Vermont Senate Votes to Legalize Recreational Marijuana

Vermont Senate Votes to Legalize Recreational Marijuana

01/10/2018Ryan McMaken

The Hill reports today that the Vermont Senate has voted to approve the legalization of recreation marijuana for users over 21 years of age.

With its passage in the Senate, the law proceeds to the governor's desk where he is expected to sign. 

While eight states (AlaskaCaliforniaColoradoMaineMassachusettsNevadaOregon, and Washington) have already legalized recreational marijuana, Vermont will be the first state to legalize via action of the state legislature. All other states that have legalized have done through statewide referenda or voter initiative. 

Since 2012, when Colorado voters approved recreational marijuana, state-level voters have repeatedly shown indifference toward federal drug law — which, of course, is in violation of Article I of the Constitution, and the Tenth Amendment. 

But now, for the first time, a state legislature and governor have joined the movement. This comes, we might note, mere weeks after US Attorney General Jeff Sessions announced he plans to ratchet up the Drug War against marijuana users. 

Apparently, Vermont legislators are happy to disregard him. 

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Fed Raises Rates, Projects More Increases This Year

06/13/2018Mises Institute

Today Jerome Powell announced another .25% increase in the Federal funds rate, bringing it to a range between 1.75% and 2%. In a corresponding move, interest paid on excess reserves by on 20 basis points, rather than 25. This is a small but significant change to Fed policy, a reaction to the Federal funds rate moving steadily towards the Fed's upper target range in recent months. 

The FOMC also increased its inflation outlook from last May's meeting, now projecting 2.1% inflation in 2019 and 2020. Other measures of inflation are much higher still, with the consumer price index hitting a 6 year high at 2.8. 

In response to projected growth and inflation pressure, the FOMC also projected an additional interest rate hike in 2018. The underlying narrative of today's announcement is the US economy is strong and good times are here. We will see if that bears out the rest of the year. 

The Wall Street Journal notes the changes in the Fed's statement from its May release:

 

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Does M&A Benefit the Economy?

06/13/2018Jeff Deist

The $85 billion mega-merger of AT&T with Time Warner appears headed for consummation, which will create another big digital media company with telecom underpinnings. But will this endless scramble for eyeballs and clicks, the quest to determine which platforms finicky content consumers will choose in coming years, actually create any value for shareholders? Or will it end up like the AOL/Time Warner merger of 2000, a poster child for unduly optimistic predictions about the value of merging technology platforms?

Beyond digital media companies, questions loom about the booming M&A market in general. Is the world of deals mostly malinvestment, as David Stockman charges, or does at least some transaction activity represent organic and healthy allocations of capital? Are company valuations and purchase prices completely out of whack, due to a Fed-juiced equities market? Do stock buybacks, creative recapitalizations, and listless horizontal mergers attempt to create ersatz "financial" growth in lieu of the real thing? 

All of these are open questions, and mises.org readers need no explanation of how central banks and low interest rates create malinvestment. But (cue movie trailer voice) in a monetary world controlled by central banks, the damnable answer is we can never know. That is precisely Stockman's point: because the Fed controls the most important price in the economy — the Fed Funds rate — it's impossible to know the true price of anything. 

Value is subjective, and supply and demand drives prices. But both measures are expressed in dollars.  

So the brilliant young tech kid who gets $30 million from a VC fund for a great new idea may have created value for society that justifies it — or may be the lucky recipient of cheap shotgun money, spread around by yield-chasing fund managers hoping whiz kid's idea pays 20X or 50X to cover losses elsewhere.

This is true of all speculative markets, to be sure. VC, M&A, and equity markets would have uneven distributions of winners and losers without the Fed. But one of the big problems with central banking generally is this: when you manipulate the cost of money and credit, you necessarily manipulate that distribution. This strengthens the perception that wealth is a rigged game, and in fact actually creates an undeserving class of Fed-connected elites in heavily "financialized" industries.   

One company hoping to cash in on easy money is Vice Media, a rough and tumble media platform focused on the advertising cliche known as the "youth market." You may have happened across Vice.com, or seen their ubiquitous videos on airlines or your social media feeds. The slant is decidedly leftwing, which is no surprise, but also fairly interesting — one recent video highlighted the tragic history between Haiti and the Dominican Republic with compelling on-the-ground storytelling.  

Still, it's a niche brand at best. So imagine thinking Vice.com is worth several billion dollars, ranking it among the most valuable private companies in America. Imagine thinking it will soon be worth $50 billion, perhaps within a decade. Imagine thinking the company is wildly undervalued, so that you pull $70 million in spare change from your back pocket and invest in something you don't quite understand but imagine represents youth and revolutionary thinking. 

We might call such a person a fool, someone suffering from historical amnesia when it comes to the dot.com and housing bubbles, who forgets the importance of fundamentals and real earnings in overvalued companies. We might call them a sucker who deserves to lose money. Or we might call them a genius, if it all works out. In fact that $70 million investor back in 2012 was no less than Rupert Murdoch — by all accounts a brilliant and shrewd media mogul, not to mention hard nosed investor. And he's not alone, as a very serious private equity player — TPG — invested $450 million just a year ago. 

Fast forward to today, and Vice Media is reeling from a combination of lagging revenue, a confusing array of platforms, and the struggle to figure out millennial TV habits. So the next round of Murdochs and TPGs might not be easily identified. 

Vice, mind you, produces "content" rather than tangible goods or services. And not just any content, but edgy content, which requires an almost preternatural understanding of the shifting social media and hipster landscapes. Edgy is amorphous, and quickly lost. Worse yet is the risk of a stale company imagining it's still edgy, i.e., lacking self-awareness. Now-shuttered Rare comes to mind, as does the struggling Buzzfeed. 

All of this suggests Vice needs the right people, and a constant new stream of them, to stay relevant. This is a tall order even in the older, slower print world, as anyone familiar with Rolling Stone or Spin can attest. So investing in Vice truly means investing in people, like its wild man founder Shane Smith, not management, products, brands, processes, or systems. And people are notoriously unreliable.

Rupert Murdoch and TPG should be worried. 

Addendum: the deal world today is not just a large-cap, headline-making phenomenon. Deal activity across company sizes is robust, both in terms of volume and value, despite cooling somewhat from a recent 2015 peak. M&A buyers spend nearly $5 trillion annually, more than $1.5 trillion of it in the US.

The two primary categories of M&A distinguishes between "strategic" and "financial" buyers.

Strategic acquisitions involve existing corporations scooping up competitors, new service lines, new brands, or new technology, with the goal of greater vertical integration and the economies of scale and management such integration makes possible. "Synergy" is the awful buzzword frequently used to describe big corporations either merging with a similarly sized company, snapping up smaller bolt-on businesses as subsidiaries, or absorbing established companies to fill holes in their product and service offerings.

Vertical integration, however, comes at a potential price. As Rothbard posits in Man, Economy, and State, corporations that become too large and dominant in a field risk losing perspective on profit and loss with regard to their intra-subsidiary transfer pricing, the amount each subsidiary "charges" the others for goods and services. Corporate executives who buy up too many similar companies might find themselves with imperfect information about internal profits and losses, and thus (like Soviet planners) become unable to allocate resources and price end goods/services effectively.

As a general rule strategic buyers are less sensitive to interest rates and central bank signals, because big existing corporations often bring cash to the table or swap their own valuable stock. When Amazon simply plunks down $13.7 billion in cash to buy Whole Foods, it's not doing so to make a quick buck or even take advantage of low interest rates (though it did issue corporate debt to raise some of the money). It's not openly engaging in the kind of financial engineering David Stockman decries, although he does frequently criticize Amazon's lack of profits and dividends relative to its sky-high P/E ratio. In essence, strategic buyers (especially public corporations) often have the luxury of long-range decision-making.

Financial buyers, however, generally consist of private equity or venture funds whose investors want to buy a company and sell it within a three to five year window. As Peter Thiel describes in Zero to One, for every investment that hits, most will fizzle. So the goal is to avoid too much downside risk while biding time to unearth the big winning investment — a story Thiel knows well from his experience with PayPal, Ebay, and Facebook (note that private equity firms often invest in large public companies; the strategic vs. financial distinction is based on the identity of the buyer rather than the target entity).

During the heady go-go years of private equity M&A, from the mid-1990s until the Crash of 2008, Alan Greenspan and Ben Bernanke demonstrated their commitment to making credit cheap and easy, and to making sure stock markets didn't crash. So private equity players responded rationally, buying up companies with 1 part equity to 6, 7, 8, or more parts debt. Often the 1 part debt was divided into tranches and split between various funds, isolating the risk of losing equity even further.

Keep in mind most corporate interest payments are deductible for tax purposes, while dividend payments are not. So it made sense to load up a company with cheap debt, and use revenue to pay off that debt quickly (while deducting the interest portion) rather than funding non-deductible capital expenditures to improve future productivity. Why worry about capex, product development, or improving factories when you plan to sell the company in three years anyway? Load it up with debt, fire existing management, install overseers, put every available dollar toward debt service, and get out before any long-term cracks began to show. After all, there was always another private equity firm (or IPO) waiting to buy. 

This model is what propelled Mitt Romney from being merely a rich man to being a very rich one.

It's hardly surprising that fund managers and corporate CEOs developed a short-term mindset: monetary policy almost demanded it. And it's hardly surprising that enterprise values rose to crazy heights, with many financial deals closing for a purchase price of 10 or 12X earnings. 

It was all driven by cheap credit, and it all came crashing down in 2008. But if M&A volume is any indicator, we haven't learned a thing.

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A Politically Weaponized FBI Is Nothing New, but Plenty Dangerous

06/13/2018James Bovard

The Justice Department Inspector General is expected to release on Thursday its report on alleged FBI misconduct during the 2016 presidential campaign. Trump supporters and opponents are already pre-spinning the report to vindicate or undercut the president. Unfortunately, the report will not consider fundamental question of whether the FBI’s vast power and secrecy is compatible with American democracy.

According to some Republicans, the FBI’s noble history was tainted by its apparent favoritism for presidential candidate Hillary Clinton. Democrats have gyrated over the past 18 months, first blaming the FBI for Clinton’s loss and then exalting the FBI (along with former FBI chief and Special Counsel Robert Mueller) as the best hope to save the nation.

In reality, the FBI has been politically weaponized for almost a century. The FBI was in the forefront of the notorious Red Scare raids of 1919 and 1920. Attorney General Mitchell Palmer reportedly hoped that arresting nearly 10,000 suspected radicals and immigrants would propel his presidential campaign. Federal Judge Anderson condemned Palmer’s crackdown for creating a “spy system” that “destroys trust and confidence and propagates hate.” He said, “A mob is a mob whether made up of government officials acting under instructions from the Department of Justice, or of criminals, loafers, and the vicious classes.”

After the Palmer raids debacle, the FBI turned its attention to U.S. senators, “breaking into their offices and homes, intercepting their mail, and tapping their telephones,” as Timothy Weiner noted in his 2012 book, “Enemies: The History of the FBI”. After the FBI’s political espionage was exposed, Attorney General Harlan Fiske Stone, warned in 1924, “A secret police system may become a menace to free government and free institutions because it carries with it the possibility of abuses of power which are not always quickly comprehended or understood.” Stone fired the FBI chief, creating an opening for J. Edgar Hoover, who would head the FBI for the next 48 years. Hoover pledged to cease the abuses but the outrages mushroomed.

In the 1948 presidential campaign, Hoover brazenly championed Republican candidate Thomas Dewey, leaking allegations that Truman was part of a corrupt Kansas City political machine. In 1952, Hoover sought to undermine Democratic presidential candidate Adlai Stevenson by spreading rumors that he was a closet homosexual.

Read the full article at The Hill
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The Anti-Marxist Argument That Clinches It

Ludwig von Mises and F.A. Hayek's criticisms of Marxism are among the most famous works within the Austrian school. Less discussed are some of the specifics criticisms of Eugen von Bohm-Bawerk. 

G.P. Manish joined the Tom Woods Show to discuss the topic, inspired by a recent Mises Wire article. 

 

The Anti-Marxist Argument That Clinches It

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Ron Paul on the Trump-Kim Summit

06/12/2018Ron Paul

"I can't help but feel a little bit proud that our views, which aren't mentioned very often, are really being talked about. They are talking about a peace treaty and ending the war. They are talking about bringing troops home. They are talking about spending less money and no more military games over there. Wow. That is very good." - Ron Paul

 

Who Won At The Summit? Trump or Kim?

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Rothbard Graduate Seminar 2018

06/11/2018Tho Bishop

Today was the first day of this year’s Rothbard Graduate Seminar. A total of 27 students from 13 countries have joined us in Auburn to dissect and discuss Murray Rothbard’s economic treatise Man, Economy, and State. RGS stands alone as the sole academic program in the world that applies the tradition of a great book seminar to Austrian economics. It has proved to be an invaluable asset in developing modern scholars in the Misesian tradition, and is possible thanks to the incredible generosity of  Alice Lillie.

Man, Economy, and State is a work deserving of the title "great book, it having played an important role in the history of Austrian economics. Dr. Joseph Salerno has credited the publishing of Rothbard’s masterpiece as being vital to the revival of the Austrian tradition in the United States. As he wrote in his paper, The Rebirth of Austrian Economics — in Light of Austrian Economics:

This handful of scattered contributions to Austrian economics forthcoming in the 1950s, however, would have defined the death throes of the school rather than the prelude to its rebirth were it not for the creative genius of Murray Rothbard, which came to fruition in the early 1960s. The revival of Austrian economics as a living scientific movement can be dated from the publication of Rothbard’s Man, Economy, and State in 1962, a contribution to Austrian economics and to pure economics in general that ranks as one of the most brilliant performances in the history of economic thought.

In his review of the book in 1962, Ludwig von Mises also identified Man, Economy, and State as an important contribution to economics that built upon the contributions of the Austrian school:

The main virtue of this book is that it is a comprehensive and methodical analysis of all activities commonly called economic. It looks upon these activities as human action, i.e., as conscious striving after chosen ends by resorting to appropriate means. This cognition exposes the fateful efforts of the mathematical treatment of economic problems…

In every chapter of his treatise, Dr. Rothbard, adopting the best of the teachings of his predecessors, and adding to them highly important observations, not only develops the correct theory but is no less anxious to refute all objections ever raised against these doctrines. He exposes the fallacies and contradictions of the popular interpretation of economic affairs.

Today’s RGS sessions focused on the first three chapters of Man, Economy, and State, with Dr. David Gordon lecturing on praxeology and Dr. Guido Hulsmann leading discussion on topics such as direct and indirect exchange.

Some photos from today’s sessions can be found below:

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How to Unlock the Free Market Possibilities of Net Neutrality's Repeal

06/11/2018Per Bylund

Past all the incendiary rhetoric, one of the key differences between Democrats and Republicans is the question of how far-reaching government intervention should be. Nowhere is this more apparent than in the most recent battleground over regulations: net neutrality.

Federal Communications Commission (FCC) Chairman Ajit Pai -- a Republican appointee -- championed a commission vote in December to repeal net neutrality regulation, arguing that deregulating internet service providers would bolster the economy.

Under a repeal, broadband providers would no longer be prohibited from blocking websites or charging for higher-quality service or certain content. The FCC, under Pai's leadership, says that ISPs like AT&T and Comcast will offer a better variety of niche services to enhance the customer experience if they are liberated from pesky regulations.

The issue is hardly settled: Democrats in the U.S. Senate disagreed with the FCC move and last month voted 52-47 to quash the repeal, but their bill is not expected to pass the House. And, even if it does, President Trump is extremely unlikely to sign it. As it stands, the repeal of net neutrality is set to take effect today, June 11.

The FCC’s repeal uncorked a tidal wave of outrage from net neutrality advocates, who fear a future of slower internet service, higher costs and fewer consumer choices. But those advocates should hold on -- because the loosening of regulatory hurdles actually fits into a market-oriented mindset that breeds entrepreneurial innovation. Here's how:

Read the full article at Entrepreneur. 
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Trump/Kim Meeting Shows Value of Policy Over Politics

06/11/2018Ron Paul

When President Reagan met with Mikhail Gorbachev in Reykjavik, Iceland, on October 11, 1987, it helped put into motion events that would dramatically change the global system. A line of communication was fully opened with an enemy of decades and substantive issues were on the table. Though the summit was initially reported as a failure, with the two sides unable to sign a final agreement, history now shows us that it was actually a great success that paved the way to the eventual end of the Cold War and a reduction in the threat of a nuclear war.

A year later Gorbachev and Reagan met in Washington to continue the dialogue that had been started and the rest is history. Success began as a “failure.”

We are now facing a similar situation with President Trump’s historic meeting with North Korean leader Kim Jong-un in Singapore. As with the Reagan/Gorbachev meetings, detractors on all sides seem determined to undermine and belittle the opening of a door to diplomacy and peace.

The neocons demand that North Korea give up all its bargaining chips up front in return for vague promises of better relations with the US. Yet in the post-Libya era no serious person would jump at such an offer. Their biggest fear is that peace may break out and they are doing everything to prevent that from happening. Conflict is their livelihood.

I also find it disheartening that many Democrat opponents of President Trump who rightly cheered President Obama’s efforts to reach a deal with Iran are now condemning Trump for opening the door to diplomacy with North Korea. Did they genuinely support President Obama’s diplomatic efforts with Iran, or did they just prefer the person who happened to occupy the Oval Office at the time?

The issue is about policy versus politics and I am afraid too many Americans of all political stripes are confusing the two. Many Americans, it seems, would prefer that we continue down the path to a potentially nuclear conflict on the Korean peninsula because they do not like the current US president. Does that make any sense? Has politics come to over-rule our common sense to the point we would go against our own interests and even our own lives? Let’s hope not!

The truth is, talking is always better than threatening. Just like trading is always better than sanctioning. Detractors on both sides miss the point while they desperately try to make political points. The current thaw with North Korea began with that country’s participation in the Olympic games in South Korea. From that point, North and South Korea came to see each other as neighbors rather than enemies. That process will continue regardless of what comes from the Trump/Kim summit and it is a process we should cheer.

Hopefully this historic Trump/Kim meeting is the beginning of a dialogue that will continue to dial back the tensions. Hopefully we can soon remove the 30,000 US troops that have been stationed in South Korea for seven decades. One thing Washington must do, however: stay out of the way as much as possible so as to allow the two Koreas to continue their peace process.

Reprinted with permission. 

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Anthony Bourdain on Kitchen Hierarchy

06/08/2018Peter G. Klein

Before Kitchen Confidential made him a celebrity, Anthony Bourdain was a real chef, working upscale New York kitchens at places like the Supper Club and Sullivan’s. Bourdain’s style is not to everyone’s taste, but he knows how to manage a restaurant crew. A chef, after all, is not primarily an artist, but a manager, facing the same set of organizational challenges — delegation, incentives, monitoring — as any administrator.

I mention this because I recently stumbled upon an interview with Bourdain in the July 2002 Harvard Business Review. Despite several attempts by interviewer Gardiner Morse to get Bourdain to endorse creativity, spontaneity, and empowerment in the kitchen, Bourdain remains an unreconstructed devotee of Escoffier’s “brigade system,” a sort of culinary Taylorism in which each member of the cooking staff has a fixed place in the production chain, a very narrow job description, and an obligation to obey his chef de partie (section leader) and the head chef without question.

Q: There’s been a trend in business to move away from hierarchies and empower workers, but you’ve embraced a very rigid staff structure and an old style of management with great success. Why do you think it works?

A: You’re defined by the job you do, not by whatever . . . predilections you have. . . . And to have any delusions that you’re better than anyone else, however true that might be as far as your technical skills are concerned, is not allowed. Your commitment is to the team effort. Everyone lives and dies by the same rules.

You have a tremendous amount of personal freedom in the kitchen. But there’s a trade-off. You give up other freedoms when you go into a kitchen because you’re becoming part of a very old, rigid, traditional society — it’s a secret society, a cult of pain. Absolute rules govern some aspects of your working life: obedience, focus, the way you maintain your work area, the pecking order, the consistency of the end product, arrival time.

This is a case where the advantages of hierarchy — the need for fast, coordinated decision-making, the ability to internalize externalities, the possession of “decisive knowledge” by the top decision-makers, and the like — appear to outweigh the high-powered incentives and Hayekian knowledge benefits of decentralization. Look for a future Foss-Klein paper (with Nils Stieglitz) discussing this tradeoff more systematically.

Originally published January 18th, 2008 on Organization and Markets
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Is Marvin Goodfriend’s Nomination in Trouble?

06/07/2018Tho Bishop

The Senate Banking Committee is set to vote next Tuesday on the nominations of Richard Clarida and Michelle Bowman. As I noted when both names were initially announced, neither’s history indicates any reason to think they will shake things up at the Fed. To his credit, Mr. Clarida did indicate during his Senate testimony that he strongly supports normalizing the Fed’s balance sheet and getting it away from direct credit allocation by purchasing non-Treasury assets. That’s a notable improvement.

Reports indicate that it’s possible both nominees will receive some bipartisan support, in notable contrast to the last Fed nominee considered – Marvin Goodfriend. In fact, it seems increasingly clear that Goodfriend’s nomination is in danger. As the American Banker noted today:

There is a bigger question another Fed board nominee, Marvin Goodfriend, whose nomination has faced controversy. Goodfriend is a professor at Carnegie Mellon University and former monetary policy adviser to the Federal Reserve Bank of Richmond.

“The Marvin Goodfriend nomination to the Board remains in limbo, but the odds of his confirmation are slim-to-none at this point,” Isaac Boltansky of Compass Point Research & Trading wrote in an analyst note May 14. “The odds slightly favor both Clarida and Bowman ultimately winning confirmation.

While Trump’s Fed nominees have largely been forgotten by the mainstream media, this development is a big deal. The reason I consider Goodfriend to be the “worst Fed nominee of all time” is that his enthusiastic support for negative interest rates and ambitious strategy for eliminating cash in America makes would make him a uniquely dangerous voice within America’s central bank.

It is worth noting as well that Goodfriend’s nomination is in peril in part due to an interesting coalition that transcends the political left and right. One of the loudest advocates against his nomination has been the organization Fed Up, a progressive organization whose primary policy goals have been greater “diversity” at the Fed and opposition to interest rate increases. While have obvious disagreement on monetary policy, it is promising to see some recognition on the left to the very real dangers negative interest rates and the war on cash can have on working class Americans.

Their advocacy seems to be working, with the expectations that Goodfriend will fail to receive a single Democratic vote in the Senate. Combined with Rand Paul’s committed no vote, Goodfriend is one more Republican opponent away from being done. Hopefully he will receive that from some of the better Republicans on monetary policy, like Ted Cruz or Mike Lee.

While it is a weird situation to see Elizabeth Warren doing more to attack a pro-tax advocate than either the Heritage Foundation or Cato, it does point to the unique political potency of the Fed as a political issue. If a Warren-Rand coalition brings down Goodfriend, America will be better off for it. 

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