaucracy—is long gone. Worse, even today’s less-palatable EU will soon no longer be on offer. Sometime in the next few years at most, Britain will likely face the choice between immersion in a powerful centralized European mega-state and full exit.

Most probably, the choice will be made in an atmosphere of crisis, with dramatic media coverage proclaiming impending doom for Europe. Britain today needs to think seriously about a Plan B, so that it does not have to take an option it will regret for lack of coherent alternatives.

Britain does have other choices. To find the country’s new role, British leaders should look to North America.

Alone among EEC members, Britain narrowed some of its major trade networks when it joined. It also traded ordinary Britons’ right to virtually bureaucracy-free movement, temporary or permanent, between the U.K. and British Commonwealth nations. This meant losing easy access to prosperous places like Canada, Australia and New Zealand, which enjoy plentiful jobs and high standards of living, for the largely theoretical right to take a job in Düsseldorf or Lille. While much trust was lost between Britain and the rest of the Commonwealth because of this move, strong personal, cultural and economic ties remain and could be revived. Ask the average Briton where he’d feel more at home, Paris or Toronto.

Canada and Australia have well-managed, vibrant economies. Both countries sit on huge deposits of natural resources of ever-increasing value. Britain’s top-tier financial sector and still-excellent technical capabilities already play a role in Canada’s economy. These ties could be much strengthened.

Britons also feel at home south of the Canadian border. Contrary to an oft-repeated myth, links between Britain and the United States are not reducible to the personal relationships between presidents and prime ministers. The U.S. and the U.K. have always been each other’s primary financial partners. A few simple measures could substantially deepen this relationship, especially once Britain no longer needs to adhere to EU rules.

Foremost among these would be to admit a post-EU Britain to the North American Free Trade Agreement. Nafta is not a perfect vehicle, but it has the enormous advantage of already existing, with a nearly 20-year track record behind it. And unlike the EU, Nafta would not seek to impose a single social vision on its members. For example, Nafta has had no effect on Canadian social policy, which is very similar to Britain’s—except for Canada having more revenue to pay for it all.

The ongoing euro crisis will not be resolved any time soon, and America will continue to be impacted by bank write-downs and declines in U.S.-European trade. Increasing U.S.-U.K. trade would be one relatively quick and effective way of taking up some of the slack.

Up to now, however, the U.S. has pursued a policy of propping up the euro while discouraging British independence from Brussels. This is incredibly short-sighted. Using the vehicles of the Federal Reserve and the International Monetary Fund to try to fill the gaping hole in Europe’s finances will get everybody nowhere. Instead, British, American and Canadian policy makers (along with their Nafta partners in Mexico) should be taking the long view and preparing for a future in which the unsustainable euro zone inevitably collapses. Welcoming Britain back into the North Atlantic economic community would be a win-win for all involved.

—Mr. Murray is a vice president at the Competitive Enterprise Institute in Washington. Mr. Bennett is author of “The Anglosphere Challenge: Why the English-Speaking Nations Will Lead the Way in the Twenty-First Century” (Rowman & Littlefield, 2004).



Manufacturers of poverty….and immigrants

Libertarian Reflections

Manufacturers of poverty….and immigrants

Ricardo Valenzuela

A few months ago my friend Pablo Kleinman, invited me to do a radio interview at Univision in Los Angeles. Pablo is someone who was educated in Europe and the USA so, I immediately accepted knowing that the event would be a real interesting experience.


The goal of the interview was to explore the reasons why the southwest states of the USA, which use to be part of Mexico, are so rich and Mexico so poor and underdeveloped. It was a real tough job to find answers to an unquestionable reality: the states of California, Arizona, Colorado, Nevada, New Mexico, Texas etc report a GNP close to 4 trillion dollars while my country of Mexico can only show less than a trillion.


I received another invitation from Pablo for a new interview. It took me some time to decide whether to participate because of the complexity of the subject now suggested by Pablo: the new immigration law approved by Arizona.


This law is controversial for many reasons. Perhaps the most important one can be found in the appearance of the attorney general before congress to explain why he was about to file a suit against Arizona to block this new law. When one of the senators asked him if he had already read the text of the law, in an unbelievable and shameful way he answered that he had not.


In other words, the attorney general of the USA was about to file a law suit against a law in which he did not know its content.


Well, I have read the law so I know what is in it, but besides that, I want to share other credentials I have which I feel give me the right to express a responsible opinion about it. I was born and grew up in Sonora—the Mexican state border with Arizona—I have been legally residing in Arizona for years and I have always interacted between Sonora and Arizona. For five years I attended college at Tec of Monterrey in a city 100 miles south of Laredo Texas. During college vacations we use to drive Monterrey, Laredo, Del Rio, Eagle Pass, El Paso, Las Cruces, Nogales and then to my home town of Hermosillo. So, I know the border.


I married an Arizonan and I have 3 daughters who were born in Arizona. They married kids from Arizona and it is where they now live. For five generations my family has been a cattle exporter and we have crossed our cattle through all the Arizona—Sonora ports of entrance for more than 100 years. In a partnership with my friend from Sinaloa, Adolfo Clouthier, I participated in a company marketing Mexican produce all over the USA headquartered it in Nogales, Arizona. I was governor Bours’ representative in the US residing in Phoenix with big responsibilities about all kind of relations between Sonora and Arizona.


I am not a lawyer but, in my intellectual formation I had a big influence from a couple of real bright jurists. My father who had a degree of international law from the University of Brussels and my uncle Gilberto Valenzuela, who was jurist of the Mexican Supreme Court and also a jurist of the International Court at Holland. Someone whose life is described in a book title: “Gilberto Valenzuela, a life devoted to the principle of legality.” So, I strongly believe that countries with no rule of law are condemned to failure.


As a free market economist I believe that supply and demand will always meet, legally or illegally. And the most dramatic example of it, is the insane war that my country is fighting against an enemy which they will never subdue; the war against drugs. However, I also think, like my good friend Alberto Mansueti say in his book; ‘The Bad Laws’; some countries have only real bad laws. But my purpose is not to analyze the legal aspect of the problem; we have another one much more grave and important.


A few weeks ago the Mexican Secretary of State made a real irresponsible affirmation. “The only root of this problem is the refusal of the USA to approve a new immigration reform.” Oh, that sounds very simple. What about the one implemented in 1986? Through that process the USA legalized more than 10 million people and was the problem solved, no? Twenty years later the USA has another 20 million undocumented people who, running away from their countries, entered the US illegally and some experts say, in the background are another few million waiting, making this situation a very profitably business for international mafias


The real problem is not to come up with a new immigration reform to document those millions of people. We can find the real problem just asking a question. Why in the last 30 years 40 million people left their countries to, illegally, enter the USA?


A few years ago Tony Blair said something really wise. You can measure the greatness of countries by keeping track of the people leaving them, or people arriving in them. If that is the case, we can affirm that we come from midget countries. We come from countries where they don’t want to build the conditions to make their economies grow, the conditions to create jobs because, when people don’t find them, they are pushed to go to the USA. We are manufacturers of poverty and misery.


But we have political leaders showing up in Washington scolding congress, because they are not opening the doors for the people we are expelling from our countries because of our corruption, ineptitude and insecurity.


Blind with fear and irresponsibility we charge against bad gringos, racists, bullies, unjust. But we don’t see that we are the ones providing those miserable human beings as the raw material to build this tragedy. I can’t understand those masses of people, from all over Latin America, wearing the war paint to, without respecting the rule of law, demand some imaginary rights when in their countries never had the freedom to do the same thing against the tyrants who expelled them. I can’t understand why the whole Latin America’s GNP is less than 20% of the USA, and the only solution we have is to demand aggressively that the gringos take the many poor people we manufacture and expel.


We Mexicans will never get it. The new Arizona law doesn’t penalize immigration. The law only authorizes and gives the tools to the police force to secure the rule of law. If people enter the USA without the kind of requirements the law demands, they became outlaws and should be prosecuted.


The only thing that Arizona has done, is to approved the laws they consider necessary to promote a civilize way of living for their societies. The only difference with Mexico is that they do enforce the rule of law and we don’t know the meaning of those words.


The political correct people in Mexico City went so far, in the middle of their ignorance, to glorify delinquents who penetrate the USA breaking the law, they are just that, criminals.


Why don’t we abandon that role of beggars armed with big sticks? Why don’t we take down that flag of imaginary racism and stop barking to the moon on the water? If we want to find the causes and solutions to this sad and painful problem, we just have to take a look of our faces in the mirror, then make an act of contrition and stop manufacturing poor people and a lot of migrants invading the USA out of desperation.