Fire Hydrant of Freedom
Politics, Religion, Science, Culture and Humanities => Science, Culture, & Humanities => Topic started by: Crafty_Dog on October 31, 2006, 10:07:32 AM
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Woof All:
As it says, this thread is for Economics.
Marc
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The Dot-Com Bubble
Is Reconsidered --
And Maybe Relived
November 8, 2006; Page B1
The traditional history of the dot-com bubble has been told many times: Too many companies rushed into the market in defiance of all known business fundamentals, and when the crash came, all but a tiny fraction of them just as quickly imploded and went away.
That received wisdom, though, is now getting a going-over by economists, business historians and others, some of whom are coming to new conclusions about what precisely went wrong during the bubble years, normally dated from the Netscape IPO in August 1995 to March 2000, when Nasdaq peaked at above 5100.
A recent paper suggests that rather than having too many entrants, the period of the Web bubble may have had to few; at least, too few of the right kind. And while most people recall the colossal flops of the period (Webvan, pets.com, etoys and the rest) the survival rates of the era's companies turns out to be on a par, if not slightly higher, than those in several other major industries in their formative years.
The paper is being published in a coming issue of the Journal of Financial Economics. As noteworthy as the findings are, even more interesting is the process that led to them. The work is an outgrowth of the Business Plan Archive at the University of Maryland. Its goal is to become a kind of Smithsonian Institution of the Internet bubble, saving for posterity every business plan, PowerPoint presentation and venture-capital term sheet -- the more frothy and half-baked, the better -- that it can get its hands on.
David A. Kirsch, a professor of management at the university's business school and one of the authors of the study, said it relied on a thorough examination of one particular treasure trove at the archive: every business plan, roughly 1,100 in all, submitted during the period to an East Coast venture firm.
The VC office later closed and donated the papers to the archive on the condition it remain anonymous. Prof. Kirsch said that while the office would be considered second tier when compared with the famous names in Silicon Valley's Sand Hill Road, the 1,100 firms he studied were representative of all of the companies started during the period.
Looking through those business plans, and contemporary press accounts, the study identifies a defining business strategy of the bubble era: Get Big Fast. A business was supposed to grow as quickly as possible because the first successful entrant in a category could keep out challengers. If a company was able to successfully get big, it could use that position to later finesse other questions, such as how it might one day actually make money.
Belief in this "first mover advantage" is today tempered by a new awareness of the risks of being the first out of the chute. Back then, though, VCs used Get Big Fast as their basic investing strategy, despite the absence of any evidence that it worked. By the spring of 2000, however, the world was beginning to wake up to the fact that it didn't work. The crash followed soon thereafter.
The study suggests, though, that the dimensions of that crash might be misunderstood. Nearly half of the companies they studied were still in business in 2004. Prof. Kirsch says that most people believe just a few percent made it through.
The study found that the attrition rate for dot-com companies was roughly 20% a year, which is no different from what occurred during many other industries, such as automobiles, during their early boom periods.
Most of these survivors, though, aren't the titans like Amazon or eBay, but much smaller efforts such as wrestlinggear.com, which sells equipment to high-school and college wrestlers, what Prof. Kirsch called precisely the sort of demanding niche market for which Web shopping was invented.
The fact that so many dot-com companies survived suggests that even more could have started. But that didn't happen, says the study. Investors following conventional wisdom of the day were interested only in companies that could dominate an entire industry. In looking for these, they ignored smaller niche opportunities that had the potential to become modest but profitable enterprises.
"It turns out there were lots of nooks and crannies for entrepreneurial action," says Prof. Kirsch. "But those nooks and crannies might have been $5 million or $10 million businesses -- well worth doing, though not necessarily for VCs."
The paper's other authors were Brent Goldfarb, a University of Maryland economist, and David A. Miller, of UC San Diego.
While they didn't deal with the current Internet bubble involving "Web 2.0" companies, it's clear that a variation on Get Big Fast is alive and well today, just a few years later.
Companies like Interactive, eBay and Google are spending hundred of millions, often billions, on start-ups such as MySpace, Skype and YouTube, which have developed a commanding market presence but without actually making money. Some of the explanations for these purchases have a certain logic; others seem like dot-com d?j? vu.
It will take awhile to know whether things will turn out differently this time. But bubbles always have happy endings, don't they?
Write to Lee Gomes at lee.gomes@wsj.com
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The dismal science
Master of the Island
Which country is the best colonizer?
By Joel Waldfogel
Posted Thursday, Oct. 19, 2006, at 3:09 PM ET
A generation ago, Christopher Columbus was a hero. No longer. Even my preteen kids can tell you that Columbus' followers brought disease and death to many New World natives. But as the forerunner of European colonization, can Columbus also claim to have ushered in an era of higher standards of living?
One of the deep questions in economics is why some countries are rich and others are poor. It is widely believed that institutions such as clear and enforceable property rights are important to economic growth. Still, debates rage: Do culture, history, government, education, temperature, natural resources, cosmic rays make the difference? The reason it's hard to resolve this question is that we have no controlled experiments comparing otherwise similar places with different sets of legal and economic institutions. In new research, James Feyrer and Bruce Sacerdote, both of Dartmouth College, consider the effect of a particular aspect of history?the length of European colonization?on the current standard of living of a group of 80 tiny, isolated islands that have not previously been used in cross-country comparisons. Their question: Are the islands that experienced European colonization for a longer period of time richer today?
Imagine the ideal experiment for measuring the role of European colonization on economic growth. You would take a bunch of Europeans, set them down on different isolated islands for different lengths of time, wait a few hundred years, and then check to see whether the islands fertilized with Europeans for longer periods had become more prosperous. The insight of Feyrer and Sacerdote's paper is that the colonization that followed European voyages of discovery to the Pacific created just this experiment.
Mitiaro, Pohnpei, and Aitutaki?these are small islands in the Pacific that were colonized by European explorers at different times. They, and 77 other islands in the Atlantic, Pacific, and elsewhere, constitute the data the authors use in their study. Scholars who have made cross-country comparisons before have ignored these islands. Europeans "discovered" some of these places by accident. Pitcairn Island was colonized when the crew of the HMS Bounty staged a mutiny after an arduous trip to Tahiti under Capt. William Bligh. Explorers encountered Penrhyn, in the Cook Islands, after storms wrecked their vessels on its shores.
Feyrer and Sacedote's key findings are that the longer one of the islands spent as a colony, the higher its present-day living standards and the lower its infant mortality rate. Each additional century of European colonization is associated with a 40 percent boost in income today and a reduction in infant mortality of 2.6 deaths per 1,000 births.
By itself, the relationship between longer colonization and higher living standards could arise either because European contact raised living standards or because European explorers colonized the most promising islands first. The authors cleverly reject the latter possibility by noting that the sailing of the day relied on wind, which meant that islands located where wind is weak were "less likely to be discovered, revisited, and colonized by Europeans." Thus, wind conditions, rather than island promise, determined which islands were colonized first, and so which islands remained as colonies longer. The relationship between colonial duration and wealth reflects the effect of colonization on material living standards, rather than the other way around.
So, what did the Europeans do right? The authors conclude that there's no simple answer. The most plausible mechanisms include trade, education, and democratic government. When the study directly measures these factors, some of them help to explain income differences among islands?for example, the places that traded only basic agricultural products in colonial times now have lower living standards. But even after accounting for these concrete determinants, longer European colonization has some extra pro-growth effect. Exposure to European colonizers, it appears, benefits living standards for reasons apart from the direct effects of government, education, and markets.
To be sure, Europeans have not always been benevolent masters. Before the Enlightenment, they tended to view natives as savages who were better off dead than not baptized. After about 1700, however, attitudes began to change. While 16th-century explorers like Magellan set out to spread Christianity as well as make money, later voyages, like those of English Capt. James Cook between 1768 and 1779, had more explicitly scientific aims. The experience of island colonies reflects the difference. When the authors divide the islands into those that were colonized in the centuries before 1700 and those that were colonized after, current island income is 64 percent higher per century for the post-Enlightenment group but only 11 percent higher per century for the pre-Enlightenment one. And, no, the effects don't appear to stem from the replacement of decimated low-income native populations with higher-income Europeans.
The authors also compare the experiences of separate Pacific islands with eight different colonizers: the United States, Britain, Spain, the Netherlands, Portugal, Japan, Germany, and France.* Their verdict is that the islands that are best off, in terms of income growth, are the ones that were colonized by the United States?as in Guam and Puerto Rico. Next best is time spent as a Dutch, British, or French colony. At the bottom are the countries colonized by the Spanish and especially the Portuguese.
There is no disputing that thousands died in the wake of European explorers' discovery of the New World. That's bad. But we can still give a small cheer for Columbus, because European colonization brought riches in its wake.
Correction, Oct. 23, 2006: The original sentence included Denmark among the eight colonizers that the study compares. It should have included the Netherlands instead. (Return to the corrected sentence.)
Joel Waldfogel is the Ehrenkranz family professor of business and public policy at the Wharton School of the University of Pennsylvania.
Article URL: http://www.slate.com/id/2151852/
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The charts with this piece don't print here, but still worth the read.
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From Ritholtz..
The Return of M3
in Data Analysis | Economy | Federal Reserve
Last year, we lamented the passing of M3 reporting. This broadest of money supply measures had shown a discomforting increase in liquidity, far greater than what M2 was revealing.
At the time of the M3 announcement, we suspected the Fed was attempting to cover their tracks, disguising an ongoing increase in money supply and an unstated "easing" in Fed bias. Since that time, we have learned: the Treasury Department was also adding liquidity -- a duty they have assumed, in part, in addition to the same performed by the Fed. Indeed, based on the credit growth data Doug Noland published last month ( October Credit Review), it appears that the Fed has ? despite increasing interest rates ? actually eased over the last two years.
In light of all this excess cash sloshing around, we wondered what M3 might look like if it were still being reported.
Wonder no more: We have located 2 separate sources for the reporting of M3. The first is Nowandfutures.com. As this article discusses, recreating M3 from publicly available data was relatively easy to do (to 5 nines accuracy).
As the chart below shows, M3 is alive and well and growing significantly. (A longer term M3 chart can be found here).
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M3 January 2003 to present
click for larger graph
Source: Now and Future
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Why is this significant? Well, M3 is growing quite rapidly, with the annual rate of change now over 10%. Prior to the announcement of M3's demise, its growth was in the range of 3 - 7%.
Anytime a government agency stops reporting about their goings on, it should raise a few eyebrows. Now we see what happened once the reporting of M3 was killed -- that measure of money supply spiked much higher -- a rate of change that's even greater than 10%+.
Funny how we alter our behavior when we think no one is watching what we are doing, isn't it?
What makes this particularly egregious is that the broadest measure of Money Supply that is still "officially" reported -- M2 -- and its been flat for 2006 (as my pal LK likes to remind me all the time).
Have a look at this chart:
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M2 versus M3 Money Supply Growth
Source: Shadow Government Statistics
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This is a classic case of "ignore what they are saying, because what they are doing is speaking so loud:" While the Federal Reserve has been reporting rather flat money supply growth in M2 ( blue line), in reality they have been dramatically increasing the cash (red and blue line) available for speculation.
Hence, that sloshing sound you heard. They have been providing the fuel for the rally, the huge M&A activity, the explosion in derivatives -- even the eye popping Art auctions are part of the shift from cash to hard assets. It is just suupply and demand -- print lots of lots of anything, and that thing becomes increasingly devalued. It works the same for cash as it did for Beanie Babies.
Its not just the increase in Money Supply that should be concerning to investors -- its the misdirection about it. If Money Supply matters so little, as Fed Chair Bernanke has been out explaining to anyone who will listen, why pray tell has the Fed been working those printing presses overtime?
Given M3 increases, its no wonder the European Central Bankers laughed at the suggestion.
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William McChesney Martin, Jr., Fed Chair from April 2, 1951 to January 31, 1970, famously described the role of Central Banks thusly: "The job of the Federal Reserve is to take away the punch bowl just when the party starts getting interesting."
It seems the present Fed is not only NOT taking the punch bowl away -- they are spiking it with alcohol. I am not looking forward to the hangover that's to follow . . .
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The original piece is well annotated with many links:
http://www.tcsdaily.com/article.aspx?id=111606G
The Exceptionally Entrepreneurial Society
By Arnold Kling : 27 Nov 2006
"The movement that built the first national democracy was not triggered by an uprising of the masses; nor was it led by intellectual theorists. It was led by entrepreneurial men of means...In fact, starting a business develops precisely the traits that make democracy work. It requires independence, much effort, and self-discipline--but also the ability to work with others and the recognition that you can only succeed by serving the needs of others."
-- Carl J. Schramm, The Entrepreneurial Imperative, p. 161
This is the first of three essays on the theme of the significance of entrepreneurship in America. This essay looks at "American exceptionalism" with respect to entrepreneurship. The next essay will look at entrepreneurship and income inequality. The final essay will look at education and entrepreneurship.
Carl Schramm's thesis is that entrepreneurialism is as important to American culture as it is to our economic vibrancy. By the same token, in order to live in a congenial world, it is as important for the U.S. to export entrepreneurialism as it is to export democracy.
Compared to the United States, other developed countries, particularly in Continental Europe, put up more regulatory impediments to entrepreneurs, particularly the important subset of entrepreneurs that I will define below as change agents. In underdeveloped countries, regulatory impediments are compounded by crime and corruption, creating an environment even less conducive to entrepreneurship.
Defining Terms
The term "entrepreneur" has at least two connotations. The term could describe someone who launches a new enterprise. Alternatively, an entrepreneur could be defined as someone whose income is at risk in a business.
My preference is to require that a person satisfy both connotations in order to be called an entrepreneur. That is, my definition of an entrepreneur is someone who both launches a new enterprise and bears considerable risk and accountability relative to its success. To my way of thinking, an innovator who develops a new product within the safe confines of a university, a government agency, or an existing corporation is an intrepreneur, not an entrepreneur. Someone who has a very high degree of risk and accountability but who did not launch the business is a hired executive, not an entrepreneur.
An important subset of entrepreneurs (and of intrapreneurs) might be termed change agents. A change agent's new enterprise defies conventional wisdom and habits in some important way. Famous entrepreneurs, from Thomas Edison to Steven Jobs, are change agents. Change agents encounter resistance from people who are unwilling or unable to see the benefits of innovation, which explains why personal charisma and salesmanship can be important to their success.
Most entrepreneurs are not change agents. More typically, entrepreneurs own individual franchises, small retail stores, and just about anything else that you would find in a typical strip mall. These businesses require dedication, risk tolerance, and hard work to operate, but they do not depend on or attract change agents to launch them.
Amar Bhide, in his classic treatise, uses the term "promising start-ups" to describe businesses started by change agents and the term "marginal businesses" to describe the more routine entrepreneurial efforts. This terminological exercise may seem tiresome, but otherwise one can slip into using the term "entrepreneur" in multiple ways, depending on context.
Continental Europe
Edmund Phelps is the 2006 winner of the Nobel Prize in economics. Shortly after his award was announced, Phelps published an essay on how capitalism in the United States differs from the system in Continental Europe. Phelps wrote,
There are two economic systems in the West. Several nations -- including the U.S., Canada and the U.K. -- have a private-ownership system marked by great openness to the implementation of new commercial ideas coming from entrepreneurs, and by a pluralism of views among the financiers who select the ideas to nurture by providing the capital and incentives necessary for their development. Although much innovation comes from established companies, as in pharmaceuticals, much comes from start-ups, particularly the most novel innovations...
The other system -- in Western Continental Europe -- though also based on private ownership, has been modified by the introduction of institutions aimed at protecting the interests of "stakeholders" and "social partners." The system's institutions include big employer confederations, big unions and monopolistic banks.
In Continental Europe, large banks control the bulk of investment. The United States has a more vibrant stock market, many more banks, venture capital firms, and other financial channels.
In Continental Europe, large established firms have access to funds from the large banks, but newer enterprises have a much more difficult time raising money. In the United States, the more competitive financial system gives more opportunity for entrepreneurs to raise start-up capital. As Barry Eichengreen put it,
Bank-based financial systems had been singularly effective at mobilizing resources for investment by existing enterprises using known technologies, but they were less conducive to growth in a period of heightened technological uncertainty.
-- (For more on Eichengreen's work, see Tyler Cowen.)
In Continental Europe, labor market regulations serve to keep small businesses small and to ossify the work forces at larger companies. In the United States, it is much easier for new businesses to expand and for old businesses to shed unnecessary workers.
European government policies sacrifice economic dynamism to other goals. For example, Joseph H. Golec and John A. Vernon recently wrote,
EU countries closely regulate pharmaceutical prices whereas the U.S. does not...In 1986, EU pharmaceutical R&D exceeded U.S. R&D by about 24 percent, but by 2004, EU R&D trailed U.S. R&D by about 15 percent. During these 19 years, U.S. R&D spending grew at a real annual compound rate of 8.8 percent, while EU R&D spending grew at a real 5.4 percent rate. Results show that EU consumers enjoyed much lower pharmaceutical price inflation, however, at a cost of 46 fewer new medicines introduced by EU firms and 1680 fewer EU research jobs.
Continental Europe is set up to preserve large public sectors, large banks, and large corporations. For individuals, the promise is stable jobs, a stable business environment, and collective sharing of the costs of unemployment, retirement, and health care. For the economy as a whole, however, the result is stagnation, inefficiency, and a burden on the working population to support the unproductive sector that is becoming increasingly unsustainable.
Over time, Europeans with entrepreneurial inclinations will be increasingly tempted to emigrate to the United States or other countries in the Anglosphere. Among the remaining Europeans, political support for welfare-state policies will solidify, even as the economic viability of those policies slips further.
Crime and Corruption
An entrepreneurial culture can emerge only in a setting where private property enjoys protection. When government fails to prevent crime, or when government corruption and expropriation serve the same functions as crime, the price for entrepreneurs is steep. A recent New York Times story summarized research done by a number of international agencies on the cost of crime in Latin America.
Years of rampant violent crime is not only robbing Latin America of significant private investment, but in some cases is stealing up to 8 percent from national economic growth, economists and World Bank officials say.
..."You have money spent on guarding stuff rather than making stuff," said Michael Hood, Latin America economist for Barclays Capital. "There's a large population standing around in blue blazers rather than engaged in more productive activities."
Much of the cost of government corruption is inflicted on start-up businesses. The World Bank and Canada's Fraser Institute have both documented the difficulties of doing business in many underdeveloped countries.
The Ethics of Growth, Once Again
Four years ago on TCS, I wrote that a nation's prosperity depends on three ethics: a work ethic, a public service ethic, and a learning ethic. The work ethic means that people believe that those who are willing to work deserve more rewards than those who are not. A public service ethic means that government officials are expected to protect private property, not to extort it. And a learning ethic means that people expect to learn, innovate, and adapt, rather than to resist change.
In the underdeveloped world, the work ethic and the public service ethic have not flourished. Instead, crime and corruption sap the economy, and entrepreneurship is particularly frustrated.
Continental Europe does not suffer such severe problems with the work ethic and the public service ethic. However, an important part of the learning ethic is taking advantage of the decentralized, trial-and-error process of entrepreneurial success and failure. The Continental European system attempts to replace the learning of decentralized markets with bureaucratic planning. Individual change agents have little access to capital and less opportunity to earn large individual rewards.
Ultimately, Europe's corporatist, bureaucratic model impedes learning and retards innovation. With its barriers to entrepreneurship, which are particularly discouraging to change agents, European economic growth has lagged behind during the last two decades of rapid technological change.
America's Natural Allies
If the United States is exceptional because of our entrepreneurial culture, then our natural allies may not be in Continental Europe, in spite of its democratic governments and high levels of economic development. China seems more dynamic than Europe, but I would argue that China's government-controlled financial system ultimately is not compatible with American-style entrepreneurship. Instead, we may have more in common with other nations of the Anglosphere, as well as such entrepreneurial outposts as India, Israel, and Singapore.
For the half century following World War II, the United States focused on democracy as the cornerstone of foreign policy. Democratic nations were our allies, and promoting democracy abroad was a top priority. However, it may be that American exceptionalism mostly reflects entrepreneurship. In that case, we have less in common with European social democracy than we thought previously. And, if our goal is to have more countries that look like America, then having them adopt a democratic political system may not be necessary and will certainly not be sufficient. Instead, our primary focus should be on fostering an entrepreneurial economic system. As Nobel Laureate Phelps put it,
I conclude that capitalism is justified -- normally by the expectable benefits to the lowest-paid workers but, failing that, by the injustice of depriving entrepreneurial types (as well as other creative people) of opportunities for their self-expression.
Arnold Kling is an adjunct scholar with the Cato Institute. His most recent book is Crisis of Abundance: Re-thinking How We Pay for Health Care.
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stratfor.com
Global Market Brief: China's Engineered Drop
February 28, 2007 0156 GMT
China's Shanghai Composite Index tumbled 8.84 percent Feb. 27, its largest fall in a decade. Its sister index, the Shenzhen Composite Index, fell 8.54 percent. The size of the drop in China is not significant in and of itself. On a number of occasions during the past year, the Shanghai Stock Exchange has experienced 5 percent plus daily reductions, and it has already boomed and busted once this decade.
But that hardly means the development is insignificant. The fall is important both for how it happened and what it triggered.
How it Happened
This was an engineered drop.
The Chinese government has become increasingly concerned about levels of investment in its economy or, more accurately, the sheer amount of money that is chasing projects. State firms with limitless access to subsidized capital from state banks have used that access to launch thousands of nonprofitable firms. This glut in "investment" money drives up the cost of commodities and adds industrial capacity without actually producing anything of much use, making life more difficult for the average Chinese and unduly harming relations with foreign powers that face a glut of otherwise noncompetitive Chinese goods.
This penchant for overinvestment has now spread to the stock market in two ways. First, the same politically connected government officials who started dud companies are taking out loans to buy shares, or are using shares they already hold as collateral for new loans. Second, ordinary Chinese citizens have started borrowing -- sometimes against their homes -- in order to play the market. In January, the number of total traders on the Chinese exchanges grew by 1.38 million, an increase of 134 percent from a month earlier, while stock turnover was up 700 percent from a year earlier.
The net result is an absurd stock surge with no basis in fundamentals. At present, some Chinese banks now have price-to-earnings ratios higher than financial behemoths such as Deutsche Bank and Chase, despite deplorable management and a history of highly questionable lending policies.
For the past few months, the government has been working to drive down this speculative investing. On Feb. 26, China's State Council launched a new "special task force" that accurately could be referred to as the "get-those-idiots-to-stop-borrowing-to-gamble-on-the-stock-exchanges" team. Its express goal is to get the Chinese domestic security brokers to lay off such speculative decision-making, while also putting a crimp in the source of the subsidized capital.
Day one started by the script, and Beijing is likely quite pleased with the way things are going (or at least it was until its actions unintentionally triggered a global meltdown). Also, since the Shanghai exchange is actually still up 3 percent for the past week despite suffering its largest drop in a decade, the State Council probably hopes for more drops in the days ahead.
What it Triggered
But the rest of the world took a different lesson. Why the Chinese stock crash occurred was unimportant to the outside world, only that it did -- and that it affected everyone else.
For the first time, China has become the trendsetter in the global stock community. Normally, the U.S. exchanges -- especially the S&P 500 index and the Dow Jones Industrial Average -- set the tone for global trading patterns. Not on Feb. 27. This time, China led Asia to a wretched day. The wider the contagion spread, the more margin calls were forced to be called in. (If an account's value falls below a minimum required level, the broker will issue a margin call for the account holder to either deposit more cash or sell securities to fix the problem.)
As the drops snowballed, Europe filed in dutifully behind, mixing the China malaise with its own nervousness about overextended markets in Central Europe and the former Soviet Union. By the time markets opened in the United States -- where investors already were fretting about the subprime mortgage markets -- the only question remaining was how far U.S. markets would descend. In the end, the Dow dropped by the most since the fall triggered by the 9/11 attacks.
So why has this not happened before now? As China's market capitalization has increased, its links to the global system have increased apace. These links have developed very quickly, and with few controls. The Shanghai exchange, for example, more than tripled in total value in 2006 to more than $900 billion -- and much of the rapid-fire initial public offerings (IPOs) of Chinese banks on the Hong Kong and other international exchanges are not included in that little factoid. Indeed, China's mainland exchanges are only the tip of the iceberg -- and they certainly do not include foreign firms that are heavily invested in the mainland.
Two years ago, China's market capitalization was too small for its problems to impact the global system. Now, between ridiculous foreign subscriptions to IPOs, irresponsible corporate policies and irrational valuations all around, that capitalization is to a level -- around $1.3 trillion -- where its integration with the global system via funds and margins makes China a sizable chunk of the international financial landscape. The insulation that once protected international exchanges from Chinese policies is gone, which makes the international system more vulnerable to Chinese crashes.
Feb. 28 and Beyond
Follow-on crashes can come from one of three places.
First, the Chinese believe their exchanges are massively overvalued (hence the engineered crash). They will do this again, and are not (yet) particularly concerned with the international consequences. China planned to dampen its own stock market, not the world's markets. Along with the rest of the world, Beijing did not expect the contagion effect to be so extreme. Yet, for now at least, China's own exchanges are its primary concern, and it will act according to that belief.
Second, everyone else now is going to chew on the fact that Beijing did this intentionally. They will either agree with the Chinese that the exchanges are overvalued and that additional measures are needed, or they will be terrified that Beijing did this intentionally and not care about the reasons. Whether what is sold is a domestic Chinese firm or a foreign firm invested in China does not matter much. Neither does it matter if the stock is on an exchange in China or abroad. Either way, the reaction will be the same: Sell.
Third, trading in 800 of the 1,400 stocks on the Shanghai exchange was suspended during the sudden drops Feb. 27; they have a lot farther to fall, even without any engineered drops caused by panicky selling.
Considering the flaws on which the Chinese system is based, this certainly will not be the last engineered drop. In theory, the move will make foreign investors far more cautious before diving into the Chinese system, but as longtime Stratfor readers know, we have been wrong on the timing of that particular development before.
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Another interpretation:
WSJ
Credit Correction
Will the Fed and the Democratic Congress tempt a larger stock market selloff?
Wednesday, February 28, 2007 12:01 a.m. EST
Any equity selloff as large as yesterday's will produce a multitude of explanations. Among other culprits, we heard about "overbought" Chinese stocks that were due for a correction, a weak durable goods report, the Kabul explosion aimed at Vice President Dick Cheney (see below), and former Federal Reserve Chairman Alan Greenspan for declaring Monday that a "recession" was possible later this year.
Our own "whodunit" contribution would point to the mortgage-related markets, which sold off nearly as much as stocks. This reflects the cracks appearing in the housing credit markets, especially in subprime loans but with some damage up the income chain as well. Along with emerging markets such as China, this is where the excesses have been most notable. And when Adam Smith does a house cleaning like yesterday's, he sweeps the dirtiest corners first.
The question is whether this is a forecast or merely a correction. As evidence of the latter, we'd point to Mr. Greenspan, whose Monday remarks seem to have been over-interpreted as a recession prediction. In the same discussion, we're told, he called the world economy "benign and stable." Nonetheless, we'd also note that Mr. Greenspan's predecessor as Fed Chairman, Paul Volcker, didn't muse about recession dangers after he left office in the 1980s. He didn't want to complicate Mr. Greenspan's monetary task at the time.
We also wouldn't make too much of one month's decline in durable goods. These are notoriously volatile, especially in transportation, which was way down in January. Today's report on fourth quarter GDP is also widely expected to be revised downward from the original 3.5%. But much of that revision may be due to an inventory work off, which bodes better for growth going forward. The labor market remains strong, if slowing from the rapid pace of job growth in 2006.
The bigger risks continue to be political and monetary. The era of tax cutting has ended with the arrival of the Democratic Congress, and other policy errors are possible. As for the Fed, we'd feel better if current Chairman Ben Bernanke had been running a tighter monetary policy for the last year; it might have left him with more policy room if the economy does turn sour. As it is, any easing now runs the risk of a dollar rout, which could lead to an even larger loss of confidence and selloff.
The current problems in the housing credit markets owe a great deal already to the Fed's mistake in keeping monetary policy too easy for too long during the late Greenspan era. We now have to ride them out, and Mr. Bernanke shouldn't make them worse with a panicky, premature easing.
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The Poor in America keep getting Richer
"Among all families with children, the poorest fifth had the fastest overall earnings growth over the 15 years measured."
The poor have been getting less poor, according to a new study by the Congressional Budget Office. On average, CBO found that low-wage households with children had incomes after inflation that were more than one-third higher in 2005 than in 1991.
The CBO results don't fit the prevailing media stereotype of the U.S. economy as a richer take all affair -- which may explain why you haven't read about them:
* Among all families with children, the poorest fifth had the fastest overall earnings growth over the 15 years measured.
* The poorest even had higher earnings growth than the richest 20 percent.
* The earnings of these poor households are about 80 percent higher today than in the early 1990s.
What happened?
* CBO says the main causes of this low-income earnings surge have been a combination of welfare reform, expansion of the earned income tax credit and wage gains from a tight labor market, especially in the late stages of the 1990s expansion.
* Though cash welfare fell as a share of overall income (which includes government benefits), earnings from work climbed sharply as the 1996 welfare reform pushed at least one family breadwinner into the job market.
Earnings growth tapered off as the economy slowed in the early part of this decade, but earnings for low-income families have still nearly doubled in the years since welfare reform became law. Some two million welfare mothers have left the dole for jobs since the mid-1990s. Far from being a disaster for the poor, as most on the left claimed when it was debated, welfare reform has proven to be a boon.
Sources: NCPA, CBO, and WSJ Editorial, "The Poor Get Richer," Wall Street Journal, May 23, 2007.
http://online.wsj.com/article/SB117988547410811664.html
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Doug:
Amazing how this CBO study received absolutely no coverage and amazing that the Republicans have not made use of it.
Perhaps Newt Gingrich, who certainly had a big hand in the welfare reform, will use it if :wink: he runs , , ,
Marc
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"Amazing how this CBO study received absolutely no coverage and amazing that the Republicans have not made use of it.
Perhaps Newt Gingrich, who certainly had a big hand in the welfare reform, will use it if he runs"
Agreed. Welfare reform and also capital gains rate cuts were the two big accomplishments of that congress, causing the great economic expansion to continue in this country. I think most people, via our media, remember Newt for the shutdown (Clinton's fault) and his "whither on the vine" remark (which had to do with a obsoleting a bureaucracy, not cutting off our grandparents) and they remember Clinton for a great economy (where credit should go more to Newt and even Reagan). I already read the rapid response of liberal bloggers to this study saying these numbers are skewed because the start date of 1991 was a recession year. (You might recall - that wasn't much of a recession.) The Democrat candidates pick stats that start at the height of the bubble to show what little progress has been made. You just exposed which numbers the media will latch onto.
IMO, public policy has a (limited) interest in watching out for the well being of the poorest among us, but no legitimate interest in the so-called 'widening gap' which means putting limits on success.
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Concerning "widening gap", I remember in the early Reagan years there was much indignation about the widening gap between rich and poor, blah blah. What these economic illiterates did not understand was that with the cut of the top tax rate from 70% to 30% it made more sense to allow the money to be taxed than to keep it in the shelters-- hence the dramatic increase in "the rich" in government data.
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Really is sickening how MM can and *willingly and knowingly* does distort facts:
The WSJ's information will never appear in the NYT (or if it did it would be buried somewhere deep on page 50 or so):
http://washingtontimes.com/commentary/20070113-103432-9181r.htm
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Tax cuts and the rich
By Alan Reynolds
January 14, 2007
The New York Times headline -- "Tax Cuts Offer Most for Very Rich" -- said it all. That claim was uncritically repeated by CNN, posted on Brad DeLong's blog and so on. But was it true?
The report by Edmund Andrews was about the latest "Historical Effective Tax Rates" from the Congressional Budget Office (CBO).
The CBO shows that from 2000 (the year before President Bush cut tax rates) to 2004, the after-tax income of the very richest 1 percent fell by 7.9 percent. After taking into account the Bush tax cuts, the 8.3 percent drop in after-tax incomes of the top 1 percent was even worse. From 2000 to 2004, average real incomes of the middle three-fifths rose 4.1 percent after-taxes, but only 0.5 percent before taxes. In other words, 88 percent of middle-income gains between 2000 and 2004 were due to those nefarious Bush tax cuts of 2003.
Those who rely on the New York Times (unlike readers of The Washington Times), will never find out what the CBO report reveals unless they go to cbo.gov and read it. To have any chance of his story appearing in the New York Times, Mr. Andrews had no choice but to dissemble.
He began by saying, "Families earning more than $1 million a year saw their federal tax rates drop more sharply than any group in the country as a result of President Bush's tax cuts, according to a new congressional study." But the top 1 percent of households (not families) are those earning more than $266,800 -- not more than $1 million. The average income for everyone earning more than $266,800 exceeds $1 million, but such a mean average is bloated by a small number of very high incomes, particularly distributed earnings of Subchapter S-corporations.
This is why we use median income to describe typical income in other cases, and should also do so when describing average income of top income groups (which differ from lower groups because income has no upper limit).
Mr. Andrews continued, "Though tax cuts for the rich were bigger than those for other groups, the wealthiest families paid a bigger share of total taxes. That is because their incomes have climbed far more rapidly, and the gap between rich and poor has widened in the last several years."
Unless "last several years" excludes 2000, the statement is brazenly false. It makes no sense to start with any year except 2000 because we can't possibly compare incomes and taxes before and after the Bush tax cuts unless we begin with the last year of the Clinton presidency. That is, after all, the tax regime congressional Democrats set up as their ideal when they criticize the Bush tax changes as unduly generous to the top 1 percent.
Measured in constant 2004 dollars, average income of the top 1 percent was $1,413,000 in 2000, but only $1,259,700 in 2004 -- a drop of 7.9 percent. Tax cuts did not help a bit. After-tax income of the top 1 percent fell from $946,300 to $887,800 -- an even larger 8.3 percent decline.
Mr. Andrews says, "Economists and tax analysts have long known that the biggest dollar value of Mr. Bush's tax cuts goes to people at the very top income levels." You don't need to be an economist to discern that "the biggest dollar value" of any equiproportionate tax cut must go to those with the "biggest dollar value" of taxes paid. Yet the top 1 percent did not get anything remotely close to a proportionate share of the tax cuts after 2000.
The article says "the wealthiest families paid a bigger share of total taxes," but what is remarkable is that they even paid a larger share than they did in 2000, although their before-tax incomes were 7.2 percent smaller. That explains why the top 1 percent's after-tax income fell even more than their before-tax income. The top 1 percent ended up with 14 percent of after-tax income, down from 15? percent in 2000, and that includes one-time capital gains and a seriously exaggerated share of corporate profits.
Mr. Andrews added that "two of [the president's] signature measures, tax cuts on investment income and a steady reduction of estate taxes, overwhelmingly benefit the wealthiest households."
That sentence is half irrelevant, half mistaken.
The CBO does not attempt to assign the estate tax by income group. To do that, they would have to know who received the money, not who died. Dead people cannot receive more income, before or after taxes, just one reason death is a highly undesirable tax avoidance strategy. If Hugh Jassets dies and leaves $10 million to be split among 10 young grandchildren, those youngsters are likely to be either invisible or poor in terms of income showing up in CBO tax data.
Second, taxes on capital gains and dividends are surprisingly hard on older retirees with low incomes. Those with incomes below $15,000 paid more than 7 percent of the federal taxes on dividends in 2002, and those with incomes below $200,000 paid 62 percent of that tax.
Third, lower tax rates on taxable dividends and capital gains generally result in investors paying more taxes on their investment income, not less. Nobody has to hold dividend-paying stock in a taxable account, and nobody has to report capital gains by selling assets from a taxable account.
The amount of dividend income reported to the IRS doubled from 2002 to 2004. Upper-income taxpayers are bound to be reporting relatively less income from tax-exempt bonds than they did before 2003. Moving income from nontaxable to taxable investments looks like an increase in top incomes in the CBO estimates, but it isn't.
There has been a lot of chatter lately about raising Social Security taxes only on those with incomes above $100,000 while cutting the same group's Social Security benefits again (their benefits were deeply slashed in 1993 through an extra tax on benefits). Can anyone really pretend that sounds "fair"?
The CBO calculates the effective tax rate for all federal taxes -- including Social Security and Medicare taxes, income taxes and excise taxes. For the bottom 80 percent as a group, that total federal tax fell from 14.1 percent in 2000 to 11.4 percent in 2004 -- a 19.1 percent tax cut.
The tax cut was deepest among the poorest fifth (29.7 percent), largely because of the Bush administration's refundable tax credit for children. For the middle fifth, the total tax rate fell from 16.6 percent to 13.9 percent -- a 16.3 percent cut. As for the top 1 percent, their overall tax rate was merely trimmed from 33 percent to 31.1 percent -- a 5.8 percent cut
A courageous (willing to be fired) New York Times ombudsman would insist on the following correction to Mr. Andrews' upside-down article: "Households earning more than $266,800 a year saw their federal tax rates drop less sharply than any other group in the country as a result of President Bush's tax cuts, according to a new Congressional Budget Office study."
Alan Reynolds is a nationally syndicated columnist and a senior fellow with the Cato Institute.
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By DAVID RANSON and PENNY RUSSELL
July 5, 2007; Page A15
WSJ
Interest rates are on the rise in the Eurozone, Great Britain and Japan, as well as in India and China. But the Federal Reserve has again elected to keep its target rate on hold despite repeated assertions that inflation risk is still its predominant concern. Are central banks abroad recognizing a threat that their American counterpart has yet to acknowledge?
The Fed seems to believe that inflation has something to do with "excessive" demand. Although it admits that inflation is already running at an unacceptable pace, the majority of its policy officials cling to the belief (or hope) that the U.S. economy is slowing down, alleviating the inflation threat. Both of these assumptions are inconsistent with historical evidence.
What's more, the recent rise in the euro and sterling relative to the dollar has obscured the fact that the world economy has embarked on another classic "run" on paper currencies that is driving inflation up everywhere. For several years now, as was the case in the 1970s, all the world's currencies have been depreciating relative to stable benchmarks such as gold. Since the end of 2001, these declines have ranged from 38% (in the case of the euro) to nearly 60% (in the case of the dollar).
Why then has the pace of consumer-price inflation to date been so much less noteworthy than the pace of currency depreciation against gold? The answer lies in the timing: Gold is a fast-moving leading indicator, whereas consumer-price indices are slow-moving indicators that lag far behind. We all learned in the period between 1975 and 1985 that consumer prices do eventually catch up. It is the size of the move in the gold price, rather than in the consumer price index, that is a true and timely indicator of the magnitude of the inflation problem.
In 1975, Yale economist Richard Cooper described the process that now appears to be driving world inflation as "a general loss of confidence in money, a psychological mood that can be transmitted across national boundaries . . . [that will] lead individuals to try to convert their assets into physical form: goods or housing or real estate."
But why does this phenomenon break out at some times and not at others? Why is it sometimes local and sometimes global? History provides the answer. Following World War II, rapidly rising prices began to be accepted as an inevitable -- even "normal" -- fact of life. But in reality, up to and including the 19th century, significant inflation had been the exception rather than the rule. And when it did occur it was usually local rather than global. In the U.S., for example, cumulative consumer-price inflation was zero from 1820 to 1913, just prior to World War I. In the United Kingdom, consumer prices were lower at the beginning of World War II than they had been in 1800. In England the prices of consumables rose at an average annual rate of less than 0.4% over the centuries-long run between 1210 and 1940.
Against this relatively stable background, inflation erupted when nations faced acute fiscal stress, particularly in times of all-out war. A government that lost a war of survival typically saw the value of its paper currency evaporate to zero. In the final stages of this process, hyperinflation and astronomical interest rates accompanied economic chaos. The defeated government either did not survive (such as the Confederacy in 1865) or had to be rescued from its currency crisis by the victors (as in Germany and Austria in 1923 and Germany and Japan after 1945). Even the winners of all-out wars, especially those that emerged seriously impoverished (such as Britain in 1945), resorted to currency devaluations and suffered high inflation as a result.
In all cases, inflation was related to the inability or unwillingness of the governing authorities to maintain a stable currency in times of war-related government spending and debt. Although we are not entirely at peace today, U.S. military activity is at nothing like the all-out scale from 1917-1918 or 1941-1945. So why are we having an inflation problem, and why is it global in scope? There are two culprits.
First, since 1971 no government had made an attempt to fix the gold value of its currency, and every political initiative that raises long-term government spending leaves the financial markets free to price currencies at a lower gold value. Depreciation of currencies relative to gold has become unpredictable, chronic and planet-wide.
Second, the massive increase in the public-sector share of the economy that occurred in World War II (and was reinvigorated in the late 1960s) has become permanent. In place of war-related debt, public finance is now saddled with long-range government spending commitments, including burgeoning debt in the form of unfunded liabilities associated with national pensions and health insurance. The popular notion that inflation is the way politicians reduce public debt without formally abrogating it is not far from the truth. In a nutshell, inflation is a manifestation of looming government insolvency.
This problem vastly overshadows the federal budget deficits with which Washington is obsessed. The military costs of the "war on terror" and the Iraq conflict are mere addenda to a mountain of obligations, which financial markets are warning that the federal government can only discharge by inflating away.
Not that the other world economies are in any better fiscal shape than America's. In fact, throughout the 20th century, the U.S. has been a sort of lender of last resort. If we had not been on the scene in 1923, who else could have underwritten a new and viable currency for Weimar Germany? Though in recent times our allies in North America and Europe have been less warlike than us, they long ago adopted much more generous social "safety nets" and thereby undermined their long-term solvency to an even greater degree than here.
Inflation was negative following the Civil War, when the price of gold fell back to its pre-war parity. Inflation was likewise low after World War I when the price of gold remained fixed. In contrast, inflation charged ahead after World War II as the market price of gold was permitted to rise. Broadly speaking, although a rise in the price of gold is a sufficient condition for consumer-price inflation, it is not entirely necessary. The shortages that occur in a widespread war (such as World War I) may be sufficient to push up the price level, despite price controls and adherence to the gold standard.
Inflation is not intrinsically global -- it is obvious that some countries experience more inflation than others. But currencies depreciating against gold across the board is a sign of world-wide inflation -- and it has begun to set off alarm bells in many major economic capitals. But in Washington, our own central bankers remain placidly confident that everything will turn out all right.
Unsustainable peacetime spending is a much slower process than the unsustainable war spending. Far from sudden death, currencies these days are facing death by a thousand cuts. The unfortunate result is that the current crisis of confidence in paper money goes largely undiagnosed by the bulk of economists and policy makers.
Mr. Ranson and Ms. Russell are principals of H. C. Wainwright & Co. Economics.
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We're Number One, Alas
July 13, 2007; Page A12
Some good news on the tax cutting front: Last week lawmakers approved an 8.9 percentage point reduction in the corporate income tax rate. Too bad the tax cutters are Germans, not Americans.
There's a trend here. At least 25 developed nations have adopted Reaganite corporate income tax rate cuts since 2001. The U.S. is conspicuously not one of them. Vietnam has recently announced it is cutting its corporate rate to 25% from 28%. Singapore has approved a corporate tax cut to 18% from 20% to compete with low-tax Hong Kong's rate of 17.5%, and Northern Ireland is making a bid to slash its corporate tax rate to 12.5% to keep pace with the same low rate in the prosperous Republic of Ireland. Even in France, of all places, new President Nicolas Sarkozy has proposed reducing the corporate tax rate to 25% from 34.4%.
What do politicians in these countries understand that the U.S. Congress doesn't? Perhaps they've read "International Competitiveness for Dummies." In each of the countries that have cut corporate tax rates this year, the motivation has been the same -- to boost the nation's attractiveness as a location for international investment. Germany's overall rate will fall to 29.8% by 2008 from 38.7%. Remarkably, at the start of this decade Germany's corporate tax rate was 52%.
All of which means that the U.S. now has the unflattering distinction of having the developed world's highest corporate tax rate of 39.3% (35% federal plus a state average of 4.3%), according to the Tax Foundation. While Ronald Reagan led the "wave of corporate income tax rate reduction" in the 1980s, the Tax Foundation says, "the U.S. is lagging behind this time."
Foreign leaders are also learning another lesson: Lower corporate tax rates with fewer loopholes can lead to more, not less, tax revenue from business. The nearby chart shows the Laffer Curve effect from business taxation. Tax receipts tend to fall below their optimum potential when corporate tax rates are so high that they lead to the creation of loopholes and the incentive to move income to countries with a lower tax rate. Ireland is the classic case of a nation on the "correct side" of this curve. It has a 12.5% corporate rate, nearly the lowest in the world, and yet collects 3.6% of GDP in corporate revenues, well above the international average.
The U.S., by contrast, with its near 40% rate has been averaging less than 2.5% of GDP in corporate receipts. Kevin Hassett, an economist at the American Enterprise Institute who has studied the impact of corporate taxes, says the U.S. "appears to be a nation on the wrong side of the Laffer Curve: We could collect more revenues with a lower corporate tax rate."
If only the tax writers in Washington would heed this advice. Congress is moving in the reverse direction, threatening to raise the tax rate on corporate dividends, which is another tax on business income. There's also movement in the Senate to raise taxes on the foreign-source income of U.S. companies. The effect would be to raise the marginal tax rate for companies that base their corporate headquarters abroad.
But one reason those countries chose to move to the Cayman Islands and elsewhere is because of the high U.S. corporate tax rate. The Laffer Curve analysis indicates that these corporate tax increases are likely to raise little if any additional revenue, because companies will have a new incentive to move even more of their operations out of the reach of the IRS.
For all the talk of "tax equity," this is also a recipe for further inequality by driving more capital offshore. Research from Mr. Hassett and others has shown that high corporate tax rates reduce the rate of increase in manufacturing wages (See our editorial, "The Wages of Growth," Dec. 26, 2006.). For that matter, most economists understand that corporations don't ultimately pay any taxes. They merely serve as a collection agent, passing along the cost of those taxes in some combination of lower returns for shareholders, higher prices for customers, or lower compensation for employees. In other words, America's high corporate tax rates are an indirect, but still damaging, tax on average American workers.
One immediate policy remedy would be to cut the 35% U.S. federal corporate tax rate to the industrial nation average of 29%. That's probably too sensible for a Congress gripped by a desire to soak the rich and punish business, but a Democrat who picked up the idea could turn the tax tables on Republicans in 2008. Meantime, as the U.S. fails to act, the rest of the world is looking more attractive all the time.
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Don't Dismiss Our Dismal Savings Rate
By BOB MCTEER
July 17, 2007; Page A17
The main fallacy in monetary theory and policy is the confusion of money and wealth. Money is wealth from the individual perspective since individuals can usually exchange it for goods and services. Money -- and financial assets easily converted to money -- may not be wealth for society as a whole if the production of goods and services has not kept pace with claims on it. Early spenders may have some success, but inflation will dilute the buying power of others. The bottom line is that real wealth has to be produced; it can't be printed.
Don't call me a Keynesian, but Keynes's Paradox of Thrift is another example of the fallacy of composition -- what's true for the individual may not be true for the group. Most U.S. families should be saving more. Indeed, the personal saving rate -- the percentage of disposable income not spent on consumption -- hovers around zero, with frequent dips into negative territory. This is made possible, for a while, by selling assets, accumulating debt, or spending capital gains in the housing and stock markets. Money obtained by realizing capital gains spends as well as money earned on the job. But not if too many of us try it at once.
The Paradox of Thrift says that attempts to save more in the aggregate reduce consumption spending, which, if not offset by increases in other spending, will reduce total spending and income. The paradox comes in when attempts to save more results in reduced saving out of lower incomes. The irony is that policy makers advise more saving but those who take the advice will benefit only if most of us ignore it, and policy makers are implicitly counting on that outcome.
A parallel is the farmer who hopes for a good crop year. But, if all or most farmers have a good crop year, the decline in prices may more than offset higher yields. What our farmer really needs is a good crop in a bad crop year. Then he could look for a popular restaurant that isn't crowded.
I realize this is not very sophisticated stuff, but it's on my mind because of the many talking heads I hear dismissing the adverse consequences of our low personal saving rate by saying it ignores capital gains as a source of spending. "Properly measured," they say, saving is not a problem.
Again, that may be true for the few, but not for the many. A penny saved may be a penny earned, but it matters whether it was earned by producing more or by a rise in the price of existing financial assets. A stock or housing market boom creates apparent wealth in the form of capital gains, but trying to convert it to real wealth en masse can make it disappear.
Economists say the main reason they worry about the budget deficit or the current account deficit is their impact on domestic saving. But my guess is that only other economists really get their meaning. Most people may be even further misled by the implication they hear that since the main harm of deficits is their impact on saving, they must not be too harmful after all. The old-fashioned notion that deficits are bad because they create debt that must be paid back with interest is probably a better prod to constructive behavior. Or that deficits impose a burden on our children or grandchildren.
Alan Greenspan has been one of the few economists to explain these matters correctly and -- I can't believe I'm saying this -- understandably, usually in the context of Social Security or other entitlement reforms. Whenever confronted by various financial fixes during congressional testimony, he frequently pointed out that any solution to the problem had to include real economic growth. With claims on output growing rapidly, output has to grow equally rapidly, or the claims are bogus. Any solution to our entitlement problems must include a bigger, more productive economy in the future. It's really as simple as not selling more tickets to the Super Bowl than there are -- or will be -- seats in the stadium. Of course, the political preoccupation with distribution rather than production puts unnecessary limits on the size of the economy on Super Bowl day.
The problem goes beyond government entitlement programs. Consider the baby boomers whose IRAs, 401(k)s and personal investments helped drive the stock market to record highs. What happens when cash-in time comes? There will be a mountain of paper claims on output, but will there be an equally tall mountain of output?
The great French economist, Frederic Bastiat, said that "The state is the great fictitious entity by which everyone seeks to live at the expense of everyone else." It's time to get real about producing real wealth, not just financial claims on wealth.
Mr. McTeer is a fellow at National Center for Policy Analysis and former president of the Dallas Fed.
RELATED ARTICLES AND BLOGS
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An exchange from an email group of which I am a member. "Scott" is Scott Grannis, noted supply side economist:
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Pat is pointing out is that a house purchase triggers other consumption purchases -- furniture, appliances, and so on. The production of these consumption items creates wealth. The people who saved and then built the lumber mills, cement factories, steel factories, appliance factories, housing construction firms, and all the rest are the people we can thank for the bounty of goods available.
The people who buy houses should be exchanging the value of their production -- whatever it might be --- for the production by residential housing constructors and all the other goods makers in the chain of residential housing activity. Normally, that would be the only way to buy a house. Or, a house buyer could borrow money from somebody else who produced something of equivalent value.
Unfortunately, we have evolved a system where mortgage money is created out of thin air and the house buyer uses that new money to bid houses away from other buyers. It's true, as Scott said, that the more desirable neighborhoods can see price increases without monetary inflation -- but that would normally be accompanied by falling prices in less desirable neighborhoods. With rampant credit inflation anybody willing to borrow can move up to a more desirable neighborhood or buy that first house. The result is rising house prices almost everywhere.
By the way, buying stock on the secondary stock market adds nothing to the country's productive capacity. It adds no wealth. The secondary markets are price-discovery markets. A security's price presumably gives us the current valuation of the "factors of production" -- one key to the capitalism's effectiveness. In a socialist economy the factors of production are not privately owned and there is no way to set meaningful prices. The result is an inability, for example, to decide whether it is economically desirable to build a new factory or rejuvenate an old one -- i.e. "economic calculation" is impossible.
Unfortunately, if a capitalistic country's price discovery mechanisms are distorted by inflation it causes analogous difficulties. Entrepreneurs look at distorted prices and make poor economic decisions. All you have to do is look at all the record breaking deals financed by debt to see that our price setting mechanisms have been distorted to some unknown degree by our ongoing credit expansion.
Tom
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Tom, I'm as worried about inflation as anyone I know in the professional money management business, but I think your concerns go over the top. My inflation credentials, by the way, go back to the 4 years I lived in Argentina during the late 1970s. I lived and breathed hyperinflation for years, and I've spent many years since then studying how and why it happened.
It is simply not true that "mortgage money is created out of thin air" as you say. If that were the case then the US money supply would be growing by staggering amounts. Instead, money supply (M1 or M2, take your pick) is growing at very modest rates that are completely consistent with low inflation (i.e., less than 6%). If you take out a mortgage to buy a house, essentially 100% of the money you receive comes out of the pocket of someone else. Almost no one buys a house these days the old-fashioned way ( i.e., from a bank), which means banks are not out there creating money thanks to the fractional reserve system. Very few banks these days are in the business of making AND HOLDING mortgages in their portfolios. Lots of banks make mortgages, but the vast majority are sold to other investors like my firm. Very few, very few hold those mortgages in their portfolios. That's the only way that money can be created out of thin air. That the money supply is growing slowly is pretty much proof of this.
I've talked about this before, but you and other Austrians are obsessed with the notion of credit bubbles and credit inflation. What you don't seem to understand is that credit expansion these days is a private sector phenomenon and has nothing to do with monetary policy or inflation. If I create a business that has a high probability of creating a future cash flow stream, I can monetize that cash flow by issuing a bond. Someone buys that bond from me with cash. That cash is not created out of thin air. It is simply existing cash that changes hands. If my new business runs aground, then my expected cash flows fail to materialize and I default on the bond. The guy who owns the bond is out of luck. No new money was created in this process.
As for inflation, the Fed can create that by setting interest rates too low. It doesn't require money expansion, it just requires interest rates (which are the only thing the Fed attempts to control) that are too low. Low interest rates undermine the demand for money, and falling money demand results in a more rapid circulation of money, and it is rising money velocity that fuels higher prices. You can observe this process by watching the declining value of the dollar and the rising gold price, and rising prices for hard assets such as real estate and commodities. What we have now is a mild but persistent inflation that could easily last for several more years. But it's definitely not an inflation like what we saw here in the 1970s. Of course, if the dollar were to fall another 15-20% then I might change my assessment, but that remains to be seen.
And as a side note, it is perfectly legitimate for home prices to rise if interest rates fall. A home is like any asset that produces future benefits: the present value of those benefits is their discounted present value. Lower interest rates boost the value of any productive asset.
-Scott
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Scott,
I understand your points, but let me point out a couple of things and ask some other questions. From Doug Noland's last weekly report: "M2 (narrow) "money" increased $4.5bn to a record $7.264 TN (week of 7/2). Narrow "money" has expanded $220bn y-t-d, or 6.0% annualized, and $438bn, or 6.4%, over the past year."
Isn't a 6.4% growth rate in M2 rather significant? If it is true that the great majority of that new money goes into real estate construction or various forms of speculative finance, it seems that rate of money creation could distort the relevant prices to a huge degree -- and that is what the Austrian theory says is the cause of malinvestment and economic .
It's true, as you say, that when the banks sell off loans that action prevents those loans from adding to the M2 balances. But banks do keep some loans! Also, many mortgage backed security buyers are highly leveraged hedge funds or other leveraged speculators -- and their leverage is normally obtained from a bank. If the M2 data is correct, the net result is a "moderate" rate of monetary increase instead of a sky rocketing rate -- but 6.4% is sufficient to damage to our economy and transfer countless billions of wealth to the financial players.
When the Fed sets interest rates "too low" the inflationary mechanism, I believe, is primarily the impetuous given to credit expansion. Sure credit creation is a "private sector" phenomenon, but the private sector credit machine is coordinated and protected by the policies of the Fed and the US government. The result is absolutely bizarre behavior by people who are running multi-gazillion dollar enterprises in this industry. I am sure you saw this quote from the Citigroup CEO:
July 10 – Financial Times (Michiyo Nakamoto and David Wighton): "Chuck Prince yesterday dismissed fears that the music was about to stop for the cheap credit-fuelled buy-out boom, declaring that Citigroup was 'still dancing'. The Citigroup chief executive told the Financial Times that the party would end at some point but there was so much liquidity at the moment it would not be disrupted by the turmoil in the US subprime mortgage market. He also denied that Citigroup, one of the biggest providers of finance to private equity deals, was pulling back, in spite of problems with some financings. 'When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing,' he said… 'The depth of the pools of liquidity is so much larger than it used to be that a disruptive event now needs to be much more disruptive than it used to be. At some point, the disruptive event will be so significant that instead of liquidity filling in, the liquidity will go the other way. I don't think we're at that point.'"
The Austrian-School economists seem to be obsessed with inflation and credit expansions because their theory tells them that these are the mechanisms that lead directly to boom/bust cycles. The theory very explicitly explains why these consequences pertain, and I have yet to see anyone in the mainstream debunk this explanation. If you know of such a paper, I would love to see it.
Tom
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In the past year M2 has grown 6.2%; in the past two years 5.5% (annualized); in the past three years 4.9% (annualized).
During the period in which U.S. inflation slowed from double digits (1980) to just 1% (mid 2002), M2 grew at a 6.0% annualized pace. During that same period, nominal GDP grew at a 6.3% pace and real GDP grew at a 3.0% pace (which is exactly the expected long-run growth rate of the economy). Money thus shrunk a bit relative to the size of the economy. The Fed was fighting inflation, and it worked, and it didn't kill or threaten the economy.
With M2 currently growing around 6% or a bit less (M1 hasn't grown at all for over two years, MZM is up at a 6.0% pace over the past two years), needless to say it's hard to make the case that rapid money growth is threatening higher inflation, at least based on the historical evidence. Current growth rates of money are entirely consistent with low inflation and a normal expansion of the economy.
If we are to have rising inflation with 6% M2 growth, we will need a rising velocity of money. There is indeed evidence of this, and it is the case that inflation has risen, albeit moderately, in the past three years--from a low of 1% to today's 2.5-3%.
Higher inflation coming on the heels of very low inflation, and perhaps even some deflation in the late 1990s and early 2000s, could well have stimulated the demand for real assets such as homes and gold and commodities. Lower interest rates, a by-product of collapsing inflation, were also responsible for stimulating the demand for housing.
Contrary to popular belief (and this is indeed heretical even among economists), declining inflation stimulates the demand for money and slows money velocity. Rising inflation tends to do the opposite. People don't want to hold a lot of money when prices are rising. So M2 growth tends to be slow when inflation is rising, and fast when inflation is falling. So just observing the growth of M2 tells you little about what the Fed is doing, or whether money growth is inflationary. Indeed, it is entirely possible that rapid credit and money expansion could occur alongside low and stable inflation. That is what we saw, in fact in the late 1990s and early 2000s.
In any event, let's stipulate that there is a huge expansion of credit in the private sector, and that easy access to credit has fueled a housing boom. If the Fed is doing its job and keeping inflation low, that housing boom will not have very long legs. If prices rise too much they will eventually fall. Lenders will lose a bundle, there will be lots of foreclosures, etc. Sound familiar?
Scott
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The stock market is looking pretty scary :-o but a good day for my LNOP :-)
Anyway the market would surely like the following:
Cap-Gains Logic
By DONALD L. LUSKIN
August 10, 2007; Page A10
Here's some advice to the Democrats on how to raise the revenues they'll need to pay for all the spending they have in mind. Don't hike the capital gains tax rate. Don't lower it, either. Eliminate the capital gains tax entirely.
How can tax revenues be increased by eliminating a tax? It's simple, when the tax in question is on capital gains. Capital itself exerts a multiplier effect that benefits the entire economy. Investment in new plant, equipment, business processes and whole companies creates new and higher paying jobs, and higher levels of economic activity, all of which generate additional tax revenues far in excess of what government would lose by foregoing cap-gains taxes.
This idea has broad theoretical support. Former Clinton Treasury Secretary Lawrence H. Summers has written, "the elimination of capital income taxation would have very substantial economic effects" which "might raise steady-state output by as much as 18%." Economist Jack L. Treynor has shown that "the level of taxation on capital that is 'fairest' -- i.e., most beneficial -- to labor is zero." And Nobel Prize-winning economist Robert E. Lucas, Jr., has concluded, "neither capital gains nor any of the income from capital should be taxed at all." These economists think in terms of very complex models. But the real-world intuition here is quite straightforward.
The cap-gains tax is a barrier to the investment of capital. Without it, capital will flow to investments that otherwise wouldn't have been made. The cost of eliminating the barrier is foregone revenues from that particular tax. But those revenues are small, usually deferred and non-recurring. In their place, government receives large and recurring revenues from corporate taxes, sales taxes, wage taxes and dividend taxes -- all generated by new economic activity.
The cap-gains tax is a poor revenue raiser, because any given capital gain is a one-time event that can only be taxed once, and in many cases, ends up not being taxed at all. Consider Microsoft. Since the company went public 20 years ago, its market value has increased by about $275 billion. A generous estimate of the cap-gains tax revenues we could expect from this increase is about $40 billion.
Actual collections will surely be less. Many shares will never be sold -- held by founders who wish to retain control, or by people who wish to avoid paying taxes. Many shares will be gifted to charitable foundations, as Bill Gates has done for the Bill and Melinda Gates Foundation, out of the tax collector's reach. Even for those shares that will eventually be sold, from today's perspective the resulting tax revenues have to be discounted, as they won't be collected for years.
At the same time, Microsoft has been a fountain of other tax revenues. Since the company went public, I estimate that, in cumulative present-value terms, corporate taxes already paid total roughly $60 billion; sales taxes paid by Microsoft's customers total roughly $11 billion; income taxes paid by Microsoft's employees total roughly $12 billion, and dividend taxes paid by Microsoft's shareholders total about $3 billion. These four sources of tax revenues over the last 20 years total $86 billion -- more than twice our generous estimate of the notional cap-gains tax revenues ($40 billion) for the same period.
Moreover, unless Microsoft's stock price increases -- which it's had a hard time doing the last couple years -- the estimated $40 billion in cap-gains tax revenues will never grow to a larger number. But corporate taxes, sales taxes, income taxes and dividend taxes will continue to be generated year after year. Even if assuming Microsoft's business stops growing (it has been reliably growing at better than 10% per year), the present value of the tax revenues from these other sources is roughly $182 billion. Added to the revenues already collected, the total is $268 billion.
There is also all the new taxable economic activity enabled by Microsoft's products. It's impossible to estimate a dollar value for it, but we can be sure it is a multiple of the value created within Microsoft. In this context, there is nothing unique about Microsoft. Anytime capital is invested, the small, deferred and non-recurring revenues that can be expected from the cap-gains tax are a tiny fraction of the perpetual revenues from other economic activities, generated directly and indirectly.
While eliminating the cap-gains tax may well induce companies like Microsoft to generate additional taxable activity, there's a more important opportunity here. Eliminating the cap-gains tax will cause the economy to generate more innovators like Microsoft.
For each new Microsoft, the cost to government would mean $40 billion in foregone revenues. But for those new Microsofts that wouldn't have existed otherwise, the payoff would mean raking in $268 billion.
That's a smart trade-off. If the Democrats were really interested in raising revenues -- and not just making life harder for a handful of wealthy private equity players -- it's a trade-off they should eagerly make.
Mr. Luskin is chief investment officer of Trend Macrolytics LLC.
WSJ
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Our Risky New Financial Markets
By HENRY KAUFMAN
August 15, 2007; Page A13
Tremors from America's quaking subprime mortgage market have spread throughout the financial world. This latest disturbance in global financial markets is neither isolated nor idiosyncratic. It points to deeper, enduring changes in the structure of our markets -- changes that have profoundly altered the behavior of market participants in ways that tend to encourage risk-taking beyond prudent limits. Just as troubling is the failure of official policy makers to effectively rein in such excesses, leaving our financial system vulnerable to similar turmoil in the future.
The principal structural driver behind this and similar financial tribulations is the massive growth of financial markets, combined with a plethora of new credit instruments. By any measure, current financial activity -- new financing or secondary market trading volume -- dwarfs the past. The outstanding volume of nonfinancial debt now exceeds nominal GDP by $15 trillion, compared with $6 trillion a decade ago. Traditional credit instruments such as stocks, bonds and money-market obligations have been joined by a long and diverse roster of new obligations, many of them extraordinarily complicated. Along with the arcane tranches of mortgages that recently garnered attention are a myriad of financial derivatives, ranging from those traded on exchanges to tailor-made products for the over-the-counter market.
Leading financial institutions have grown rapidly as well. More importantly, they have evolved to become integrated, diversified, global enterprises that bear little resemblance to traditional commercial banks, investment banks or insurance companies. As these giants grow and dominate the market, they carry enormous potential for conflicts of interest -- they simultaneously act as investors of their own massive assets and as dealmakers and consultants on behalf of their clients. And their reach into the financial system is so broad and deep that no central bank is willing to allow the collapse of one of these leviathans. They are deemed "too big to fail."
These structural and institutional changes have, in turn, encouraged a new understanding among market participants of liquidity. In the decades that followed World War II, liquidity was by and large an asset-based concept. For business corporations, it meant the size of cash and very liquid assets, the maturity of receivables, the turnover of inventory, and the relationship of these assets to total liabilities. For households, liquidity primarily meant the maturity of financial assets being held for contingencies along with funds that reliably would be available later in life. In contrast, firms and households today often blur the distinction between liquidity and credit availability. When thinking about liquid assets, present and future, it is now commonplace to think in terms of access to liabilities.
This new mindset has been abetted by the tidal wave of securitization -- the conversion of nonmarketable assets into marketable assets -- that swept across the financial world in recent decades. This flood of marketable assets not only has eroded traditional concepts of liquidity, it has stimulated risk appetites and fostered a belief that credit usually is available at reasonable prices.
Technological change also has bolstered the easy-credit outlook now commonplace among investors. As markets have been linked globally by information technology networks, financial information flows nearly instantaneously, computerized trading is spreading, and transactions are executed almost without delay. Investors can access financial data and participate in markets around the world and around the clock.
These two developments -- securitization and the seamless interconnectivity of markets -- have brought intricate quantitative risk modeling to the forefront of financial practices. Securitization generates market prices, while information technology offers the power to quantify pricing and risk relationships. Few recognize, however, that such modeling assumes constancy in market fundamentals. This is because modeling does not adequately account for underlying structural changes when attempting to calculate future risks and prices.
Nor can models take into account the impact of growing financial concentration in the making of markets and in the pricing of securities that are traded infrequently, or that have tailor-made attributes. And what about the risks to financial markets of a major military flare-up, the ravages of a pandemic flu, a terrorist attack that would immobilize computer networks, or even shifts in the broader monetary environment? Do the models quantify these and other profound risks in any meaningful way?
Then there is the question of asset pricing. An essential component of successful risk modeling is accurate pricing of the securities used in the analysis. Here, again, the strictly quantitative approach shows its weaknesses. Accurate pricing is a thorny challenge. In rapidly moving markets, the price of the last trade may be invalid for the next one. The price a dealer is prepared to quote may be no more than an indication of a potential trade. And the price quoted may be valid only for a small quantity of assets, not for the full amount in the investor's portfolio.
These problems are especially germane to securities of lower credit quality, where liquidity and marketability are often blurred in the mark-to-market process. Again, the subprime mortgage crisis is revealing: Quantitative modeling proved to work poorly in pricing those lower-quality assets. We can expect major problems of this kind in the below-investment-grade corporate bond market once corporate profits begin to decline.
Risk modeling -- with its clear-cut timeline and aura of certainty -- has encouraged investors to seek near-term profits while pushing aside more qualitative approaches to risk assessment that rely more heavily on judgment and reason. The appetite for near-term profits showed itself plainly in the environment leading up to the subprime mortgage debacle -- leading financial institutions were unwilling to pull back from aggressive lending and investing tactics. To do so, they feared, posed a number of risks, from loss of market share and underperforming earnings to shareholder discontent and a failure to meet the bonus expectations of employees.
The Federal Reserve cannot walk away from its responsibility to limit financial excesses. The central tenet of monetary policy is to achieve sustainable economic growth. Central bank policies and actions attempt to do this by providing just enough reserves to constrain the price of goods and services at acceptably low levels. But how can the Fed achieve this objective when widespread financial excesses are disrupting the functioning of financial markets and thus threatening economic prosperity?
At the heart of the long-term underlying challenges that face the U.S. financial system is the question of how to enforce discipline. One way is to let competitive forces discipline market participants: The manager who performs well prospers, while those who do not fail. This is the central precept of free market economies. But this approach is compromised by the fact that advanced societies typically do not allow the process to follow through when it comes to very large financial institutions. The fear is that the failure of behemoth financial institutions will pose systemic risks both here and abroad.
Therefore, market discipline falls more heavily on smaller institutions, which in turn motivates them to merge into larger entities protected by the too-big-to-fail umbrella. This dynamic has driven financial concentration and will continue to do so for years to come. As financial concentration increases, it will undermine marketability, trading activity and effective allocation of financial resources.
If competition is not allowed to enforce market discipline, the most viable alternative is increased supervision over financial institutions and markets. In today's markets, there is hardly a clarion call for such measures. On the contrary, the markets oppose it, and politicians voice little if any support. For their part, central bankers do not possess a clear vision of how to proceed toward more effective financial supervision. Their current, circumspect approach seems objectively technical, whereas greater intervention, they fear, would seem intrusive, subjective, even excessive.
What is missing today is a comprehensive framework that pulls together financial-market behavior and economic behavior. The study of economics and finance has become highly specialized and compartmentalized within the academic community. This is, of course, another reflection of the increasingly specialized demands of our complex civilization. Regrettably, today's economics and finance professions have produced no minds with the analytical reach of Adam Smith, John Maynard Keynes or Milton Friedman.
It is therefore urgent that the Fed take the lead in formulating a monetary policy approach that strikes the right balance between market discipline and government regulation. Until it does so, we will continue to see shocks of even greater intensity than the one now radiating outward from the quake in the U.S. subprime mortgage market.
Mr. Kaufman is president of Henry Kaufman & Company, Inc., and the author of "On Money and Markets: A Wall Street Memoir" (McGraw-Hill, 2000).
WSJ
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Reaganomics 2.0
By STEPHEN MOORE
August 31, 2007; Page A8
Earlier this year the cover of Time Magazine depicted Ronald Reagan with a tear running down his cheek -- the message being that the political class has abandoned the Reagan legacy. There's no doubt Reagan's pro-growth, tax cutting philosophy is in full-scale retreat: This Congress has proposed higher tax rates on personal income, capital gains and dividends. Ironically, the Reagan economic philosophy of lower taxes, less regulation and free trade has never been more in vogue abroad -- so much so that it has become the global economic operating system.
Let's call this phenomenon Reaganomics 2.0.
In the Pacific Rim nations, for example, Malaysia, New Zealand, Singapore, Taiwan and Vietnam all have cut taxes this year or have plans to do so. Singapore has cut taxes multiple times in recent years and it now operates with no capital gains tax.
But the remarkable attitudinal shift on taxes has been in Europe, which in the 1980s and '90s showcased their gold-plated social safety nets, boasted of their citizens' willingness to pay high tax rates to maintain them and were openly contemptuous of the Reagan tax-cutting philosophy. Now those same nations of old-Europe seem to be in a sprint to see which country can get their tax rates lowest quickest. Nicholas Vardy, the editor of "The Global Guru" economic newsletter calls the phenomenon "Europe's Reagan Revolution."
French President Nicolas Sarkozy has plans to cut his country's business income tax by at least five percentage points as part of his economic rehabilitation plan. Spain and Italy are negotiating plans to lower their corporate tax rates, and the U.K. already did so earlier this year. Sweden and Russia last year eliminated their estate taxes because they said the tax was economically counterproductive. In Germany under Chancellor Angela Merkel, the corporate tax rate has been reduced to less than 30% from 39%.
Some of this tax chopping in Old Europe is a response to the success of the U.S. tax rate reductions and the fast pace of job creation that ensued from economic growth -- though few European officials will acknowledge that reality. But a bigger factor more recently has been the impact of the flat-tax revolution in Eastern Europe. Dan Mitchell of the Cato Institute says there are now 14 nations with flat taxes, 10 of them in nations formerly behind the Iron Curtain. "The pace of tax reform in these nations is so frantic, that it's hard to keep up to date with the changes," he says. Poland hasn't yet established a flat tax, but recently cut its business tax to 19% from 27%.
Austria cut its corporate tax rate to keep pace with its neighbor, Slovakia which recently adopted an 18% flat tax. Singapore is cutting taxes to compete with its 16% flat-tax rival Hong Kong. Northern Ireland wants to cut its tax rates so that it can compete with the economic gazelle of Europe, the Republic of Ireland. In 1988 Ireland was a high-unemployment stagnant economy with a 48% corporate tax rate, today that rate is 12.5% and the rest of the world is now desperate to match its economic results. Meanwhile German Finance Minister Peer Steinbrueck sold the latest tax cuts as "an investment in Germany as a business location."
The idea that jobs, businesses and wealth follow low tax rates is widely accepted. Nguyen Van Ninh, head of the Department of Taxation in Vietnam is typical. He concedes that the corporate tax cuts may lose revenues, but "on the other side, the business environment will become more and more attractive, resulting in increased investment."
This is all very good news -- except in the U.S. Arthur Laffer, one of the architects of the Reagan tax policies, believes that one major explanation for the strength of the euro and the weakness of the dollar in recent years, is the divergent paths on tax policies on the two sides of the Atlantic. Europe is cutting levies, while the only debate among the political class in Washington is how high to jack them up.
Still, it is a testament to the Reagan economic revolution launched in 1981 that, a quarter century later, global tax rates are 25 percentage points lower on average today than in the 1970s. And those figures don't even include this latest round of chopping under Reaganomics 2.0. The enactment of supply-side policies is helping ignite one of the strongest and longest world-wide economic expansions in history. Yet few are giving Reagan or his ideas the credit. Mr. Vardy points out that there are only two official statues of Reagan in Europe. Last month the Poles unveiled one financed by an American entrepreneur. The first was erected in Budapest to commemorate Reagan's "tear down this wall" speech in Berlin. Now tax walls are being torn down.
Alas, there's only about one place on the planet where politicians hold Reaganomics in outright disrepute today -- and that is here. The Democratic leadership in Congress believes that tax rates don't matter much if at all, and that the Bush tax cuts were a giveaway to the rich. Presidential candidate John Edwards has even suggested a near doubling of the U.S. capital gains tax rate as part of his economic program, and his rivals all have schemes to soak the wealthy as well.
All of this threatens to move America from leader to laggard in the global race for job creation, capital investment and prosperity. Maybe that explains the tear rolling down the Gipper's cheek.
Mr. Moore is a member of the Journal's editorial board.
WSJ
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Executive summary of a lengthy, well annotated piece that can be found here:
http://www.heritage.org/Research/Welfare/upload/bg_2064.pdf
August 27, 2007
Executive Summary: How Poor Are America's Poor? Examining the "Plague" of Poverty in America
by Robert E. Rector
Executive Summary #2064
Each year, the U.S. Census Bureau counts the number of "poor" persons in the U.S. In 2005, the Bureau found 37 million "poor" Americans. Presi dential candidate John Edwards claims that these 37 million Americans currently "struggle with incredible poverty."[1] Edwards asserts that America's poor, who number "one in eight of us…do not have enough money for the food, shelter, and clothing they need," and are forced to live in "terrible" cir cumstances.[2] However, an examination of the living standards of the 37 million persons, whom the government defines as "poor," reveals that what Edwards calls "the plague"[3] of American poverty might not be as "terrible" or "incredible" as candi date Edwards contends.
But, if poverty means (as Edwards asserts) a lack of nutritious food, adequate warm housing, and clothing for a family, then very few of the 37 million people identified as living "in poverty" by the Cen sus Bureau would, in fact, be characterized as poor. Clearly, material hardship does exist in the United States, but it is quite restricted in scope and severity.
The average "poor" person, as defined by the government, has a living standard far higher than the public imagines. The following are facts about persons defined as "poor" by the Census Bureau, taken from various government reports:
Forty-three percent of all poor households actu ally own their own homes. The average home owned by persons classified as poor by the Cen sus Bureau is a three-bedroom house with one-and-a-half baths, a garage, and a porch or patio.
Eighty percent of poor households have air conditioning. By contrast, in 1970, only 36 percent of the entire U.S. population enjoyed air conditioning.
Only 6 percent of poor households are over crowded; two-thirds have more than two rooms per person.
The typical poor American has more living space than the average individual living in Paris, Lon don, Vienna, Athens, and other cities throughout Europe. (These comparisons are to the averagecitizens in foreign countries, not to those classi fied as poor.)
Nearly three-quarters of poor households own a car; 31 percent own two or more cars.
Ninety-seven percent of poor households have a color television; over half own two or more color televisions.
Seventy-eight percent have a VCR or DVD player; 62 percent have cable or satellite TV reception.
Eighty-nine percent own microwave ovens, more than half have a stereo, and a more than a third have an automatic dishwasher.
Overall, the typical American defined as poor by the government has a car, air conditioning, a refrig erator, a stove, a clothes washer and dryer, and a microwave. He has two color televisions, cable or satellite TV reception, a VCR or DVD player, and a stereo. He is able to obtain medical care. His home is in good repair and is not overcrowded. By his own report, his family is not hungry, and he had suf ficient funds in the past year to meet his family's essential needs. While this individual's life is not opulent, it is equally far from the popular images of dire poverty conveyed by the press, liberal activists, and politicians.
Of course, the living conditions of the average poor American should not be taken as representing all of the nation's poor: There is a wide range of liv ing conditions among the poor. A third of "poor" households have both cell and landline telephones. A third also have telephone answering machines. At the other extreme, approximately one-tenth of fam ilies in poverty have no telephone at all. Similarly, while the majority of poor households do not expe rience significant material problems, roughly a third do experience at least one problem such as over crowding, temporary hunger, or difficulty getting medical care.
Much poverty that does exist in the United States can be reduced, particularly among children. There are two main reasons that American children are poor: Their parents don't work much, and their fathers are absent from the home.
In both good and bad economic environments, the typical American poor family with children is supported by only 800 hours of work during a year—the equivalent of 16 hours of work per week. If work in each family were raised to 2,000 hours per year—the equivalent of one adult working 40 hours per week throughout the year—nearly 75 percent of poor children would be lifted out of offi cial poverty.
As noted above, father absence is another major cause of child poverty. Nearly two-thirds of poor children reside in single-parent homes; each year, an additional 1.5 million children are born out of wedlock. If poor mothers married the fathers of their children, nearly three-quarters of the nation's impoverished youth would immediately be lifted out of poverty.
Yet, although work and marriage are reliable lad ders out of poverty, the welfare system perversely remains hostile to both. Major programs such as food stamps, public housing, and Medicaid con tinue to reward idleness and penalize marriage. If welfare could be turned around to encourage work and marriage, the nation's remaining poverty could be reduced.
While renewed welfare reform can help to reduce poverty, such efforts will be partially offset by the poverty-boosting impact of the nation's immigration system. Each year, the U.S. imports, through both legal and illegal immigration, hun dreds of thousands of additional poor persons from abroad. As a result, one-quarter of all poor persons in the U.S. are now first-generation immigrants or the minor children of those immigrants. Roughly one in ten of the persons counted among the poor by the Census Bureau is either an illegal immigrant or the minor child of an illegal. As long as the present steady flow of poverty-prone persons from foreign countries continues, efforts to reduce the total number of poor in the U.S. will be far more dif ficult. A sound anti-poverty strategy must seek to increase work and marriage, reduce illegal immigra tion, and increase the skill level of future legal immigrants.
Robert Rector is Senior Research Fellow in Domestic Policy Studies at The Heritage Foundation.
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Licensed to Kill
September 10, 2007; Page A14
Butchers, bakers and candlestick makers should enjoy their freedom while it lasts. These lucky professions have so far managed to stay off the list of livelihoods that now require a license to practice in any number of states. Taxidermists, massage therapists and interior decorators aren't so fortunate: They're among the professionals who must have their skills validated by the government.
Overall, the level of licensing regulation in the workplace is rising precipitously, with more than 20% of the workforce now required to get a permit to do their jobs -- up from 4.5% in the 1950s. This is the alarming finding of a new study by Adam Summers for the Reason Foundation. These requirements are essentially barriers to business entry and job creation, and Mr. Summers notes that they have become a greater obstacle to employment than minimum wage laws and labor unions.
With a total of more than 1,000 occupations now controlling entry, the numbers break down much as you might expect, providing a good reflection of state regulatory climates. With the exception of California, Eastern states are more regulated than Western states with their vestiges of the frontier mentality. Ditto states that usually show up as red on an election map: Republican leaners typically have fewer professional licensing barriers than their blue-state counterparts.
Some professional licensing may be a defensive outgrowth of the lawsuit culture, as business owners seek protection against, say, customers irate over how their haircuts turned out. But most is pushed by businesses for the age-old reason of restricting competition. This summer, in the wake of recent troubles in California's housing market, a legislator began calling for mandatory licensing for mobile home dealers. With a coming boom in foreclosures and resales, that must suit the existing big players just fine.
But even as one silly new credential is erected, others are being challenged. One Californian is suing the state for requiring him to spend two years studying to get a license to install spikes that deter pigeons from nesting. This, despite the fact that the plaintiff is already the holder of five state pest-control licenses. His case went before the Ninth Circuit Court of Appeals last month, where the government's own witnesses acknowledged that the law is irrational and intended to make it harder for new competitors to qualify. That's the kind of restraint on trade that the Federal Trade Commission ought to be worrying about instead of attacking successful supermarket chains.
The government's role in protecting the public from fraud may argue in favor of licensing in some very specialized, learned professions. A doctor or lawyer clearly needs a certified level of expertise. But even these professions sometimes attempt to create their own guild monopolies, such as when lawyers lobby to bar non-lawyers from assisting the public with such routine legal tasks as writing wills. It's even harder to see public benefit when similar rigorous oversight is applied to people who want to catch a reptile in Michigan, serve as a tribal rainmaker in Arizona, or be a fortune-teller in Maryland. That's right; it takes a license to predict the future in Baltimore, which we doubt leads to a better forecasting record.
Thanks to the Reason study, we now know how far the pendulum has swung in favor of these nasty little exercises in domestic protectionism.
WSJ
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Below is an essay found on the Fraser Institute web site. The Fraser Institute is an independent research and educational organization with offices in Vancouver, Calgary and Toronto. Our mission is to measure, study, and communicate the impact of competitive markets and government intervention on the welfare of individuals. Enjoy
http://oldfraser.lexi.net/publications/forum/1999/03/individualism.html
Individualism, Intellectual Property, and the Future of Capitalism
Simple coincidence cannot explain that the first known patent was issued not just in the birthplace of the Italian Renaissance, Florence, but also roughly at the moment of its birth (1421). What is most intriguing about the issuance of patent No. 1 to Filippo Brunelleschi, who had invented a loading crane for ships, is less that the Florentine authorities granted it, and more that Filippo had asked for it in the first place. The preamble to this first patent states: “he refuses to make such machine available to the public, in order that the fruit of his genius and skill may not be reaped by another without his will and consent; and that, if he enjoyed some prerogative concerning this, he would open up what he is hiding, and would disclose it to all.”1 For 20 generations, medieval artisans had devised the means to build ever more complex cathedrals and public works and, yet, we know the names of only a handful of them. Why, then, against all tradition, did one man in 1421 stand up to demand both recognition of, and financial control over “his genius and skill”?
The answer encompasses both changes to economic life and to the way people viewed themselves in society. In part, Filippo wanted control over his invention because economic changes had suddenly made it valuable beyond historical precedent. In the early fifteenth century, Florence had not only secured access to the markets of Constantinople and Cairo, but also had developed rudimentary banking and insurance skills which spurred a dramatic increase in trade. Still, the middle ages had witnessed the invention of the stirrup, the windmill, and the flying buttress without ever making an inventor wealthy. Perhaps more significantly, this obsessively commercial Italian city-state had incubated a view of people as no longer simply anonymous souls in an organic, hierarchical society held together by bonds of piety and obligation. Though argued to be classically-inspired, this singlatore uomo emerged as a new person in history, an active, self-directed agent in an expressive, creative and possessive society, in short, an individual in the world as it is, not as it should be.
The very idea of a patent broke tradition with the norm of outright seizure. Florence’s rulers probably devised it as a trial-and-error response to an individual who had unexpectedly redefined what he could possess in and of himself at a time when the city was striving hard to improve its reputation vis à vis Venice as a safer and more profitable venue for the Eastern trade. Not to be outdone, Venice, itself, soon ran patent contests offering winners even more favourable terms.
If, for the city fathers of Florence and Venice (and shortly thereafter the German and Dutch trade cities), the granting of a patent was simply a calculation of costs and benefits, for Filippo, and the inventive individuals who followed him, it was a revolution in their economic and legal relationship to both the state and the broader business community. They held a property right, if only temporarily protected, to the relatively exclusive use and control of the physical and practical forms derived from their own unique insights into the possibilities of matter. What they owned the state could not seize, nor competitors steal. Thus, from its beginning, the patent embodied, in the words of Michael P. Ryan, “the philosophical tension between natural property rights and public welfare—enhancing incentives for risky investment.”2
One could, indeed, write the history of patent law as the shifting relative value of personal property rights versus a mere incentive for innovation and investment. Deputies of the National Assembly during the French Revolution asserted that an inventor’s property right in his or her discovery represented one of the “rights of man.” They desired in part to restrict the state and the aristocrats who controlled it from exploiting productive and innovative members of the bourgeoisie. In contrast, Thomas Jefferson, who worried less about aristocrats and more about the social value of proprietary knowledge, wrote Article I, section 8, of the Constitution to establish patents for strictly utilitarian purposes; in his words, “to promote the progress of Science and the useful Arts.”3 In the years since, fierce debates have broken out over whether intellectual innovations ought to be governed by property rights or by the utility of government’s either granting or removing monopoly privileges.
One could conclude that personal interests will forever determine the debate. On the one side, inventors and their lawyers insist that intellectual property rights are about preventing theft. On the other, politicians and economic planners assert that patent “law” concerns the balance between industrial incentives and the diffusion of useful knowledge. But just as the Renaissance created “new facts” as to the nature of capitalism and to the nature of mankind, thus altering profoundly the treatment of innovation, so, too, will the next 20 years re-shape our thinking of intellectual property protection, tipping the balance farther towards a property-rights based conception of intellectual property.
The impetus, the “new facts,” lies beyond the obvious—an economy increasingly driven by technological advances and thus more heavily dependent on proprietary knowledge, be it in the new (computers and software), or the traditional (medicine and agriculture). This greater dependence on intellectual property is not changing the nature of modern capitalism, but rather allowing it to operate at a qualitatively higher level of efficiency. New communication tools have sped the diffusion of both market information and production, thus speeding up the articulation of consumer preferences and the ability of producers to respond. It is no longer necessary to have either a central market or a central factory. Technology has simplified and automated monitoring and process functions, thus reducing both transaction costs and personnel costs relative to a unit of economic output. Technology has allowed us to become more productive, while at the same time subjecting us to fewer hierarchical and personal controls. Just as the innovations of banking and insurance awoke Florence to the possibilities of early capitalism, the greater economic role of intellectual property has brought into clearer focus Friederich Hayek’s vision of “extended order” through the “rule of law.”4
As entrepreneurs flourish and more individuals work for themselves (roughly one in six North Americans), the concept of productive work in a capitalist economy has embraced new, decentralized configurations. Work can be self-directed. High levels of economic activity can be sustained by networks of self-contracting individuals and not just by economies-of-scale corporations. This emergent free-agent capitalism will, in turn, give greater weight to the insight of Austrian economics—that our “producer surplus” lies less in the hours of our labour and more in our creativity.5
In time, this understanding should further strengthen and extend to intellectual property John Locke’s familiar argument that individuals own their labours, at least initially.6 If the value of our labour lies in the product of our minds, we have no less a right to own it than the product of our physical labour, regardless of the social cost. If anything, the argument for the personal possession of intellectual creativity is stronger than for physical labour because the former is by definition unique. As such, it remains outside the purview of the state and society until we choose to share it. Though collective rules may define the limits of possession, they should still respect the origins of possession.
It would be insufficient to argue circularly that the current highly productive use of “owned” knowledge (patents) proves the case that property law, not policy wishes, guide decision-makers. Just as in the Renaissance, economic opportunity is alone an incomplete force to change attitudes. As in the fifteenth century, the legal recognition of intellectual property arose in response to both a new form of economic organization and to a new sense not just of self, but of its abstraction—the individual. If we are not surprised today that the nature of the economy is in flux, neither should we be if our ideas of the individual are shifting. At least, Western history shows individualism to possess an ontology or a story of change.7 This cannot help but alter the cultural boundaries into which we cast the nature and treatment of innovation and innovators. After all, it was a champion of the individual, not of economics, Lysander Spooner, the nineteenth century libertarian, who first coined the potent phrase, “intellectual property,” recasting unalterably the debate.8
Will our society, in the new millennium, recognize even greater individual autonomy, thus further shielding intellectual property from the short-term utilitarian machinations of a politicized state? It should, but wishes are poor predictions.
Still, if the hard-edged men of Renaissance Florence could figure out the advantage of patents in the first place, perhaps we can discern the potential value of conceiving of intellectual property as individual property before the law. In the real world, full of Filippo Brunschellis and Bill Gateses, the power of these individuals’ imaginations may illuminate a social self-interest expanding our current definitions of collective utility. The future of individualism, intellectual property, and capitalism should not be bound by today’s crude efforts to measure and analyze them.
Notes
1Bruce W. Bugbee, Genesis of American Patent and Copyright Law (Washington: Public Affairs Press, 1967), p. 17.
2Michael P. Ryan, Knowledge Diplomacy: Global Competition and the Politics of Intellectual Property (Washington: Brookings Inst. Press, 1998), p. 7.
3Tom Bethell, The Noblest Triumph: Property and Prosperity through the Ages (New York: St. Martin’s Press, 1998), p. 262.
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The Fed and Character
September 19, 2007; Page A20
The Federal Reserve pulled no punches yesterday with its decision to cut the fed funds rate by 50 basis points to 4.75%. The unanimous statement from the Fed's Open Market Committee was equally as definitive, leaning clearly on the side of those willing to risk more inflation in order to protect the economy from recent disruptions in the credit markets.
The equity markets rejoiced, posting their biggest daily gain of the year. Inflation-sensitive indicators were less thrilled, with the yield on the long (30-year) bond rising 26/32s to 4.75%, oil climbing above $82 a barrel, and gold reaching new heights at $733 an ounce. In the optimistic case, the Fed's move will ease the credit crisis, increase the demand for money by reviving economic confidence, and help avoid a recession without triggering more inflation. We can only hope it does.
The point we'd like to stress today concerns the Fed and its credibility -- or to put it more tartly, its character. It is easy for a central bank to cut rates and ease money. At least in the short term everybody loves a good time, as yesterday's equity euphoria showed. The harder task is being willing to tighten money amid the business and political criticism that inevitably follows. That's the true test of a central banker's mettle.
We've argued that the Fed hasn't shown that character in many years, which is a major reason it found itself this week having to choose between the risk of higher inflation and a potential recession. A central bank that stresses preserving the value of the currency when it isn't popular will have more credibility to ease money when it really needs to.
This is the abiding lesson of the Paul Volcker era at the Fed, in contrast to the current decade. As Chairman Ben Bernanke looks beyond today's crisis to what he wants his own legacy to be, we hope he'll make a restoration of the Fed's character his main priority.
WSJ
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There is quite a wide range of views from good economists on the economy right now. I see Brian Wesbury thinks interest rate cuts aren't necessary and the economy still has good growth going. http://blogs.forbes.com/digitalrules/2007/09/dont-cut-says-w.html
David Malpass sees a 'material slowdown', very weak growth coming and calls for the Fed to "move quickly to its interest-rate goal rather than stringing out its hikes or cuts as in the past." http://blogs.forbes.com/digitalrules/2007/09/material-slowdo.html
From my point of view, I hold economists to a much lower standard than their ability to see the future - I am happy if they can just explain the past with some degree of accuracy. For example, I am interested in a plausible explanation of how we got to these new relative values for competing currencies.
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The Best Economy Ever?
http://www.powerlineblog.com/archives/2007/10/018668.php
It's time to start taking seriously the proposition that the American economy under the Bush administration is the best in the nation's history. This morning the White House expressed entirely appropriate pride in the country's economic achievements on its watch:
Today, the Bureau of Labor Statistics released new jobs figures – 110,000 jobs created in September. September 2007 is the 49th consecutive month of job growth, setting a new record for the longest uninterrupted expansion of the U.S. labor market. Significant upward revisions to employment in July and August mean employment growth has averaged 97,000 per month over the last three months. Since August 2003, our economy has created more than 8.1 million jobs, and the unemployment rate remains low at 4.7 percent.
Real after-tax per capita personal income has increased by over 12.5 percent – an average of over $3,750 per person – since President Bush took office. More than 30 percent of the Nation's net worth has been added since the President's 2003 tax cuts.
Real wages have grown 2.2 percent over the 12 months that ended in August. This is much higher than the average growth rate during the 1990s, and it means an extra $1,266 in the past year for a family with two average wage earners.
Real GDP grew at a strong 3.8 percent annual rate in the second quarter of 2007. The economy has now experienced nearly six years of uninterrupted growth, averaging 2.7 percent a year since the turnaround in 2001.
The stock market is at record highs, unemployment continues at historic lows. What's not to like? Of course, one can always question the link between prosperity (or the lack thereof) and government policies. But in President Bush's case, it seems pretty obvious that his tax cuts prevented what could have been a disastrous downward spiral. At a time when our economy was subject to the double-whammy of recession and the bursting of the tech bubble, the terrorist attacks of September 11, 2001 could easily have sent the economy into a tailspin.
By the same token, I don't think any serious observer doubts that the policies the Democrats want to adopt will damage the economy. The Democrats want higher taxes:
If Congress lets Bush's tax cuts expire, it would increase taxes by more than $1,800, on the average, for a family of four making $60,000 dollars a year. Small business owners would see their taxes go up by almost $4,000, and families with children would pay an additional $500 per child.
Beyond that, the adverse economic consequences of socialized medicine are incalculable. And we haven't mentioned what would happen if the federal government started mandating the shut-down of industry so as to reduce carbon emissions in a superstitious attempt to control the weather, while China and India do nothing of the sort.
I became a Republican mostly because experience and observation taught me that free enterprise works, and socialism doesn't. Those issues have been more or less off the table in recent years because of the downfall of international socialism, the relatively enterprise-friendly Clinton administration and the Republicans' failure to control spending while they controlled Congress. But the economic issues may be about to emerge once again, as Americans consider whether they want to abandon the successful policies of the Bush administration.
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Payroll Growth: 1990s vs. 2000s
Posted by BRIAN WESBURY October 17, 2007
http://time-blog.com/real_clear_politics/2007/10/payroll_growth_1990s_vs_2000s.html
As far as economic recoveries go, the current one may be the most maligned in history. One glaring weakness, which pessimists never tire of pointing out, is that payroll job growth in this cycle has been weaker than in the 1990s. Over the past three years, payroll jobs have grown at an average monthly rate of 180,000. At the same point in the previous cycle (1994-96) payrolls grew at an average monthly rate of 244,000.
But don't despair. While the data is accurate, it is highly misleading. After digging beneath the surface, the jobs market is just as strong today as it was in the mid-1990s.
First, the unemployment rate was higher in 1994 than it was in 2004, 6.6% versus 5.4%. As a result, pent up demand for labor in the 1990s helped lift job growth.
Second, there has been a massive decline in young people who want a job. Without the drop among 16-24 year olds, a higher share of the population would be participating in the labor force today than a decade ago.
Notably, most of the drop in labor force participation among the young is due to increased school enrollment. Not only do students work less than non-students, but today's students are working less than their predecessors. About 44% of teenage students were in the labor force in the mid- 1990s versus about 36% in the past few years. In our view, this is a sign of prosperity and suggests support for productivity growth in the future once these more educated workers eventually get a job.
Third, Baby Boomers were in their peak working years in the 1990s and are now moving toward retirement. Labor force participation tends to peak at about age 40 and declines rapidly after age 50. In the mid-1990s the typical Baby Boomer was about age 40 and none of them were older than 50. Now, about half of Boomers have passed age 50.
Last, the Labor Department uses two major surveys for job creation. The establishment survey asks businesses how many are on their payrolls. That's the source of the payroll data, which has been weak relative to the 1990s. The household survey asks people directly if they are working. This survey generates data on civilian employment, which has increased at an average monthly rate of 189,000 in the past three years, almost exactly the 191,000 rate in 1994-96.
If someone has two jobs, the payroll data counts them twice, while the household survey does not. In the 1990s, the number of workers holding multiple jobs was rising, which boosted the payroll data relative to the household data. Lately, the number of these multiple job holders has fallen, helping move the two surveys back in line. Clearly, this suggests that the 2000s may actually have a healthier job market than the 1990s. This view is buttressed by the fact that in the past two years average hourly earnings are up 8.4, the fastest pace since 1990.
Given all these important demographic changes, payroll growth has actually been healthy, not weak. A useful analysis published last year by the Federal Reserve Bank of Kansas City suggests payrolls need to grow at an average monthly rate of about 120,000 to keep the unemployment rate steady. Looking back, payroll employment has grown at a 1.07% annual rate since March 1998, when the unemployment rate was also equal to today's 4.7%. Applying this rate of growth to the current level of payrolls suggests that the US needs 123,000 new payroll jobs every month to hold the unemployment rate steady.
A little digging is all it takes to show that the unfairly maligned economy is actually doing quite well. The good news is that all this concern creates a “wall of worry†that the stock market continues to climb.
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Thanks for this Doug. Wesbury is an outstanding economist, with a true gift for conceptualizing in a way that both simplifies and gets to the essence. His track record as a prognosticator is one of the very best out there.
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Since I haven't found anyone here so far to argue against free market based economics, I'll post the opposing view myself, courtesy of the NY Times. They contend we are severely under-taxed. Absolutely no hint in their 'analysis' that revenues to the treasury are actually growing at record rates. Only 'logic' I could find to back their view is that America needs to be more like the rest of the world, starting with tax burden. Their math with a 28% total tax burden doesn't exactly match tax freedom day that occurs here in May. Nonetheless, our "meager tax take" of 4 trillion dollars per year"leaves the United States ill prepared to compete." :?
http://www.nytimes.com/2007/10/22/opinion/22mon2.html?_r=1&ref=opinion&oref=slogin
Editorial: A Dearth of Taxes
Published: October 22, 2007
President Bush considers himself a champion tax cutter, but all the leading Republican presidential candidates are eager to outdo him. Their zeal is misguided. This country’s meager tax take puts its economic prospects at risk and leaves the government ill equipped to face the challenges from globalization.
According to a report from the Organization of Economic Cooperation and Development, a think tank run by the industrialized countries, the taxes collected last year by federal, state and local governments in the United States amounted to 28.2 percent of gross domestic product. That rate was one of the lowest among wealthy countries — about five percentage points of G.D.P. lower than Canada’s, and more than eight points lower than New Zealand’s. And Danes, Germans and Slovaks paid more in taxes, as a share of their economies.
Politicians on the right have continuously paraded the specter of statism to rally voters’ support for tax cuts, mainly for the rich. But the meager tax take leaves the United States ill prepared to compete. From universal health insurance to decent unemployment insurance, other rich nations provide their citizens benefits that the United States government simply cannot afford.
The consequences include some 47 million Americans without health insurance and companies like General Motors being dragged to the brink by the cost of providing workers and pensioners with medical care.
President Bush and his tax-averse friends extol the fact that the tax haul has risen over the past two years as evidence of the wisdom of his tax cuts. But if anything, the numbers underscore the economy’s weaknesses — mainly its growing inequality.
Indeed, the growth in tax revenue since 2004 is due mostly to the spectacular increase in corporate profits, which have grown at the expense of workers’ wages. Moreover, it’s proving ephemeral. As economic growth has decelerated, corporate profits are losing steam and the growth of tax revenue has begun to slow. This pretty much guarantees that the revenue will prove too low to face the challenges ahead.
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Exactly the sort of swill that one expects from the NYT :-P
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Dollar Ben
November 1, 2007; Page A18
Watching the U.S. currency continue to decline in value, our irreverent friends at the New York Sun have stopped referring to the dollar. They now call it "the Bernanke," in mock honor of the Federal Reserve Chairman who is presiding over the greenback's plunge. With another rate cut yesterday, Ben Bernanke and the Fed are continuing to act as if they like the Sun's moniker.
At least this time the Fed accompanied its rate cut with a statement acknowledging that "some inflation risks remain" and that it will "act as needed to foster price stability" and economic growth. This time there was also a dissenter, with Kansas City Fed President Thomas Hoenig opposing the rate cut. Perhaps he's been paying attention to the super-rally in inflation-sensitive price signals since the Fed declared in September that it put a higher priority on limiting the housing recession than on the value of the currency.
Commodities have soared, including oil, which passed $94 a barrel yesterday; predictions of $100 oil are commonplace. Some politicians are blaming tensions with Iran for the oil spike, but those tensions have ebbed and flowed for several years. What has mostly flowed is the supply of dollars, and so some part of oil's increase should be called the Alan Greenspan-Ben Bernanke inflation premium. To the extent higher oil prices slow economic growth, they also defeat the stated purpose of the Fed's rate cuts.
The dollar price of gold is also reaching heights not seen since 1980, closing near $800 an ounce yesterday. Gold is not some magic talisman, but it has served throughout history as a reasonable proxy for other prices. The nearby chart shows the trend since 1971, and if nothing else the recent gold rally is a market commentary on the Fed's priorities. The speculators think the risk is all on the inflation side. Meanwhile, the dollar -- "the Bernanke" -- also hit a record low against the euro yesterday.
For the Fed and most of Wall Street, this is all worth any future inflation risk. The Fed is guarding against the danger that the recent credit-market turmoil will send the larger economy into a recession. The bankers holding bad mortgage assets are also cheering easier money, as they beg for a housing reflation so they don't have to take even larger write-offs. Then there are the exporters and economists who think the U.S. can devalue its way to prosperity, or at least to a few quarters of export-driven expansion until the housing market hits bottom.
Lost in all of this domestic focus is the fact that there are also major risks to the Fed's reflation. The Fed isn't merely a creature of U.S. policy but is the steward of the global financial system. The dollar is the world's reserve currency. It is vital as a medium of global trade and investment, and central banks hold hundreds of billions of dollars as reserves. Many countries peg their own currencies to the greenback, meaning that they are subcontracting their own monetary policies to the Fed. These countries import American inflation when the Fed makes a mistake.
All of which means the Fed has a special responsibility to avoid a disruption in the world monetary system. In particular, it needs to avoid the perception that it favors a devalued greenback for narrow domestic purposes, lest it signal to countries around the world that they can play the same game. The recent cry of concern over the dollar by Rodrigo Rato, the departing head of the International Monetary Fund, is a sign that the world is beginning to wonder.
In the worst case, the world could lose faith in U.S. monetary management and there would be a run on the dollar. Then the Fed would have no choice but to raise rates much higher and faster to restore its credibility, and the recession that followed would be far worse. That's what happened as recently as the 1970s, the last time gold and oil reached these heights and the dollar was this weak. In that era, as in this one, the excuse for easier money was always to save the U.S. economy from recession. In that era, too, the rise in oil prices, gold and other commodities was blamed on everything except monetary policy -- OPEC, or rising global demand or something.
We rehearse all this not to say we are back at the 1970s but as a warning that we can get there faster than the sages at the Fed imagine. Yesterday's report that third-quarter economic growth clocked in at 3.9%, following 3.8% in the second, already shows that most Wall Street forecasters were wrong earlier this year. The Fed is worried about growth after the summer credit implosion, to be sure. But if the economy defies the forecasters again, the Fed could be raising rates faster than it now expects. The dollar's credibility as the world's reserve currency may depend on it.
WSJ
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The dangers of living in a zero-sum world economy
By Martin Wolf
Published: December 19 2007 02:00 | Last updated: December 19 2007 02:00
We live in a positive-sum world economy and have done so for about two centuries. This, I believe, is why democracy has become a political norm, empires have largely vanished, legal slavery and serfdom have disappeared and measures of well-being have risen almost everywhere. What then do I mean by a positive-sum economy? It is one in which everybody can become better off. It is one in which real incomes per head are able to rise indefinitely.
How long might such a world last, and what might happen if it ends? The debate on the connected issues of climate change and energy security raises these absolutely central questions. As I argued in a previous column ("Welcome to a world of runaway energy demand", November 14, 2007), fossilised sunlight and ideas have been the twin drivers of the world economy. So nothing less is at stake than the world we inhabit, by which I mean its political and economic, as well as physical, nature.
According to Angus Maddison, the economic historian, humanity's average real income per head has risen 10-fold since 1820.* Increases have also occurred almost everywhere, albeit to hugely divergent extents: US incomes per head have risen 23-fold and those of Africa merely four-fold. Moreover, huge improvements have happened, despite a more than six-fold increase in the world's population.
It is an astonishing story with hugely desirable consequences. Clever use of commercial energy has immeasurably increased the range of goods and services available. It has also substantially reduced both our own drudgery and our dependence on that of others. Serfs and slaves need no longer satisfy the appetites of narrow elites. Women need no longer devote their lives to the demands of domesticity. Consistent rises in real incomes per head have transformed our economic lives.
What is less widely understood is that they have also transformed politics. A zero-sum economy leads, inevitably, to repression at home and plunder abroad. In traditional agrarian societies the surpluses extracted from the vast majority of peasants supported the relatively luxurious lifestyles of military, bureaucratic and noble elites. The only way to increase the prosperity of an entire people was to steal from another one. Some peoples made almost a business out of such plunder: the Roman republic was one example; the nomads of the Eurasian steppes, who reached their apogee of success under Genghis Khan and his successors, were another. The European conquerors of the 16th to 18th centuries were, arguably, a third. In a world of stagnant living standards the gains of one group came at the expense of equal, if not still bigger, losses for others. This, then, was a world of savage repression and brutal predation.
The move to the positive-sum economy transformed all this fundamentally, albeit far more slowly than it might have done. It just took time for people to realise how much had changed. Democratic politics became increasingly workable because it was feasible for everybody to become steadily better off. People fight to keep what they have more fiercely than to obtain what they do not have. This is the "endowment effect". So, in the new positive-sum world, elites were willing to tolerate the enfranchisement of the masses. The fact that they no longer depended on forced labour made this shift easier still. Consensual politics, and so democracy, became the political norm.
Equally, a positive-sum global economy ought to end the permanent state of war that characterised the pre-modern world. In such an economy, internal development and external commerce offer better prospects for virtually everybody than does international conflict. While trade always offered the possibility of positive-sum exchange, as Adam Smith argued, the gains were small compared with what is offered today by the combination of peaceful internal development and expanding international trade. Unfortunately, it took almost two centuries after the "industrial revolution" for states to realise that neither war nor empire was a "game" worth playing.
Nuclear weapons and the rise of the developmental state have made war among great powers obsolete. It is no accident then that most of the conflicts on the planet have been civil wars in poor countries that had failed to build the domestic foundations of the positive-sum economy. But China and India have now achieved just that. Perhaps the most important single fact about the world we live in is that the leaderships of these two countries have staked their political legitimacy on domestic economic development and peaceful international commerce.
The age of the plunderer is past. Or is it? The biggest point about debates on climate change and energy supply is that they bring back the question of limits. If, for example, the entire planet emitted CO 2 at the rate the US does today, global emissions would be almost five times greater. The same, roughly speaking, is true of energy use per head. This is why climate change and energy security are such geopolitically significant issues. For if there are limits to emissions, there may also be limits to growth. But if there are indeed limits to growth, the political underpinnings of our world fall apart. Intense distributional conflicts must then re-emerge - indeed, they are already emerging - within and among countries.
The response of many, notably environmentalists and people with socialist leanings, is to welcome such conflicts. These, they believe, are the birth-pangs of a just global society. I strongly disagree. It is far more likely to be a step towards a world characterised by catastrophic conflict and brutal repression. This is why I sympathise with the hostile response of classical liberals and libertarians to the very notion of such limits, since they view them as the death-knell of any hopes for domestic freedom and peaceful foreign relations.
The optimists believe that economic growth can and will continue. The pessimists believe either that it will not do so or that it must not if we are to avoid the destruction of the environment. I think we have to try to marry what makes sense in these opposing visions. It is vital for hopes of peace and freedom that we sustain the positive-sum world economy. But it is no less vital to tackle the environmental and resource challenges the economy has thrown up. This is going to be hard. The condition for success is successful investment in human ingenuity. Without it, dark days will come. That has never been truer than it is today.
*Contours of the World Economy, 1-2030 AD, Oxford University Press 2007
martin.wolf@ft.com
Copyright The Financial Times Limited 2007
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The above post is basically saying that the prosperity that we have had is due to the positive growth economics theory. I have 2 comments about this.
1. There is evidence that our present unprecedented economic success is based not on the economic theory but the fact that we entered an age where we had started to use vast stores of oil as an energy source. Its not the theory that generated prosperity, its the presence of resources. If we imagine a day when someone works out a "magic" solution such as unlimited cheap energy (fusion or whatever) everyone everywhere would breath a sigh of relief
2. There is a recent article in Scientific American that points out that present economic theory was modeled after Helmhotz equations on the conservation of energy. In this article it basically reiterates the point that present day economic theory is flawed for not accounting for the impacts of resource extraction as part of the system. This seems to point a finger at positive growth economics.
I keep finding articles like this. Most of them come from people with training in both economics and science.
The article:
Scientific American Magazine - March 17, 2008
The Economist Has No Clothes
Unscientific assumptions in economic theory are undermining efforts to solve environmental problems
http://www.sciam.com/article.cfm?id=the-economist-has-no-clothes&sc=rss (http://www.sciam.com/article.cfm?id=the-economist-has-no-clothes&sc=rss)
By Robert Nadeau
The 19th-century creators of neoclassical economics—the theory that now serves as the basis for coordinating activities in the global market system—are credited with transforming their field into a scientific discipline. But what is not widely known is that these now legendary economists—William Stanley Jevons, Léon Walras, Maria Edgeworth and Vilfredo Pareto—developed their theories by adapting equations from 19th-century physics that eventually became obsolete. Unfortunately, it is clear that neoclassical economics has also become outdated. The theory is based on unscientific assumptions that are hindering the implementation of viable economic solutions for global warming and other menacing environmental problems.
The physical theory that the creators of neoclassical economics used as a template was conceived in response to the inability of Newtonian physics to account for the phenomena of heat, light and electricity. In 1847 German physicist Hermann von Helmholtz formulated the conservation of energy principle and postulated the existence of a field of conserved energy that fills all space and unifies these phenomena. Later in the century James Maxwell, Ludwig Boltzmann and other physicists devised better explanations for electromagnetism and thermodynamics, but in the meantime, the economists had borrowed and altered Helmholtz’s equations.
The strategy the economists used was as simple as it was absurd—they substituted economic variables for physical ones. Utility (a measure of economic well-being) took the place of energy; the sum of utility and expenditure replaced potential and kinetic energy. A number of well-known mathematicians and physicists told the economists that there was absolutely no basis for making these substitutions. But the economists ignored such criticisms and proceeded to claim that they had transformed their field of study into a rigorously mathematical scientific discipline.
Strangely enough, the origins of neoclassical economics in mid-19th century physics were forgotten. Subsequent generations of mainstream economists accepted the claim that this theory is scientific. These curious developments explain why the mathematical theories used by mainstream economists are predicated on the following unscientific assumptions:
The market system is a closed circular flow between production and consumption, with no inlets or outlets.
Natural resources exist in a domain that is separate and distinct from a closed market system, and the economic value of these resources can be determined only by the dynamics that operate within this system.
The costs of damage to the external natural environment by economic activities must be treated as costs that lie outside the closed market system or as costs that cannot be included in the pricing mechanisms that operate within the system.
The external resources of nature are largely inexhaustible, and those that are not can be replaced by other resources or by technologies that minimize the use of the exhaustible resources or that rely on other resources.
There are no biophysical limits to the growth of market systems.
If the environmental crisis did not exist, the fact that neoclassical economic theory provides a coherent basis for managing economic activities in market systems could be viewed as sufficient justification for its widespread applications. But because the crisis does exist, this theory can no longer be regarded as useful even in pragmatic or utilitarian terms because it fails to meet what must now be viewed as a fundamental requirement of any economic theory—the extent to which this theory allows economic activities to be coordinated in environmentally responsible ways on a worldwide scale. Because neoclassical economics does not even acknowledge the costs of environmental problems and the limits to economic growth, it constitutes one of the greatest barriers to combating climate change and other threats to the planet. It is imperative that economists devise new theories that will take all the realities of our global system into account.
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Thanks to Karsk for comments and the article. I disagree. I don't see a correlation between economic growth, wealth and the 'owning' of the natural resources in demand. For example, America largely leaves its oil in the ground and is the world's leading economy and the largest consumer of oil. Japan with virtually no natural resources built its wealth other ways, while places loaded with resources such as Brazil and Africa for example always seem to sputter. I think oil wealth in countries like Iraq, Saudi, Iran, Venezuela and Russia is a distraction from real wealth building activities, much like drug kingpins with the nicest cars in the ghetto are a distraction away from constructive, wealth-building activities.
I think positive growth is more a function of consistent public policies that are conducive to earn, save, own, invest, hire, etc.
A classic book that covers timeless economic principles, Ibn Khaldun's 'Muqaddimah' introduction to history (from 1377) is now published on the web at books.google.com
An economic excerpt in translation from the original arabic:
"In the early stages of the state, taxes are light in their incidence, but fetch in a large revenue...As time passes and kings succeed each other, they lose their tribal habits in favor of more civilized ones. Their needs and exigencies grow...owing to the luxury in which they have been brought up. Hence they impose fresh taxes on their subjects...[and] sharply raise the rate of old taxes to increase their yield...But the effects on business of this rise in taxation make themselves felt. For business men are soon discouraged by the comparison of their profits with the burden of their taxes...Consequently production falls off, and with it the yield of taxation."
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The point of the article is that there is an upper limit to things sometimes. Its tempting to make some simplistic examples from ecology where real limits exist to make the point. Human beings are more complex in that they have always managed to innovate to take advantage of other resources. Nevertheless, I have always felt that there is a simple logic that we live in a world where matter is finite (there is only so much matter) and energy flows from concentrated to dispersed. The fact that we have finite resources has been less important than our capacity to be innovative up to now. But there is some population level where the capacity to innovate becomes less important than the genuine scarcity of materials or the inability of energy flow to keep up with the consumption. Are we there globally for some resources? I dunno. But I do know that their really are limits. The consequence of going past real limits is catastrophic change resulting in a resetting of the systems. Lots of people don't like that sort of change.
This is an aside, but one of the things that truly amazes me about people is their adaptability. We pride ourselves on being adaptable. I know I do. But not all forms of adaptation are good. At what population level does human existence become so base that people cannot stand it and implode? The scary thing to me is not that there is a point of degradation that people cannot stand. Its actually that people adapt to the extreme levels of environmental degradation that they do. The population density of large cities, the density of some third world countries....that is freaky that people can adapt. They adapt and adapt until they reach a point that is far beyond a sustainable carrying capacity and then blammo. I suppose you could say that thats mother nature for you and I think you would be correct. Is the only effective economics systems those that pretty much ignore limits until there are impacts that cause catastrophes or are there other more clever ways to manage things as pressures increase? How can you avoid periods of time where there are downturns? Is it possible or even desirable to try to avoid downturns forever? Are downturns natural and if so can we plan specifically for them? Can we plan for a 4 staged cycle of innovation and evolution, build up, stagnation, and collapse? An economic model that defines success as growth seems inconsistent with reality when viewed from an ecological perspective. When has growth continued anywhere unabated ever? I can think of no example where growth is not balanced by collapse in the natural world whenever resources are limiting. The complexities of economics and political machinations all function within that context don't they?
In the spirit of good discourse
Karsk
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Personally I like low interest rates, but Wesbury explains clearly here IMO why we have problems now with the value of the dollar. At the conclusion I must quibble with him. The solution in 1980-83 included a two-prong pollicy, tighter money AND stimulative tax rate cuts. A tighter Fed today would not be linked with tax rate cuts, regulatory reform or anything else economically helpful so it certainly would dampen the growth rate of the economy. It's hard to correct suddenly for a decade of mistakes. (Cut and paste from a columned pda doesn't format very well.)
http://www.ftportfolios.com/Commentary/EconomicResearch/2008/4/30/Deja_Vu:_The_Feds_Interest_Rate_Dilemma
Déjà Vu: The Fed's Interest Rate Dilemma
By BRIAN S. WESBURY
Despite record passenger traffic,
airlines are bleeding cash and
going bankrupt. Food riots have
cropped up around the world,
Canada is paying farmers to kill
pigs because feed costs too much,
and rice, it seems, is in very short
supply.
While ethanol subsidies have
created havoc, they don't explain
everything – like huge increases
in precious metals prices, the
sharp decline in the value of the
dollar, or record-high fuel prices.
What's missing in most analysis is
the impact of inflationary
monetary policy. Since 2001, and
especially since September 2007 –
when the Fed started cutting rates
in response to credit market issues
– excessively easy monetary
policy has driven oil and other
commodity prices through the
roof.
The good news is we've been here
before, and we know – well, at
least 1980s Fed Chairman Paul
Volcker knows – how to get out
of this mess. Loose money in the
1960s and 1970s drove up the
price of everything. A barrel of
oil, which sold for $2.92 in 1965,
rose to $40 in 1980. Most people
believed that rising commodity
prices indicated that the world
was running out of resources. The
Club of Rome predicted global
ruin, and then President Jimmy
Carter said that "peak oil" was
right around the corner.
Oklahoma-based Penn Square Bank
handed out oil loans freely, and
sold off pieces of its loans in
packages called "participations."
Seafirst Bank in Seattle and
Continental Bank in Chicago were
two good customers. These banks
thought oil prices would remain
elevated and paid a huge price for
their mistake.
Today, Bear Stearns, Countrywide
and subprime lending are a repeat
of Penn Square, Continental and oil
loans. Bad decision making, based
on a money-induced mirage, is the
culprit. We are not running out of
food or natural resources; this is an
entirely man-made disaster caused
by the Fed opening wide the
monetary floodgates.
Money is the ultimate commodity
because all prices have only money
in common. And it is the only thing
that a central bank directly controls.
Unfortunately, because of
globalization and financial-market
innovation, money itself has
become hard to measure and
useless as a forecasting tool. So
analysts use interest rates.
The "natural rate of interest" is the
theoretical interest rate at which
monetary policy does not
artificially boost the economy, nor
hold it back. It is also the rate at
which money is neutral on
inflation. There have been many
attempts at measuring this. Some
economists look at real interest
rates. Others use the Taylor Rule,
which includes a target rate for
inflation and real growth.
And while these methods are
helpful, they rely on estimates. I
devised a much simpler system
back in 1993, based on actual
economic data, that has proven
extremely useful. It predicted the
sharp increase in long-term
interest rates in 1994; it also
predicted the recession of 2001,
the deflation of the early 2000s,
and the inflation of recent years.
This model shows that a neutral
federal funds rate should be
roughly equal to nominal GDP
growth. Nominal GDP growth
(real growth plus inflation)
measures total spending in the
economy, or to put it another
way, it reflects the average
growth rate for all companies in
the economy.
If interest rates are pushed well
below nominal GDP growth,
money is too easy and it
encourages leverage. If interest
rates are pulled above nominal
GDP, money is too tight, and
average companies cannot
overcome borrowing costs.
Between 1960 and 1979, the
federal funds rate averaged 5.6%
and nominal GDP growth
averaged 8.4%. With the funds
rate 280 basis points below GDP
growth, monetary policy was
highly accommodative. The
result: a falling dollar, rising
commodity prices and fears that
resources were being used up.
In 1980, then Fed Chairman
Volcker lifted the fed funds rate
significantly above GDP growth
and held it there long enough to
end inflation. This policy
instigated a steep decline in oil
prices, and drove a stake through
the heart of stagflation.
Oil and inflation stayed low in the
1980s and '90s, when the Fed held
the fed funds rate 74 basis points
above GDP growth on average.
By 1999, with oil prices still low,
the Economist magazine wrote
that the world was "drowning in
oil."
Low inflation turned to deflation
in 1999 and 2000, when the Fed
mistakenly pushed the funds rate
above nominal GDP growth
again. This deflation spooked the
Fed and led to a radical reduction
in interest rates. Since then, the
fed funds rate has been well
below GDP growth – an average
of 210 basis points – the most
accommodative six years of
monetary policy since the 1970s.
No wonder inflation is on the rise
and commodity prices are setting
new records.
The Fed lifted the funds rate from
1% to 5.25% between 2004 and
2006, but monetary policy was
never tight because the rate never
went above nominal GDP. This
suggests that housing market
problems were not caused by tight
money in 2006-07, but by
excessive investment during the
super-easy money of the years
before.
Nonetheless, the Fed opened up the
old playbook and cut rates
aggressively when subprime loans
blew up. This cemented higher
inflation into place, crushed the
dollar, pushed commodity prices up
sharply, and created major
problems in the energy, airline and
agricultural marketplaces. And just
like the 1970s, it is now popular to
argue that the world is running out
of resources again.
The answer to all of this is for the
Fed to lift rates back to their natural
rate, which is somewhere north of
5%. Tax-rate reductions and
interest-rate hikes cured the world
of its ills in the early 1980s. They
can do so again.
Mr. Wesbury is chief
economist for First Trust
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Doug:
Wesbury is one of the best around IMHO, thanks for sharing.
I think you raise an interesting line of thought in your introdutory remarks to Wesbury's piece. Would you please flesh out the implications of the fact that the Reagan cuts were phased in over three years? IRRC, per supply side doctrine, the acutalization of many gains was deferred untill the third year, which, contrary to monetarist predictions, is when the Reagan boomed kicked off.
TAC,
Marc
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Crafty wrote:"Would you please flesh out the implications of the fact that the Reagan cuts were phased in over three years? IRRC, per supply side doctrine, the actualization of many gains was deferred until the third year, which, contrary to monetarist predictions, is when the Reagan boomed kicked off."
What you are getting at I think is that people don't accelerate their economic activity now when they know their income will be taxed at a better rate later.
As concisely as I can recap from memory:
We had horrible 'stagflation' coming into the Reagan election, simultaneous stagnation and inflation, defying all things Keynesian namely the Phillips curve which said that high unemployment meant low inflation and high inflation meant low unemployment. We had both out of control at the same time and called it the Misery Index.
Robert Mundell, now a Nobel winner and Professor at Columbia, wrote a two prong solution for a two prong problem. We needed tight money to control inflation and SIMULTANEOUS across the board marginal tax rate cuts to stimulate economic activity and correct what he called the "asphyxiating" tax rates that people grew into because of inflation-caused bracket creep. In other words, ordinary workers were being taxed at the punitive rates aimed at the rich and the rich were keeping their money out of productive uses to minimize taxes.
But the timing didn't work out that way. Reagan had to compromise with a reluctant congress led by the other party so the 30% tax cuts became 25% and were delayed and phased in over 3 years instead of immediately. Meanwhile the Fed cranked down hard on tight money right away - no delay, no phase-in. The result was a painful recession until the full effect of the tax cuts hit in the third year.
By 1984 the economy was hitting on all cylinders and inflation was largely gone. Candidate Mondale hated the tax cuts and promised to raise them. Reagan won 49 states.
----
That part you knew, so I have to add this piece from my Minnesota bias that most historians miss: the national confidence to elect Reagan, cut taxes, rebuild America and stand up to the Soviets started when some college kids that trained hard, went to Lake Placid NY, beat the Soviet hockey team and took the Olympic gold medal. Fighters should get the movie 'Miracle' and see the workout Herb Brooks put his team through after a disappointing tie with Norway on their path to the gold... :-)
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I agree with your historical summary.
And good suggestion about the movie "Miracle". My son is getting involved in playing hockey and this could be a good movie for us to watch. To help me with my search, do you remember the name of the lead actors?
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Contracts as Good as Gold
By AMITY SHLAES
June 5, 2008
People these days fear inflation. We also fear changing rates of inflation. And most of the tools we might use to protect ourselves, such as the Treasury Inflation-Protected Securities bond or gold stocks, are imperfect. TIPS are, after all, based on an inflation-measure whose accuracy is itself controversial – the Consumer Price Index.
So it's worth remembering that, 75 years ago today, President Franklin D. Roosevelt destroyed an inflation hedge that was literally as good as gold: the so-called "gold clause." This helped prolong the Depression and has been causing damage ever since.
Consider an investor in the gold standard era. An ounce of gold was worth $20.67 and you could, at least in theory, trade your greenbacks for gold at the bank. The gold standard checked a government's willingness to inflate, since it started losing gold when it did so. Those who traded bonds knew a confidence we can never know.
Washington, like all governments, could occasionally cheat on the gold standard – suspend it, limit the ability of citizens to convert paper into gold, and so on. But investors could protect themselves by writing a gold clause into their contracts. Such a clause promised a borrower that he could be repaid "in gold coin of the United States of America of or equal to the present standard of weight and fineness." The gold clause fostered economic growth in the late 19th and early 20th centuries by making it easier for young industries to raise capital. Since investors protected by these clauses knew they would get their money back, interest rates were lower. To finance World War I, Washington even inserted gold clauses into Liberty Loans.
The powerful deflation of the early 1930s gave Roosevelt the excuse to end the gold standard. Dirt-low commodity prices, starving farmers, bank seizures of homes, 20% unemployment: All these miseries shouted, "looser money now!" The agricultural community, including eccentric Agriculture Secretary Henry Wallace, viewed the end of the gold standard as the ultimate revenge of the farmers punishing Wall Street for its 1920s prosperity.
One night in April, 1933, FDR surprised a bunch of advisers, saying "Congratulate me." He'd taken the country off the gold standard, and now planned to personally manage the dollar's exchange rate and price levels. Hearing the news, colleagues "began to scold Mr. Roosevelt as though he were a perverse and particularly backward schoolboy," recalled Ray Moley. Secretary of State Cordell Hull, the great free trader, "looked as though he had been stabbed in the back. FDR took out a ten-dollar bill, examined it and said 'Ha! . . . How do I know it's any good? Only the fact that I think it is makes it so.'"
Congress then drafted a joint resolution declaring gold clauses – protection against any damage Roosevelt might do – to be "against public policy." Roosevelt couldn't wait to see the resolution become law. Henry Wallace wrote that Roosevelt "looked up at the clock and put down 4:40 p.m., June 5, 1933 and signed his name."
Randall Kroszner, a governor at the Federal Reserve Board, has studied this period and has noted that the price went up on most stocks and bonds, even gold-clause bonds, when the Supreme Court eventually validated FDR's action. Mr. Kroszner and others argue that the abrogation of the gold clause had some virtue because it reduced the cost and inconvenience of debt renegotiation in a period of credit crisis.
But you can also argue that those price movements were more an expression of relief that a futile battle was over rather than a vote of approval. In my own review of the period I found evidence that snatching away from investors the perfect inflation hedge hurt the economy.
The market rally in the spring of 1933 slowed as investors watched FDR fiddle with the dollar and commodities over the course of the fall. In 1934, FDR thought better of it all and fixed the dollar to gold again, albeit now at $35 dollars an ounce. But the abrogation of the gold clause suggested that Washington had no regard for property rights. The general uncertainty generated by government economic policies did not abate. Capital went on strike. The Great Depression endured to the end of the decade. The positive transparency that the Securities and Exchange Commission or the creation of deposit insurance brought to markets was offset by losses like that of the gold clause.
And from then on, the federal government enjoyed wider license to inflate. Without the gold-clause option, citizens tried out other hedges – today a line about the CPI may stand where the old gold line once stood. In the 1970s, Sen. Jesse Helms pushed for repeal of the old abrogation, and eventually, with the support of Treasury Secretary William Simon, he won. But the average investor never used the clause to the same extent.
Today, as in the last days of the gold clause, officials like Mr. Kroszner of the Fed's Board of Governors are weighing a difficult choice between efficient crisis management and property rights. People don't talk more about the damage of monetary uncertainty because that damage is so spread out – harder to discern than, say, a single giant event like the implosion of Bear Stearns. But the old gold clause footnote explains why we may see yet more angst over the Consumer Price Index, the TIPS bond, or even LIBOR, the London Interbank rate. We have lost our bearings and our confidence in money generally.
After a majority of the Supreme Court upheld the constitutionality of the gold clause abrogation, Justice James McReynolds read the dissent. Today McReynolds is generally regarded as an irrelevant reactionary, a footnote himself. But his rueful words ring true for those trying to reckon the dollar's future. It was, he said, "impossible to estimate the result of what has been done."
Miss Shlaes is a senior fellow in economic history at the Council on Foreign Relations and author of "The Forgotten Man: A New History of the Great Depression," out in paperback this week (Harper Perennial).
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New Evidence on Government and Growth
By KEITH MARSDEN
June 16, 2008
In the early 1980s, Ronald Reagan embraced the ideas of a small group of economists dubbed "supply-siders." They argued that lower taxes and slimmer government would stimulate growth, enterprise, harder work and higher levels of saving and investment. These views were widely ridiculed at the time, dismissed as "voodoo economics."
Barbara Kelley
Reagan did succeed in lowering some taxes. But a Democrat-controlled Congress weakened their impact by raising government spending sharply, resulting in large budget deficits.
A quarter of a century later, many more countries have cut taxes and reined in heavy-handed government intervention. How far have they gone down this path, and with what success?
My study, "Big, Not Better?" (Centre for Policy Studies, 2008), looks at the performance of 20 countries over the past two decades. The first 10 have slimmer governments with revenue and expenditure levels below 40% of GDP. This group includes Australia, Canada, Estonia, Hong Kong, Ireland, South Korea, Latvia, Singapore, the Slovak Republic and the U.S.
I compared their records to the 10 higher-taxed, bigger-government economies: Austria, Belgium, Denmark, France, Germany, Italy, the Netherlands, Portugal, Sweden and the United Kingdom. Both groups cover a representative range of large, medium and small economies measured by their gross national incomes. The average incomes per capita of the two groups are similar ($27,046 and $30,426 respectively in 2005).
Most governments have reduced their top tax rates and spending-to-GDP ratios over the last decade or so, according to data published by the OECD, IMF and World Bank. But slimmer governments have done so at a faster pace, and to significantly lower levels. Their highest tax rate on personal income fell to a group average of 30% in 2006 from 36% in 1996. Top corporate rates were lowered to an average of 22% from 30%. Their average ratio of total government outlays to GDP fell to 31.6% in 2007, from an average peak level during the previous two decades of 40.4%
Investment growth jumped to an average annual rate of 5.9% in 2000-2005, from 3.8% over the previous decade. Exports have risen by 6.3% annually since 2000. The net result was a surge in economic growth. The IMF reports that GDP soared in the slimmer-government group at a 5.4% average annual rate from 1999-2008 (including its forecast for the current year), up from a 4.6% rate over the previous decade.
Over that same period, the bigger-government group was more timid in its tax reductions. Their highest individual rates declined to an average of 45% from 49%, and corporate rates to 29% from 35%. Furthermore, their average spending-to-GDP ratio only fell to 48.3% from a peak of 55.2%.
The bigger-government group therefore failed to gain any competitive advantages in global markets by generating or attracting larger investment funds. Their investment growth slowed to an average annual rate of 0.8% in 2000-2005, from 4.1% in 1990-2000. Their export growth rate almost halved to 3.1% annually in 2000-2005, down from 6.1% in 1990-2000. The bottom line is a drop in their average annual GDP growth rate to 2.1% in 1999-2008, from 2.3% over the previous decade.
Nor did they balance their books. They ran budgetary deficits averaging 1.1% of GDP in 2006, whereas slimmer governments generated an average surplus of 0.3% of GDP. Their net government debt averaged 39.2% of GDP in 2006, more than four times higher than the latter's. Interest payments on their debt took 2.3% of their GDP, compared with an average of just 0.5% in the slimmer-government group.
Slimmer-government countries also delivered more rapid social progress in some areas. They have, on average, higher annual employment growth rates (1.7% compared to 0.9% from 1995-2005). Their youth unemployment rates have been lower for both males and females since 2000. The discretionary income of households rose faster in the first group. This allowed their real consumption to increase by 4.1% annually from 2000-2005, up from 2.8% in 1990-2000. In the bigger-government group, the growth of household consumption has slowed to a 1.3% average annual rate, from 2.1% during the 1990-2000 period.
Faster economic growth in the first group also generated a more rapid increase in government revenue, despite (or rather, because of, supply-siders suggest) lower overall tax burdens.
Slimmer-government countries seem to have made better use of their smaller health resources. Total spending on health programs reached 9.5% of GDP in the bigger government group in 2004, 1.6 percentage points above the average in the slimmer-government group. Yet slimmer-government countries have raised their average life expectancy at birth at a faster pacer since 1990, reaching an average level of 78 years in 2005, just one year below the average for bigger spenders. Average life expectancy is now 80 years in Singapore, although government and private health programs combined cost only 3.7% of its GDP.
Finally, spending by bigger governments on social benefits (such as unemployment and disability benefits, housing allowances and state pensions) was higher (20.3% of GDP in 2006) than that of slimmer governments (9.6%). But these transfers do not appear to have resulted in greater equality in the distribution of income. The Gini index measuring income distribution is similar for both groups.
Other forces clearly helped to narrow income disparities in slimmer-government economies. These forces include wage-setting practices, saving habits, the availability of employer-funded pension schemes, and income sharing among extended families.
Both groups reduced the share of defense spending in GDP over the past decade. The slimmer-government average fell 0.1 points to 2.2% in 2005, but this level was 0.5 percentage points above the bigger-government average. The average share of armed forces personnel in the total labor force in the bigger-government group fell to 1.1% from 1.5% in 1995, whereas it grew to 1.7% from 1.5% in the slimmer-government group.
Information on public order and safety expenditures is incomplete. But for the 11 countries for which data are available, slimmer governments seem to take their responsibilities more seriously. They spent an average of 1.8% of GDP on these functions in 2006, compared with 1.5% by bigger governments.
The early supply-siders were right. My findings firmly reject the widely held view that lower taxes inevitably result in cuts in public services, slower growth and widening income inequalities. Today's policy makers should take note of how tax cuts and the pruning of inefficient government programs can stimulate sluggish economies.
Mr. Marsden, a fellow of the Centre for Policy Studies in London, was previously an adviser at the World Bank and senior economist in the International Labour Organization.
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An Economist Who Matters
By KYLE WINGFIELD
June 21, 2008; Page A7
Copenhagen
Robert Mundell isn't in the habit of making fruitless policy recommendations, though some take a long time ripening. Nearly four decades passed between his early work on optimal currency areas and the birth of the euro in 1999 – the same year he received the Nobel Prize for economics.
Terry Shoffner
So when Mr. Mundell says that rescinding the Bush tax cuts "would be devastating to the world economy," that oil prices are "not so far off track," that Asia needs its own multilateral currency, or that the ham sandwiches sitting before us could use some mustard, one is inclined to pay attention – and, except in the case of lunch, to think long term.
It's late May, and we are in surprisingly sunny Denmark for a Copenhagen Consensus summit. Mr. Mundell is one of eight economists debating cost-effective solutions to such problems as malnutrition and global warming. Europe is a natural enough place to meet the Ontario native, and not only because of his advocacy for the euro. When Mr. Mundell is not in New York City – where he's a professor at Columbia University and occasionally appears on David Letterman's late-night TV show (reading from Paris Hilton's book, listing the top 10 ways winning the Nobel has changed his life) – he's often in Tuscany at his 500-year-old castle, "Palazzo Mundell," restored in part with his Nobel winnings.
Back in America, there's an election going on. There's also been a spate of financial problems, not the least of which is a weak dollar. But Mr. Mundell says "the big issue economically . . . is what's going to happen to taxes."
Democratic nominee Barack Obama regularly professes disdain for the Bush tax cuts, suggesting that those growth-spurring measures may be scrapped. "If that happens," Mr. Mundell predicts, "the U.S. will go into a big recession, a nosedive."
One of the original "supply-side" economists, he has long preached the link between tax rates and economic growth. "It's a lethal thing to suddenly raise taxes," he explains. "This would be devastating to the world economy, to the United States, and it would be, I think, political suicide" in a general election.
Should taxes instead be cut again, I ask him, to stimulate the sluggish economy? Mr. Mundell replies that he favors a ceiling of 30% on marginal rates (the current top rate is 35%). He recounts how the past century experienced a titanic struggle over whether tax rates are too high or too low: from a 3% income tax in 1913; up to 60% during World War I; down to 25% before Congress and President Herbert Hoover raised taxes back to 60% in 1932 and "sealed the fate of our economy for a long, long time"; all the way up to 92.5% during World War II before falling in three steps, reaching 28% under President Ronald Reagan; and back to nearly 40% under Bill Clinton before George W. Bush lowered them to their current level.
In light of this fiscal roller coaster, Mr. Mundell says, "the most important thing that could be done with respect to tax rates now is to make the Bush tax cuts permanent. Eliminating that uncertainty would be more important than pushing for a further cut – in the income tax rates, anyway."
One tax that he would cut, to 25%, is the corporate tax rate. "It could be even lower," he says, "but I think it would be a big step to lower it to 25% . . . I made that proposal back in the 1970s."
A long-haired Mr. Mundell spent that decade not only arguing for the euro, but laying the intellectual groundwork for the Reagan tax-cut revolution. Mr. Mundell says those tax cuts remain "as important to the United States as the creation of the euro was to Europe – a fundamental change." Combined with Paul Volcker's tight-money policy at the Fed, which Mr. Mundell also championed, supply-side economics killed off stagflation.
Or at least it killed it off at the time. With prices again rising as growth slows, some economists are worried that stagflation could be making a comeback. Not Mr. Mundell – not yet.
He draws a comparison with the situation in 1979-1980. Start with the dollar price of oil, which he calls "one of the two most important prices in the world" (the other being the dollar-euro exchange rate, which we'll get to in a moment).
"If you look at the price level since 1980," he begins, "oil prices would naturally double by the year 2000. So from $34 a barrel in 1980 to $68 a barrel. And then . . . because the inflation rate's about 3.5%, it would double again by 2020. So the natural price . . . would be something like $136 in 2020.
"Now, we [already] got to $130-something, but . . . I really think the price is going to settle down, probably below $100, if not below $90. What I'm saying is we're not so far off track."
American motorists still shocked by $4-a-gallon gasoline might think we're rather more off track than Mr. Mundell suggests. Bolstering his case, he immediately moves on to another commodity often invoked to demonstrate inflation: gold.
"The price of gold in 1980 was $850 an ounce. And the price of gold today is about the same. It's astonishing," he says. "It's true, gold did go up" to more than $1,000 an ounce earlier this year, "but the public doesn't believe that there is inflation. If there was big inflation coming, then you'd see the price of gold going up to $1,500 an ounce very quickly, and that hasn't happened."
In any case, don't expect to hear Barack Obama or John McCain talk about the weak dollar's contributions to any problem. "As [journalist] Robert Novak once put it, it's like cleaning ladies who come in and say 'I don't do ironing.' [Politicians] say, 'I don't do exchange rates,'" Mr. Mundell chuckles. "They think they can only lose by talking about exchange rates, because they don't know enough about it, and it's hard to predict anyway, for anyone."
If Mr. Mundell had his way, there wouldn't be anything for politicians to say about exchange rates. They would be fixed – as they were under the Bretton Woods arrangement after World War II until 1971, when President Nixon took the U.S. off the postwar gold standard and effectively launched the era of floating exchange rates.
"It's a very poor and a dangerous system," Mr. Mundell says of the floating regime, "because it creates exaggerated swings in the exchange rate." Case in point is the dollar-euro rate. From a low of about 82 cents in 2000, Europe's common currency has risen fairly steadily and has been valued at more than $1.50 since late February, even breaking the $1.60 barrier once.
"What people have to realize is there's been a fundamental change in the way markets work in the past 20 years," Mr. Mundell says. "Now, exchange rates are driven not so much by trade but by capital accounts and capital movements, and the huge amount of liquidity that's sloshing around the world."
Central banks world-wide, he notes, are trying to reach an equilibrium between dollars and euros in their $6.5 trillion worth of foreign reserves. Roughly two-thirds of these reserves are kept in dollars now, so they have about $1 trillion left to move into euros.
"If you did a hundred billion dollars" annually, Mr. Mundell points out, "you'd need 10 years to build that up, and that amount of capital movement has a tremendous effect in keeping the euro overvalued. It's not good for Europe and . . . ultimately it would cause more inflation in the United States."
But this continuing shift doesn't mean that the dollar's status as the world's dominant currency is in danger, at least not in the short run. Countries like Iran may be pushing for the pricing of oil in another currency, "but it wouldn't happen unless Saudi Arabia and the Gulf states moved in that direction, and I don't see any way in which they would do this," Mr. Mundell says. "It would be very damaging to the relations between the United States and the Gulf countries. There's an implicit defense alliance between those, and that's what overrides as a top priority."
Nor is there a macroeconomic argument for demoting the dollar. "Remember, the growth prospects for the United States are probably stronger than that of Europe, because you've got continued and substantial population growth in the United States, and zero population growth in Europe," Mr. Mundell says. "Quite apart from the fact that the U.S. economy is innovating more rapidly, and the population is younger and not getting old as rapidly, so they pick up new technology faster. So I look upon the United States still as the main sparkplug of economic growth in the world."
As for the euro's overvalued status, he forecasts deflation in Europe, along with a slowdown and an end to its housing boom. The answer, he suggests, is for the Federal Reserve and the European Central Bank to cooperate in putting a floor and a ceiling on both the euro and the dollar. "You have to grope" to the appropriate range, he maintains, but a good starting point would be to keep the euro between 90 cents and $1.30.
Even better, in his mind – and now we're really talking long term – would be to have a global currency. This could take the form of a new money or a dominant existing one to which all others are fixed – probably the dollar. "As Paul Volcker says," Mr. Mundell relates, "the global economy needs a global currency."
To get there, he proposes holding a new, Bretton Woods-type meeting in 2010 at the Shanghai World's Fair. Mr. Mundell, who has been spending "a lot of time" in China advising the government, says reviving an international system of fixed exchange rates would be a tremendous help to Beijing as it tries to fend off demands from U.S. and European politicians that it appreciate or float its currency.
Here, he recalls Washington's similar "bashing" of the Japanese yen in the 1980s, and its ultimately disastrous effects: "Japan got stuck with an overvalued currency for a decade, and suffered from a perpetual deflation in its housing market from 1990 until just a couple of years ago. And China doesn't want to have the same problem."
Another part of his solution is for Asian countries to form their own currency bloc. If they did so, he says, "it'd be comparable in size to the European and the American bloc. And then it would not be so much the question of . . . the U.S. and Europe bashing China" or other rising economies.
These three currency blocs, he predicts, would be large enough to weather wide swings in their exchange rates. But the swings would still do economic damage, so "the best thing you could do is to stabilize them, and that's where the global currency comes in."
Could it happen? Mr. Mundell allows that three decades may pass, but predicts that like the euro and the Reagan revolution before it, the global currency's time, too, will come. Any skeptics might want to review the last few decades before betting against him.
Mr. Wingfield is an editorial-page writer for The Wall Street Journal Europe.
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Reversal of Fortune
by Joseph E. Stiglitz November 2008
When the American economy enters a downturn, you often hear the experts debating whether it is likely to be V-shaped (short and sharp) or U-shaped (longer but milder). Today, the American economy may be entering a downturn that is best described as L-shaped. It is in a very low place indeed, and likely to remain there for some time to come.
Virtually all the indicators look grim. Inflation is running at an annual rate of nearly 6 percent, its highest level in 17 years. Unemployment stands at 6 percent; there has been no net job growth in the private sector for almost a year. Housing prices have fallen faster than at any time in memory—in Florida and California, by 30 percent or more. Banks are reporting record losses, only months after their executives walked off with record bonuses as their reward. President Bush inherited a $128 billion budget surplus from Bill Clinton; this year the federal government announced the second-largest budget deficit ever reported. During the eight years of the Bush administration, the national debt has increased by more than 65 percent, to nearly $10 trillion (to which the debts of Freddie Mac and Fannie Mae should now be added, according to the Congressional Budget Office). Meanwhile, we are saddled with the cost of two wars. The price tag for the one in Iraq alone will, by my estimate, ultimately exceed $3 trillion.
This tangled knot of problems will be difficult to unravel. Standard prescriptions call for raising interest rates when confronted with inflation, just as standard prescriptions call for lowering interest rates when confronted with an economic downturn. How do you do both at the same time? Not in the way that some politicians have proposed. With gasoline prices at all-time highs, John McCain has called for a rollback of gas taxes. But that would lead to more gas consumption, raise the price of gas further, increase our dependence on foreign oil, and expand our already massive trade deficit. The expanding deficit would in turn force the U.S. to continue borrowing gargantuan sums from abroad, making us even more indebted. At the same time, the higher imports of oil and petroleum-based products would lead to a weaker dollar, fueling inflationary pressures.
Millions of Americans are losing their homes. (Already, some 3.6 million have done so since the subprime-mortgage crisis began.) This social catastrophe has severe economic effects. The banks and other financial institutions that own these mortgages face stunning reverses; a few, such as Bear Stearns, have already gone belly-up. To prevent America’s $5.2 trillion home financiers, Fannie Mae and Freddie Mac, from following suit, Congress authorized a blank check to cover their losses, but even that generosity failed to do the trick. Now the administration has taken over the two entities completely, a stunning feat for a supposedly market-oriented regime. These bailouts contribute to growing deficits in the short run, and to perverse incentives in the long run. Market economies work only when there is a system of accountability, but C.E.O.’s, investors, and creditors are walking away with billions, while American taxpayers are being asked to pick up the tab. (Freddie Mac’s chairman, Richard Syron, earned $14.5 million in 2007. Fannie Mae’s C.E.O., Daniel Mudd, earned $14.2 million that same year.) We’re looking at a new form of public-private partnership, one in which the public shoulders all the risk, and the private sector gets all the profit. While the Bush administration preaches responsibility, the words are addressed only to the less well-off. The administration talks about the impact of “moral hazard” on the poor “speculator” who borrowed money and bought a house beyond his ability to pay. But moral hazard somehow isn’t an issue when it comes to the high-stakes speculators in corporate boardrooms.
How Did We Get into This Mess?
A unique combination of ideology, special-interest pressure, populist politics, bad economics, and sheer incompetence has brought us to our present condition.
Ideology proclaimed that markets were always good and government always bad. While George W. Bush has done as much as he can to ensure that government lives up to that reputation—it is the one area where he has overperformed—the fact is that key problems facing our society cannot be addressed without an effective government, whether it’s maintaining national security or protecting the environment. Our economy rests on public investments in technology, such as the Internet. While Bush’s ideology led him to underestimate the importance of government, it also led him to underestimate the limitations of markets. We learned from the Depression that markets are not self-adjusting—at least, not in a time frame that matters to living people. Today everyone—even the president—accepts the need for macro-economic policy, for government to try to maintain the economy at near-full employment. But in a sleight of hand, free-market economists promoted the idea that, once the economy was restored to full employment, markets would always allocate resources efficiently. The best regulation, in their view, was no regulation at all, and if that didn’t sell, then “self-regulation” was almost as good.
The underlying idea was, on the face of it, absurd: that market failures come only in macro doses, in the form of the recessions and depressions that have periodically plagued capitalist economies for the past several hundred years. Isn’t it more reasonable to assume that these failures are just the tip of the iceberg? That beneath the surface lie a myriad of smaller but harder-to-assess inefficiencies? Let me venture an analogy from biology: A patient arrives at a hospital in serious condition. Now, it may be that the patient has simply fallen victim to one of those debilitating ailments that go around from time to time and can be cured by a massive dose of antibiotics. In this case we have a macro problem with a macro solution. But it could instead be that the patient is suffering from a decade of serious abuse—smoking, drinking, overeating, lack of exercise, a fondness for crystal meth—and that it has not only taken a catastrophic toll but also left him open to opportunistic infections of every kind. In other words, a buildup of micro problems has led to a macro problem, and no cure is possible without addressing the underlying issues. The American economy today is a patient of the second kind.
We are in the midst of micro-economic failure on a grand scale. Financial markets receive generous compensation—in the form of more than 30 percent of all corporate profits—presumably for performing two critical tasks: allocating savings and managing risk. But the financial markets have failed laughably at both. Hundreds of billions of dollars were allocated to home loans beyond Americans’ ability to pay. And rather than managing risk, the financial markets created more risk. The failure of our financial system to do what it is supposed to do matches in destructive grandeur the macro-economic failures of the Great Depression.
Economic theory—and historical experience—long ago proved the need for regulation of financial markets. But ever since the Reagan presidency, deregulation has been the prevailing religion. Never mind that the few times “free banking” has been tried—most recently in Pinochet’s Chile, under the influence of the doctrinaire free-market theorist Milton Friedman—the experiment has ended in disaster. Chile is still paying back the debts from its misadventure. With massive problems in 1987 (remember Black Friday, when stock markets plunged almost 25 percent), 1989 (the savings-and-loan debacle), 1997 (the East Asia financial crisis), 1998 (the bailout of Long Term Capital Management), and 2001–02 (the collapses of Enron and WorldCom), one might think there would be more skepticism about the wisdom of leaving markets to themselves.
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The new populist rhetoric of the right—persuading taxpayers that ordinary people always know how to spend money better than the government does, and promising a new world without budget constraints, where every tax cut generates more revenue—hasn’t helped matters. Special interests took advantage of this seductive mixture of populism and free-market ideology. They also bent the rules to suit themselves. Corporations and the wealthy argued that lowering their tax rates would lead to more savings; they got the tax breaks, but America’s household savings rate not only didn’t rise, it dropped to levels not seen in 75 years. The Bush administration extolled the power of the free market, but it was more than willing to provide generous subsidies to farmers and erect tariffs to protect steelmakers. Lately, as we have seen, it seems willing to write blank checks to bail out its friends on Wall Street. In each of these cases there are clear winners. And in each there are clear losers—including the country as a whole.
What Is to Be Done?
As America attempts to work its way out of the present crisis, the danger is that we will listen to the same people on Wall Street and in the economic establishment who got us into it. For them, our current predicament is another opportunity: if they can shape the government response appropriately, they stand to gain, or at least stand to lose less, and they may be willing to sacrifice the well-being of the economy for their own benefit—just as they did in the past.
There are a number of economic tools at the country’s disposal. As noted, they can yield contradictory results. The sad truth is that we have reached the limits of monetary policy. Lowering interest rates will not stimulate the economy much—banks are not going to be willing to lend to strapped consumers, and consumers are not going to be willing to borrow as they see housing prices continue to fall. And raising interest rates, to combat inflation, won’t have the desired impact either, because the prices that are the main sources of our inflation—for food and energy—are determined in international markets; the chief consequence will be distress for ordinary people. The quandaries that we face mean that careful balancing is required. There is no quick and easy fix. But if we take decisive action today, we can shorten the length of the downturn and reduce its magnitude. If at the same time we think about what would be good for the economy in the long run, we can build a durable foundation for economic health.
To go back to that patient in the emergency room: we need to address the underlying causes. Most of the treatment options entail painful choices, but there are a few easy ones. On energy: conservation and research into new technologies will make us less dependent on foreign oil, reduce our trade imbalance, and help the environment. Expanding drilling into environmentally fragile areas, as some propose, would have a negligible effect on the price we pay for oil. Moreover, a policy of “drain America first” will make us more dependent on foreigners in the future. It is shortsighted in every dimension.
Our ethanol policy is also bad for the taxpayer, bad for the environment, bad for the world and our relations with other countries, and bad in terms of inflation. It is good only for the ethanol producers and American corn farmers. It should be scrapped. We currently subsidize corn-based ethanol by almost $1 a gallon, while imposing a 54-cent-a-gallon tariff on Brazilian sugar-based ethanol. It would be hard to invent a worse policy. The ethanol industry tries to sell itself as an infant, needing help to get on its feet, but it has been an infant for more than two decades, refusing to grow up. Our misguided biofuel policy is taking land used for food production and diverting it to energy production for cars; it is the single most important factor contributing to higher grain prices.
Our tax policies need to be changed. There is something deeply peculiar about having rich individuals who make their money speculating on real estate or stocks paying lower taxes than middle-class Americans, whose income is derived from wages and salaries; something peculiar and indeed offensive about having those whose income is derived from inherited stocks paying lower taxes than those who put in a 50-hour workweek. Skewing the tax rates in the other direction would provide better incentives where they count and would more effectively stimulate the economy, with more revenues and lower deficits.
We can have a financial system that is more stable—and even more dynamic—with stronger regulation. Self-regulation is an oxymoron. Financial markets produced loans and other products that were so complex and insidious that even their creators did not fully understand them; these products were so irresponsible that analysts called them “toxic.” Yet financial markets failed to create products that would enable ordinary households to face the risks they confront and stay in their homes. We need a financial-products safety commission and a financial-systems stability commission. And they can’t be run by Wall Street. The Federal Reserve Board shares too much of the mind-set of those it is supposed to regulate. It could and should have known that something was wrong. It had instruments at its disposal to let the air out of the bubble—or at least ensure that the bubble didn’t over-expand. But it chose to do nothing.
Throwing the poor out of their homes because they can’t pay their mortgages is not only tragic—it is pointless. All that happens is that the property deteriorates and the evicted people move somewhere else. The most coldhearted banker ought to understand the basic economics: banks lose money when they foreclose—the vacant homes typically sell for far less than they would if they were lived in and cared for. If banks won’t renegotiate, we should have an expedited special bankruptcy procedure, akin to what we do for corporations in Chapter 11, allowing people to keep their homes and re-structure their finances.
If this sounds too much like coddling the irresponsible, remember that there are two sides to every mortgage—the lender and the borrower. Both enter freely into the deal. One might say that both are, accordingly, equally responsible. But one side—the lender—is supposed to be financially sophisticated. In contrast, the borrowers in the subprime market consist mainly of people who are financially unsophisticated. For many, their home is their only asset, and when they lose it, they lose their life savings. Remember, too, that we already give big homeowner subsidies, through the tax system, to affluent families. With tax deductions, the government is paying in some states almost half of all mortgage interest and real-estate taxes. But many lower-income people, whose deductions are meaningless because their tax bill is too small, get no help. It makes much more sense to convert these tax deductions into cashable tax credits, so that the fraction of housing costs borne by the government for the poor and the rich is the same.
About these matters there should be no debate—but there will be. Already, those on Wall Street are arguing that we have to be careful not to “over-react.” Over-reaction, we are told, might stifle “innovation.” Well, some innovations ought to be stifled. Those toxic mortgages were certainly innovative. Other innovations were simply devices to circumvent regulations—regulations intended to prevent the kinds of problems from which our economy now suffers. Some of the innovations were designed to tart up the bottom line, moving liabilities off the balance sheet—charades designed to blur the information available to investors and regulators. They succeeded: the full extent of the exposure was not clear, and still isn’t. But there is a reason we need reliable accounting. Without good information it is hard to make good economic decisions. In short, some innovations come with very high price tags. Some can actually cause instability.
The free-market fundamentalists—who believe in the miracles of markets—have not been averse to accepting government bailouts. Indeed, they have demanded them, warning that unless they get what they want the whole system may crash. What politician wants to be blamed for the next Great Depression, simply because he stood on principle? I have been critical of weak anti-trust policies that allowed certain institutions to become so dominant that they are “too big to fail.” The harsh reality is that, given how far we’ve come, we will see more bailouts in the days ahead. Now that Fannie Mae and Freddie Mac are in federal receivership, we must insist: not a dime of taxpayer money should be put at risk while shareholders and creditors, who failed to oversee management, are permitted to walk away with anything they please. To do otherwise would invite a recurrence. Moreover, while these institutions may be too big to fail, they’re not too big to be reorganized. And we need to remember why we’re bailing them out: in order to maintain a flow of money into mortgage markets. It’s outrageous that these institutions are responding to their near-monopoly position by raising fees and increasing the costs of mortgages, which will only worsen the housing crisis. They, and the financial markets, have shown little interest in measures that could help millions of existing and potential homeowners out of the bind they’re in.
The hardest puzzles will be in monetary policy (balancing the risks of inflation and the risk of a deeper downturn) and fiscal policy (balancing the risk of a deeper downturn and the risk of an exploding deficit). The standard analysis coming from financial markets these days is that inflation is the greatest threat, and therefore we need to raise interest rates and cut deficits, which will restore confidence and thereby restore the economy. This is the same bad economics that didn’t work in East Asia in 1997 and didn’t work in Russia and Brazil in 1998. Indeed, it is the same recipe prescribed by Herbert Hoover in 1929.
It is a recipe, moreover, that would be particularly hard on working people and the poor. Higher interest rates dampen inflation by cutting back so sharply on aggregate demand that the unemployment rate grows and wages fall. Eventually, prices fall, too. As noted, the cause of our inflation today is largely imported—it comes from global food and energy prices, which are hard to control. To curb inflation therefore means that the price of everything else needs to fall drastically to compensate, which means that unemployment would also have to rise drastically.
In addition, this is not the time to turn to the old-time fiscal religion. Confidence in the economy won’t be restored as long as growth is low, and growth will be low if investment is anemic, consumption weak, and public spending on the wane. Under these circumstances, to mindlessly cut taxes or reduce government expenditures would be folly.
But there are ways of thoughtfully shaping policy that can walk a fine line and help us get out of our current predicament. Spending money on needed investments—infrastructure, education, technology—will yield double dividends. It will increase incomes today while laying the foundations for future employment and economic growth. Investments in energy efficiency will pay triple dividends—yielding environmental benefits in addition to the short- and long-run economic benefits.
The federal government needs to give a hand to states and localities—their tax revenues are plummeting, and without help they will face costly cutbacks in investment and in basic human services. The poor will suffer today, and growth will suffer tomorrow. The big advantage of a program to make up for the shortfall in the revenues of states and localities is that it would provide money in the amounts needed: if the economy recovers quickly, the shortfall will be small; if the downturn is long, as I fear will be the case, the shortfall will be large.
These measures are the opposite of what the administration—along with the Republican presidential nominee, John McCain—has been urging. It has always believed that tax cuts, especially for the rich, are the solution to the economy’s ills. In fact, the tax cuts in 2001 and 2003 set the stage for the current crisis. They did virtually nothing to stimulate the economy, and they left the burden of keeping the economy on life support to monetary policy alone. America’s problem today is not that households consume too little; on the contrary, with a savings rate barely above zero, it is clear we consume too much. But the administration hopes to encourage our spendthrift ways.
What has happened to the American economy was avoidable. It was not just that those who were entrusted to maintain the economy’s safety and soundness failed to do their job. There were also many who benefited handsomely by ensuring that what needed to be done did not get done. Now we face a choice: whether to let our response to the nation’s woes be shaped by those who got us here, or to seize the opportunity for fundamental reforms, striking a new balance between the market and government.
Joseph E. Stiglitz, a Nobel Prize–winning economist, is a professor at Columbia University.
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As a Noble winner, Stiglitz is certainly a big name, but I find this piece singularly unimpressive.
For example, lets look at his list of woe:
"Virtually all the indicators look grim. Inflation is running at an annual rate of nearly 6 percent, its highest level in 17 years. Unemployment stands at 6 percent; there has been no net job growth in the private sector for almost a year. Housing prices have fallen faster than at any time in memory—in Florida and California, by 30 percent or more. Banks are reporting record losses, only months after their executives walked off with record bonuses as their reward. President Bush inherited a $128 billion budget surplus from Bill Clinton; this year the federal government announced the second-largest budget deficit ever reported. During the eight years of the Bush administration, the national debt has increased by more than 65 percent, to nearly $10 trillion (to which the debts of Freddie Mac and Fannie Mae should now be added, according to the Congressional Budget Office). Meanwhile, we are saddled with the cost of two wars. The price tag for the one in Iraq alone will, by my estimate, ultimately exceed $3 trillion."
a) inflation is a function of too much money being printed. Gold has gone from $250 to over $900 during the Bush years and interest rates are negative. The govt, via the Fed, prints money and as such this is 100% a government caused problem.
b) the 6% number he quotes for inflation, is that of one month at the peak of peak oil prices, which have declined dramatically since then. I don't know the time lag for new data, but it will be intereting to see. I comment that making the point as he does based upon one month, a month which I am sure a bright fellow likes him to know to be a typical, is the sort of type of persuasion that I would expect from a chattering class piece, not a Nobel laureate.
c) Again, the government deficit is a function of , , , drum roll please , , , the government!!! Duh!!! The deficit has increased despite an increase in revenues (until this year at any rate!) because , , , shocking development here , , , government spending has increased dramatically.
d) FM and FM, and their debt, are the creations of , , , the government!!!
e) war is waged by , , , the government!!!
Yet somehow from this tale of woe he concludes the cause was the free market and the solution is , , , the government!!!
I find it remarkably unserious for a lengthy piece (lengthy enough to require two entries in our forum here) by a serious economist to not address that the government has pushed private behavior towards the reckless due to causing inflation, due to negative interest rates, due to a dramatically fallling currency, due to the force of law of the CRA (Community Reinvestment Act or something like that) which forced lenders to lend to mass numbers of unqualified people-- people who numbers now swell the data of foreclosures--and particulary due to the FMs and all that they have spawned. Add in the unintended consequences of the "mark to market" regulations too! For him not to address these points in a piece that blames the free market and proposes MORE GOVERNMENT is simply extraordinary.
I am unable to comprehend the derivatives thing enough to comment there, but until I do understand better, it seems to me that what transpired would not have transpired or would have transpired to a significantly lesser degree but for the underlying impetus of unsound money and negative interest rates.
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NPR did two really great shows about the current financial crisis. The first was in May and the next was in early October.
355: The Giant Pool of Money
http://www.thislife.org/radio_episode.aspx?episode=355
365: Another Frightening Show About the Economy
http://thisamericanlife.org/Radio_Episode.aspx?episode=365
They also currently have a website called Planet Money that does a 15 to 20 minute daily podcast about the economy
Planet Money website
http://www.npr.org/blogs/money/
Planet Money Podcasts
http://www.npr.org/blogs/money/planet_money_podcast/
I have really found them really useful in understanding the current situation. I listen to the podcasts daily and every day I learn something new. It is obviously NPR but they have a wide variety of guests with different view points including a visit by Ralph Reed. He was sitting around waiting to be interviewed by another station and they talked him into appearing on the show :)
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Doctor Doom
The Worst Is Not Behind Us
Nouriel Roubini 11.13.08, 12:01 AM ET
It is useful, at this juncture, to stand back and survey the economic landscape--both as it is now, and as it has been in recent months. So here is a summary of many of the points that I have made for the last few months on the outlook for the U.S. and global economy, as well as for financial markets:
--The U.S. will experience its most severe recession since World War II, much worse and longer and deeper than even the 1974-1975 and 1980-1982 recessions. The recession will continue until at least the end of 2009 for a cumulative gross domestic product drop of over 4%; the unemployment rate will likely reach 9%. The U.S. consumer is shopped-out, saving less and debt-burdened: This will be the worst consumer recession in decades.
--The prospect of a short and shallow six- to eight-month V-shaped recession is out of the window; a U-shaped 18- to 24-month recession is now a certainty, and the probability of a worse, multi-year L-shaped recession (as in Japan in the 1990s) is still small but rising. Even if the economy were to exit a recession by the end of 2009, the recovery could be so weak because of the impairment of the financial system and the credit mechanism that it may feel like a recession even if the economy is technically out of the recession.
--Obama will inherit an economic and financial mess worse than anything the U.S. has faced in decades: the most severe recession in 50 years; the worst financial and banking crisis since the Great Depression; a ballooning fiscal deficit that may be as high as a trillion dollars in 2009 and 2010; a huge current account deficit; a financial system that is in a severe crisis and where deleveraging is still occurring at a very rapid pace, thus causing a worsening of the credit crunch; a household sector where millions of households are insolvent, into negative equity territory and on the verge of losing their homes; a serious risk of deflation as the slack in goods, labor and commodity markets becomes deeper; the risk that we will end in a deflationary liquidity trap as the Fed is fast approaching the zero-bound constraint for the Fed funds rate; the risk of a severe debt deflation as the real value of nominal liabilities will rise, given price deflation, while the value of financial assets is still plunging.
--The world economy will experience a severe recession: Output will sharply contract in the Eurozone, the U.K. and the rest of Europe, as well as in Canada, Japan and Australia/New Zealand. There is also a risk of a hard landing in emerging market economies. Expect global growth--at market prices--to be close to zero in Q3 and negative by Q4. Leaving aside the effects of the fiscal stimulus, China could face a hard landing growth rate of 6% in 2009. The global recession will continue through most of 2009.
--The advanced economies will face stag-deflation (stagnation/recession and deflation) rather than stagflation, as the slack in goods, labor and commodity markets will lead advanced economies' inflation rates to become below 1% by 2009.
--Expect a few advanced economies (certainly the U.S. and Japan and possibly others) to reach the zero-bound constraint for policy rates by early 2009. With deflation on the horizon, zero-bound on interest rates implies the risk of a liquidity trap where money and bonds become perfectly substitutable, where real interest rates become high and rising, thus further pushing down aggregate demand, and where money market fund returns cannot even cover their management costs.
Deflation also implies a debt deflation where the real value of nominal debts is rising, thus increasing the real burden of such debts. Monetary policy easing will become more aggressive in other advanced economies even if the European Central Bank cuts too little too late. But monetary policy easing will be scarcely effective, as it will be pushing on a string, given the glut of global aggregate supply relative to demand--and given a very severe credit crunch.
--For 2009, the consensus estimates for earnings are delusional: Current consensus estimates are that S&P 500 earnings per share (EPS) will be $90 in 2009, up 15% from 2008. Such estimates are outright silly. If EPS falls--as is most likely--to a level of $60, then with a price-to-earnings (P/E) ratio of 12, the S&P 500 index could fall to 720 (i.e. about 20% below current levels).
If the P/E falls to 10--as is possible in a severe recession--the S&P could be down to 600, or 35% below current levels.
And in a very severe recession, one cannot exclude that EPS could fall as low as $50 in 2009, dragging the S&P 500 index to as low as 500. So, even based on fundamentals and valuations, there are significant downside risks to U.S. equities (20% to 40%).
Similar arguments can be made for global equities: A severe global recession implies further downside risks to global equities in the order of 20% to 30%.Thus, the recent rally in U.S. and global equities was only a bear-market sucker's rally that is already fizzling out--buried under a mountain of worse-than-expected macro, earnings and financial news.
--Credit losses will be well above $1 trillion and closer to $2 trillion, as such losses will spread from subprime to near-prime and prime mortgages and home equity loans (and the related securitized products); to commercial real estate, to credit cards, auto loans and student loans; to leveraged loans and LBOs, to muni bonds, corporate bonds, industrial and commercial loans and credit default swaps. These credit losses will lead to a severe credit crunch, absent a rapid and aggressive recapitalization of financial institutions.
--Almost all of the $700 billion in the TARP program will be used to recapitalize U.S. financial institutions (banks, broker dealers, insurance companies, finance companies) as rising credit losses (close to $2 trillion) will imply that the initial $250 billion allocated to recap these institutions will not be enough. Sooner rather than later, a TARP-2 will become necessary, as the recapitalization needs of U.S. financial institutions will likely be well above $1 trillion.
--Current spreads on speculative-grade bonds may widen further as a tsunami of defaults will hit the corporate sector; investment-grade bond spreads have widened excessively relative to financial fundamentals, but further spread-widening is possible, driven by market dynamics, deleveraging and the fact that many AAA-rated firms (say, GE) are not really AAA, and should be downgraded by the rating agencies.
--Expect a U.S. fiscal deficit of almost $1 trillion in 2009 and 2010. The outlook for the U.S. current account deficit is mixed: The recession, a rise in private savings and a fall in investment, and a further fall in commodity prices will tend to shrink it, but a stronger dollar, global demand weakness and a larger U.S. fiscal deficit will tend to worsen it. On net, we will observe still-large U.S. twin fiscal and current account deficits--and less willingness and ability in the rest of the world to finance it unless the interest rate on such debt rises.
--In this economic and financial environment, it is wise to stay away from most risky assets for the next 12 months: There are downside risks to U.S. and global equities; credit spreads--especially for the speculative grade--may widen further; commodity prices will fall another 20% from current levels; gold will also fall as deflation sets in; the U.S. dollar may weaken further in the next six to 12 months as the factors behind the recent rally weather off, while medium-term bearish fundamentals for the dollar set in again; government bond yields in the U.S. and advanced economies may fall further as recession and deflation emerge but, over time, the surge in fiscal deficits in the U.S. and globally will reduce the supply of global savings and lead to higher long-term interest rates unless the fall in global real investment outpaces the fall in global savings.
Expect further downside risks to emerging-markets assets (in particular, equities and local and foreign currency debt), especially in economies with significant macro, policy and financial vulnerabilities. Cash and cash-like instruments (short-term dated government bonds and inflation-indexed bonds that do well both in inflation and deflation times) will dominate most risky assets.
So, serious risks and vulnerabilities remain, and the downside risks to financial markets (worse than expected macro news, earnings news and developments in systemically important parts of the global financial system) will, over the next few months, overshadow the positive news (G-7 policies to avoid a systemic meltdown, and other policies that--in due time--may reduce interbank spreads and credit spreads).
Beware, therefore, of those who tell you that we have reached a bottom for risky financial assets. The same optimists told you that we reached a bottom and the worst was behind us after the rescue of the creditors of Bear Stearns in March; after the announcement of the possible bailout of Fannie and Freddie in July; after the actual bailout of Fannie and Freddie in September; after the bailout of AIG in mid-September; after the TARP legislation was presented; and after the latest G-7 and E.U. action.
In each case, the optimists argued that the latest crisis and rescue policy response was the cathartic event that signaled the bottom of the crisis and the recovery of markets. They were wrong literally at least six times in a row as the crisis--as I have consistently predicted over the last year--became worse and worse. So enough of the excessive optimism that has been proved wrong at least six times in the last eight months alone.
A reality check is needed to assess risks--and to take appropriate action. And reality tells us that we barely avoided, only a week ago, a total systemic financial meltdown; that the policy actions are now finally more aggressive and systematic, and more appropriate; that it will take a long while for interbank and credit markets to mend; that further important policy actions are needed to avoid the meltdown and an even more severe recession; that central banks, instead of being the lenders of last resort, will be, for now, the lenders of first and only resort; that even if we avoid a meltdown, we will experience a severe U.S., advanced economy and, most likely, global recession, the worst in decades; that we are in the middle of a severe global financial and banking crisis, the worst since the Great Depression; and that the flow of macro, earnings and financial news will significantly surprise (as during the last few weeks) on the downside with significant further risks to financial markets.
I'll stop now.
Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics, is a weekly columnist for Forbes.com.
http://www.forbes.com/opinions/2008/11/12/recession-global-economy-oped-cx_nr_1113roubini.html
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This could be filed several places and ultimately begins to document what I suspect folks in the future will regard as a monopoly battle similar to the Standard Oil/passenger/freight train monopolies of a century + ago.
The Plot to Kill Google
By Nicholas Thompson and Fred Vogelstein 01.19.09
Google may not be evil, but it sure does have enemies.
Illustration: Tom Rowe
When Google's lawyers entered the smooth marble hallways of the Department of Justice on the morning of October 17, they had reason to feel confident. Sure, they were about to face the antitrust division—an experience most companies dread—to defend a proposed deal with Yahoo. But they had to like their chances. In the previous seven years, only one of the mergers that had been brought here had been opposed. And Google wasn't even requesting a full merger. It just wanted the go-ahead to pursue a small deal that it was convinced would benefit consumers, the two companies, and the search-advertising market as a whole. Settling around a large oval table in the conference room, the attorneys from Google and Yahoo prepared to make their arguments. Google wanted to serve its ads for certain search terms on Yahoo's pages in exchange for a share of the revenue those ads generated. It already had similar arrangements with AOL, Ask.com, and countless other Web sites. And the deal wasn't exclusive or permanent.
Tom Barnett, assistant attorney general for antitrust, took his seat at the table and called the meeting to order. The Yahoo lawyers kicked things off by describing their negotiations with DOJ staff; they had already suggested limiting the length of the deal and capping the amount of money in play. Barnett seemed unimpressed. "Staff," he proclaimed, "is irrelevant." He made the decisions around there.
As five lawyers involved with the case recount it, the rest of the meeting did not go much better. For hours, Barnett picked apart the deal. Google, he argued, was not preserving competition by keeping Yahoo solvent; it was trying to increase control over its old rival, with a goal of dominating the online search-advertising market. If the proposal was so harmless, he went on, why had he been deluged with letters and phone calls from advertisers opposing it? Then, late in the day, Barnett brought up the two words Google lawyers least wanted to hear: Section Two—as in, Section Two of the Sherman Antitrust Act, which criminalizes monopolies. The Justice Department invoked Section Two to splinter Standard Oil in 1911, break up AT&T in 1982, and prosecute Microsoft in 1998. Now Barnett was signaling not just that the Google-Yahoo deal was dead but that the government saw Google as a potential monopolist. In fact, Barnett insisted, if the deal wasn't substantially changed or scuttled, he would sue within five days. It was a stunning blow. Google had expected a speedy approval. Now the company, whose brand is defined by its "Don't be evil" slogan, faced the prospect of being hauled into court on an antitrust charge. Google and Yahoo tried to salvage the negotiations, but on the morning of November 5, three hours before the DOJ was going to file its antitrust case, they abandoned the deal.
Google's capitulation marked a rare defeat for the search giant, which has been almost as successful among the regulators of Washington as among the coders of Silicon Valley. And it was cause for celebration in Redmond, where Microsoft spent six months on a massive effort, costing millions of dollars, to block the Yahoo deal. Microsoft played a role in persuading members of Congress to hold hearings. It initiated a campaign that filled DOJ mailboxes with letters from politicians and nonprofit groups objecting to the deal. It convinced the country's largest advertisers to join together to oppose the company in public. It's impossible to know exactly what impact all this had on the DOJ decision. But many observers believe that Barnett, who declined to be interviewed for this article, was influenced in part by Microsoft's arguments.
The bid to stop the Yahoo deal was just one front in an emerging multipronged war against Google. The company's growth, ambitions, and politics have made it a target of some of the country's most powerful businesses and interest groups. When Google pressed the Federal Communications Commission to reallocate "white space"—unused chunks of radio spectrum—for wireless broadband and other uses, it ran into a counter-lobbying effort that included everyone from the National Association of Broadcasters to Dolly Parton. Google's push for net neutrality, which would forbid ISPs from giving preferential treatment to certain data providers, has been met by fierce resistance from telecom and cable companies, whose allies describe it as "special-interest legislation dressed up to sound less self-serving." It purchased YouTube, whose users' laissez-faire approach to copyright infuriates Viacom and other content providers. Google wants to digitize entire libraries, a prospect that frightens publishers. It has terrified a legion of small businesses that feel at the mercy of its opaque but all-powerful search algorithm. It has annoyed Republicans by associating itself largely with Democrats.
The thwarting of the Yahoo deal was the most successful attack so far by the many forces aligned against Google—but it won't be the last. "There were a lot of sharks circling Google during the DOJ review," says Christopher Murray, senior counsel for Consumers Union. "Now there's a whiff of blood in the water. I expect a feeding frenzy in 2009."
The Enemies List
Google is under fire on 4 fronts.
What's at stake:
How much do you trust Google? The search giant says there's no reason to fear its purchase of DoubleClick or its proposed revenue-sharing deal with Yahoo. But competitors and major advertisers think it's plotting world domination.
Who's upset:
Association of National Advertisers, Microsoft, WPP Group
What's at stake:
Every time a new chunk of radio spectrum becomes available, Google argues it should be opened to the public. Sounds great—except to telcos that have wanted it for themselves and broadcasters that worry new devices will mess with their transmissions.
Who's upset:
AT&T, National Association of Broadcasters, Verizon
What's at stake:
Google thinks all information is created equal and favors laws forbidding Internet service providers from determining how fast content from different providers will download. ISPs, not surprisingly, beg to differ.
Who's upset:
AT&T, Comcast, Verizon
What's at stake:
Google's insatiable hunger for data scares even some of its allies. Now its business rivals have launched a privacy crusade to drum up fears that Big Brother lives in Mountain View.
Who's upset:
AT&T, Center for Digital Democracy, Microsoft
High-profile legal battles aren't fought only in the courtroom. Public perceptions matter. Momentum matters. Relationships matter. For John Kelly, Microsoft's head of strategic relations, this lesson didn't come easy. In the 1990s, the lawyer and former lobbyist watched as Microsoft defended itself against charges that its practice of bundling its software onto computers constituted anticompetitive behavior. The company settled the case in 2001. But by then it had already won a reputation as an unrepentant and thuggish monopolist, thanks in part to shrewd lobbying by competitors like Sun Microsystems and Netscape, uninspiring testimony by Bill Gates, and masterful media relations by David Boies, the government lawyer on the case.
"Ten years ago we said, 'This is all going to depend on being right in court,'" Kelly says. "'Don't worry about all the noise, rhetoric, and lobbying by our competitors.' While the facts and the law are still what matters in the end, the important lesson we took way from that experience was that you could not let your competitors define you in the court of public opinion."
A decade later, Microsoft's reputation was still getting in its way. In January 2008, Microsoft made an unsolicited bid to purchase Yahoo. The takeover would help Microsoft bulk up its search advertising business, an area where Google held a huge advantage. But Yahoo CEO Jerry Yang, who viewed Microsoft as an uncompromising leviathan, was determined to block the deal. In early May, Microsoft dropped its bid—a tough defeat made even more frustrating when Google CEO Eric Schmidt celebrated the failure in comments to the media. "We're obviously happy it's not going to happen," Schmidt said at a press conference. "Had the merger gone through, we would have had to have a meeting around it. We would have had to have a campaign against it."
It was a stark reversal for Schmidt, who had made few public statements against Microsoft since joining Google in 2001. Kelly took the saber-rattling as a warning that Google was preparing to join the fray, perhaps by proposing its own deal to keep Yahoo out of Microsoft's hands. (Sure enough, Google did just that on June 12.) For years, Microsoft had quietly seethed as Google waltzed into a position of immense power while charming regulators and politicians with an aura of gee-whiz innocence. Even when Google hired a small team of lobbyists and took the occasional swing at Redmond, the company's feel-good reputation remained intact. The idea that Google would end up inking a deal with Yahoo, increasing its domination of search advertising while successfully casting Microsoft—again!—as a power-mad Darth Vader, was more than Kelly could stand. "Frankly, we saw history repeating itself," he says. "We realized that we were going to have to speak up."
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Kelly sprang into action, activating his company's vast Washington infrastructure.Microsoft's protracted antitrust battles had left it with an army of lawyers and lobbyists and deep institutional knowledge of which politicians to approach and how best to sway them. Soon, Microsoft's lobbyists were meeting with Herbert Kohl, chair of the Senate's Antitrust Subcommittee. By early July the subcommittee was holding hearings. In October, Kohl wrote to Barnett warning that "important competition issues are raised by this transaction."
But that was all familiar, the kind of campaign Microsoft had routinely run. Kelly wanted to take a different approach this time—not just opposing the deal but persuading other interested parties to speak out as well. The arguments of a known competitor may not sway the Justice Department, but customers' opinions hold special influence. If advertisers—Google's customers—voluntarily declared their opposition, the DOJ would listen closely.
Kelly turned to Michael Kassan, an advertising consultant who had been advising Microsoft off and on since 2002. Kassan—whose clients have included AT&T, Disney, and Viacom—recently had been named by Advertising Age as possessing the third-most-impressive Rolodex in the industry. Kelly asked Kassan to start talking to his contacts and drum up opposition to Google. Kassan assured him he knew just how to do it; there was plenty of fear and mistrust of Google among advertisers. "Google has badly misjudged how it is perceived," he reassured Kelly. "We have a clear and easy story to tell."
It went like this: Google had 70 percent of the search advertising business, and Yahoo had 20 percent. Now those two companies were proposing a business deal. That would give advertisers less leverage to negotiate ad rates, and they would end up paying more.
Kassan was eager to make his case. He flew to Cannes, France, where he pitched the board of the International Association of Advertisers. He traveled to conferences in New York, Washington, Los Angeles, and Florida. He talked to many of the 32 chief marketing officers on the board of the Association of National Advertisers, the trade group that represents the top 375 advertisers in the country. By late August, Kelly and Kassan were conducting as many as three conference calls a day with major national advertisers. Google, meanwhile, hadn't started any serious outreach effort to defend the deal to the advertising community.
The hardest part of the campaign wasn't convincing ANA's board members that the Google-Yahoo proposal was bad for them. The trick, Kassan says, was getting them to say so. Indeed, Kassan was rebuffed in June, when he first asked the head of the ANA to take a public stand. "They wanted me to do something right away," ANA president Bob Liodice says. "I told them I'd look at it. But at the time I had no ability to say whether the deal was bad or good, and the last thing I wanted to do was have the organization looking like a shill for Microsoft."
Kassan and Kelly kept at Liodice, seeding his inbox with position papers, briefing documents, and news stories. Their goal was straightforward: Convince him that the ANA's position on the deal not only mattered but was crucial to stopping it. Liodice went on a fact-finding mission, inviting Google and Yahoo to answer questions and then sending written queries to executives at all three companies. Ultimately, he concluded that Google would drive Yahoo out of business and gain a stranglehold on online advertising. "The more we dug in, the more we realized that we had to say something," Liodice says. "The tipping point for me was that I had all these advertisers on my board opposing the deal. Meanwhile, Google and Yahoo couldn't produce any significant advertisers who were supporting it." In September, the ANA formally voiced its opposition. It wasn't alone; individual advertisers piled on with additional letters to the Justice Department expressing their own disapproval. DOJ staffers were talking about the "telephone book of complaints" they had received.
Microsoft's arguments weren't just winning over advertisers. Back in July, the company penned one of a series of confidential memos titled "Google + Yahoo ≠ Competition" and sent it to its allies and the Justice Department. The memo claimed that the Google-Yahoo deal was illegal on its face, mentioning as precedent the 68-year-old case United States v. Socony-Vacuum Oil Co. Inc., which Microsoft also cited in congressional testimony that same month. When Yahoo lawyer Dan Wall heard the argument, he didn't see how a 1940s case against conspiring oil companies bore much relevance to a deal in which prices are set by electronic auctions. But then a Justice official brought up Socony during one of their regular phone calls. "I thought, 'Good grief, they're buying the Microsoft BS,'" Wall says. "I don't have any doubt that Microsoft put that in DOJ's mind."
Meanwhile, the fight against Google quickly spread beyond Redmond, as other companies and trade groups began to lend support. Some had no obvious interest in the deal; Microsoft hired lobbyists who knew how to drum up support among rural and Latino groups, and before long organizations as far-reaching as the American Corn Growers Association and the Dominican American Business Network had voiced their opposition.
Other companies joined in, including AT&T. Many observers believe that the telecom company hopes to compete directly with Google someday by going into the business of serving online ads to its users, and it was happy for the opportunity to beat up on its future rival. On September 24, 10 members of Congress sent a letter to the DOJ opposing the deal. All of them have received donations from AT&T over their careers (average total contribution since 1996: $29,000), and most counted the telecom giant as one of their largest contributors.
These campaigns converged at the October 17 Justice Department hearing, in which Barnett threatened to bring an antitrust case against Google. Publicly, Google remained upbeat after the arrangement fell apart. Lobbyists for the company maintained that even in failure they had kept Yahoo out of the hands of Microsoft for at least six months, perhaps permanently. And if Microsoft eventually tries to snap up Yahoo, Google can respond with the same kind of antitrust arguments that were deployed against it.
Kassan doesn't share Google's optimistic interpretation. "They have permanently invited the scrutiny of the Justice Department into every future deal they do," he says. "Nine months ago everyone aspired to be Google. Now they have monopolist written all over them."
Google barely had time to recover from the failed Yahoo deal before its staff learned of a 94-page document titled "Google Data Collection and Retention," that had been circulating around Washington. The treatise listed all the ways that Google hoards user information. Google Checkout remembers credit card numbers. Gmail reads private email. Blogger saves draft posts. As one annotation on the document helpfully notes, Google's privacy policy "gives Google the right to retain personal information over the wishes of a user." Overall, Google is painted as a Big Brother with an insatiable desire for private data.
The document, written by a consulting firm, was commissioned by AT&T, which says it was intended only for internal use. Protection from snooping, says AT&T public policy chief James Cicconi, is one of his firm's top priorities. "We sell our customers access to the Internet," he says, "and we want them to have a good experience." Privacy is a newfound concern for the company, which in 2005 was one of the telecoms that allowed the National Security Agency to listen in on millions of phone calls. AT&T was accused of "warrantless wiretapping" before successfully lobbying Congress to grant it immunity against suits by its customers. But now AT&T is trumpeting the cause of consumer privacy, unveiling an elaborate policy stating that it will not sell its customers' browsing histories to advertisers without explicit permission.
But AT&T's nascent crusade may also be in the service of a less noble agenda: keeping up its attack on Google. Over the past couple of months, several AT&T allies have spoken out against what they describe as Google's disdain for privacy. Scott Cleland, who serves as CEO of a telecom-funded consultancy, has turned his widely read blog into a Google attack machine, with posts titled "Why Google Is the Biggest Threat to Americans' Privacy" and "Google Protecting Its Privacy to Invade Your Privacy." In late November, a cochair of an advocacy group called the Future of Privacy Forum published an op-ed in the Bangkok Post titled "Google Is Watching You." The writer was a former lawyer for AT&T, which is the group's sole funder. AT&T is also launching volleys under its own name: When its senior vice president of public policy introduced the company's new set of policies in front of the Senate, she repeatedly named Google as a privacy threat—and mentioned no other company in the entire testimony.
Once again, AT&T has found an ally in Microsoft. LMG, a public-relations firm that Microsoft hired to help defeat the Yahoo deal, has emailed public-interest advocates accusing Google of privacy violations. Last spring, Microsoft supported bills in the New York and Connecticut legislatures to impose strict regulations on businesses that gather personal information online for marketing purposes. The bills would hurt Microsoft, too, given that it also wants to sell advertisements based on customer behavior. But the self-inflicted wound may be worth it for the damage it causes Google.
True to form, Google remains cheery and confident. The company's reputation still beats the stodgy, unfriendly images of Microsoft and AT&T. Google executives also know they may be able to win some supporters on this issue; advertisers, the same group whose complaints torpedoed the Yahoo deal, aren't put off by Google's attempts to collect user data—it only helps them create more targeted ads.
And for all its woes in Washington, Google is finally learning how to operate there. It has hired more lobbyists, and its policy experts are starting to attend the cocktail parties they have long ignored. Schmidt serves as chair of the New America Foundation (a think tank at which one of the authors of this article is a fellow). And Google can now boast a uniquely powerful ally: Barack Obama, who benefited from Google employees' extensive campaign contributions and from Schmidt's well-timed endorsement.
AT&T maintains that even Google's Democratic pals might turn against the company over privacy. "Civil libertarians have fought hard over decades to establish a right to privacy as fundamental to preserving all other liberties enshrined in our Constitution," Cicconi says. "It would be shameful if liberals now toss that achievement over the side because a liberal, pro-Obama, hip-cool-trendy company comes along that wants to run roughshod over those rights." Leslie Harris, president of the Center for Democracy and Technology, a nonprofit that has long fought Google on privacy grounds, says she considers AT&T's recent interest in her cause "a perfect storm in our favor." And Google isn't out of the antitrust woods yet, either. Sanford Litvack—a government lawyer who would have run the DOJ's suit against Google had it not withdrawn the Yahoo proposal—says that, in his opinion, Google's current position may already constitute a monopoly, even without Yahoo.
Traditionally, Google has fought off powerful rivals with masterful code. It took on the established search behemoths by creating more effective software. It bested Microsoft's and Yahoo's advertising efforts by inventing an entirely new ad platform. But the war today is being fought in Washington, in the press, and perhaps even in the Justice Department again. And these aren't battles you can win with engineers and algorithms.
Nicholas Thompson (nicholas_thompson@wired.com) is a senior editor at Wired. Contributing editor Fred Vogelstein (fred_vogelstein@wired.com) wrote about the secret history of the iPhone in issue 16.02.
http://www.wired.com/techbiz/it/magazine/17-02/ff_killgoogle
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Stimulus: A History of Folly
James K. Glassman From issue: March 2009
Before he was sworn in as President, Barack Obama began to lay out his plans for reviving an American economy that, it would later be discovered, had declined 3.8 percent in the fourth quarter of 2008, its worst performance in 26 years. About the first part of his project, “stimulating” businesses to invest and consumers to consume through government spending and tax remittances, he was forthcoming and enthusiastic. About the second, stabilizing the financial system, he wished to reserve judgment.
He anointed the stimulus proposal with a convenient and vivid metaphor. “We’re going to have to jump start this economy with my economic recovery plan,” he said on January 3. According to the image, one can jolt a dormant economy into action just as one can hook up polarized cables to a car battery, clamp a defibrillator to the chest, or breathe into the ear of a reluctant lover. Suddenly, the object of our attention will be back in action, aroused.
Alas, the questions raised by a proposed stimulus—whether to apply it, what sort it should be, how much it should cost, and when it should begin and end—are far trickier to answer than problems involving dead batteries. And, remarkably enough, history and economic research offer no conclusive answers. The recession that began in 2008 could turn out to be the worst slowdown since the Great Depression of the 1930’s. For three-quarters of a century, economists have been studying it diligently. And even now they cannot come to a definitive conclusion about the cause of that depression, the reasons for its severity and duration, or what cured it. In an introduction to a book of essays on the Great Depression he compiled in 2000, Ben S. Bernanke, then a Princeton professor and now chairman of the Federal Reserve Board, wrote, “Finding an explanation for the worldwide economic collapse of the 1930’s remains a fascinating intellectual challenge.”
Today, of course, the challenge is more than intellectual.
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When he wrote in 1936 that “practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist,” John Maynard Keynes surely did not have himself in mind. But, in times of trouble, Americans still cling to Keynes, or at least to the caricature of him as the economist who said you could spend your way out of a recession. His big idea was that, left to its own devices, an economy can fall into a slump and just stay there. Self-corrective mechanisms will not necessarily work on their own; they will need help.
Prosperity depends on investment, on businesses building new plants, buying new machines, and employing more workers. In a typical case, when an economy slows, businesses reduce their demand for credit. At the same time, worried consumers save their earnings in banks, and by doing so, add to the store of money available for lending. These two forces—as well as actions taken by the Federal Reserve Board—combine to push interest rates to levels so attractive that businesses start borrowing again, and the economy picks up. The Great Depression, however, was atypical. The economy slowed and interest rates fell, but businesses were so frightened about the future that they refused to invest; instead, they did the opposite, shutting plants and firing workers. As for consumers, while they may have wanted to save, they lacked the cash to put away. Because they were out of work, they depleted what savings they had.
Keynes argued that, when businesses and people cannot or will not invest, then the government must take on the role of filling the gap. The key is speed. The means, Keynes wrote in The General Theory of Employment, Interest and Money, really did not matter so much:
If the Treasury were to fill old bottles with bank notes, bury them at suitable depths in disused coal mines which are then filled to the surface with town rubbish and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again, . . . there need be no more unemployment and with the help of the repercussions, the real income of the community would probably become a good deal larger than it is.
Of course, Keynes favored large public-works projects over the burying of bottles. Building roads in the right places, for example, would both put people to work and provide the basis for more commerce. At first, Keynes emphasized government spending as stimulus, but, when pressed in 1933, he advocated tax cuts as well—specifically in response to criticism that public-works projects do not put cash into the system quickly enough.
The dire situation for which Keynes prescribed a cure bears distressing similarities to our own. Interest rates set by the Fed stand effectively at zero percent, but banks are recalcitrant about lending and even businesses flush with cash are hesitant to invest. It appears that the current sickness occurred because the Fed, in an effort to keep the economy stimulated after the collapse of the tech-stock bubble and in the wake of September 11, cut interest rates far too much during 2001 (from 6.5 percent at the start of the year to 1.75 percent at the end) and waited too long to raise them, making credit so easy that businesses expanded beyond all reasonable bounds, and banks, flush with cash and trying to make higher returns, shoveled money at borrowers with poor credit; risk aversion disappeared, and loans, especially to home buyers, went bad. Booms do, after all, create their own busts.
In response, Congress last year voted funds for the Treasury to use to shore up financial institutions—the widely maligned Troubled Asset Relief Program, or TARP—and the Fed opened wide its lending window. Those actions forestalled mass failures, but banks, chastened by their past overindulgence and worried about depleting their capital, still do not want to lend. So while government action proved necessary (and remains necessary) to maintain public confidence in the banking system, it became clear those actions could not and would not mitigate the parlous effects of the recession that, we were told late in 2008, had begun at the end of 2007. So the question becomes: In a world in which monetary adjustments do not appear effective, can tax and spending policies pull us out of the slump?
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The track record is discouraging. Despite Franklin Roosevelt’s aggressive spending, unemployment reached 25 percent in 1933, fell only to 14 percent by 1937, and was back up to 19 percent in 1939.1 In the end, the New Deal did little or nothing to resuscitate the economy. Certainly, inept monetary policies helped prolong the Great Depression, as did tax increases, constant interventions in the conduct of business, and the erection of global trade barriers, beginning with the Smoot-Hawley Tariff in 1930, more than two years before Roosevelt took office. There was a stretch of twelve years from the stock-market crash to Pearl Harbor, and, during that time, fiscal stimulus simply did not jump-start the economy (or, in Keynes’s own metaphor, “awaken Sleeping Beauty”). Now, some do attempt to make the case that Roosevelt did not increase government spending enough during the early and mid-1930’s and that it took World War II and the unprecedented infusion of government dollars into the economy to provide the stimulus that finally pulled America from the swamp.
But even if that were true—and considering the fact that federal spending tripled during the Great Depression, rising from 3 percent of the country’s gross domestic product to nearly 10 percent in 1939,2 it does not seem the likeliest explanation—it still does not offer much in the way of guidance through our current thicket. Few economists today believe the United States could tolerate the kind of budget deficits that developed during World War II, which ran more than 50 percent of gross domestic product, or about $7 trillion annually in current terms. When the federal government ramped up its spending during the war, it had not yet grown into the entitlement cash machine it is now, spitting out trillions of dollars a year in retirement and health-care benefits.
Not only was the stimulative effect of Great Depression fiscal policy non-existent, but follow-on efforts during the ten subsequent recessions proved equally ineffective. As a result of that hard-won experience, the consensus until recently among economists was that attempts at stimulus through emergency fiscal policies—as opposed to monetary policies and the automatic effects of increases in unemployment assistance and decreases in tax payments—were useless at best. Typical was the statement of Martin Eichenbaum of Northwestern University in the American Economic Review in 1997: “There is now widespread agreement that countercyclical discretionary fiscal policy is neither desirable nor politically feasible.” Martin Feldstein, then president of the National Bureau of Economic Research, agreed. Fiscal stimulus, he said in 2002, “has not contributed to economic stability and may have actually been destabilizing.”
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A good place to turn to understand the failure of the jump-start is the work of Frederic Bastiat, a French politician of the early 19th century. “In the economic sphere,” he wrote,
an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.
To prove his point, Bastiat described what happens when a vandal breaks a shopkeeper’s window. The seen effect is that repairing the glass creates economic value in the payment to the glazier, who then has money to buy a new suit or hire a part-time employee. What is unseen is that the shopkeeper has to pay the glazier with money that he would otherwise have used to buy a suit or add an employee. “The broken-window fallacy, under a hundred disguises, is the most persistent in the history of economics,” wrote the economic journalist Henry Hazlitt in 1946.
Like payments for broken windows, tax rebates and new roads (the seen) do not come free. The stimulus money that flows to taxpayers, government agencies, and businesses has to come from somewhere (the unseen). During a recession, it is usually borrowed, and the anticipation of taxpayers is that they will have to repay these loans, which means their taxes will rise in the future. This knowledge makes people anxious about spending the extra money, or even about investing it in the kind of ventures that help an economy grow.3
Lately, however, economists have become more sanguine about the power of fiscal stimulus, in large part because of the apparent success of the tax-rate reductions and rebates in 2001 and 2003 (although such a conclusion may ignore the monetary effects of the huge cut in interest rates). A summary of a conference held in May by the Federal Reserve Bank of San Francisco stated that “the consensus” against stimulus “has unraveled and perhaps even begun to emerge on the opposite viewpoint.” Last year, Jason Furman and Douglas Elmendorf of the Brookings Institution wrote, “Fiscal policy implemented promptly can provide a larger near-term impetus to economic policy than monetary policy can.” And, in a paper delivered to the American Economic Association in January, Feldstein himself switched sides and said he now favored tax cuts and government spending.
The views of these economists are undoubtedly heartfelt, but it must be recognized that one of the great attractions of Keynes’s theories is that he gives you permission to do what you wanted to do anyway. Feldstein, chairman of the Council of Economic Advisors under Ronald Reagan, proposes a stimulus policy that extends the Bush tax cuts currently scheduled to expire in 2011 and increases spending on defense and national intelligence. In their stimulus proposal, Furman, now deputy director of Obama’s National Economic Council, and Elmendorf, head of the Congressional Budget Office under the current Democratic majority, adamantly oppose extending the Bush cuts and instead want to extend unemployment and Food Stamp benefits and issue short-term tax credits, even to people who owe no taxes.
Also, in the new enthusiasm for stimulus, there is not a small degree of panic; monetary policy is not working, so fiscal policy must! To his credit, however, Feldstein writes toward the end of his January paper, “It is of course possible that the planned surge in government spending will fail. Two or three years from now we could be facing a level of unemployment that is higher than today and that shows no sign of coming down.”
The truth is that we have learned almost nothing about the use of fiscal stimulus since the Great Depression, and it is a fatal conceit to assume that we can hurriedly construct a fiscal policy that will produce the prescribed results today. Economists seem to admit this fact by advocating what they prefer anyway, for political or ideological reasons. I would feel better about stimulus if Elmendorf were clamoring for permanent tax cuts and Feldstein food stamps.
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On being presented the Nobel Prize in economics in 1974, Friedrich von Hayek devoted his Stockholm lecture to acknowledging the severe limitations of his profession. “It seems to me,” he said, “that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences—an attempt which in our field may lead to outright error.” Government simply cannot know enough to direct an economy successfully, and when the President claims that his fiscal stimulus plan will create (or save) at least three million jobs, he is taking a wild, and dangerous, leap. Said Hayek:
If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants.
What is that environment? First, it provides a confidence that, in a crisis, bank deposits are safe and insurance policies will be paid in full. Such confidence can be provided only by the government of the United States in its legitimate and essential role as the lender of last resort. Second, the environment supports, rather than denigrates or browbeats, productive members of society. The U.S. will not emerge from a serious recession unless businesses and investors lead it out. Third, it recognizes that Americans have undergone a financial calamity and that we need time to adjust; we cannot, like a car battery, be shocked back to life, and we aren’t in the mood to have someone blow in our ear.
In fact, stimulus may be precisely the wrong metaphor. Rather than getting jazzed up, we need to be calmed down and to take the time to learn from the Great Depression, a time when government did too much, not too little. Amity Shlaes makes the argument in The Forgotten Man, her book about the Great Depression, that the constant experimenting and meddling of the New Deal froze investors and business operators in fear: “Businesses decided to wait Roosevelt out, hold on to their cash, and invest in future years.”
Despite the warnings of Keynes, the experience of the past half-century indicates that today’s low interest rates will start having a positive effect, though it still will take many months. Meanwhile, left alone, what Hayek called “spontaneous order” will find its way forward. Using a different metaphor, James Grant, in his history of credit, Money of the Mind, wrote, “The cycle of decay and renewal is as much a part of capitalism as it is of the forest floor.” But, in the 1930’s, “something in the normal regenerative process was missing. There was no decisive recovery from the business-cycle bottom. People had lost their speculative courage, and the more government legislated and taxed, the more that credit sulked.”
Stimulus—that is, fiscal intervention with the express purpose of speeding up the normal regenerative process that Grant describes—is unnecessary and almost certainly harmful, a policy based on hubris and anxiety, rather than on history and good sense. Under such circumstances, the proper way to analyze discrete proposals today for spending or taxing is on their own merits, not on their supposed ability to stimulate something else. There may, in fact, be a good reason for government to spend billions of dollars today on building highways, and it has nothing to do with stimulus. It is that long-term interest rates are at historic lows and that the right highways can boost the economy in the long term. There also may be a good reason, again far apart from stimulus, for revising the tax code and reforming Social Security and Medicare. It is that Americans now understand that the economic future is not so assured as they believed a couple of years ago, and it is time for decisions to be made—in a manner careful, sensible, and unstimulated.
ABOUT THE AUTHOR
James K. Glassman is the former Under Secretary of State for Public Diplomacy and Public Affairs. He is president of the World Growth Institute, which promotes global economic development.
http://www.commentarymagazine.com/viewarticle.cfm/special-preview-stimulus--a-history-of-folly-14953
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Adam Smith gets the last laugh
By P.J. O’Rourke
Published: February 10 2009 19:22 | Last updated: February 10 2009 19:22
The free market is dead. It was killed by the Bolshevik Revolution, fascist dirigisme, Keynesianism, the Great Depression, the second world war economic controls, the Labour party victory of 1945, Keynesianism again, the Arab oil embargo, Anthony Giddens’s “third way” and the current financial crisis. The free market has died at least 10 times in the past century. And whenever the market expires people want to know what Adam Smith would say. It is a moment of, “Hello, God, how’s my atheism going?”
Adam Smith would be laughing too hard to say anything. Smith spotted the precise cause of our economic calamity not just before it happened but 232 years before – probably a record for going short.
“A dwelling-house, as such, contributes nothing to the revenue of its inhabitant,” Smith said in The Wealth of Nations. “If it is lett [sic] to a tenant for rent, as the house itself can produce nothing, the tenant must always pay the rent out of some other revenue.” Therefore Smith concluded that, although a house can make money for its owner if it is rented, “the revenue of the whole body of the people can never be in the smallest degree increased by it”. [281]*
Smith was familiar with rampant speculation, or “overtrading” as he politely called it.
The Mississippi Scheme and the South Sea Bubble had both collapsed in 1720, three years before his birth. In 1772, while Smith was writing The Wealth of Nations, a bank run occurred in Scotland. Only three of Edinburgh’s 30 private banks survived. The reaction to the ensuing credit freeze from the Scottish overtraders sounds familiar, “The banks, they seem to have thought,” Smith said, “were in honour bound to supply the deficiency, and to provide them with all the capital which they wanted to trade with.” [308]
The phenomenon of speculative excess has less to do with free markets than with high profits. “When the profits of trade happen to be greater than ordinary,” Smith said, “overtrading becomes a general error.” [438] And rate of profit, Smith claimed, “is always highest in the countries that are going fastest to ruin”. [266]
The South Sea Bubble was the result of ruinous machinations by Britain’s lord treasurer, Robert Harley, Earl of Oxford, who was looking to fund the national debt. The Mississippi Scheme was started by the French regent Philippe duc d’Orléans when he gave control of the royal bank to the Scottish financier John Law, the Bernard Madoff of his day.
Law’s fellow Scots – who were more inclined to market freedoms than the English, let alone the French – had already heard Law’s plan for “establishing a bank ... which he seems to have imagined might issue paper to the amount of the whole value of all the lands in the country”. The parliament of Scotland, Smith noted, “did not think proper to adopt it”. [317]
One simple idea allows an over-trading folly to turn into a speculative disaster – whether it involves ocean commerce, land in Louisiana, stocks, bonds, tulip bulbs or home mortgages. The idea is that unlimited prosperity can be created by the unlimited expansion of credit.
Such wild flights of borrowing can be effected only with what Smith called “the Daedalian wings of paper money”. [321] To produce enough of this paper requires either a government or something the size of a government, which modern merchant banks have become. As Smith pointed out: “The government of an exclusive company of merchants, is, perhaps, the worst of all governments.” [570]
The idea that The Wealth of Nations puts forth for creating prosperity is more complex. It involves all the baffling intricacies of human liberty. Smith proposed that everyone be free – free of bondage and of political, economic and regulatory oppression (Smith’s principle of “self-interest”), free in choice of employment (Smith’s principle of “division of labour”), and free to own and exchange the products of that labour (Smith’s principle of “free trade”). “Little else is requisite to carry a state to the highest degree of opulence,” Smith told a learned society in Edinburgh (with what degree of sarcasm we can imagine), “but peace, easy taxes and a tolerable administration of justice.”
How then would Adam Smith fix the present mess? Sorry, but it is fixed already. The answer to a decline in the value of speculative assets is to pay less for them. Job done.
We could pump the banks full of our national treasure. But Smith said: “To attempt to increase the wealth of any country, either by introducing or by detaining in it an unnecessary quantity of gold and silver, is as absurd as it would be to attempt to increase the good cheer of private families, by obliging them to keep an unnecessary number of kitchen utensils.” [440]
We could send in the experts to manage our bail-out. But Smith said: “I have never known much good done by those who affect to trade for the public good.” [456]
And we could nationalise our economies. But Smith said: “The state cannot be very great of which the sovereign has leisure to carry on the trade of a wine merchant or apothecary”. [818] Or chairman of General Motors.
* Bracketed numbers in the text refer to pages in ‘The Wealth of Nations’, Glasgow Edition of the Works of Adam Smith, Oxford University Press, 1976
The writer is a contributing editor at The Weekly Standard and is the author, most recently, of On The Wealth of Nations, Books That Changed the World, published by Atlantic Books, 2007
http://www.ft.com/cms/s/0/2802e3a8-f77c-11dd-81f7-000077b07658.html?nclick_check=1
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Money Managers Who Get It
February 13, 2009 9:52 AM by Peter G. Klein | Other posts by Peter G. Klein | Comments (0)
Philip Greenspun (via Luke Froeb):
I spent a few days recently in the company of some money managers with a total of about $2 trillion to invest, precisely the sort of folks whose confidence the government is currently trying to win. How did they feel about all of the rule and policy changes coming out of Washington and the new more muscular government? Terrified.
The "real money" investors didn't want to invest alongside the government. Their concern is that if things go south, the government will take 100% of the value left in the bank or whatever and leave private investors, including recent ones, with nothing. This is precisely what happened to recent investors in Fannie Mae.
The "real money" investors didn't want to see judges modifying contracts, e.g., bankruptcy judges resetting mortgage payments at a lower level and reducing the principal owed. As far as they were concerned, a central tenet of the U.S. Constitution is that people are free to make contracts. Given how mortgages are split up among investors, a foreclosure is greatly preferable to these folks than a modification. In a foreclosure the most senior investors get what they expected, i.e., their money back. The holders of the most junior tranches, which carried a higher return and were known to be high risk, would get nothing. This is also what they would have expected. If mortgages are modified by government action, however, it is unclear how the obligations among the various private parties should be adjusted.
The punch line:
Much of the justification for government intervention comes from the assertion that markets have failed. One money manager scoffed at this idea. "The markets are working fine, but they're giving people answers that they don't like, so people cry market failure." Stocks and bonds low? That's because investors are afraid of a prolonged depression and continued government interference. House in a jobless region of Michigan worth almost nothing? A place with 50% of its former jobs only needs 50% of its houses. There are plenty of former steel towns where the price of a comfortable house stabilized at $20,000 decades ago and has barely moved since.
What did these guys want the government to do? Nothing, basically. "Back in the 19th Century, there were a lot of steep crashes, guys got wiped out, and the economy came back quickly." What's different now? The government is a lot bigger and more powerful. Rich companies and people can put some of their wealth into lobbying and demand that the government prevent them from getting wiped out (or at least slow the process).
http://blog.mises.org/archives/009433.asp#
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(http://media.economist.com/images/20090207/20090207WWKal.jpg)
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O ye of little faith! This economic crisis is evidence that the market is working
Like skaters on a lake’s frozen surface, we are sometimes reminded how thin is the crust of philosophical confidence on which our systems of political economy rest. Two years ago we were mostly agreed that free market economics had won the ancient argument between capitalism and the planned economy. Two years ago the case for a single market for goods and labour within the European Union was widely thought unanswerable.
Yet everywhere we turn today, wise heads mutter that the global free market has failed. And (after some placard-waving at the Total refinery and beyond) we heard Alan Johnson, the Health Secretary, declare on the Andrew Marr programme on BBC television last week that labour from outside Britain might ‘undercut’ domestic workers — as if this ‘undercutting’ were a bad thing, rather than the very engine of a capitalist economy.
Mr Johnson was not challenged. No senior colleague came to the public support of Lord Mandelson, the Business Secretary, in his restatement of the obvious about the single market. Is our grasp of general principle so weak? Do politicians not understand that if we say workers should not travel to ‘undercut’ local labour markets, the corollary that cheaper goods should not travel to ‘undercut’ locally produced goods cannot be far behind? How can our confidence in Adam Smith have evaporated so fast?
It is true that part of the reason for our former philosophical certitude lay in results. Why doubt prevailing theories when we were demonstrably getting richer? By their fruits we should (we thought) know them; and even an ignoramus may, if medical science cures him, claim to ‘believe’ in its theoretical base.
But did our confidence go no deeper? Medical science may be hard to fathom, but political economy is not. We did not need to believe the latter by dumb faith alone: we surely understood the argument that underpins free market economics and the free movement of goods and labour. The theoretical case is, after all, so simple, and has been explained with such clarity by writers from Adam Smith onwards. The mechanisms by which markets work can be grasped by any 12-year-old.
So our confidence should have been solid not only because the free market was evidently delivering prosperity and growth, but because we understood why it must be the most efficient engine of wealth-creation. And if the market had then seemed to falter, we could still know this would only be a pause, a reculer pour mieux sauter, and feel reassured that, however stuttering the free market might be at delivering wealth, it would be more reliable than any rival system.
Or that is what we thought we believed. Yet now, after a setback which, though sharp, will turn very few of us out on to the streets, and require only a modest reassessment of what we are worth and how we can afford to live, we run around in philosophical panic, proclaiming our agnosticism or, worse, apostasy.
O ye of little faith! I feel as a priest must feel when a member of his flock abandons the faith because her child has died. Children (the priest might respond) do die; accidents do happen. You knew that. You knew when you embraced the faith. Theology has explanations for human suffering. You knew that too.
And world recessions do occur. You knew that. You were surely taught at school about the last big one in the first half of the 20th- century, and many smaller ones since. The theology of market economics has never denied that there could be sharp corrections and reverses; even, for a time, collapses. Indeed it explains them. You knew that too.
So amid all the doom-mongering and recanting, I have an assertion to make. The market has not failed. The present collapse is evidence that the market is working. Confidence bubbles are an inherent feature of a free market system. Panics — confidence vacuums — are an inherent feature too. The test of the theory of market capitalism is whether the system provides from within itself the means to prick both.
It does. The first — a confidence bubble — has been pricked. We are now sucking ourselves the other way: into a confidence vacuum. In time this too will be pricked. The market will steady.
The bubble that has just burst was based, worldwide, on financial services. Financial services are a product. It is true they are a product critical to the efficient functioning of the market (so is electricity, so is oil) but that just makes them an unusually important product. From time to time products fail in any market. They may fail through force majeure — droughts, floods, pestilence. They may fail due to inherent flaws — airships, Thalidomide, blue asbestos. Or they may fail through ignorance, trickery or the credulity of human beings — Madoff, the property bubble, the repackaging of sub-prime debt.
The present financial crash has been precipitated by product failure of the third kind. Trade in financial instruments too opaque for even those who traded in them to assess them properly, and bonus incentive schemes that acted against the interests of the companies offering them, fuelled a banking bubble that has now burst.
But ask: what pricked it? Did politicians rumble the trade? Did governments, or international forums or symposiums, provide the sharp instrument? Did academic research and expertise expose the dodgy product? Did statutory regulators apply the pin? No, the free market wised up and pricked this bubble. Politicians and finance ministers (if they had had the power) would have tried to keep it inflated. The market puffed itself up, and then, without intervention — despite intervention — the market let itself down. The speed with which this has happened has been awful, but however inconvenient for many or catastrophic for a few, correction is not a failure of the market, but a success.
New rules and regulations will now be brought in. This, too, is no failure of the market. Free markets require — often demand — limits to the exercise of their freedom. Since the beginning of commerce, society has collectively imposed curbs and safeguards on the market (the very introduction of a law of contract was the first and still by far the biggest act of regulation) and a handful more of these, minor in the context of economic history, will now be applied. There will be no ‘new economic world order’, just some useful tweaks to the old one.
The earth will continue in its orbit, and nature will resume its course. No re-examination of our governing theories of political economy is called for. Calm down, dear, it’s only a market correction.
http://www.spectator.co.uk/print/the-magazine/columnists/3346016/another-voice.thtml
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A nice, basic economics primer that argues for a sensible business climate as a cure for poverty:
http://www.thecureforpoverty.com/
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Monetary Base
March 4, 2009 11:44 AM by Briggs Armstrong | Other posts by Briggs Armstrong | Comments (3)
Take a look at this chart depicting the monetary base on a monthly basis dating from 1917. This chart was cobbled together from data found on no fewer than three different websites managed by the Federal Reserve.
(http://blog.mises.org/blog/moneybase2009.gif)
http://blog.mises.org/archives/009542.asp
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I find the visual presentation quite misleading. A move from 200 to 400 is 100%, yet shows the same as a move from 1400 to 1600, which is roughly 14.14 %.
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I suppose, and I can't discern if it's inflation adjusted either. Just amused me to see a hockey stick coming from the other side of the aisle.
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"I suppose, and I can't discern if it's inflation adjusted either."
Umm , , , as best as I can tell, that is another way of saying the same thing :-)
Its a pet peeve of mine.
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I read with a smile this article. But I have news for these folks thinking the funeral business is stable. It isn't. I have a patient who is in this business who is very anxious because business is bad. I asked him how business could be bad in this field. He said no one is splurging for anything other then the bare minimum. The cheapest caskets the cheapest funerals. The least expensive everything. Business is very bad.
So why are people dying to go into this field? It sounds like a phoney sales pitch from the schools to me:
***If nothing is certain but death and taxes, then funeral service may be the closest thing to a recession-proof career in these uncertain times.
Nowhere is that more evident than mortuary science programs like the one at Nassau Community College, where interest and applications have mounted as the economy contracts.
At Nassau, which offers the only such public program in the metropolitan area, inquiries about mortuary science are up 15 percent in recent months, and enrollment for last fall's class was nearly double the year before.
At the American Academy McAllister Institute of Funeral Education, a private program in Manhattan, enrollment has jumped to 270 students for the spring semester, compared with 200 a year ago. The school attributes the rise to the economic downturn and the addition of an online program.
Worried about your money? Stay on top of Wall Street and local LI business stories "They're looking for something stable, a career that will last them," said Michael Mastellone, chairman of the Nassau program. "And there will always be work out there."
Among the recent inquiries Mastellone fielded was one from a retired police officer who at 57 wondered whether there was an age limit to start the two-year program.
"He retired and his pension was fine, and now his retirement fund isn't fine anymore," Mastellone said.
He said that about 80 percent of the program's graduates are employed in the funeral service industry. Graduates can earn about $50,000 a year by the time they complete a yearlong residency at a funeral home, he said.
The demographics don't hurt, either.
"I sometimes see a twinkle in the eye of some particularly entrepreneurial students . . . as they imagine what their future will be like with the aging of baby boomers," said Regina Smith, dean of the McCallister Institute in Manhattan, in an e-mail.
What's more, funeral directors are, on average, older than workers in most other occupations, which means they will be retiring in greater numbers over the next decade, according to a U.S. Department of Labor report.
"I think we have an extremely unique career," said John Madigan, 20, of Hicksville, a second-year student at Nassau. "Not many people can do it.
"A lot of the kids I graduated from high school with . . . now they're worried about whether they'll find a job. I'm still on track."
Nassau has an enrollment of 107 students, including part-timers - an increase of nearly 20 percent over this time in 2008. The fall 2008 class was about 50 students, twice what the school normally enrolls.
The program has attracted an eclectic mix of fresh-out-of-high-school students and second careerists, who shrug off stereotypes that the profession is ghoulish or maudlin.
"I get a lot of, 'Are you sure you want to do that?' " said Arielle Gallo, 22, a second-year student from Holbrook. She was inspired by the funeral director who handled the funerals of her grandparents, who died within two months of each other when she was in high school. "It's not really about hanging around deceased people. It's about caring for the families."
For Matthew Bennett, 37, getting laid off from his job as a personal assistant was the catalyst for pursuing a career he had always wondered about.
"Losing my job gave me that push," said Bennett, a second-year student who also lives in Holbrook. "I was in a good position to go to school full-time - and it's a good job."
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By MARY ANASTASIA O'GRADY
"What can we do that would be beneficial? [One thing] is lower corporate taxes and businesses taxes and maybe taxes in general. Particularly, you want to lower the tax on capital so you raise the after-tax return to investing and get more investing going on."
Gary Becker, the winner of the 1992 Nobel Prize in Economic Sciences, is in New York to speak to a special meeting of the Mont Pelerin Society on the global meltdown. He has agreed to sit down to chat with me on the subject of his lecture.
Ismael RoldanSlumped in a soft chair in a noisy hotel coffee lounge, the 78-year-old University of Chicago professor is relaxed and remarkably humble for a guy who has achieved so much. As I pepper him with the economic and financial riddles of our time, I am impressed by how many times his answers, delivered in a pronounced Brooklyn accent, include an "I think" and sometimes even an "I don't know the answer to that." It is a reminder of why he is so highly valued. In contrast to a number of other big-name practitioners of the dismal science, he is a solid empiricist genuinely in search of answers -- not the job as the next chairman of the Federal Reserve. What he sees is what you get.
What Mr. Becker has seen over a career spanning more than five decades is that free markets are good for human progress. And at a time when increasing government intervention in the economy is all the rage, he insists that economic liberals must not withdraw from the debate simply because their cause, for now, appears quixotic.
As a young academic in 1956, Mr. Becker wrote an important paper against conscription. He was discouraged from publishing it because, at the time, the popular view was that the military draft could never be abolished. Of course it was, and looking back, he says, "that taught me a lesson." Today as Washington appears unstoppable in its quest for more power and lovers of liberty are accused of tilting at windmills, he says it is no time to concede.
Mr. Becker sees the finger prints of big government all over today's economic woes. When I ask him about the sources of the mania in housing prices, the first culprit he names is the Fed. Low interest rates, he says, were "partly, maybe mainly, due to the Fed's policy of keeping [its] interest rates very low during 2002-2004." A second reason rates were low was the "high savings rates primarily from Asia and also from the rest of the world."
"People debate the relative importance of the two and I don't think we know exactly," Mr. Becker admits. But what is clear is that "when you have low interest rates, any long-lived assets tend to go up in price because they are based upon returns accruing over many years. When interest rates are low you don't discount these returns very much and you get high asset prices."
On top of that, Mr. Becker says, there were government policies aimed at "extending the scope of homeownership in the United States to low-credit, low-income families." This was done through "the Community Reinvestment Act in the '70s and then Fannie Mae and Freddie Mac later on" and it put many unqualified borrowers into the mix.
The third effect, Mr. Becker says, was the "bubble mentality." By this "I mean that much of the additional lending and borrowing was based on expectations that prices would continue to rise at rates we now recognize, and should have recognized then, were unsustainable."
Could this behavior be considered rational? "There is a lot of debate in economics about whether we can understand bubbles within a rational framework. There are models where you can do it, but it's not easy," he says. What he does seem sure about is that "the lending would not have continued unless there was this expectation that prices would continue to rise and therefore one could refinance these assets through the higher prices." That mentality was at least partly related to Fed action, he says, because the low interest rates "generated an increase in prices and I think that helped generate some of this excess of optimism."
Mr. Becker says that the market-clearing process, so important to recovery, is well underway. "Construction in new residential housing is way down and prices are way down. Maybe 25% down. Lower prices stimulate demand, reduced construction reduces supply."
That's the good news. But he complains about "counterproductive" government policies "designed to lower mortgage rates to stimulate demand." He says he was against the Bush Treasury's idea of capping mortgage rates (which was only floated) and he has "opposed the mortgage plan of President Obama." "It goes against both these adjustments . . . it would hold up prices and increase construction. I think that's a bad idea at this time."
Yet the professor is no laissez-faire ideologue. He says we have to think about what the government can do to "moderate the hit to the real economy," and he says it should start with "the first law of medicine: Do no harm." Instead it has done harmful things, and chief among them has been the "inconsistent policies with the large institutions . . . We let some big banks fail, like Lehman Brothers. We let less-good banks, big [ones] like Bear Stearns, sort of get bailed out and now we bailed out AIG, an insurance company."
Mr. Becker says that he opposed the "implicit protection" that the government gave to Bear Stearns bondholders to the tune of "$30 billion or so." So I wonder if letting Lehman Brothers go belly up was a good idea. "I'm not sure it was a bad idea, aside from the inconsistency." He points out that "the good assets were bought by Nomura and a number of other banks," and he refers to a paper by Stanford economics professor John Taylor showing that the market initially digested the Lehman failure with calm. It was only days later, Mr. Taylor maintains, that the market panicked when it saw more uncertainty from the Treasury. Mr. Becker says Mr. Taylor's work is "not 100% persuasive but it sort of suggest that maybe the Lehman collapse wasn't the cause of the eventual collapse" of the credit markets.
He returns to the perniciousness of Treasury's inconsistency. "I do believe that in a risky environment which is what we are in now, with the market pricing risk very high, to add additional risk is a big problem, and I think this is what we are doing when we don't have consistent policies. We add to the risk."
On the subject of recovery, Mr. Becker repeats his call for lower taxes, applauds the Fed's action to "raise reserves," (meaning money creation, though he said this before the Fed's action a few days ago), and he says "I do believe one has to try to do something more directly to help with the toxic assets of the banks."
How about getting rid of the mark-to-market pricing of bank assets [that is, pricing assets at the current market price] that some say has destroyed bank capital? Mr. Becker says he prefers mark-to-market over "pricing by cost because costs are often completely out of whack with what the real prices are." Then he adds this qualifier: "But when you have a very thin market, you have to be very careful about what it means to mark-to-market. . . . It's a big problem if you literally take mark-to-market in terms of prices continuously based on transactions when there are very few transactions in that market. I am a mark-to-market person but I think you have to do it in a sensible way."
However that issue is resolved in the short run, there will remain the problem of institutions growing so big that a collapse risks taking down the whole system. To deal with the "too big to fail" problem in the long run, Mr. Becker suggests increasing capital requirements for financial institutions, as the size of the institution increases, "so they can't have [so] much leverage." This, he says, "will discourage banks from getting so big" and "that's fine. That's what we want to do."
Mr. Becker is underwhelmed by the stimulus package: "Much of it doesn't have any short-term stimulus. If you raise research and development, I don't see how it's going to short-run stimulate the economy. You don't have excess unemployed labor in the scientific community, in the research community, or in the wind power creation community, or in the health sector. So I don't see that this will stimulate the economy, but it will raise the debt and lead to inefficient spending and a lot of problems."
There is also the more fundamental question of whether one dollar of government spending can produce one and a half dollars of economic output, as the administration claims. Mr. Becker is more than skeptical. "Keynesianism was out of fashion for so long that we stopped investigating variables the Keynesians would look at such as the multiplier, and there is almost no evidence on what the multiplier would be." He thinks that the paper by Christina Romer, chairman of the Council of Economic Advisors, "saying that the multiplier is about one and a half [is] based on very weak, even nonexistent evidence." His guess? "I think it is a lot less than one. It gets higher in recessions and depressions so it's above zero now but significantly below one. I don't have a number, I haven't estimated it, but I think it would be well below one, let me put it that way."
As the interview winds down, I'm thinking more about how people can make pretty crazy decisions with the right incentives from government. Does this explain what seems to be a decreasing amount of personal responsibility in our culture? "When you get a larger government, when you have the government taking over Social Security, government taking over health care and with further proposals now for the government to take over more activities, more entitlements, the rational response is to have less responsibility. You don't have to worry about things and plan on your own as much."
That suggests that there is a risk to the U.S. system with more people relying on entitlements. "Well, they become an interest group," Mr. Becker says. "The more you have dependence on the government, the stronger the interest group of people who want to maintain it. That's one reason why it is so hard to get any major reform in reducing government spending in Scandinavia and it is increasingly so in the United States. The government is spending -- at the federal, state and local level -- a third of GDP, and that share will go up now. The higher it is the more people who are directly or indirectly dependent on the government. I am worried about that. The basic theory of interest-group politics says that they will have more influence and their influence will be to try to maintain this, and it will be hard to go back."
Still, there remain many good reasons to continue the struggle against the current trend, Mr. Becker says. "When the market economy is compared to alternatives, nothing is better at raising productivity, reducing poverty, improving health and integrating the people of the world."
Ms. O'Grady writes the Journal's Americas column.
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The Anti-Stimulus
Arnold Kling
Greg Mankiw reports that the yield curve is steep, meaning that long-term interest rates have risen. In my view, this is perfectly rational, and it shows that the short-run effect of the fiscal stimulus is negative, as Jeff Sachs predicted.
This is all based on a Keynesian type of macro analysis. As we know, most of the stimulus spending does not take place until next year and beyond, so the short-run gains are puny. On the other hand, the big increase in the projected deficit creates the expectation of higher interest rates, which raises interest rates now. These higher interest rates serve to weaken the economy.
According to this standard analysis, the stimulus is going to hurt GDP now, when we could use the most help. Much of the spending will kick in a year or more from now, with multiplier effects following afterward, when the economy will need little, if any, stimulus.
This is the flaw with using spending rather than tax cuts as a stimulus. The lags are longer when you use spending.
Of course, if the real goal is to promote government at the expense of civil society and to create a one-party state in which business success is based on political favoritism, then the stimulus is working exactly as intended.
[UPDATE] It is important not to confuse the outlook for economic activity with the effect of the stimulus. Even if the stimulus has a negative impact, the outlook for economic activity could be positive, and this could cause an upward-sloping yield curve. But I'm not sure that the outlook is necessarily positive. Bond investors could simply be taking the view that with or without a strong recovery in real output, the deficit spending is going to be monetized at some point, leading to inflation and higher interest rates.
http://econlog.econlib.org/archives/2009/05/the_anti-stimul.html
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http://www.reason.com/news/show/134981.html
The Dangerous Minimum Wage Mirage
Why raising the minimum wage will hurt workers and worsen the economy
Steve Chapman | July 23, 2009
The federal government is trying to strengthen the U.S. auto industry. So here's a great idea for what it can do: Tell the Big Three to raise their prices across the board.
That would help in some obvious ways. Higher prices would mean bigger profit margins on every sale. Bigger profits would mean more jobs. More jobs would mean more workers buying new American cars.
But anyone can see that raising prices wouldn't work, because it would dry up sales. If American consumers were willing to pay more for American cars, dealers would already be charging higher prices. This is such an obviously boneheaded idea that no one would ever dream of doing it.
But in the realm of employee compensation, the federal government is taking that absurd notion and putting it into law. Come Friday, the federally mandated minimum wage will jump from $6.55 an hour to $7.25—an 11 percent increase. At a time when employers are laying off workers, Washington is going to make it more expensive to keep them.
If you're a minimum wage employee, your job will pay more, but only if it still exists. These days, most companies are scrutinizing every position on the payroll to make sure it's worth the cost. Raise the toll, and some employees will find they are no longer valuable enough to make the cut.
Economists generally agree that increases in the minimum wage cause unemployment even when the economy is prospering—something it has not been doing for the last year and a half. David Neumark, a professor at the University of California, Irvine, estimates this rise will destroy some 300,000 jobs among teens and young adults.
Even proponents of the increase understand the tradeoff. Otherwise they would demand an even bigger hike. If you can force employers to pay higher wages without reducing employment, why set the minimum at $7.25 an hour? Why not $17.25? Why not $37.25?
The suspension of disbelief required to support the minimum wage will only take you so far. It's impossible to deny that if it were illegal to pay someone less than a mere $36 an hour, a lot of jobs would vanish. But a small dose of poison is still poison, and in this case it's being administered to a patient who is already ill.
Supporters make a virtue of bad timing by claiming the change will provide a stimulus exactly when the economy needs it. The liberal Economic Policy Institute in Washington insists that a minimum wage increase "would not only benefit low-income working families, but it would also provide a boost to consumer spending and the broader economy."
Not likely. Companies, unlike the government, can't create cash at will. Any money they give to workers has to be obtained by cutting jobs, reducing employee benefits, or slashing other expenses that happen to be someone's income. Net stimulus: zero.
Besides eliminating minimum wage jobs, the increase stands to have another little-noticed effect: pushing people into jobs that pay even less. Some employees are exempt from the law, including those working in newspaper delivery, fishing, and seasonal amusement parks, as well as staffers at companies with annual revenues of less than $500,000 a year.
Doesn't sound like a big group, does it? But in 2008, reports the Bureau of Labor Statistics, 1.94 million Americans were below the "minimum" wage—compared to 286,000 getting the actual minimum. When the floor went unchanged for 10 years, the number of workers in sub-minimum jobs steadily declined. But in 2007, when the mandate went from $5.15 to $5.85, the total climbed by 14 percent, at a time when overall employment was stable.
That's not a coincidence. Economist Alan Reynolds of the libertarian Cato Institute in Washington has found that when the minimum wage went up in 1996 and 1997, the number of workers beneath the floor expanded by more than 75 percent—even though the economy was booming. It looks like the minimum wage destroys some low-paying jobs and replaces them with lower-paying ones, to the detriment of the people who are supposed to benefit.
Economics punctures alluring myths about the sources of material improvement, which is why it is known as the "dismal science." But the victims of the minimum wage will find that the truly dismal thing about economics is what happens when you ignore it.
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A long winded and often pedantic piece about the causes of recessions and the upswings that follow. I've only included the conclusion; see the rest of the piece for the long-winded Austrian take:
Most experts are of the view that the worst of the US recession may be over by year's end. Common opinion holds that the key reason for the expected turnaround is the positive effect that the policies of the government and Fed have on various economic indicators. The pace of monetary pumping by the US central bank jumped from 4% in September 2007 to 152% by December 2008. With respect to fiscal stimulus, aggressive government spending has resulted in a record deficit of over one trillion dollars in the first nine months of fiscal year 2009. Careful examination shows that, rather than protecting the economy, it is loose monetary policies that are the key source of boom-bust economic cycles. Loose Fed and government fiscal policies have only weakened the wealth generators' ability to grow the economy. Aggressive policies have inflicted severe damage to the sources of funding that support real economic growth. Hence, we are doubtful that the US economy is on the verge of a solid economic recovery. On account of massive monetary pumping, the growth in momentum of various key economic data is likely to strengthen in the months ahead. We maintain this may prompt Fed policy makers to consider curtailing the pace of monetary pumping, and we suggest that this will set in motion a new economic bust.
http://mises.org/story/3585
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So I guess the guy has to play cheerleader and downplay bad news, but listening to this stuff now is down right embarrassing.
[youtube]http://www.youtube.com/watch?v=HQ79Pt2GNJo[/youtube]
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2nd post:
Why Mortgage Modifications Aren’t Working
Posted by Mark A. Calabria
As covered in both today’s Wall Street Journal and Washington Post, the Obama administration has called 25 of the largest mortgage servicing companies to Washington to try to figure out why the Obama efforts to stem foreclosures has been a failure.
The reason such efforts, as well as those of the Bush Administration and the FDIC, have been a failure is that such efforts have grossly misdiagnosed the causes of mortgage defaults. An implicit assumption behind former Treasury Secretary Paulson’s HOPE NOW, FDIC Chair Sheila Bair’s IndyMac model, and the Obama Administration’s current foreclosure efforts is that the current wave of foreclosures is almost exclusively the result of predatory lending practices and “exploding” adjustable rate mortgages, where large payment shocks upon the rate re-set cause mortgage payment to become “unaffordable.”
The simple truth is that the vast majority of mortgage defaults are being driven by the same factors that have always driven mortgage defaults: generally a negative equity position on the part of the homeowner coupled with a life event that results in a substantial shock to their income, most often a job loss or reduction in earnings. Until both of these components, negative equity and a negative income shock are addressed, foreclosures will remain at highly elevated levels.
Sadly the Obama Administration is likely to use today’s meeting as simply an excuse to deflect blame from themselves onto “greedy” lenders. Instead the Administration should be focusing on avenues for increasing employment and getting our economy growing again. Then of course, this Administration has from the start been more focused on re-distributing wealth rather than creating it, which explains why it views mortgage modifications as simply a game of taking from lenders (in reality investors - like pension funds) and giving to delinquent homeowners.
http://www.cato-at-liberty.org/2009/07/28/why-mortgage-modifications-arent-working/
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Perhaps too eclectic a piece for this category, but I was struck by some of the economic arguments made herein.
Tuesday, July 28, 2009
[Ilya Somin, July 28, 2009 at 8:24pm] Trackbacks
Do the Recent Failures of the Oakland A's Discredit Moneyball Strategies in Baseball and Academia? Like many academics, I have praised the "Moneyball" strategies adopted by Oakland A's GM Billy Beane. Beane's innovative use of statistical methods for evaluating player performance built the small-market A's into a powerhouse that posted records as good as those of top teams with much higher payrolls, including the Red Sox and Yankees. Meanwhile, in the academic world, my employer, the George Mason University School of Law, used similar strategies to identify and hire undervalued scholars, an approach that enabled the school to rise rapidly in the US News rankings (from around 90th or so in the late 90s, to a peak of 34th in 2007 and 41st today). GMU's moneyball approach also enjoyed impressive successes on measures of faculty quality, such as Brian Leiter's citation count study, in which we ranked 21st in 2007. Like the A's, GMU has outperformed competitors with much greater financial resources (we charge lower tuition and have a much smaller endowment than most of our peer schools).
However, as ESPN writer Howard Bryant explains in this article, the A's poor performance over the last three years has led many people to doubt the effectiveness of Beane's approach. Although GMU's rankings haven't fallen anywhere near as much as the A's place in the American League standings, we have fallen a few slots in US News over the last two years.
In my view, the the A's recent problems in no way discredit Moneyball strategies. In both baseball and academia, Moneyball hiring is still a success. And, while the A's may not have a bright future, I am cautiously optimistic that GMU does.
I. The A's Problems are Caused by Moneyball's Success.
As Daniel Drezner explains, the A's have slipped not because Moneyball strategies stopped working, but because other teams with bigger payrolls (most notably, my beloved Red Sox) successfully copied them. So long as the A's were the only ones rigorously applying Moneyball strategies, they could outperform bigger-spending rivals with inferior approaches. But once the Red Sox and other larger market teams copied the A's approach, it got much harder for Beane to keep up. If the A's were defeated by clubs relying on pre-Moneyball conventional wisdom, that would indeed discredit their approach. Being defeated by better-heeled imitators actually vindicates it.
Furthermore, Beane's overall record as GM is still very impressive. Since he took over in 1999, the A's have made five playoff appearances and had two other seasons when they won around 90 games and just missed the postseason. I hate to admit it, but this is almost as good as the Red Sox' record over the same period (6 playoff appearances and one other 90 win season) - and the Red Sox spent more than twice as much as the A's on payroll during that time. The Red Sox of the last ten years are usually considered one of the best-run teams in baseball. Had Beane been given as much money to play with as Boston's GMs, the A's would probably have been a lot better than the Sox - or any other AL franchise.
II. Implications for GMU and Legal Academia.
Nonetheless, the recent decline of the A's does raise the question of whether GMU will suffer a similar decline as better-funded competitors mimic some of our hiring strategies. It certainly could happen, but I am guardedly optimistic that it won't. Competitive pressure in academia is much weaker than in professional sports, where losing GMs tend to get fired and owners of losing teams suffer big financial losses. In the academic world, faculty who perform poorly relative to their competitors are unlikely to lose either funding or tenure. Even law school deans are unlikely to lose their jobs merely because the school's ranking stagnates or declines.
Thus, GMU's innovations are less likely to be copied widely than those of the A's. Even so, some have spread. The three undervalued faculty assets that GMU has historically pursued include 1) law and economics scholars, 2) conservative and libertarian academics who might have gone to higher-ranked schools but for ideological discrimination, and 3) academics with strong publication records who were overlooked by higher-ranked schools because they didn't have a prestigious clerkship or didn't get their JDs at a top-5 school. I think it's clear that law and econ scholars are no longer undervalued by most of our competitors. Ideological discrimination and school/clerkship snobbery persist, but both are less intense than ten years ago. In particular, our rivals are beginning to realize that past publication record is a better predictor of the quality of future scholarship than who you clerked for or where you got your JD (this is similar to Beane's famous insistence on evaluating prospects based on minor league and college stats rather than whether they looked good to tradition-minded scouts).
Overall, one of our comparative advantages has been completely eliminated by the market, and the other two have at least been eroded. On the other hand, we have several edges that the A's don't. Unlike the A's, we can close the financial gap that separates us from our rivals by building up our endowment over time (the A's resources, by contrast, are constrained by their status as a small-market team). The school's rise in the rankings and increased public profile make fundraising easier. Converting a temporary innovative edge into longterm financial success is much easier in academia than baseball.
In addition, ideological discrimination and school/clerkship snobbery are likely to persist to a significant degree. We can therefore continue to exploit these two shortcomings of many of our peer schools. Finally, GMU has an important advantage stemming from its geographic location near Washington, DC - an attractive site for people interested in law, history, and public policy. I doubt that GMU will rise as fast in the rankings over the next ten years as it did over the last ten. But if we continue to follow good hiring strategies, we should be able to hold on to our gains and hopefully make some additional progress.
UPDATE: I do not wish to suggest that US News rankings are anywhere close to perfect indicators of a law school's relative quality. Like many other academics, I have criticized them in the past. However, rising 50 slots in the rankings, as GMU did, is probably an indicator of significant progress. In addition, GMU actually does better on more objective measures of faculty quality, such as Leiter's citation counts (where we are close to the top 20), and SSRN download counts (where we rank 18th over the last year, and 11th if one controls for the relatively small size of our faculty).
http://volokh.com/archives/archive_2009_07_26-2009_08_01.shtml#1248827099
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Red all over
Jul 29th 2009
From Economist.com
Mapping the global recession
MOODY'S Economy.com has mapped the geographic spread of the worst global downturn since the Depression. All of North America is in recession now. In Europe only Norway, Slovenia and Slovakia have avoided a similar fate, although Moody’s reckons these countries are on the brink of a downturn. Emerging Asia looks cheerier, although the small export-led economies of Singapore and Hong Kong are shrinking, as are Malaysia and Thailand. Even the BRICs are looking a bit diminished, with downturns in both Brazil and Russia. At least India and China are growing (the latter at a pace that is causing worries about overheating). Data for Africa are spotty but the continent’s biggest economy, South Africa, is in recession. The IMF expects global GDP to shrink by 1.4% this year, with rich countries’ economies contracting by around 3.8%.
(http://media.economist.com/images/na/2009w31/Recession.jpg)
http://www.economist.com/research/articlesBySubject/displaystory.cfm?subjectid=7933596&story_id=14119302
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Why Default on U.S. Treasuries is Likely
Jeffrey Rogers Hummel*
"Buried within the October 3, 2008 bailout bill was a provision permitting the Fed to pay interest on bank reserves. Within days, the Fed implemented this new power, essentially converting bank reserves into more government debt. Now, any seigniorage that government gains from creating bank reserves will completely vanish or be greatly reduced."
Almost everyone is aware that federal government spending in the United States is scheduled to skyrocket, primarily because of Social Security, Medicare, and Medicaid. Recent "stimulus" packages have accelerated the process. Only the naively optimistic actually believe that politicians will fully resolve this looming fiscal crisis with some judicious combination of tax hikes and program cuts. Many predict that, instead, the government will inflate its way out of this future bind, using Federal Reserve monetary expansion to fill the shortfall between outlays and receipts. But I believe, in contrast, that it is far more likely that the United States will be driven to an outright default on Treasury securities, openly reneging on the interest due on its formal debt and probably repudiating part of the principal.
To understand why, we must look at U.S. fiscal history. Economists refer to the revenue that government or its central bank generates through monetary expansion as seigniorage. Outside of America's two hyperinflations (during the Revolution and under the Confederacy during the Civil War), seigniorage in this country peaked during World War II, when it covered nearly a quarter of the war's cost and amounted to about 12 percent of Gross Domestic Product (GDP). By the Great Inflation of the 1970s, seigniorage was below two percent of federal expenditures or less than half a percent of GDP.1 This was partly a result of globalization, in which international competition disciplines central banks. And it also was the result of sophisticated financial systems, with fractional reserve banking, in which most of the money that people actually hold is created privately, by banks and other financial institutions, rather than by government. Consider how little of your own cash balances are in the form of government-issued Federal Reserve notes and Treasury coin, rather than in the form of privately created bank deposits and money market funds. Privately created money, even when its quantity expands, provides no income to government. Consequently, seigniorage has become a trivial source of revenue, not just in the United States, but also throughout the developed world. Only in poor countries, such as Zimbabwe, with their primitive financial sectors, does inflation remain lucrative for governments.
For more on hyperinflations, bank reserves, and central banks, see Hyperinflation, Money Supply, and Federal Reserve System in the Concise Encylopedia of Economics.
The current financial crisis, moreover, has reinforced the trend toward lower seigniorage. Buried within the October 3, 2008 bailout bill, which set up the Troubled Asset Relief Program (TARP), was a provision permitting the Fed to pay interest on bank reserves, something other major central banks were doing already. Within days, the Fed implemented this new power, essentially converting bank reserves into more government debt. Fiat money traditionally pays no interest and, therefore, allows the government to purchase real resources without incurring any future tax liability. Federal Reserve notes will, of course, continue to earn no interest. But now, any seigniorage that government gains from creating bank reserves will completely vanish or be greatly reduced, depending entirely on the differential between market interest rates on the remaining government debt and the interest rate on reserves. The lower is this differential, the less will be the seigniorage. Indeed, this new constraint on seigniorage becomes tighter as people replace the use of currency with bank debit cards and other forms of electronic fund transfers. In light of all these factors, even inflation well into the double digits can do little to alleviate the U.S. government's potential bankruptcy.
What about increasing the proceeds from explicit taxes? Examine Graph 1, which depicts both federal outlays and receipts as a percent of GDP from 1940 to 2008. Two things stand out. First is the striking behavior of federal tax revenue since the Korean War. Displaying less volatility than expenditures, it has bumped up against 20 percent of GDP for well over half a century. That is quite an astonishing statistic when you think about all the changes in the tax code over the intervening years. Tax rates go up, tax rates go down, and the total bite out of the economy remains relatively constant. This suggests that 20 percent is some kind of structural-political limit for federal taxes in the United States. It also means that variations in the deficit resulted mainly from changes in spending rather than from changes in taxes. The second fact that stands out in the graph is that federal tax revenue at the height of World War II never quite reached 24 percent of GDP. That represents the all-time high in U.S. history, should even the 20-percent-of-GDP post-war barrier prove breachable.2
(http://www.econlib.org/library/Columns/y2009/Hummeltbillsgraph.jpg)
Graph 1. Federal Outlays and Receipts as a Percent of GDP, 1940-2008
Compare these percentages with that of President Barack Obama's first budget, which is slated to come in at above 28 percent of GDP. Although this spending surge is supposed to be significantly reversed when the recession is over, the administration's own estimates have federal outlays never falling below 22 percent of GDP. And that is before the Social Security and Medicare increases really kick in. In its latest long-term budget scenarios, the Congressional Budget Office (CBO), not known for undue pessimism, projects that total federal spending will rise over the next 75 years to as much as 35 percent of GDP, not counting any interest on the accumulating debt, which critically varies with how fast tax revenues rise. However, the CBO's highest projection for tax revenue over the same span reaches a mere 26 percent of GDP. Notice how even that "optimistic" projection assumes that Americans will put up with, on a regular peacetime basis, a higher level of federal taxation than they briefly endured during the widely perceived national emergency of the Second World War. Moreover, once you add in the interest on the growing debt because of the persistent deficits, federal expenditures in 2083, according to the CBO, could range anywhere between 44 and 75 percent of GDP.3
We all know that there is a limit to how much debt an individual or institution can pile on if future income is rigidly fixed. We have seen why federal tax revenues are probably capped between 20 and 25 percent of GDP; reliance on seigniorage is no longer a viable option; and public-choice dynamics tell us that politicians have almost no incentive to rein in Social Security, Medicare, and Medicaid. The prospects are, therefore, sobering. Although many governments around the world have experienced sovereign defaults, U.S. Treasury securities have long been considered risk-free. That may be changing already. Prominent economists have starting considering a possible Treasury default, while the business-news media and investment rating agencies have begun openly discussing a potential risk premium on the interest rate that the U.S. government pays. The CBO estimates that the total U.S. national debt will approach 100 percent of GDP within ten years, and when Japan's national debt exceeded that level, the ratings of its government securities were downgraded.
The much (unfairly) maligned credit default swaps (CDS) in February 2009 were charging more for insurance against a default on U.S. Treasuries than for insurance against default of such major U.S. corporations as Pepsico, IBM, and McDonald's. Because the premiums and payoffs of the CDS on U.S. Treasury securities are denominated in Euros, the annual premiums also reflect exchange-rate risk, which is probably why, with the subsequent modest decline in the dollar, CDS premiums for ten-year Treasuries fell from 100 basis points to almost 30.4 But you can make a plausible case that CDS underestimate the probability of a Treasury default since such a default could easily have far reaching financial repercussions, even hurting the counterparties providing the insurance and impinging on their ability to make good on their CDS. Surely the purchasers of the U.S. Treasury CDS have not overlooked this risk, which would be reflected in a lower annual premium for less-valuable insurance.
Predicting an ultimate Treasury default is somewhat empty unless I can also say something about its timing. The financial structure of the U.S. government currently has two nominal firewalls. The first, between Treasury debt and unfunded liabilities, is provided by the trust funds of Social Security, Medicare, and other, smaller federal insurance programs. These give investors the illusion that the shaky fiscal status of social insurance has no direct effect on the government's formal debt. But according to the latest intermediate projections of the trustees, the Hospital Insurance (HI-Medicare Part A) trust fund will be out of money in 2017, whereas the Social Security (OASDI) trust funds will be empty by 2037.5 Although other parts of Medicare are already funded from general revenues, when HI and OASDI need to dip into general revenues, the first firewall is gone. If investors respond by requiring a risk premium on Treasuries, the unwinding could move very fast, much like the sudden collapse of the Soviet Union. Politicians will be unable to react. Obviously, this scenario is pure speculation, but I believe it offers some insight into the potential time frame.
The second financial firewall is between U.S. currency and government debt. It is not literally impossible that the Federal Reserve could unleash the Zimbabwe option and repudiate the national debt indirectly through hyperinflation, rather than have the Treasury repudiate it directly. But my guess is that, faced with the alternatives of seeing both the dollar and the debt become worthless or defaulting on the debt while saving the dollar, the U.S. government will choose the latter. Treasury securities are second-order claims to central-bank-issued dollars. Although both may be ultimately backed by the power of taxation, that in no way prevents government from discriminating between the priority of the claims. After the American Revolution, the United States repudiated its paper money and yet successfully honored its debt (in gold). It is true that fiat money, as opposed to a gold standard, makes it harder to separate the fate of a government's money from that of its debt. But Russia in 1998 is just one recent example of a government choosing partial debt repudiation over a complete collapse of its fiat currency.
Admittedly, seigniorage is not the only way governments have benefited from inflation. Inflation also erodes the real value of government debt, and if the inflation is not fully anticipated, the interest the government pays will not fully compensate for the erosion. This happened during the Great Inflation of the 1970s, when investors in long-term Treasury securities earned negative real rates of return, generating for the government maybe one percent of GDP, or about twice as much implicit revenue as came from seigniorage. But today's investors are far savvier and less likely to get caught off guard by anything less than hyperinflation. To be clear, I am not denying that a Treasury default might be accompanied by some inflation. Inflationary expectations, along with the fact that part of the monetary base is now de facto government debt, can link the fates of government debt and government money. This is all the more reason for the United States to try to break the link and maintain the second financial firewall. We still may end up with the worst of both worlds: outright Treasury default coupled with serious inflation. I am simply denying that such inflation will forestall default.
Still unconvinced that the Treasury will default? The Zimbabwe option illustrates that other potential outcomes, however unlikely, are equally unprecedented and dramatic. We cannot utterly rule out, for instance, the possibility that the U.S. Congress might repudiate a major portion of promised benefits rather than its debt. If it simply abolished Medicare outright, the unfunded liability of Social Security would become tractable. Indeed, one of the current arguments for the adoption of nationalized health care is that it can reduce Medicare costs. But this argument is based on looking at other welfare States such as Great Britain, where government-provided health care was rationed from the outset rather than subsidized with Medicare. Rationing can indeed drive down health-care costs, but after more than forty years of subsidized health care in the United States, how likely is it that the public will put up with severe rationing or that the politicians will attempt to impose it? And don't kid yourself; the rationing will have to be quite severe to stave off a future fiscal crisis.
Other welfare States have higher taxes as a proportion of GDP, with Sweden and Denmark in the lead at nearly 50 percent.6 Can I really be confident that the United States will never follow their example? Let us ignore all the cultural, political, and economic differences between small, ethnically-unified European States and the United States. We still must factor in the take of state and local governments, which, together with the federal government, raises the current tax bite in the United States to 28 percent of GDP, only five percentage points below that of Canada. Recall that the CBO projects that federal spending alone for 2082 will reach almost 35 percent of GDP, excluding rising interest on the national debt. Thus, if taxes were to rise pari passu with spending, the United States might be able to forestall bankruptcy with a total tax burden, counting federal, state, and local, of around 45 percent of GDP—15 percentage points higher than the combined total at its World War II peak, higher than in the United Kingdom and Germany today, and nearly dead even with Norway and France. However, if there is any significant lag between expenditure and tax increases, the increased debt would cause the proportion to rise even more. Furthermore, this estimate relies on the CBO's economic and demographic assumptions about the future, along with the assumption of absolutely no increase in state and local taxation as a percent of GDP. More-pessimistic assumptions also drive the percentage up.
Even conceding that federal taxes might rise rapidly enough to a level noticeably higher than during World War II overlooks an important consideration: All the social democracies are facing similar fiscal dilemmas at almost the same time. Pay-as-you go social insurance is just not sustainable over the long run, despite the higher tax rates in other welfare States. Even though the United States initiated social insurance later than most of these other welfare States, it has caught up with them because of the Medicare subsidy. In other words, the social-democratic welfare State will come to end, just as the socialist State came to an end. Socialism was doomed by the calculation problem identified by Ludwig Mises and Friedrich Hayek. Mises also argued that the mixed economy was unstable and that the dynamics of intervention would inevitably drive it towards socialism or laissez faire. But in this case, he was mistaken; a century of experience has taught us that the client-oriented, power-broker State is the gravity well toward which public choice drives both command and market economies. What will ultimately kill the welfare State is that its centerpiece, government-provided social insurance, is simultaneously above reproach and beyond salvation. Fully-funded systems could have survived, but politicians had little incentive to enact them, and much less incentive to impose the huge costs of converting from pay-as-you-go. Whether this inevitable collapse of social democracies will ultimately be a good or bad thing depends on what replaces them.
Footnotes
1.
Gary M. Walton and Hugh Rockoff, History of the American Economy, 10th ed. (Mason, OH: South-Western, 2005), p. 500; Robert Higgs, "The World Wars," in Price Fishback, et. al., History of the American Government and Economy: Essays in Honor of Robert Higgs (Chicago: University of Chicago Press, 2007); Jeffrey Rogers Hummel, "Death and Taxes, Including Inflation: The Public versus Economists," Econ Journal Watch, 4 (January 2007): 46-59.
2.
Data on government expenditures and revenues come from Susan B. Carter, et. al., eds., Historical Statistics of the United States: Earliest Times to the Present, Millennial ed. (New York: Cambridge University Press, 2006), v. 5, Series Ea584-678, as brought forward by Budget of the United States Government: Historical Tables Fiscal Year 2010 (Washington: U.S. Government Printing Office, 2009). Annual estimates for GDP are from Louis D. Johnston and Samuel H. Williamson, "What Was the U.S. GDP Then?" MeasuringWorth, 2008. Their GDP numbers coincide with those of the U.S. Bureau of Economic Analysis.
3.
Office of Management and Budget, A New Era of Responsbility: Renewing America's Promise (Washington: U.S. Government Printing Office, February 2009), Table S-1, p. 114; Doug Elmendorf, Federal Budget Challenges (Washington: Congressional Budget Office, April 2009), pp. 3-11.
4.
A basis point is one hundredth of a percentage point.
5.
Social Security and Medicare Boards of Trustees, Status of the Social Security and Medicare Programs: A Summary of the 2009 Annual Reports.
6.
Organisation for Economic Co-operation and Development, Revenue Statistics 1965-2007, 2008 Edition, Table A (Paris: OECD, October 15, 2008). PDF file.
*Jeffrey Rogers Hummel is Associate Professor of economics at San Jose State University and the author of Emancipating Slaves, Enslaving Free Men: A History of the American Civil War. Some of his more recent writings can be found on the Liberty & Power group blog.
http://www.econlib.org/library/Columns/y2009/Hummeltbills.html
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Hmm, models longer in development fail to explain phenomena occurring in systems less complex than say the planetary climate. Could a lesson lie within?
Guy Sorman
Wild Randomness
Traditional economics has failed to grasp the complexity and dynamism of financial markets.
Summer 2009
In the summer of 2008, wheat and corn prices shot up across the globe. Pundits provided seemingly convincing explanations: grain was becoming scarce and thus more expensive because mainland Chinese were changing their eating habits and needed lots of it to feed their cattle—or perhaps because fear of oil shortages, combined with ecological fads, was leading consumers to adopt corn-based ethanol. Yet one year later, the Chinese are eating basically the same food as last year (feeding habits change very slowly), ethanol production is more or less at the same level, but the price of grain and corn on the Chicago market is back down again. How to explain the volatility of prices when production levels remain essentially the same?
The reason: grain or corn prices may at any point in time be driven more by speculation than by actual harvests. The rule applies to all transactions on financial markets, including oil, stocks, and derivatives. This is one of many examples that Rama Cont offers to describe how the real economy and the financial markets follow different rationales. In the short term—which can mean several years, in practice—the connection can be tenuous at best and difficult to model. If the connection were closer, Cont would know: he is at the forefront of the new science of financial modeling.
Finance itself is a relatively young field of research in which data have been available in large quantities only over the last 20 years. Thanks to electronic trading, it is now possible to quantify and analyze the fluctuations of financial markets on a large scale, but much interdisciplinary expertise is necessary to make headway in understanding it all.
In fact, Cont, an associate professor at Columbia University, conducts his research not in the economics department but in the School of Engineering and Applied Science. “My background is in theoretical physics,” he tells me. He discovered economics by accident while studying in Paris, where he emigrated from Tehran in 1987. “When I first became interested in economics, I was surprised by the deductive, rather than inductive, approach of many economists,” he says. Whereas in physics, researchers tend to observe empirical data and then build a theory to explain their observations, “many economic studies typically start with a theory and eventually attempt to fit the data to their model.” Such an approach might have been justifiable when financial and economic data were scarce, he believes, but with today’s wealth of information it is no longer acceptable.
Traditional economics, Cont argues, has failed to grasp the complexity and dynamic nature of financial markets. This outlook leads him to a distinctive interpretation of the current financial crisis. While the mainstream view explains the crisis by a lack of regulation, Cont believes that misguided regulations, often applied by not-too-smart regulators, were also a major factor. “Bear Stearns was perfectly compliant with regulations on the eve of its bankruptcy,” he observes. It had strictly followed the international banking rules imposed by the so-called Basel II Convention and, in fact, held $2 billion in excess of the amount of capital that the convention required for the bank to weather a major shock. But that capital, the regulations say, can consist of assets, such as bonds or shares, that aren’t liquid—that is, they have a market value but aren’t cash. In a panic situation, a bank needs cash to pay its creditors, and when confronted about its debts, Bear Stearns had only illiquid assets and no time to sell them. The bank went under the next day. The regulation seemed cleverly designed, Cont says, but proved useless in a real-life situation.
Why did the demise of Lehman Brothers generate worldwide financial turmoil? Again, Cont believes, existing regulations were at fault. As Lehman liquidated its portfolio, he explains, it sold off large quantities of stock, pushing overall stock prices down. This resulted in losses for other banks and increased the risk of their portfolios. To comply with Basel II regulations, these banks then had to reduce that risk by cutting back lending and by selling assets. They did both, bringing the stock exchange to its knees and drying up global credit.
Does Cont’s indictment of poorly designed regulations mean that he holds Wall Street bankers blameless? No: the bankers were greedy, he charges—though “greed in itself is not a new phenomenon.” But the Wall Street bonus system, as everyone knows by now, institutionalized that greed by compensating high short-term returns, so that traders and managers had an incentive to take more—and more dangerous—risks. That risk-taking, Cont says, should have been balanced by countervailing forces, such as boards of directors that, in theory, would represent the long-term interests of the banks and their shareholders. But Wall Street bank boards tended to have little say in the day-to-day management of the companies.
Nor did other countervailing forces intercede. Every bank had a risk-management unit, Cont points out, but the risk manager usually wasn’t a major figure, and the quantitative analysts in the risk units typically had little influence on major bank decisions. “Everybody knows the names of the CEOs of major investment banks,” he says. “But who has ever heard of the Chief Risk Officer of these institutions?”
Less sophisticated investors—fund managers and sovereign funds—relied on rating agencies for guidance, but didn’t get good advice, to say the least. The agencies—Moody’s, Standard and Poor’s, Fitch—utterly failed to anticipate the huge risks in the subprime market. “Either they truly ignored the risk of a fall in the housing market or they pretended everything was fine, in order to sustain the bubble and profit from it while it lasted,” says Cont. Ignorance probably played the larger role, he thinks. Rating agencies, like investors and regulators, rely on relatively simple models to forecast the risk associated with future market movements. Those models often assume a “mild randomness” of market fluctuations. In reality, Cont argues, what visionary mathematician Benoît Mandelbrot calls “wild randomness” prevails: risk is concentrated in a few rare, hard-to-predict, but extreme, market events (see sidebar).
Simple forecasts can also be mistaken if they fail to account for the actions of market participants themselves: investor strategies can influence prices, which in turn influence future strategies in a feedback loop that can cause considerable instability. Cont recalls the severe stock-market crash of October 1987, which seemed to strike out of the blue, since nothing significant was happening in the real economy. Subsequent research, though, blamed the crash in part on a new investment strategy, “portfolio insurance,” which a large number of fund managers had simultaneously adopted. Based on the famous Black-Scholes options-pricing model, this strategy recommended that fund managers reduce their risks by automatically selling shares whenever their values fell. But the approach didn’t take into account what would happen if many investors followed it simultaneously: a massive sell-off that could send the market plummeting. The 1987 crash was thus not provoked by events in the real economy but by a supposedly smart risk-management strategy—and the current downturn, of course, also derives at least partly from a global craze for a seemingly foolproof financial innovation.
Yet if the financial markets can become disconnected from the real economy and then generate storms that threaten and damage prosperity, Cont continues, they are nevertheless essential to a flourishing economy. They have dragged us under now; but over the last several decades, they have helped drive unprecedented global growth and innovation.
Investors in financial markets rationally pursuing individual profit, then, can produce outcomes that are globally negative. Doesn’t that contradict classical economic theory? “Both theory and empirical facts do tend to show that, on the financial markets, the Invisible Hand does not always lead to welfare-improving general outcomes,” Cont replies.
He offers another example: the diversification strategies that any wise investor should follow to protect himself from market risk. In the 1990s, in the name of diversification, investors poured money into various emerging markets and did well. When a currency crisis hit some Asian countries in 1997, however, emerging-market funds had to sell off Brazilian assets to dampen their losses on Asian investments, causing a sharp fall in Brazilian stocks. Rational individual choices in the financial markets had amplified a local shock in Asia into a systemic shock felt across the globe.
Is there a way to protect against these disruptions? “To regulate a financial market efficiently, we need first to understand its mechanisms,” Cont argues. Knowledge is thus the priority. Currently, regulatory bodies like the Federal Reserve and the SEC can determine the risk exposure of financial institutions, but only at a national level. The market, however, is global, and at present, we have no monitor to assess risk factors and their interdependence at the global level.
A first step toward rectifying this problem, Cont believes, would be to create a global risk observatory. In previous global crashes, abnormal concentrations of market participants began to engage in similar investment strategies—portfolio insurance back in the eighties and leveraged housing loans more recently. A global risk observatory would be in a position to observe such concentrations and raise a red flag. It would then be up to each national regulator to take these alerts into consideration or dismiss them. Cont doesn’t go so far as to promote the idea of an international regulator, which would potentially conflict with national sovereignty. In any case, the United States has already said that it would not accept such a body. An observatory is feasible, however: the data exist and need only be consolidated.
As for national regulators, Cont maintains that they should focus on ensuring financial stability and protecting against systemic risk, rather than worry about the health of individual financial institutions. Rules that apparently help reduce risk in individual firms can sometimes amplify systemwide risk, as with the Basel II regulations that required banks to reduce lending and sell assets after Lehman’s fall. Further, national regulation should encompass not only banks but all institutions, such as insurance companies and mortgage brokers, that have an impact on the financial system.
If realized, Cont’s proposals would not stabilize the financial markets overnight. But they could help us avoid the kind of regulations that tend to aggravate crises. His proposals may also seem modest, given the scope of the current crisis. “The American public is fond of gurus,” he says—and he isn’t one. He is only a man of science.
Guy Sorman, a City Journal contributing editor, is the author of numerous books, including the brand-new Economics Does Not Lie.
The Mandelbrot Line
At 86, creative and witty as ever, Benoît Mandelbrot has grown accustomed to the ups and downs of his scientific reputation. When the Dow Jones touches the sky, economists tend to forget his dark prophecies; when crisis strikes, he is suddenly rediscovered. These days, at his Cambridge apartment overlooking the Charles River, he gets more calls than ever. The last time publishers and conference organizers besieged him with so many requests was in 2000, after the Internet bubble burst—and before that, in 1987, when the stock market unexpectedly crashed. At the time, Mandelbrot seemed to be the only thinker able to explain why crashes could happen without any apparent economic reason. Financial markets, he argued, follow their own internal logic, not necessarily related to actual economic factors.
Mandelbrot has many disciples. Rama Cont, in the field of financial modeling, is one of the most noteworthy. The notion of “black swans”—unpredictable, rare, and massive-impact events—has made the trader and author Nassim Taleb famous, and it is pure Mandelbrot. George Soros’s apocalyptic economic scenarios derive from Mandelbrot, too, though haphazardly quoted.
Mandelbrot does not define himself primarily as an economist: he is, above all, a mathematician. Born in Poland, educated in France, a professor at Harvard in the 1960s and at Yale in the 1990s, with 30 years in between at IBM’s research center in Yorktown Heights, New York, the man is as unconventional as his career. In 1974, he became an instant celebrity with his theory of fractals—a fractal being “a rough or fragmented geometric shape that can be split into parts, each of which is (at least approximately) a reduced-size copy of the whole,” as he once defined it. On college campuses, T-shirts soon appeared adorned with fractal figures, which often appear in nature: think of snowflakes.
While most scientists try to understand and describe what is regular, repetitive, and hence predictable in nature, Mandelbrot mostly interests himself in the accidental, what he calls “monsters.” The fractal mathematics that he invented lets us see the hidden rules of apparent disorder, the order behind monstrous chaos. But can we deduce from the idea of fractals that any seemingly chaotic occurrence—like prices on the stock exchange—can be anticipated? Many financial economists think so and have tried to use mathematical formulas to master market volatility.
Mandelbrot dismisses these economists as hubristic and notes that all of their predictive theories have proved false. They commit two scientific errors, he says. First, they try to transport the theory of fractals into a field where it does not apply. (This is a common temptation—recall Marx, who tried to apply the laws of thermodynamics and Darwinian evolution to history and the social sciences.) Second, they do not start from the empirical data but instead build a curve first, assuming a logic behind volatility. When stock prices are shooting upward, these economists win media praise and even Nobel Prizes. When the market crashes, the same economists suddenly become less visible. It happens that one of them, Robert Merton, who shared a Nobel with Myron Scholes for a theory on predicting financial markets, lives in Mandelbrot’s apartment building. “We do not see him very often these days,” Mandelbrot says, tongue in cheek.
When one looks closely at financial-market data, as Mandelbrot has done throughout his life, unexplained accidents appear to be common—even the rule, so to speak. But if prices prove so erratic, there is no way for investors to become rich by incremental investments, Mandelbrot believes. Any portfolio can only follow the market, not beat it.
But some investors do make fortunes, right? “Yes, this is called ‘luck,’ ” answers Mandelbrot. As the financial market is prone to major accidents, one can strike it rich by being positioned luckily on the right side of the road. All major fortunes on the financial market have basically been made in a day, never on an incremental basis, he maintains. Soros comes to mind: in 1992, he earned $2 billion betting against the British pound. He got lucky and never did it again. Since that day, he has managed his fortune, and his faithful clients’ fortunes, by following the ups and downs of market volatility.
Mandelbrot suggests no alternative approach to the theories that pretend to predict volatility. “My role as a scientist,” he says, “is to demonstrate that available theories are plainly wrong. This does not mean that in my own turn I will invent a substitute snake oil that will make you rich.” The financial market is inherently a dangerous place to be, he emphasizes. “By drawing your attention to the dangers, I will not make you rich, but I could help you avoid bankruptcy. I am a doomsday prophet—I promise more blood and tears than windfall profits.”
Both scientists and the public like to believe in what Mandelbrot calls “mild randomness,” in which ordinary laws of probability apply, as is the case with many phenomena in nature. This happens not to be the case with financial markets. History—as well as Mandelbrot’s own empirical research, beginning with a famous 1960s study of the unpredictability of cotton prices—shows that the law of the financial markets is instead “wild randomness,” and that no mathematical model will ever be able to tame it.
http://www.city-journal.org/2009/19_3_financial-markets.html
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Hoover's pro-labor stance helped cause Great Depression, economist says
August 28th, 2009 By Meg Sullivan
(PhysOrg.com) -- Pro-labor policies pushed by President Herbert Hoover after the stock market crash of 1929 accounted for close to two-thirds of the drop in the nation's gross domestic product over the two years that followed, causing what might otherwise have been a bad recession to slip into the Great Depression, a UCLA economist concludes in a new study. "These findings suggest that the recession was three times worse — at a minimum — than it would otherwise have been, because of Hoover," said Lee E. Ohanian, a UCLA professor of economics.
The policies, which included both propping up wages and encouraging job-sharing, also accounted for more than two-thirds of the precipitous decline in hours worked in the manufacturing sector, which was much harder hit initially than the agricultural sector, according to Ohanian.
"By keeping industrial wages too high, Hoover sharply depressed employment beyond where it otherwise would have been, and that act drove down the overall gross national product," Ohanian said. "His policy was the single most important event in precipitating the Great Depression."
The findings are slated to appear in the December issue of the peer-reviewed Journal of Economic Theory and were posted today on the website of the National Bureau of Economic Reasearch (www.nber.org) as a working paper.
Hoover's approach is unlikely to be considered today as a means of responding to economic crisis, but it does illustrate the perils of ill-conceived government policies in times of economic upheaval and confusion, says Ohanian, a macroeconomist who specializes in economic crises.
"Hoover's response illustrates the danger of knee-jerk policy reactions in a time of crisis," he said. "Almost always when bad policies are adopted, it's during a period of crisis. The real risk is picking a cure that turns out to be worse than the disease."
While economists have long debated the factors that led to the Great Depression, Ohanian's findings are novel because they don't simply pinpoint — they also quantify — the considerable impact of such labor-market distortions. The findings also challenge Hoover's pro-market reputation. "This was a president who had served as secretary of commerce under his predecessor, yet many of the mistakes he made were remarkably similar to those later made by Franklin D. Roosevelt, whose reputation is much less market-based and more pro-labor," Ohanian said.
To isolate the culprit of the Depression, Ohanian spent four years sifting through historic wage data from the Conference Board, information from Hoover's own memoirs and press accounts of the Hoover administration. Ohanian also conducted sophisticated economic modeling that allowed him to see how the economy would have progressed had Hoover's policies not been enacted.
At the time, Hoover was concerned about two potential crises, Ohanian found. He was afraid the stock market collapse of October 1929 would result in a recession with deflation, leading to dramatic wage cuts, as a period of deflation had done just a decade earlier. And because of a series of recent legislative and court decisions that had expanded the power of organized labor, he also worried about the possibility of crippling strikes if such wage cuts were to come to pass.
"Hoover had the idea that if wages were kept high for workers and they shared jobs instead of being laid off, they would be able to buy more goods and services, which would help the economy improve," Ohanian said.
After the crash, Hoover met with major leaders of industry and cut a deal with them to either maintain or raise wages and institute job-sharing to keep workers employed, at least to some degree, Ohanian found. In response, General Motors, Ford, U.S. Steel, Dupont, International Harvester and many other large firms fell in line, even publicly underscoring their compliance with Hoover's program.
Designed to placate labor and safeguard workers' buying power, the step had an unintended effect: As deflation eventually did set in, the inflation-adjusted value of these wages rose over time, effectively giving workers a raise precisely at the time when companies were least in a position to afford such increases and precisely when productivity was beginning to fall.
"The wage freeze effectively raised the cost of labor and, by extension, production," Ohanian said. "If you artificially raise the price of production, your costs go way up and you pass them on to the customers, and they buy that much less."
Reluctant to lower wages due to Hoover's entreaties, employers in the manufacturing sector responded by reducing the work week and laying off workers. By September 1931, the manufacturing sector was already hurting: Hours clocked by workers had fallen by 20 percent and employment by 35 percent.
Overall, the economy suffered, with the GDP falling by 27 percent. In a situation in which wages would have been expected to fall, they remained at about 92 percent of what they had been two years earlier. When adjusted for deflation, they had actually climbed by 10 percent, Ohanian found. Interestingly, during the dreaded period of deflation a decade earlier, some manufacturing wages fell 30 percent. GDP, meanwhile, only dropped by 4 percent.
"The Depression was the first time in the history of the U.S. that wages did not fall during a period of significant deflation," Ohanian said.
The paper, "What — or Who — Started the Great Depression" is not Ohanian's first research on the underlying causes of this dark period in American history. Along with former UCLA economics professor Harold L. Cole (now a professor of economics at the University of Pennsylvania), Ohanian published research in 2004 indicating that Roosevelt's response also had an unintentionally deleterious effect. By their calculations, fallout from Roosevelt's National Industrial Recovery Act (NIRA) dragged out the Depression for seven years longer than a more market-based response would have.
While several other economists have also implicated Roosevelt in the Great Depression's extensive duration, the UCLA research is unique because it is based on mathematical models that pinpointed the exact extent to which Roosevelt's policies prolonged the Depression, according to the UCLA economists. They calculated that the policies accounted for 60 percent of the Depression's duration.
Similarly, Hoover's employment policies have been cited as a precipitating factor in Depression. But the latest UCLA study uses modern economic tools to quantify the impact of the president's wage freeze and job-sharing policies and also provides a theory for why the major industrial businesses followed Hoover's request. By Ohanian's calculation, Hoover's policies accounted for 18 percent of the 27 percent decline in the nation's GDP by the fourth quarter of 1931.
Often-cited causes of the Depression include banking failures and large contractions of the money supply. The problem is, Ohanian says, neither of these events occurred significantly until mid-1931 — nearly two years after Hoover's fateful wage policies.
Moreover, unemployment did not plague the part of the labor force that was exempt from Hoover's 1929 wage policy. While farm employment would be reduced by Dust Bowl climatic conditions in 1935, at the outset of the Depression it remained surprisingly strong, Ohanian found. In fact, hours clocked in the agricultural sector, which comprised about 30 percent of the workforce at the time, were roughly unchanged through 1931. And unlike in the manufacturing sector, agricultural wages fell dramatically, by 30 percent.
"Wages fell substantially, but farm employment rates held steady until the Dust Bowl," Ohanian said.
Despite continued calls from industry for wage cuts in 1930 and 1931, Hoover held industry to their original promise, Ohanian found. By late 1931, manufacturers requested that Hoover provide relief in the form of increasing their ability to collude for price-setting purposes. Hoover denied this request. In response, industry signaled they would no longer support the wage freeze.
"In late 1931, industry finally did cut wages, but it was too late," Ohanian said. "By this point, the economy was in an unprecedented, full-blown depression."
Source: University of California - Los Angeles
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Money figures show there's trouble ahead
Private credit is contracting on both sides of the Atlantic. The M3 money data is flashing early warning signals of a deflation crisis next year in nearly half the world economy. Emergency schemes that have propped up spending are being withdrawn, gently or otherwise.
By Ambrose Evans-Pritchard
Published: 8:48PM BST 26 Sep 2009
Comments 39 | Comment on this article
Unemployment benefits have masked social hardship unto now but these are starting to expire with cliff-edge effects.The jobless army in Spain will be reduced to €100 a week; in Estonia to €15.
Whoever wins today's elections in Germany will face the reckoning so deftly dodged before. Kurzarbeit, that subsidises firms not to fire workers, is running out. The cash-for-clunkers scheme ended this month. It certainly "worked".
Car sales were up 28pc in August, but only by stealing from the future. The Center for Automotive Research says sales will fall by a million next year: "It will be the largest downturn ever suffered by the German car industry."
Fiat's Sergio Marchionne warns of "disaster" for Italy unless Rome renews its car scrappage subsidies. Chrysler too will see some "harsh reality" following the expiry of America's scheme this month. Some expect US car sales to slump 40pc in September.
Weaker US data is starting to trickle in. Shipments of capital goods fell by 1.9pc in August. New house sales are stuck near 430,000 – down 70pc from their peak – despite an $8,000 tax credit for first-time buyers. It expires in November.
We are moving into a phase when most OECD states must retrench to head off debt-compound traps.
Britain faces the broad sword; Spain has told ministries to slash 8pc of discretionary spending; the IMF says Japan risks a funding crisis.
If you look at the sheer scale of global stimulus this year, what shocks is how little has been achieved. China's exports were down 23pc in August; Japan's were down 36pc; industrial production has dropped by 23pc in Japan, 18pc in Italy, 17pc in Germany, 13pc in France and Russia and 11pc in the US.
Call this a "V-shaped" recovery if you want. Markets are pricing in economic growth that is not occurring.
The overwhelming fact is that private spending has slumped in the deficit countries of the Anglosphere, Club Med, and East Europe but has not risen enough in the surplus countries (East Asia and Germany) to compensate. Excess capacity remains near post-war highs across the world.
Yet hawks are already stamping feet at key central banks.
Are they about to repeat the errors made in early 2007, and then again in the summer of 2008, when they tightened – or made hawkish noises – even as the underlying credit system fell apart?
Fed chairman Ben Bernanke spoke in April 2008 of "a return to growth in the second half of this year", and again in July 2008 that growth would "pick up gradually over the next two years".
He could only have thought such a thing if he was ignoring the money data. Key aggregates had been in free-fall for months.
I cited monetarists in July 2008 warning that the lifeblood of the Western credit was "draining away". For whatever reason (the lockhold of New Keynesian ideology?) the Fed missed the signal.
So did the European Central Bank when it raised rates weeks before the Lehman collapse, blathering about a "1970s inflation spiral."
Yes, the money entrails can mislead. The gurus squabble like Trotskyists. But you ignore the data at your peril.
Tim Congdon from International Monetary Research says that US bank loans have been falling at an annual pace of almost 14pc since early Summer: "There has been nothing like this in the USA since the 1930s."
M3 money has been falling at a 5pc rate; M2 fell by 12pc in August; the Commercial Paper market has shrunk from $1.6 trillion to $1.2 trillion since late May; the Monetary Multiplier at the St Louis Fed is below zero (0.925). In Europe, M3 money has been contracting at a 1pc rate since April.
Private loans have fallen by €111bn since January. Whether you see a credit crunch in Euroland depends where you sit. It is already garrotting Spain. Germany's Mittelstand says it is "a reality", even if not for big companies that issue bonds. The Economy Ministry is drawing up plans for €250bn in state credit, knowing firms will be unable to roll over debts.
Bundesbank chief Axel Weber sees no crunch now, yet fears a second pulse of the crisis this winter. "We are threatened by stress from our domestic credit industry through the rise in the insolvency of firms and households," he says.
Draw your own conclusion. Western central banks will have to "monetize" deficits on a huge scale to stave off debt deflation. The longer they think otherwise, the worse it will be.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6234939/Money-figures-show-theres-trouble-ahead.html
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Is monetarism the cause and solution of everything?
I think not.
Certainly the printing presses have had the politicians throwing money out the door of helicopters everywhere to little or no avail.
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By ROBERT J. BARRO AND CHARLES J. REDLICK
The global recession and financial crisis have refocused attention on government stimulus packages. These packages typically emphasize spending, predicated on the view that the expenditure "multipliers" are greater than one—so that gross domestic product expands by more than government spending itself. Stimulus packages typically also feature tax reductions, designed partly to boost consumer demand (by raising disposable income) and partly to stimulate work effort, production and investment (by lowering rates).
World War II defense spending offers a good measure of stimulus effects.
The existing empirical evidence on the response of real gross domestic product to added government spending and tax changes is thin. In ongoing research, we use long-term U.S. macroeconomic data to contribute to the evidence. The results mostly favor tax rate reductions over increases in government spending as a means to increase GDP.
For defense spending, the principal long-run variations reflect the buildups and aftermaths of major wars—World War I, World War II, the Korean War and, to a much lesser extent, the Vietnam War. World War II tends to dominate, with the ratio of added defense spending to GDP reaching 26% in 1942 and 17% in 1943, and then falling to -26% in 1946.
Wartime spending is helpful for estimating spending multipliers for three key reasons. First, the variations in spending are large and include positive and negative values. Second, since the main changes in military spending are independent of economic developments, it is straightforward to isolate the direction of causation between government spending and GDP. Third, unlike many other countries during the world wars, the U.S. suffered only moderate loss of life and did not experience massive destruction of physical capital. In addition, because the unemployment rate in 1940 exceeded 9% but then fell to 1% in 1944, there is some information on how the multiplier depends on the strength of the economy.
For annual data that start in 1939 or earlier (and, thereby, include World War II), the defense-spending multiplier that applies at the average unemployment rate of 5.6% is in a range of 0.6-0.7. A multiplier less than one means that, overall, other components of GDP fell when defense spending rose. Empirically, our research shows that most of the fall was in private investment, with personal consumer expenditure changing little.
Our research also shows that greater weakness in the economy raises the estimated multiplier: It increases by around 0.1 for each two percentage points by which the unemployment rate exceeds its long-run median of 5.6%. Thus the estimated multiplier reaches 1.0 when the unemployment rate gets to about 12%.
To evaluate typical fiscal-stimulus packages, however, nondefense government spending multipliers are more important. Estimating these multipliers convincingly from U.S. time series is problematical, however, because the movements in nondefense government purchases (dominated since the 1960s by state and local outlays) are closely intertwined with the business cycle. Thus the explanation for much of the positive association between nondefense spending and GDP is that government spending increased in response to growing GDP, rather than the reverse.
The effects of tax rates on GDP growth can be analyzed from a time series we've constructed on average marginal income-tax rates from federal and state income taxes and the Social Security payroll tax. Since 1950, the largest declines in the average marginal rate from the federal individual income tax occurred under Ronald Reagan (to 21.8% in 1988 from 25.9% in 1986 and to 25.6% in 1983 from 29.4% in 1981), George W. Bush (to 21.1% in 2003 from 24.7% in 2000), and Kennedy-Johnson (to 21.2% in 1965 from 24.7% in 1963). Tax rates rose particularly during the Korean War, the 1970s and the 1990s. The average marginal tax rate from Social Security (including payments from employees, employers and the self-employed) expanded to 10.8% in 1991 from 2.2% in 1971 and then remained reasonably stable.
For data that start in 1950, we estimate that a one-percentage-point cut in the average marginal tax rate raises the following year's GDP growth rate by around 0.6% per year. However, this effect is harder to pin down over longer periods that include the world wars and the Great Depression.
It would be useful to apply our U.S. analysis to long-term macroeconomic time series for other countries, but many of them experienced massive contractions of real GDP during the world wars, driven by the destruction of capital stocks and institutions and large losses of life. It is also unclear whether other countries have the necessary underlying information to construct measures of average marginal income-tax rates—the key variable for our analysis of tax effects in the U.S. data.
The bottom line is this: The available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise GDP by less than the increase in government spending. Defense-spending multipliers exceeding one likely apply only at very high unemployment rates, and nondefense multipliers are probably smaller. However, there is empirical support for the proposition that tax rate reductions will increase real GDP.
Mr. Barro is a professor of economics at Harvard. Mr. Redlick is a recent Harvard graduate. This op-ed is based on a working paper issued by the National Bureau of Economic Research in September.
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**Mr. Barro is a professor of economics at Harvard. Mr. Redlick is a recent Harvard graduate.**
I would imagine they are not popular on campus about now.
Would the NYT carry their piece as opposed to the WSJ?
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Well, the WSJ is a FAR lesser publication than it used to be before Murcdoch took over.
As for Pravda on the Hudson, maybe it didn't read the piece and just assumed if they were from Harvard it was OK. :lol:
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Is the Dollar Going to Collapse?
by Mark Skousen
10/09/2009
Rumors are flying that secret meetings are taking place between Arab states, China, Russia, Japan and France, to dump the dollar and replace the U.S. currency’s role in the pricing of oil. The dollar fell against the euro, yen and Swiss franc, while gold hit new highs of $1,041 an ounce.
Is there any truth to the rumors that the dollar is being replaced by a basket of foreign currencies, and what will be the impact your investments and the U.S. economy?
The fact is that this rumor has been making the rounds for years. It has been repeatedly denied by officials, but that doesn’t mean foreigners are happy with the falling dollar.
But facts are a stubborn thing: The dollar is still the world’s currency. Oil, gold and other commodities have to be conveniently priced in some currency, and the dollar has traditionally been the currency of choice for a variety of reasons: The United States remains by far the world’s largest economy and trading partner. It remains the only military superpower. And the Federal Reserve is the most powerful central bank.
The Treasury securities market is the world’s largest liquid market. Where else is China going to keep its foreign exchange reserves of $2.1 trillion? As of July 2009, foreigners owned the following amounts in U.S. Treasuries:
Holder Total
China $800.5 billion
Japan $724.5 billion
United Kingdom $220.0 billion
Caribbean Banks $193.2 billion
Oil Exporters $189.2 billion
Brazil $138.1 billion
(Source: the United States Treasury)
In short, the United States is the 800-pound gorilla, and will continue to be the principal investment vehicle for foreign reserves.
Now of course the Chinese and other foreign countries will make every effort to diversify their holdings into euros, yen, Swiss francs, and British pounds, as well as stockholding gold and other commodities.
That’s just prudent diversification.
And that’s what’s happening. Last week, the IMF reported that the dollar's share of total reserves has fallen to its lowest level since 1995.
Despite all the talk of pricing oil in another currency, the dollar reigns supreme. Russia has been talking about doing a oil contract in Rubbles for years, but it hasn’t happened. The Arabs lost out to the New York Mercantile Exchange in the early 1980s in setting the price of crude. Crude oil is the world's most actively traded commodity, and the NYMEX light sweet crude oil futures contract is the world's most liquid form for crude oil trading, as well as the world's largest-volume futures contract trading on a physical commodity, and the pricing is in dollars. So far, changing the pricing to a basket of foreign currencies has proven unworkable.
The biggest risk is a massive crash or run on the dollar, and that’s always conceivable if the Federal Reserve engages in reckless irresponsible monetary policy.
The dollar has fallen sharply this year, losing over 20% against the euro, but so far it’s been an orderly decline.
In order for the dollar to rally, the Fed needs to abandon its “zero” interest rate policy, the Obama administration needs to reign in its deficit spending, and the US economy needs to recover sharply from the Great Recession. So far neither event has happened.
Until these three events occur, it would be wise for investors to keep buying gold and silver, especially silver. Gold has hit new highs, but silver at $17 an ounce is still way below its all time high of $50 an ounce set in 1980.
(I recommend the major chapter on gold in my book, EconoPower: How a New Generation of Economists is Transforming the World (Wiley, 2008).)
Mr. Skousen is a renowned financial economist, author and university professor. He has been the editor of the financial advice newsletter, Forecasts & Strategies, for 28 years. Two of his books highlight Milton Friedman's career: "The Making of Modern Economics" and "Vienna and Chicago, Friends or Foes?." Check out his latest book "The Big Three in Economics: Adam Smith, Karl Marx, And John Maynard Keynes" or "Investing in One Lesson" and "EconoPower: How a New Generation of Economists is Transforming the World." He is the producer of FreedomFest, the world's largest gathering of free minds, in Las Vegas every July (www.freedomfest.com).
http://www.humanevents.com/article.php?id=33892
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PAAS is my investment in silver and it is doing VERY nicely, but I would hesitate to use the high of $50 in any evaluation-- wasn't that number generated by the Hunt brothers trying to corner the silver market?
Is a 20% decline in one year for the world's primary currency truly "orderly"?
Yes interest rate increases can/would dramatically increase the dollar's exchange rate, but with the deficits and debt already in the pipeline and seditious motivations in the White House to devalue our debt, how much do we want to rely upon that?
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What That Jobs Report Might Really Mean
December 5, 2009 1:04 AM by Grayson Lilburne (Archive)
This post is one in a series entitled Posthumous Refutations. Previously in this series: Cash for Cranks.
Here is a statement release from Christina Roemer, quick to take today's employment report as...
...the most hopeful sign yet that the stabilization of financial markets and the recovery in economic growth may be leading to improvements in the labor market. (...)
There are many bumps in the road ahead. The monthly employment and unemployment numbers are volatile and subject to substantial revision. Therefore, it is important not to read too much into any one monthly report, positive or negative. But, it is clear we are moving in the right direction.
I've done a lot of driving today, so I've heard a lot of coverage of the employment report on the radio, and the only misgivings about it that I heard was that it might be a "blip". There was nary a whisper that just perhaps the specific jobs created in the specific industries they were created in might be unsustainable. Even some mainstream commentators admit that the easy credit policies of the Fed at least contributed to the bubble in the first place. Yet, with Bernanke having doubled the Fed's balance sheet in order to keep interest rates around 0%, is it such a hard connection to make that an even more extreme easy credit policy just might induce a false-recovery bubble?
In fact, this rebound in employment, following a "jobless recovery" in capital markets (as evidenced in the bull market we've been having) strikes me as perfectly fitting the Austrian Business Cycle Theory's characterization of an economic bubble.
In Economic Depressions: Their Cause and Cure, Murray N. Rothbard considers:
...what happens when the rate of interest falls... from government interference that promotes the expansion of bank credit? In other words, if the rate of interest falls artificially, due to intervention, rather than naturally, as a result of changes in the valuations and preferences of the consuming public?
What happens is trouble. For businessmen, seeing the rate of interest fall, react as they always would and must to such a change of market signals: They invest more in capital and producers' goods. Investments, particularly in lengthy and time-consuming projects, which previously looked unprofitable now seem profitable, because of the fall of the interest charge. In short, businessmen react as they would react if savings had genuinely increased: They expand their investment in durable equipment, in capital goods, in industrial raw material, in construction as compared to their direct production of consumer goods.
..which would explain the recent run-up in the housing market (durable goods) and the stock markets (capital goods). It is only later that
...eventually this money gets paid out in ... higher wages to workers in the capital goods industries.
...higher wages being, of course, a function of an increased demand for labor: thus today's labor market rebound.
What comes next in the narrative should put quite a damper on Roemer's upbeat view of today's jobs report and the labor market upswing it may represent:
The problem comes as soon as the workers and landlords--largely the former, since most gross business income is paid out in wages--begin to spend the new bank money that they have received in the form of higher wages. For the time-preferences of the public have not really gotten lower; the public doesn't want to save more than it has. So the workers set about to consume most of their new income, in short to reestablish the old consumer/saving proportions. This means that they redirect the spending back to the consumer goods industries, and they don't save and invest enough to buy the newly-produced machines, capital equipment, industrial raw materials, etc. This all reveals itself as a sudden sharp and continuing depression...
Now that doesn't sound like a "right direction" to me.
What Christina Roemer does not understand is that, for society as a whole, jobs are not ends in and of themselves. For society, they are only a boon insofar as they produce goods and services without consuming capital. For society, they are liabilities insofar as they are allocated toward unsustainable projects, as they will tend to be under artificial credit expansion. The consequences of Bernanke's mind-boggling credit expansion will eventually catch up to us. Far from being a sign of better days to come, the job report everybody's so excited about today may very well be a harbinger of those consequences.
http://blog.mises.org/archives/011164.asp
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Ben S. Bernanke doesn't know how lucky he is. Tongue-lashings from Bernie Sanders, the populist senator from Vermont, are one thing. The hangman's noose is another. Section 19 of this country's founding monetary legislation, the Coinage Act of 1792, prescribed the death penalty for any official who fraudulently debased the people's money. Was the massive printing of dollar bills to lift Wall Street (and the rest of us, too) off the rocks last year a kind of fraud? If the U.S. Senate so determines, it may send Mr. Bernanke back home to Princeton. But not even Ron Paul, the Texas Republican sponsor of a bill to subject the Fed to periodic congressional audits, is calling for the Federal Reserve chairman's head.
I wonder, though, just how far we have really come in the past 200-odd years. To give modernity its due, the dollar has cut a swath in the world. There's no greater success story in the long history of money than the common greenback. Of no intrinsic value, collateralized by nothing, it passes from hand to trusting hand the world over. More than half of the $923 billion's worth of currency in circulation is in the possession of foreigners.
View Full Image
Associated Press
President Richard M. Nixon after his Aug. 15, 1971, speech which established that dollars could not be exchanged for gold.
.In ancient times, the solidus circulated far and wide. But it was a tangible thing, a gold coin struck by the Byzantine Empire. Between Waterloo and the Great Depression, the pound sterling ruled the roost. But it was convertible into gold—slip your bank notes through a teller's window and the Bank of England would return the appropriate number of gold sovereigns. The dollar is faith-based. There's nothing behind it but Congress.
But now the world is losing faith, as well it might. It's not that the dollar is overvalued—economists at Deutsche Bank estimate it's 20% too cheap against the euro. The problem lies with its management. The greenback is a glorious old brand that's looking more and more like General Motors.
You get the strong impression that Mr. Bernanke fails to appreciate the tenuousness of the situation—fails to understand that the pure paper dollar is a contrivance only 38 years old, brand new, really, and that the experiment may yet come to naught. Indeed, history and mathematics agree that it will certainly come to naught. Paper currencies are wasting assets. In time, they lose all their value. Persistent inflation at even seemingly trifling amounts adds up over the course of half a century. Before you know it, that bill in your wallet won't buy a pack of gum.
For most of this country's history, the dollar was exchangeable into gold or silver. "Sound" money was the kind that rang when you dropped it on a counter. For a long time, the rate of exchange was an ounce of gold for $20.67. Following the Roosevelt devaluation of 1933, the rate of exchange became an ounce of gold for $35. After 1933, only foreign governments and central banks were privileged to swap unwanted paper for gold, and most of these official institutions refrained from asking (after 1946, it seemed inadvisable to antagonize the very superpower that was standing between them and the Soviet Union). By the late 1960s, however, some of these overseas dollar holders, notably France, began to clamor for gold. They were well-advised to do so, dollars being in demonstrable surplus. President Richard Nixon solved that problem in August 1971 by suspending convertibility altogether. From that day to this, in the words of John Exter, Citibanker and monetary critic, a Federal Reserve "note" has been an "IOU nothing."
From the Solidus to the Euro
A guide to currencies through the ages.
Solidus
Art Resource, NY
A gold coin introduced around A.D. 310, early in the reign of Emperor Constantine I. In the Byzantine currency system, it was the prime coin against which other coins could be exchanged and was used in international trade and major payrolls. Its use continued into the 11th century, when Constantine IX began debasing it.
.Pound sterling
Getty Images
The U.K. currency is the oldest currency still in use. Its paper form was introduced when the Bank of England was formed in 1694.
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Dollar
American Numismatic Society
The Coinage Act of 1792 affirmed the dollar as the U.S. currency unit and specified that each was to equal the value of the Spanish milled dollar and was to contain 371 4/16 grains of pure, or 416 grains of standard, silver.
.Euro
Deutsche Bundesbank/Getty Images
This common currency for 16 European Union countries launched on Jan. 1, 1999, replacing, among others, Italy's lira, Germany's Deutsche mark and France's franc. The euro erased most of Western Europe's monetary borders.
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.To understand the scrape we are in, it may help, a little, to understand the system we left behind. A proper gold standard was a well-oiled machine. The metal actually moved and, so moving, checked what are politely known today as "imbalances." Say a certain baseball-loving North American country were running a persistent trade deficit. Under the monetary system we don't have and which only a few are yet even talking about instituting, the deficit country would remit to its creditors not pieces of easily duplicable paper but scarce gold bars. Gold was money—is, in fact, still money—and the loss would set in train a series of painful but necessary adjustments in the country that had been watching baseball instead of making things to sell. Interest rates would rise in that deficit country. Its prices would fall, its credit would be curtailed, its exports would increase and its imports decrease. At length, the deficit country would be restored to something like competitive trim. The gold would come sailing back to where it started. As it is today, dollars are piled higher and higher in the vaults of America's Asian creditors. There's no adjustment mechanism, only recriminations and the first suggestion that, from the creditors' point of view, enough is enough.
So in 1971, the last remnants of the gold standard were erased. And a good thing, too, some economists maintain. The high starched collar of a gold standard prolonged the Great Depression, they charge; it would likely have deepened our Great Recession, too. Virtue's the thing for prosperity, they say; in times of trouble, give us the Ben S. Bernanke school of money conjuring. There are many troubles with this notion. For one thing, there is no single gold standard. The version in place in the 1920s, known as the gold-exchange standard, was almost as deeply flawed as the post-1971 paper-dollar system. As for the Great Recession, the Bernanke method itself was a leading cause of our troubles. Constrained by the discipline of a convertible currency, the U.S. would have had to undergo the salutary, unpleasant process described above to cure its trade deficit. But that process of correction would—I am going to speculate—have saved us from the near-death financial experience of 2008. Under a properly functioning gold standard, the U.S. would not have been able to borrow itself to the threshold of the poorhouse.
Anyway, starting in the early 1970s, American monetary policy came to resemble a game of tennis without the net. Relieved of the irksome inhibition of gold convertibility, the Fed could stop worrying about the French. To be sure, it still had Congress to answer to, and the financial markets, as well. But no more could foreigners come calling for the collateral behind the dollar, because there was none. The nets came down on Wall Street, too. As the idea took hold that the Fed could meet any serious crisis by carpeting the nation with dollar bills, bankers and brokers took more risks. New forms of business organization encouraged more borrowing. New inflationary vistas opened.
Not that the architects of the post-1971 game set out to lower the nets. They believed they'd put up new ones. In place of such gold discipline as remained under Bretton Woods—in truth, there wasn't much—markets would be the monetary judges and juries. The late Walter Wriston, onetime chairman of Citicorp, said that the world had traded up. In place of a gold standard, it now had an "information standard." Buyers and sellers of the Treasury's notes and bonds, on the one hand, or of dollars, yen, Deutschemarks, Swiss francs, on the other, would ride herd on the Fed. You'd know when the central bank went too far because bond yields would climb or the dollar exchange rate would fall. Gold would trade like any other commodity, but nobody would pay attention to it.
I check myself a little in arraigning the monetary arrangements that have failed us so miserably these past two years. The lifespan of no monetary system since 1880 has been more than 30 or 40 years, including that of my beloved classical gold standard, which perished in 1914. The pure paper dollar regime has been a long time dying. It was no good portent when the tellers' bars started coming down from neighborhood bank branches. The uncaged teller was a sign that Americans had began to conceive an elevated opinion of the human capacity to manage financial risk. There were other evil omens. In 1970, Wall Street partnerships began to convert to limited liability corporations—Donaldson, Lufkin & Jenrette was the first to make the leap, Goldman Sachs, among the last, in 1999. In a partnership, the owners are on the line for everything they have in case of the firm's bankruptcy. No such sword of Damocles hangs over the top executives of a corporation. The bankers and brokers incorporated because they felt they needed more capital, more scale, more technology—and, of course, more leverage.
In no phase of American monetary history was every banker so courageous and farsighted as Isaias W. Hellman, a progenitor of an institution called Farmers & Merchants Bank and of another called Wells Fargo. Operating in southern California in the late 1880s, Hellman arrived at the conclusion that the Los Angeles real-estate market was a bubble. So deciding—the prices of L.A. business lots had climbed to $5,000 from $500 in one short year—he stopped lending. The bubble burst, and his bank prospered. Safety and soundness was Hellman's motto. He and his depositors risked their money side-by-side. The taxpayers didn't subsidize that transaction, not being a party to it.
In this crisis, of course, with latter-day Hellmans all too scarce in the banking population, the taxpayers have born an unconscionable part of the risk. Wells Fargo itself passed the hat for $25 billion. Hellmans are scarce because the federal government has taken away their franchise. There's no business value in financial safety when the government bails out the unsafe. And by bailing out a scandalously large number of unsafe institutions, the government necessarily puts the dollar at risk. In money, too, the knee bone is connected to the thigh bone. Debased banks mean a debased currency (perhaps causation works in the other direction, too).
Many contended for the hubris prize in the years leading up to the sorrows of 2008, but the Fed beat all comers. Under Mr. Bernanke, as under his predecessor, Alan Greenspan, our central bank preached the doctrine of stability. The Fed would iron out the business cycle, promote full employment, pour oil on the waters of any and every major financial crisis and assure stable prices. In particular, under the intellectual leadership of Mr. Bernanke, the Fed would tolerate no sagging of the price level. It would insist on a decent minimum of inflation. It staked out this position in the face of the economic opening of China and India and the spread of digital technology. To the common-sense observation that these hundreds of millions of willing new hands, and gadgets, might bring down prices at Wal-Mart, the Fed turned a deaf ear. It would save us from "deflation" by generating a sweet taste of inflation (not too much, just enough). And it would perform these feats of macroeconomic management by pushing a single interest rate up or down.
It was implausible enough in the telling and has turned out no better in the doing. Nor is there any mystery why. The Fed's M.O. is price control. It fixes the basic money market interest rate, known as the federal funds rate. To arrive at the proper rate, the monetary mandarins conduct their research, prepare their forecast—and take a wild guess, just like the rest of us. Since December 2008, the Fed has imposed a funds rate of 0% to 0.25%. Since March of 2009, it has bought just over $1 trillion of mortgage-backed securities and $300 billion of Treasurys. It has acquired these assets in the customary central-bank manner, i.e., by conjuring into existence the money to pay for them. Yet—a measure of the nation's lingering problems—the broadly defined money supply isn't growing but dwindling.
The Fed's miniature interest rates find favor with debtors, disfavor with savers (that doughty band). All may agree, however, that the bond market has lost such credibility it once had as a monetary-policy voting machine. Whether or not the Fed is cranking too hard on the dollar printing press is, for professional dealers and investors, a moot point. With the cost of borrowing close to zero, they are happy as clams (that is, they can finance their inventories of Treasurys and mortgage-backed securities at virtually no cost). The U.S. government securities market has been conscripted into the economic-stimulus program.
Neither are the currency markets the founts of objective monetary information they perhaps used to be. The euro trades freely, but the Chinese yuan is under the thumb of the People's Republic. It tells you nothing about the respective monetary policies of the People's Bank and the Fed to observe that it takes 6.831 yuan to make a dollar. It's the exchange rate that Beijing wants.
On the matter of comparative monetary policies, the most expressive market is the one that the Fed isn't overtly manipulating. Though Treasury yields might as well be frozen, the gold price is soaring (it lost altitude on Friday). Why has it taken flight? Not on account of an inflation problem. Gold is appreciating in terms of all paper currencies—or, alternatively, paper currencies are depreciating in terms of gold—because the world is losing faith in the tenets of modern central banking. Correctly, the dollar's vast non-American constituency understands that it counts for nothing in the councils of the Fed and the Treasury. If 0% interest rates suit the U.S. economy, 0% will be the rate imposed. Then, too, gold is hard to find and costly to produce. You can materialize dollars with the tap of a computer key.
Let me interrupt myself to say that I am not now making a bullish investment case for gold (I happen to be bullish, but it's only an opinion). The trouble with 0% interest rates is that they instigate speculation in almost every asset that moves (and when such an immense market as that in Treasury securities isn't allowed to move, the suppressed volatility finds different outlets). By practicing price, or interest-rate, control, the Bank of Bernanke fosters a kind of alternative financial reality. Let the buyer beware—of just about everything.
A proper gold standard promotes balance in the financial and commercial affairs of participating nations. The pure paper system promotes and perpetuates imbalances. Not since 1976 has this country consumed less than it produced (as measured by the international trade balance): a deficit of 32 years and counting. Why has the shortfall persisted for so long? Because the U.S., uniquely, is allowed to pay its bills in the currency that only it may lawfully print. We send it west, to the central banks of our Asian creditors. And they, obligingly, turn right around and invest the dollars in America's own securities. It's as if the money never left home. Stop to ask yourself, American reader: Is any other nation on earth so blessed as we?
There is, however, a rub. The Asian central banks do not acquire their dollars with nothing. Rather, they buy them with the currency that they themselves print. Some of this money they manage to sweep under the rug, or "sterilize," but a good bit of it enters the local payment stream, where it finances today's rowdy Asian bull markets.
A monetary economist from Mars could only scratch his pointy head at our 21st century monetary arrangements. What is a dollar? he might ask. No response. The Martian can't find out because the earthlings don't know. The value of a dollar is undefined. Its relationship to other currencies is similarly contingent. Some exchange rates float, others sink, still others are lashed to the dollar (whatever it is). Discouraged, the visitor zooms home.
Neither would the ghosts of earthly finance know what to make of things if they returned for a briefing from wherever they were spending eternity. Someone would have to tell Alexander Hamilton that his system of coins is defunct, as is, incidentally, the federal sinking fund he devised to retire the public debt (it went out of business in 1960). He might have to hear it more than once to understand, but Congress no longer "coins" money and regulates the value thereof. Rather, it delegates the work to Mr. Bernanke, who, a noted student of the Great Depression, believes that the cure for borrowing too much money is printing more money.
Walter Bagehot, the Victorian English financial journalist, would be in for a jolt, too. It would hardly please him to hear that the Fed had invoked the authority of his name to characterize its helter-skelter interventions of the past year. In a crisis, Bagehot wrote in his 1873 study "Lombard Street," a central bank should lend without stint to solvent institutions at a punitive rate of interest against sound collateral. At least, Bagehot's shade might console itself, the Fed was faithful to the text on one point. It did lend without stint.
If Bagehot's ghost would be chagrined, that of Bagehot's sparring partner, Thomson Hankey, would be exultant. Hankey, a onetime governor of the Bank of England, denounced Bagehot in life. No central bank should stand ready to bail out the imprudent, he maintained. "I cannot conceive of anything more likely to encourage rash and imprudent speculation..., " wrote Hankey in response to Bagehot. "I am no advocate for any legislative enactments to try and make the trading community more prudent."
Hankey believed in the price system. It might pain him to discover that his professional descendants have embraced command and control. "We should have required [banks to hold] more capital, more liquidity," Mr. Bernanke rued in a Senate hearing on Thursday. "We should have required more risk management controls." Roll over, Isaias Hellman.
So our Martian would be mystified and our honored dead distressed. And we, the living? We are none too pleased ourselves. At least, however, being alive, we can begin to set things right. The thing to do, I say, is to restore the nets to the tennis courts of money and finance. Collateralize the dollar—make it exchangeable into something of genuine value. Get the Fed out of the price-fixing business. Replace Ben Bernanke with a latter-day Thomson Hankey. Find—cultivate—battalions of latter-day Hellmans and set them to running free-market banks. There's one more thing: Return to the statute books Section 19 of the 1792 Coinage Act, but substitute life behind bars for the death penalty. It's the 21st century, you know.
James Grant, editor of Grant's Interest Rate Observer, is the author, most recently, of "Mr. Market Miscalculates" (Axios Press).
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Planning the Next Bubble
Now that the housing bubble has burst, will government create a green-energy bubble?
By Kling & Schulz
This recession was not planned. The recovery will not be planned, either. One of the great conceits of Keynesian economics is that economic performance can be controlled by government technocrats. The reality is rather different.
The housing bubble that finally burst last year was pumped up by at least three forces: new technology, media and industry hype, and, most consequentially, government planning. Without these three there is no way the housing bubble could have grown so large.
When the dot-com bubble burst in 2000, our government geniuses “solved” the problem of the resulting recession by creating a housing bubble. Now that this plan has exploded to disastrous effect, the planners have come up with their next great project — creating a “green” economy.
During the housing boom, the business and political media were filled with fawning profiles of innovative and ambitious lenders, such as New Century Financial and Countrywide, and visionary homebuilders, such as Toll Brothers and KB Home, which were helping redesign the American dream. Barron’s touted Countrywide’s Angelo Mozilo as one of the world’s most admired corporate leaders for three years in a row. New Century was third on the Wall Street Journal’s “Top Guns” list of best-performing companies as recently as 2005.
Today, the pages of the elite media are filled with stories of Silicon Valley’s venture capitalists boldly investing in green tech, GE’s much-lauded efforts to power a green-energy future, and clean-tech automakers such as Fisker that hope to take on the world’s car majors.
During the housing bubble, politicians of both parties cheered every uptick in the rate of home ownership, heedless of the fragile and unsustainable financing methods behind it. Today, government policymakers can’t conceive of any limit to the benefits of switching to green energy. A big part of the Obama administration’s stimulus effort has been geared toward eco-friendly energy technologies. Republican hawks who want to wean the country off Middle Eastern oil also heavily promote renewable and other energy projects. Energy Secretary Steven Chu is picking winners in the green automotive and energy-generation sectors. Using our money as venture capital, he has provided the electric-car maker Fisker with $500 million in loan guarantees. This, even though Fisker already had substantial investments from the venture-capital firm Kleiner Perkins (the firm of which Al Gore is a partner; another partner, John Doerr, is a member of Obama’s Economic Recovery Advisory Board).
Indeed, we might see increased efforts to inflate a green bubble in the coming years as the Obama administration sees renewable energy as a way of driving down the unemployment rate. In a speech last week at the Brookings Institution touting proposals for job creation, President Obama urged Congress to “consider a new program to provide incentives for consumers who retrofit their homes to become more energy efficient, which we know creates jobs, saves money for families, and reduces the pollution that threatens our environment.”
Further, he proposed expanding “select Recovery Act initiatives to promote energy efficiency and clean-energy jobs which have proven particularly popular and effective. . . . With additional resources, in areas like advanced manufacturing of wind turbines and solar panels, for instance, we can help turn good ideas into good private-sector jobs.”
The echoes of the efforts to expand home ownership are eerie. Expanding the housing supply was always justified in part because it, too, could “create jobs.” A little over ten years ago, then-HUD chief Andrew Cuomo testified before Congress that “we must work to do two key things: We must create housing, and we must create jobs.” He then asked Congress for billions of dollars of loan guarantees and millions of dollars of subsidies that would “help create jobs and leverage private investment.” President Bush was similarly enthusiastic about boosting home ownership, no matter the costs. His former economics adviser Larry Lindsey admitted one year ago that “No one wanted to stop that bubble. It would have conflicted with the president’s own policies.”
And we have now seen how those policies, promoted by both political parties, have turned out. Does anyone doubt today that if a green-energy bubble emerges, President Obama’s own advisers will stay silent, as popping such a bubble would conflict with the president’s own policies?
There is no doubt that the boosters of green-energy programs have their hearts in the right place. But then, so did most of those who were pumping up the housing bubble.
If Congress and the president want to push the country in a greener direction, there are easier — and safer — ways of doing it. Put a price, in the form of a tax, on the pollution or emissions you don’t want (such as carbon). And subsidize early-stage, basic research at the university and lab levels.
Beyond that, let the unique power of the market to experiment through trial and error and to sort and filter innovations proceed without meddling. And let entrepreneurs compete vigorously to pump those innovations into the marketplace without government’s attempting to pick winners and losers. Otherwise we are setting the stage for another bubble. It likely won’t be as large as the housing bubble, but it will be costly and wasteful all the same.
— Arnold Kling is a member of the Mercatus Center's Financial Markets Working Group. Nick Schulz is DeWitt Wallace fellow at the American Enterprise Institute and editor of American.com. They are the authors of From Poverty to Prosperity: Intangible Assets, Hidden Liabilities, and the Lasting Triumph over Scarcity (Encounter, New York, 2009)
National Review Online - http://article.nationalreview.com/?q=MWJjNDc3OTY3YzhlYmUzZWJjZmY1NmI5NDVjZGI2NGU=
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I am sympathetic to the notion that BO and his running dog progressives are following the Japanese strategy-- so lets take a look at Japan.
The following article from Pravda on the Hudson, has much that is hideous economics, so caveat lector.
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TOKYO — The broiled meat is tender and the rice is silky-smooth. But as Japan’s economic recovery falters, beef bowls have come to symbolize one of its most pressing woes: deflation.
Shokuan, which has vending machines but no table service, is an inexpensive place to eat.
Japan’s big three beef bowl restaurant chains, the country’s answer to hamburger giants like McDonald’s, are in a price war. It is a sign, many people say, of the dire state of Japan’s economy that even dirt-cheap beef bowl restaurants must slash their already low prices to keep customers.
The battle has also come to epitomize a destructive pattern repeated across Japan’s economy. By cutting prices hastily and aggressively to attract consumers, critics say, restaurants decimate profits, squeeze workers’ pay and drive the weak out of business — a deflationary cycle that threatens the nation’s economy.
“These cutthroat price wars could usher in another recessionary hell,” the influential economist Noriko Hama wrote in a magazine article that has won much attention. “If we all got used to spending just 250 yen for every meal, then meals priced respectably will soon become too expensive,” she said. “When you buy something cheap, you lower the value of your own life.”
Deflation — defined as a decline in the prices of goods and services — is back in Japan as it struggles to shake off the effects of its worst recession since World War II.
While prices have fallen elsewhere during the global economic crisis, deflation has been the most persistent here: consumer prices among industrialized economies rose by a robust 1.3 percent in the year to November, but fell 1.9 percent in Japan.
In the decline, companies that undercut rivals too aggressively are being chastised as reckless at best, or as traitors undermining the country’s recovery at worst. Every markdown of beef bowl prices by the big three restaurants — Sukiya, Yoshinoya and Matsuya — has been promptly broadcast by the national news media here.
Japan has reason to be worried. Deflation hampered Japan from the mid-1990s, after the collapse of its bubble economy, to at least 2005. Households held back spending on big-ticket goods, knowing they would only get cheaper. Companies were unsure of how much to invest. At the time, the three beef bowl chains were in a similar price war.
Still, government officials back then emphasized the supposed benefits of deflation; falling prices were good for households, they said. Others said deflation would help restructure the economy by weeding out weak companies.
But the drawn-out deflationary cycle weighed heavily on Japan’s recovery. Apart from putting a damper on consumption and investment, asset deflation ravaged the country’s banks and shut out new businesses from credit.
Now that deflation is back, Japan is wary. Unemployment remains near record highs, and wages are falling. Mounting public debt is also a problem, causing Standard & Poor’s on Tuesday to cut its outlook for Japan’s sovereign rating for the first time since 2002. Japan must do more to lift its economy out of deflation and bolster long-term growth, S.& P. said.
Moreover, the population is shrinking, making demand inherently weak. Economists say Japan’s economy is saddled with a 35 trillion yen, or $388 billion, “demand gap,” or almost 7 percent of the country’s economic output.
“With supply continuing to exceed demand by a massive margin, deflationary expectations are proving very difficult to shake,” said Ryutaro Kono, an economist at BNP Paribas in Tokyo. “Households have been tightening their purse strings as the income outlook looks increasingly bleak, and we believe firms will continue to respond by lowering prices.”
Matsuya, the smallest of the three chains, set off the price war by cutting the price of its standard beef bowl to 320 yen, or $3.55, from 380 yen in early December. The market leader, Sukiya, followed suit that month, lowering its price to 280 yen, from 330 yen.
This month, the No. 2 beef bowl chain, Yoshinoya, lowered the price of its beef bowl to 300 yen, from 380 yen, though it says the cut is temporary. A smaller chain, Nakau, has also lowered prices.
The restaurant chains insist they have not downsized their portions, and will make up for cheaper prices by raising efficiency.
“We don’t consider this a price cut. We’ve simply set a new price,” said Naoki Fujita at Zensho, which runs the Sukiya chain. “With incomes falling, we needed to figure out what would be a reasonable price,” he said. “We hope customers who came every week will now come twice a week.”
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In a sense, the beef bowl has always been about low prices. Yoshinoya, the beef bowl pioneer with about 1,560 stores in Japan and overseas, helped bring beef to the Japanese working class with its first restaurant in the Nihonbashi district of Tokyo in 1899.
Though beef was a delicacy at the time, Eikichi Matsuda, the Yoshinoya founder, kept prices cheap by buying in bulk, and serving as many customers as possible from his tiny stall. Speed and efficiency reigned, with workers trained to start preparing a bowl even before a customer sat down.
The same principles still apply at Yoshinoya. At a branch in central Tokyo, servers rarely take more than a minute to fill an order. The average customer spends just 7.5 minutes on a meal, and a small restaurant can serve more than 3,000 customers a day.
But forced to sell at ever-lower prices — and hurt by lower-priced competitors — making a profit has been increasingly difficult. The company suffered a 2.3 billion yen net loss in the nine months to November, and the next month, before Yoshinoya slashed prices, its sales slumped 22.2 percent. In contrast, sales at Sukiya, which serves up the cheapest beef bowl, surged 15.9 percent that month from the previous year.
Yoshinoya is not considering further price cuts. Squeezing out more savings is “like wringing a dry towel,” said a spokesman, Haruhiko Kizu.
Meanwhile, labor disputes at Sukiya show how falling prices and revenue can quickly hurt workers. A string of former workers have sued the chain over withholding overtime pay. Sukiya denies the accusations.
Other companies have been harshly criticized for slashing prices. Fast Retailing, the company behind the fast-growing Uniqlo brand, has garnered as much disapproval as awe for selling jeans as low as 990 yen. McDonald’s, on the other hand, has won kudos for resisting bargain basement prices by introducing a series of big “American-style” burgers for more than 400 yen, considered expensive in today’s Japan.
“Some Japanese companies are waging such reckless price wars, they’re wringing their own necks,” said Masamitsu Sakurai, who heads the influential business lobby Keizai Doyukai. “Companies need to be more creative. They should come up with products that add value.”
Economists say it is absurd to blame individual companies for Japan’s deflation. “For prices to fall during an economic downturn is natural. That stimulates demand and facilitates an eventual recovery,” said Takuji Aida, chief economist for UBS in Tokyo. “But this mechanism doesn’t work when there is such a big demand shortfall.”
“When prices fall because of an increase in productivity at a company, it’s good for the economy,” said Sean Yokota, an economist for UBS based in Tokyo. “It’s the demand gap that’s damaging.”
The government has vowed to lift household incomes through a series of subsidies, including new cash payments to families with small children. But the scale of government payments — 2.3 trillion yen in the case of the child subsidies — is hardly enough to fill the nation’s huge demand shortfall. With interest rates close to zero, Japan also has few options left in monetary policy.
In the meantime, cutthroat price battles are already driving laggards out of business. Wendy’s, the American burger chain, left Japan on Dec. 31.
It is not surprising, considering the competition. A mere stone’s throw from Tokyo’s celebrated Ginza district is Shokuan, the kind of restaurant that is undercutting everyone.
Shokuan, which has no chairs nor table service, is a cluster of beer vending machines huddled under the train tracks. A man behind a tiny counter sells dirt-cheap morsels: fish sausages for 50 yen, prawn crackers for 60 yen, canned yakitori for 160 yen. Many days of the week, Shokuan is spilling over with customers.
“I don’t think there’s anything around here cheaper than this. That’s why I started to come,” said Yasunori Miura, a manufacturing company employee and a recent regular. “This here,” he said, pointing to his fish sausage, “is deflation.”
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1. Ricardo Reis writes,
With regards to its interest-rate policy, the Federal Reserve has followed the advice from theory by committing to …deflation and to keep interest rates at zero for the foreseeable future. It has deviated from the theoretical recommendations by not making a clear commitment to have higher-than-average inflation in the future, and especially by not providing a clear signal that it will keep nominal interest rates low for some time even after the crisis is over.
Scott Sumner might feel a bit less lonely reading this. Thanks to Mark Thoma for the pointer. Reis also tries to explain the Fed's non-standard balance sheet moves.
Rather than try to come up with an economic theory to explain Fed policy, I would suggest a more cynical approach. The goal has been to transfer wealth to banks and to the holders of mortgage securities. The thinking is that those constituents are more important to the economy than taxpayers.
Suppose that in 2013 President Palin meets with Ben Bernanke and says, "I want you to sell your entire portfolio of mortgage securities, by close of business today." I don't think that Bernanke could argue that she was interfering with the conduct of monetary policy.
The Fed has changed from a central bank to a piggy bank. Any economist who tries to interpret Fed policy from the standpoint of economic theory is playing a fool's game.
http://econlog.econlib.org/archives/2010/02/interpreting_fe.html
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Wow. Brilliant piece:
Priceless is worthless: in health care, education, or bonds, the price is (metaphysically) right.
Link to this page
MASTERCARD is right: Some things in life are priceless. Those are the things that don't work. If you care about something--health care, education, a clean environment--put a price on it.
Prices are, or should be, objects of awe and wonder, a mystery to be meditated upon. They are not mere intersections of supply and demand curves, the predictable $19.99 of late-night infomercials: Prices are the Paraclete of the market economy, the mystical intercessor between producers and consumers, making possible miracles of information management and economic coordination that could not otherwise be accomplished. Prices are the epistemological movers and shakers of community life, transporting knowledge instantly and frictionlessly, coordinating the actions of a shipyard in Virginia with those of a steel mill in China, directing global flows of capital, letting clueless executives in Atlanta know that New Coke is a fiasco.
That last bit of Cold War history is worth thinking about: When it hit the market in 1985, New Coke was the most highly engineered, polished, researched, lovingly refined, focus-grouped, test-marketed product of its time. (Socialist governments aren't the only organizations that find their central-planning efforts nullified by the market, which is to say, by reality.) The Coca-Cola Company had everybody from food scientists to psychiatrists working on what they codenamed, in the military-industrial style, Project Kansas. All the best minds told them New Coke was going to be a smashing success, but prices said otherwise: They found that they could not give New Coke away. The price of Old Coke, if you could find it, skyrocketed. Consumers began to spend extraordinary sums of money--to pay very high prices--to import "The Real Thing" from overseas, and an organization calling itself "Old Cola Drinkers of America" was able to raise $120,000 to lobby Coca-Cola for a return to the original formula. Price spoke loud and clear. So poorly regarded was the new product that, in some cities in the South, where Coke is considered an item of particular cultural importance, revanchist cola conservatives paid full price for bottles of New Coke for the sole purpose of emptying them out in the streets as an act of protest. Sales tanked, orders nose-dived, regional bottlers revolted. Coke's brain trust said "X," but prices said "Not X." The price was right.
It took a little trauma to get there, but consumers prevailed, and New Coke followed Communism into the dustbin of history--for similar reasons, but with a lot less bloodshed. The Coca-Cola Company had to bend to reality more quickly than the Marxist-Leninists did. Prices are, among other things, a snapshot of the relationship between what producers are selling and what consumers want. That relationship, though intangible, is a reality, as real as gravity or a skyscraper or a case of pancreatic cancer.
TO compare the contemporaneous declines of New Coke and Soviet Communism from 1985 to 1991 is not to engage in frivolity. As F. A. Hayek noted, the great problem facing central-planning regimes like that of the Soviet Union is that there are no prices to facilitate communication between producers and consumers. The tales of Communist-era production misalignments would be comical if they had not exacted such a high price in human suffering: There would be huge surpluses of, say, pesticides (not to mention tanks and rockets and ideology) but acute shortages of sugar, flour, shoes, and other common items. Toilet paper was used as filler in sausages until that homely commodity itself went into short supply. Burglars would break into houses and steal everything but the money--there was no point in taking it, as there was little or nothing to buy. (That might have changed during the toilet-paper shortage.) For the Soviets, there were no real prices, so there was no feedback loop between producers and consumers: If we'd had that model for soft drinks, we'd still be drinking New Coke, and the cola executives in Atlanta would be strutting around in their nifty military uniforms, with epaulets and braid, telling us to drink our New Coke and like it, because they had determined, RATIONALLY, that this is what we want. A good rule of thumb: Fear the man who says he will make things rational by ignoring reality--and ignoring prices is ignoring reality.
Unhappily, there are sectors of the American economy that are almost as lacking in meaningful prices as those old Soviet shops were. And where the epistemological labor performed by prices goes undone, you may be sure that dysfunction and unhappiness will follow. Most of the occasions that find us lacking good prices are the result of political manipulation of the economy--the allegedly rational government planner overruling prices--but not all of them are. Up until about a decade ago, for example, NASDAQ traders indulged a curious habit of quoting stock prices only in quarter-dollar amounts even though they were actually calculated in amounts of one-eighth of a dollar. (This was back in the pre-decimal Dark Ages of the 1990s.) So a stock that might be offered at one and one-eighth dollars ($1.125) would end up being quoted on the market at one and a quarter ($1.25), increasing the traders' profits. It was a terrible system for everybody but the top dealers and, when the practice was exposed and discontinued, spreads on some high-volume stocks, like Microsoft, dropped by half.
But you don't have to go to Wall Street to find prices being hidden and distorted, with ugly consequences for consumers. One of the most bothersome examples is the lack of price transparency in medical procedures.
A few years ago, needing a medical procedure, I conducted an experiment, partly out of curiosity and partly out of dread of dealing with the insurance bureaucrats who are theoretically paid, by me, to provide me with an agreed-upon service, but who in fact earn their pay in no small part by scheming to renege upon and undermine that agreement in various sneaky ways. I asked my doctor: "If my insurance will not pay for Procedure X, how much would it cost me to pay for it out of pocket?" Doc X looked at me skeptically, as though I had asked to borrow one of his many Ferraris. "Just talk to Alice in our insurance office, and she'll sort out the insurance for you. You may have to jump through some hoops, but they'll cover it." Undeterred (actually, a bit deterred by the many photographs of Ferraris on his office wall), I pressed on: "But, say I didn't have insurance. What would it cost me?" Doc X: "You have insurance." Me: "Yes, but if I want to pay for it myself, how much?" And so on. He had to consult with his business manager. "We bill the insurance companies $25,000 for Procedure X. If you pay for it out of pocket, we charge $18,000." That different parties are charged wildly different prices is one sign of a defective market. Me: "So, is that $18,000 flat? Is there sales tax, or anything else?" Doc X: "The $18,000 is my fee. There's the anesthesiologist, too, and the nurse, and the hospital will have charges, too. And ..." And, as it turns out, there was a whole battery of tests, screenings, pre-procedure procedures, etc., necessary before Procedure X. "So, totaled up, the final bill looks like what?" Doc X is one of the leading practitioners in his field, a man of great learning, and wit, and rarefied taste in fine automobiles. "I have no freaking idea," he said. "You should talk to Alice in insurance." I spent a few days making phone calls, talking to perplexed and befuddled healthcare providers who were absolutely nonplussed by the fact that I wanted to pay them to provide me with health care. The best I could figure was somewhere between $25,000 and $250,000--which is to say, somewhere between a Honda Accord and a Ferrari F430. I talked to Alice in insurance.
OTHERS have reported similar experiences. And even with insurance, it is well nigh impossible to find out in advance how much you will be charged for a particular procedure. Going into a doctor's office for some common blood work, which was covered by my insurance, I tried, very diligently, to discover what I would be charged. "It depends," the receptionist told me. I had the numbers in front of me: My deductible was X, my co-pay was Y, etc. So, "What's the damage?" She: "I don't know." I called Alice in insurance. She didn't know.
Health-care prices are a mishmash for lots of reasons, but one of the main ones is the way we pay for health care--you don't pay the doctor, your insurance company does, an arrangement that gives at least two of the three parties involved a good incentive to obscure prices, so that the consumer has no idea how good or how rotten a deal he is getting while the insurers and hospitals attempt to game and swindle each other. Given the shocking and terrifying size of serious medical bills--my mother's last stay in the hospital billed out at $360,000 (that's a Ferrari 612 Scaglietti for Doc X plus a BMW 5-Series for one of his brats)--the American health-care consumer, quaking in his paper hospital slippers, no longer even asks: "What does this procedure cost?" He only asks: "Does my insurance cover it?" No prices, no negotiation, no mystical coordination between producer and consumer--instead, maddening and expensive and often underhanded mediation by the insurer.
Medicine is complicated; computers are complicated, too, but you can call Dell or Apple or Best Buy or whomever and ask: "What does this sort of computer cost?" and you will receive an answer. And then, when you get to the store--miracle of miracles!--that will be the price. Computers are damned complicated to make, with programmers in the United States and India collaborating with Taiwanese microchip fabricators, Dutch LED manufacturers, Irish customer-support agents, etc. You can get a price on an iMac, but you can't get a price quote on an ingrown toenail.
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If I may make a populist-credibility-destroying admission, I live in New York City and I take yoga classes. Yoga is a super-competitive business in New York--there's big money in sweaty enlightenment. Signing up for a series of classes, I was surprised at the specificity of the prices and the number of options available: There's one rate for a one-off class, a discount for buying ten classes at once, another for a month's or a year's worth of classes. You can elect to bring your own yoga mat or to rent one, or to buy your own but have the studio store and clean it for you for a fee. There is a menu of options for towels, lockers, etc. I counted nine major variables that could be combined in various iterations to determine the final cost of a yoga class, with about 2,000 different possible combinations of those options. The yoga jock working the front desk at my studio does not, I would guess, enjoy quite as generous a neurological endowment as Doc X but, unlike Doc X, he could tell me what things would cost. He had the prices right there in front of him: Magic! I suspect that health care would cost less, and that Americans would be much less anxious about it, if rotator-cuff surgeries were priced as transparently as yoga classes or computers or Oreo cookies.
But rather than bring price transparency to health care, we're going full-tilt boogie in the opposite direction, specifically by insisting that insurance companies be barred from putting real prices on preexisting conditions. Set aside, if you can, all those images of poor little children with terrible diseases being chucked out into the Dickensian streets by mean old insurance executives in top hats and monocles, and think, for a second, about what insurance means, and what a preexisting condition is. Insurance is, basically, a bet: The insurer calculates the probability that a certain unhappy condition will befall a consumer. Actuarially speaking, the number of people who will suffer heart disease or car accidents is fairly predictable within a very large pool, so the insurer can figure out roughly what it will have to pay out in a typical year for every 100,000 policies, and the premium will incorporate that number. But predictable applies to things that happen in the future. Maybe 3 percent of those 100,000 people will need to see a cardiologist in a given year, but 100 percent of the people with diabetes will suffer from diabetes. That's a fact: It's what preexisting means.
Unless Governor Schwarzenegger manages to invent Terminator insurance, whereby Allstate agents travel back in time to insure you against problems you haven't developed yet, you cannot insure against something that already has happened, and to pretend otherwise dumps a whole metaphysical can of worms all over the insurance space--time continuum, landing us in an alternative universe where Insurance = Not Insurance. You'd never take a bet that you knew you were going to lose, right? Insurance companies won't do that, either, unless they get paid to do so--specifically, unless they are allowed to charge at least as much for covering Preexisting Condition X as it's going to cost them to treat Preexisting Condition X. Ignoring the reality of prices--waving the magic wand and saying: "There shall be no price put on preexisting conditions"--does not solve the problem. Health care costs money. The price is right, and you cannot politically engineer your way out of that reality, no matter how many sickly toddlers you parade around on CNN.
HEALTH CARE consumes 17 percent of GDP and the cost is growing at 10 percent a year; we spend about $7,000 per capita on it. Is there anything else you're spending seven grand a year on but can't get a price for? Yes, there is, now that you're heavily invested, through your government, in the financial-services industry, with a diverse portfolio of craptastic positions in mortgage-backed securities, wobbly insurance companies, zombie banks, etc. You'd think that Wall Street suits, of all people, would have been paying attention to prices. But they weren't. There were all sorts of pricing problems leading up to the financial crisis, the fundamental one being that the government wanted housing prices to keep going up but also wanted more and more people to buy houses, i.e. they wanted demand to rise with rising prices rather than to fall as prices went higher--which is to say, they wanted magical pixies to plant unicorn trees and fertilize them with faerie dust. We could cloak the effects of rising house prices for a long time--about 60 years, as it turned out--through all sorts of schemes, including the mortgage-interest tax deduction, artificially low mortgage-interest rates, and Fannie Mae and Freddie Mac shenanigans.
Mortgages, like all loans, entail risk, and risk has a price, too, but we managed to find a way around that, creating a federally chartered cartel of credit-rating agencies--Moody's, Standard & Poor's, Fitch--that mindlessly applied the same formula over and over, slapping Triple-Aratings on securities. And it was the Triple-A rating, not the underlying security, that determined the price banks and other investors put on that risk. We inflated the price of houses, depressed the price of mortgages, and cloaked the price of the risks attached to doing so. But as even the Soviets found out, prices are not to be denied forever: The price of housing turned around, back down toward its normal, non--politically adjusted level, taking the price of mortgage-backed securities with it and sending the cost of borrowing, conversely, through the roof. Boom: financial meltdown. Turned out there was a lot of Triple-A toilet paper in our sausage. The lesson: Don't mess with prices!
So we messed with prices some more. Mark-to-market accounting, the rule that says that banks and other financial institutions must value all the assets on their books at the most recent market price, decimated (and then some) the capital of our banks. Interesting thing about mark-to-market: It creates imaginary prices. If Security A sells at Price X, everybody who owns Security A has to write it down on his books to Price X--even if there is no way in tarnation he'd actually sell it at that price. Think of it this way: For almost any asset, there will be times when distressed parties sell at a fire-sale price. A degenerate gambler may hock his wife's diamonds during a bad run in Vegas, but that does not mean that the folks at Tiffany's will start selling the same jewelry at the price the pawnbroker paid. Mark-to-market essentially turned the structured-finance markets into a Quentin Tarantino Mexican standoff, with every bank holding a gun to every other bank's head: In that situation, there were no real market prices for lots of those mortgage-backed securities, because everybody was too terrified to buy or sell and establish a theoretical price that, because of accounting rules that do not reflect economic reality, would require them to rebalance their books, to catastrophic results.
Prices do their thing because of the nature of economic information. Information basically comes in two flavors: You've got your for-the-ages, centralized, Library of Alexandria--type information, your Big Truths that are relevant at all times for all men. These are things like scientific knowledge and works of history, scholarship, philosophy, the grammars and lexicons of ancient languages--you know: stuff practically nobody ever uses. On the other hand, you have contingent, contextual information of the "Got milk?" variety. "Do I need to buy milk, and, if so, how much and what kind?" is an interesting question, because the answer is likely to be different every time you ask. How much milk you and your family need on any given day is likely to vary wildly: If you're whipping up some homemade ice cream for a summertime party, you will probably buy more milk than you usually do. If your fruity daughter goes vegan, you're buying less. Milk is complicated: Survey the magnificence of the dairy aisle! You have choices that are almost incalculable: 0.5 percent, 1 percent, 1.5 percent, 2 percent, skim, whole, organic, grass-fed, chocolate, strawberry, soy, lactose-free, half-pints and pints and gallons. Apply the whole range of choices to hundreds of millions of consumers making hundreds of purchases apiece over the course of a year and you have an information-management problem of a very hairy kind. No central planner, no matter how powerful or gifted, could predict Americans' milk needs in advance or coordinate them with producers. Prices do that.
But milk prices in the United States are not set by the market--they are set by milk-pricing bureaucrats, partly in the employ of the U.S. government and partly in the employ of Big Bessy. Now, we know for a fact that, given the billions of possible distributions in the dairy market, the allegedly rational planners who set milk prices are not evaluating American milk consumption and production in their full glorious complexity. So, how are they making their decisions? Nobody really knows, but the Organization for Economic Cooperation and Development estimates that American families pay 26 percent more for milk than they would pay if they paid real prices, i.e. the prices set by a free market. Whoever's interest is being looked after, it isn't the interest of the guy on a tight budget staring down a dry bowl of Count Chocula. And as we continue to pretend that there is another unseen economic reality beyond market prices when it comes to health care, banking, housing, labor, cotton, sugar, fuel-efficient Japanese automobiles, solar panels, and every other product with prices distorted by politics--whose interests do you imagine are being served? Yours, chump?
In health care, banking, education, and other critical areas, Uncle Sam is putting his big ugly federal boot squarely on the neck of prices, choking off the lifeblood that allows economies to work efficiently and rationally: not perfectly efficiently, not perfectly rationally--that's the stuff of theoretical models and utopian visions--but making the best use of the best information we have. Lowering health-care costs will require consumers to comparison-shop between providers (insurers, doctors, hospitals, specialists) just as reforming Wall Street will require giving investors real prices for the risks they are bearing--and charging "too big to fail" institutions a real price for the subsidy they now collect from taxpayers. We cannot make intelligent reforms without real prices, because we are blind without them. But given that Washington has been setting the price of milk since the 1930s and shows no sign of giving it up, the chances of their taking up the Gospel of Price are slim. Let him with ears, hear.
http://www.thefreelibrary.com/Priceless+is+worthless:+in+health+care,+education,+or+bonds,+the...-a0213694548
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Unsustainable Spending
By David Warren
A spectre is haunting Europe, and America -- the spectre of Keynesianism finally gone nuts.
What began, not very innocently, as a suggestion that governments should run deficits in bad times, and surpluses in good times, gradually "evolved." In the next phase, governments tried to balance at least the operating account during the best of times. In phase three, governments ran deficits by habit during the good times, but much bigger "stimulus" deficits during the bad times. We are now entering phase four.
Canadians tend to feel smug about this, for we look south at a fiscal catastrophe that had nothing to do with us. For the last generation, we have been trying to claw our way back to budgetary conditions before Pierre Trudeau broke the bank. This had once seemed a small price to pay for his "just society" (or "just watch me"). Surely it was worth mortgaging our children's future, and that of their children, and children's children, for the transient privilege of being governed by such a man. (I can still hear the erotic screams of the women, from the 1968 general election, as Trudeau passed by.)
By about 1984, we had had enough. Michael Wilson balanced the operating account, then Paul Martin balanced the overall budget, and today Jim Flaherty tries to keep the federal debt "shrinking" in proportion to national income. (Of course, the debt itself grows and grows.)
We feel smug because we are watching President Barack Obama do for the United States what Prime Minister Trudeau did for us -- although in their case, on top of what Obama's predecessors did. The U.S. national debt now exceeds $12.3 trillion in a $14.2 trillion economy, and the U.S. government is now piling it on with unprecedented new deficits. The U.S. Treasury's borrowing requirement is, as it were, coming up against the Great Wall of China.
Little things, such as the heart of the U.S. space program, are being gutted to make way for metastasizing social security entitlements and debt service payments that will soon swamp the entire federal budget -- thus requiring the elimination of more little things such as the army, navy and air force. At some point the entitlements simply can't be paid, without hyperinflation.
I am not exaggerating. The American debt is now at levels that ring bells at the International Monetary Fund. And as the world's biggest debtor rapidly accelerates its borrowing, the fiscal carrying capacity of the rest of the planet comes into question.
There are two large reasons why we cannot afford to be smug, up here. The first is that after adding the "entitlement" heritage of our provincial governments to the federal debt load, our position is not much better. The second is that even if it were much better, the tsunami coming from south of the border will anyway sweep all our dikes away.
The Obama administration's financial projections are extremely optimistic, yet even if they all come true, the U.S. debt will continue to grow unsustainably. The kind of alarm falsely placed in "global warming" would more usefully be directed towards the remarkable cooling effect this will have, as all our fiscal and demographic trends converge. For this is a predictable future; an issue where the numbers correspond to real things, not to mere speculation.
We can already see where the U.S. is headed, because Iceland and Greece are showing the way. Both have now passed a point of no return, and both are being followed down that plughole by Britain and several other European countries that will probably precede the U.S. into outright bankruptcy. The State of California also gives some clues.
While an optimist would say that we are witnessing the final demise of the welfare state, and good riddance, a pessimist would observe that everything must go down with it. Moreover, as we have seen from the history of Germany and other countries, fiscal catastrophe accentuates every latent threat to public order.
For our governments have created vast bureaucracies, employing immense numbers whose livelihoods depend entirely (whether they realize it or not) upon the capacity of profit-earning people to pay constantly increasing taxes.
It should have been grasped, decades ago, that the constant transfer of resources from the productive to the unproductive must eventually tip the ship. And when it does, real people go over the side, who get angry when they are thrown in the water. There are consequences to that anger.
The idea that we can spend our way out of a debt crisis -- or what I called above, "Keynesianism gone nuts" -- has already been rejected by the Tea Party movement in the U.S., and has always been rejected by voters of conservative tendency. They know what's wrong with the present order, and have an important teaching function to the rest of the electorate, which doesn't get it yet.
But more urgently, we are in need of a positive conception of how to rebuild economy and society, when Nanny State collapses under her own weight. For yelling "run!" is only a short-term solution.
otiosus@sympatico.ca
Page Printed from: http://www.realclearpolitics.com/articles/2010/02/21/unsustainable_spending_104503.html at February 21, 2010 - 10:38:32 AM PST
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The Future of Money: It’s Flexible, Frictionless and (Almost) Free
By Daniel Roth February 22, 2010 | 12:00 pm | Wired March 2010
Cash in the clouds—neither paper nor plastic.
Illustration: Aegir Hallmundur; Benjamin Franklin: Corbis
THE FUTURE OF MONEY
From Credit Card to PayPal: 3 Ways to Move Money
A simple typo gave Michael Ivey the idea for his company. One day in the fall of 2008, Ivey’s wife, using her pink RAZR phone, sent him a note via Twitter. But instead of typing the letter d at the beginning of the tweet — which would have sent the note as a direct message, a private note just for Ivey — she hit p. It could have been an embarrassing snafu, but instead it sparked a brainstorm. That’s how you should pay people, Ivey publicly replied. Ivey’s friends quickly jumped into the conversation, enthusiastically endorsing the idea. Ivey, a computer programmer based in Alabama, began wondering if he and his wife hadn’t hit on something: What if people could transfer money over Twitter for next to nothing, simply by typing a username and a dollar amount?
Money Over Time
A brief history of
currency technology.
—Bryan Gardiner
9000 BC: Cows
The rise of agriculture made commodities like cattle and grain ideal proto-currencies: Since everyone knew what a heifer or a bushel was worth, the system was more efficient than barter.
Just a decade ago, the idea of moving money that quickly and cheaply would have been ridiculous. Checks took ages to clear. Transferring money from one bank account to another could take days, as banks leisurely handed off funds, levying fees nearly every step of the way. Credit cards made it a little easier to pass money to a friend — provided that friend owned a credit card reader and didn’t mind paying a few percentage points in fees or waiting a couple of days for the payment to process.
Ivey got around that problem by using PayPal. Since 1998, PayPal had enabled people to transfer money to each other instantly. For the most part, its powers were confined to eBay, the online auction company that purchased PayPal in 2002. But last summer, PayPal began giving a small group of developers access to its code, allowing them to work with its super-sophisticated transaction framework. Ivey immediately used it to link users’ Twitter accounts to their PayPal accounts, and his new company, Twitpay, took off. Today, the service has almost 15,000 users.
That may not sound like much, but it sends a message: Moving money, once a function managed only by the biggest companies in the world, is now a feature available to any code jockey. Ivey is just one of hundreds of engineers and entrepreneurs who are attacking the payment ecosystem, seeking out ways small and large to tear down the stronghold the banks and credit card companies have built. Square, a new company founded by Twitter cocreator Jack Dorsey, lets anyone accept physical credit card payments through a smartphone or computer by plugging in a free sugar-cube-sized device — no expensive card reader required. A startup called Obopay, which has received funding from Nokia, allows phone owners to transfer money to one another with nothing more than a PIN. Amazon.com and Google are both distributing their shopping cart technologies across the Internet, letting even the lowliest etailers process credit cards for less than the old price, cutting out middlemen, and figuring out ways to bundle payments to sidestep the credit card companies’ constant nickel-and-diming. Facebook appears to be building its own payment system for virtual goods purchased on its social network and on external sites. And last March, Apple gave iTunes developers the ability to charge subscription fees through their applications, making iTunes the gateway for an entirely new breed of transaction. When Research in Motion announced a similar initiative last fall at a session of the BlackBerry Developer Conference in San Francisco, programmers crowded the room, spilling out into the hallway. About 20 percent of all online transactions now take place over so-called alternative payment systems, according to consulting firm Javelin Strategy and Research. It expects that number to grow to nearly 30 percent in just three years.
But perhaps nobody is as ambitious as PayPal. In November, it further opened up its code, giving anyone with rudimentary programming skills access to the kind of technology and payment-industry experience that Ivey used to build Twitpay. The move could unleash a wave of innovation unlike any we’ve seen since self-publishing came to the Web. Two months after PayPal opened its platform, 15,000 developers had used it to create new payment services, sending $15 million through the company’s pipes. Software developer Big in Japan, whose ShopSavvy program lets people find an item’s cheapest price by scanning its barcode, used PayPal to add a “quick pay” button to its app. LiveOps, a call-center outsourcing firm, built a tool that streamlined payments to its operators, turning what had been a nightmare of invoicing and time-tracking into an automated process. Previously, anybody who wanted to create a service like this would have had to navigate a morass of state and federal regulations and licensing bodies. But now engineers can focus on building applications, while leaving the regulatory and risk-management issues to PayPal. “I can focus on the social side of the business and not on touching money,” as Ivey puts it.
PayPal is just the latest company to try to harness the creative powers of the open Internet. Google created a platform that lets anyone buy or display online advertisements. Facebook allows any developer to write applications for its social network, and Apple does the same with its iTunes App Store. Amazon’s Web Services provides developers the cloud-based processing power and storage space they need to build applications and services. Now PayPal has brought this same spirit of innovation and experimentation to the world of payments. Your wallet may never be the same.
Rate of Exchange One US dollar translated into various virtual currencies.*
Social Network Massively Multiplayer Role-Playing Game Digital Marketplace
10 Facebook Credits >>> 125-170 WOW Gold (World of Warcraft) >>> 80 Microsoft Points >>> 10 Project Entropia Dollars (Entropia Universe) >>> 6 Q coins (QQ.com) >>> 250 Linden Dollars (Second Life) >>> 1,500,000 Star Wars Galaxies Credits >>> 6 Habbo Coins (Habbo Hotel) >>> 10 Twollars (Twitter) >>> 100 Nintendo points >>> 1,000 IMVU credits >>> 80 hi5 coins >>> 5 Farm Cash (FarmVille) >>> 5.71 WildCoins (WildTangent WildGames) >>> 2,000 Therebucks >>> 100 Whyville Pearls >>> 25,000,000 ISK (EVE Online) >>> 0.75 Mahalo Dollars >>> 4 Zealies (Dogster) >>> 10 Ven (Hub Culture)
* Values are approximate. Not all currencies are pegged to the dollar, and many are not intended to be exchanged for cash.
Two months after PayPal opened its platform, 15,000 developers had used it to create new payment services.
Illustration: Heads of State
The banks and credit card companies have spent 50 years building a proprietary, locked-down system that handles roughly $2 trillion in credit card transactions and another $1.3 trillion in debit card transactions every year. Until recently, vendors had little choice but to participate in this system, even though — like a medieval toll road — it is long and bumpy and full of intermediaries eager to take their cut. Take the common swipe. When a retailer initiates a transaction, the store’s point-of-sale system provider — the company that leases out the industrial-gray card reader to the merchant for a monthly fee — registers the sale price and passes the information on to the store’s bank. The bank records its fee and passes on the purchase information to the credit card company. The credit card company then takes its share, authorizes all the previous fees, and sends the information to the buyer’s bank, which routes the remaining balance back to the store. All in all, it takes between 24 and 72 hours for the vendor to get any money, and along the way up to 3.5 percent of the sale has been siphoned away.
In the earliest days of credit cards, those fees paid for an important service. Until the late 1950s, each card was usually tied to a single bank or merchant, limiting its usefulness and resulting in a walletload of unique cards. But when BankAmericard — later renamed Visa — offered to split its fees with other banks, those banks began to offer Visa cards to their customers, and merchants began accepting Visa as a way to drive sales. Meanwhile, Visa and rival MasterCard — as well as distant competitors American Express and Discover — used their share of the fees to build their own global technological infrastructures, pipes that connected all the various banks and businesses to ensure speedy data transmission. For its time, it was a technologically impressive system that, for a price, brought ease and convenience to millions of buyers and sellers.
Money Over Time
A brief history of
currency technology.
—Bryan Gardiner
1200 BC: Shells
Rare or exotic items like shells, whale teeth, and metals were used for trade by cultures around the world because their scarcity and beauty lent them great symbolic value. (The earliest Chinese character for money was even a cowry shell.)
But today, vendors are seeing fewer benefits from paying those fees, even as credit card companies have jacked them up over the years. Credit cards were once a way for a business to differentiate itself from competitors, but now that they’ve grown ubiquitous, nearly all vendors must accept them or risk losing a huge swath of customers. According to a 2003 study in the Review of Network Economics, every sale by credit card costs a merchant six times what the same sale with cash would run. (Cash comes with its own costs, such as requiring more oversight of cashiers, upkeep of vaults, and a bank’s services to process it.)
Not that the store owner is ever quite sure how much a credit card transaction will cost. MasterCard and Visa charge hundreds of different rates — called interchange fees — for every type of card that runs through their networks; mileage cards tend to charge higher fees, for example. And if a retailer accepts one flavor of Visa, say, it has to accept them all, no matter the fee. In 1991, MasterCard had four fees, the highest of which had an interchange rate of 2.08 percent. Today it has 243 fees, and the heftiest one tops out at over 3 percent — more than a 50 percent jump. And yet the service provided has hardly grown any better, faster, or easier to access. “It seems really odd that credit card companies can continue to charge a tax on the economy,” says Aaron Patzer, founder of the financial management service Mint.com, which is now owned by Intuit. “Outside the US government, they are the only entity that has the power to levy a fee across virtually every transaction. Maybe that made sense in the early 1960s, when computer infrastructure was expensive and proprietary. But now, with cheap bits everywhere, the actual cost to do a transaction is pennies.”
There is, in other words, a massive inefficiency to be exploited. And so, an army of engineers and entrepreneurs is rushing in, hoping to do to the payment world what has already been done to the music, movie, and publishing businesses — unseat a legacy industry built on access and distribution, drive the costs to zero, undercut the traditional middlemen, and unleash a wave of innovation. Square’s Dorsey sees his company as creating a new, open system that allows users to swap funds instantly, without a series of interlopers grabbing their share. “We bring an engineering discipline to this problem,” he says. “What we want to know is, how can we get right to the source?”
For businesses that depend on moving money, the distributed, lower-cost, easier-to-access future can’t come soon enough. Mitchell Wolfe, an ecommerce veteran who ran Compaq’s Canadian Internet sales team before moving on to a series of startups, has been wrestling with the payment industry for 15 years. “There’s friction all over the place,” he says. He once helped build an ecommerce system for a Persian rug vendor and was stunned to find that the rug dealer’s bank required it to keep $250,000 in its account in case a charge was disputed. The lesson stuck. When he started bTrendie, a members-only site that sells clothes and gear for pregnant women and new mothers, he decided to do as much as possible through PayPal. Now he accepts payments from customers into the same PayPal account he uses to pay his vendors. The money flows instantly, bypassing direct contact with banks or credit cards. That means no charges for moving money internationally, no extra staffers, no long delays while he waits for transactions to process, and he can keep better track of his cash and data. For Wolfe, the old payment world is a vestigial appendage. “The less you have to deal directly with the banks and credit card companies,” he says, “the better off you are.”
The New Ways
to Pay
The credit card is in decline. Here are a few hints of what might replace it. — D.R.
Twitpay
Type a friend’s Twitter handle, a dollar amount, and twitpay to transfer funds to their PayPal account.
Zong
Instead of entering credit card information anew for every online purchase, users fill in their phone number and the charge shows up on their monthly bill.
Square
The latest from Twitter cofounder Jack Dorsey, this 3/4-inch cube turns any iPhone into a credit card reader.
GetGiving
This mobile app uses PayPal to enable charities to accept small donations without the usual exorbitant credit card transaction fees.
Hub Culture
Travelers can avoid the hassle and fees of swapping dollars for euros by transacting in virtual currency in this international network of workstations.
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In a world of virtual currencies, your wallet may never be the same.
Illustration: Studio Tonne
Money Over Time
A brief history of
currency technology.
—Bryan Gardiner
640 BC: Coins
Historians credit the Lydians of Asia Minor (now Turkey) with developing the first coins. Made of electrum — an amalgam of gold and silver — the innovation was promptly adopted by the Greeks, sparking a commercial revolution in the sixth century BC.
This is the kind of revolutionary fervor that PayPal was always intended to foment. Peter Thiel, PayPal’s cofounder and a die-hard libertarian, launched the company as a means of creating a stateless monetary system, making it possible for anyone to switch, instantly and easily, between global currencies. “PayPal will give citizens worldwide more direct control over their currencies than they’ve ever had before,” he told new employees in 1999, according to the book The PayPal Wars. “It will be nearly impossible for corrupt governments to steal wealth from their people.”
But for most of its history, PayPal acted more as an enabler — a way of extending the credit card model of payment into the online realm — than as a bomb-thrower. Customers didn’t want to use PayPal to escape the tyranny of government currencies. They wanted to use it to spend money online without having to give out their credit card information to a million different vendors. By the turn of the millennium, PayPal pretty much operated as an online credit card company, charging vendors a percentage of every transaction to move funds from a buyer’s bank account to a seller’s bank account. Still, there were some hints of PayPal’s revolutionary capabilities. Unlike credit card companies, PayPal had no need to build and maintain an expensive digital network between vendors and banks around the world; it operated over the Internet. There was no need for a credit card reader, cutting point-of- sale system providers — and their vigorish — out of the equation. While credit card companies still paid fees to banks, a legacy from the days when they had to buy their cooperation, PayPal piggybacked on a communications system that enables digital transactions like direct deposits and automatic bill payment without charging a fee. Furthermore, PayPal users could keep their funds within their PayPal accounts, accruing interest and continuing to trade them with other PayPal users without ever once involving banks or anyone outside the PayPal ecosystem — a friction-free shadow economy in its own right. All of these advantages meant that PayPal could charge lower transaction fees than traditional credit card companies. That may have been a good business model, but it wasn’t exactly a game changer.
In recent years, many other companies have come up with their own PayPal-like innovations, creative tweaks to further squeeze some margins out of the traditional credit card model. Apple’s iTunes and Research in Motion’s payments program reduce transaction fees by bundling a customer’s purchases before sending them to a credit card company for processing. (That’s why you don’t usually see a series of 99-cent charges on your credit card bill; they are processed as one lump sum.) Virtual currencies, from Microsoft Points to Linden Dollars, encourage “in-world” trade, incurring credit card and banking fees only when their users buy in. By reducing their exposure to traditional transaction systems, these companies are able to wring extra pennies of profit out of each sale — which can aggregate into millions of dollars, turning their payment platforms into profit generators in their own right.
Money Over Time
A brief history of
currency technology.
—Bryan Gardiner
800 AD: Paper
A shortage of copper and the hassles of transporting heavy coins prompted China’s Tang dynasty to start issuing paper notes. Dubbed “flying cash,” this first paper-based money was used by merchants and the government.
PayPal moved even further away from its revolutionary roots in 2002, when it was purchased by eBay for $1.5 billion. Suddenly the service, always a favored payment method on the site, became almost entirely focused on making auctions easier. Between 2005 and 2008, PayPal went from serving as the payment provider for 47 percent of eBay auctions to facilitating more than 60 percent (eBay expects it to hit around 75 percent by 2011). That was a fine strategy as long as eBay was growing. But in CEO Meg Whitman’s last years at the company’s helm, as the auction platform started to see a slowdown in revenue growth, it became clear to the PayPal team that it was time to get aggressive again. PayPal started working with outside vendors, and by 2007 it was transacting $47 billion worth of business a year — still a pittance compared to the trillions that moved through financial institutions. Scott Thompson, then PayPal’s CTO, started meeting with Osama Bedier, vice president of merchant services technology, and his team. How, Thompson asked, could PayPal capture more of that business?
Bedier’s team argued that PayPal’s users seemed to have plenty of ideas. They had long pushed for PayPal to expand into new businesses — payroll, invoicing, business-to-business money transfers. But building out any one of those services would take years, and the timing wasn’t right. Bedier pointed out that PayPal’s users had been responsible for many of the company’s most successful innovations: Users dragged PayPal onto eBay in the first place. (The company had initially resisted the move.) Other users cobbled together PayPal-enabled “tip jars”, which quickly spread across the blogosphere. What if the company opened up its code, embraced its developers, and turned its service into a platform? What if PayPal asked its users to create the tools and functions that would make it grow?
Thompson loved the idea in theory but was skeptical that Bedier’s team could pull it off. Thompson, who had recently left Visa, was hardly used to Silicon Valley’s freewheeling, experimental culture. With his Boston accent, bushy Cliff Clavin mustache, and fondness for pleated pants and button-down shirts, he looked like a dotcom engineer’s straightlaced father. “Where I come from, you can’t just let developers come in here and open accounts and move money around,” he says.
Illustration: Oliver Munday
Money Over Time
A brief history of
currency technology.
—Bryan Gardiner
1949: Plastic
When the check for dinner arrived, Frank McNamara realized he didn’t have enough cash to pay his bill. What the world needed, he realized, was an alternative to currency. One year later he returned to the same restaurant with what would become the first modern credit card, the Diners Club Card.
Bedier was used to blasting through objections. Born in Cairo, he had spent a few years in Oregon as a preteen while his father earned a PhD. When the family moved back to Egypt, Bedier put together a plan to return to the US. He persuaded his father to have a friend, an IT manager at Oregon State University, take legal guardianship. Bedier never left the States again. Now he turned his powers of persuasion on Thompson. He said he would prove he could make a more open system work.
But first he had to figure out whether developers would play along. So in late 2007, he started on a road trip to meet with the people who were already building on PayPal’s limited open code. He met with more than 100 developers, most of whom were eager to help build an easier, more flexible system. PayPal had been requiring buyers and sellers to go through several steps to complete a transaction — go to its site, fill out forms, authenticate accounts. The developers envisioned something larger, a true digital currency that could be used on any Web site, that enabled money to move as easily as email: Send funds with a click, from and to anywhere and anyone on the Net.
In April 2008, Bedier led a meeting at eBay’s North First Street headquarters, where he presented his idea to CEO John Donahoe and his lieutenants. When Bedier was finished, he was stunned to get applause. “It was like a lightbulb clicked on,” Donahoe says. “I basically said, ‘You have unlimited funding.’ This is the highest-potential business I’ve ever seen in my career.”
Bedier hired executives from the banking and airline industries to help him design the platform. Soon other PayPal engineers were asking to be transferred to the project. They saw it as a return to PayPal’s original ambitions, when Peter Thiel and his cofounder Max Levchin sought to create an entirely new currency — not just a tool to help people sell used roller skates to one another. (In homage to this legacy, Bedier’s team called the project X.com, the name of Elon Musk’s payment company, which PayPal merged with back in 2000.) In November 2009, PayPal released the platform. In addition to the do-it-yourself ethos, X.com would sport a feature that should have terrified the traditional payment conglomerates: a new fee structure that charged vendors about one-third of what credit card companies were charging.
Whatever the future of payments looks like, it will probably be brought about by people like Christian Lanng. A tall and wide 31-year-old with a booming, operatic voice, Lanng is sitting on the couch of his venture backer’s house in Copenhagen. When he talks about the way banks and credit card companies process payments, he gets so upset that his entire body tenses and his voice rises until it’s echoing off the stark white walls. “This is the main battleground of capitalism!” he says. “This is the heart of it.”
Money Over Time
A brief history of
currency technology.
—Bryan Gardiner
1995: Digital
Cryptographer David Chaum wanted consumers to be able to transfer money digitally, just like banks. His ecash was an anonymous form of money first issued by an American bank in 1995. The company declared bankruptcy in 1998, but the concept has since been built upon by dozens of digital and virtual currencies.
Lanng rests his MacBook on a tree-stump table in front of him. For the last seven months, he and a dozen or so other coders have been building an e-invoicing company called Porta. (At press time, Lanng was planning to rename the company TradeShift.) Already, the service has signed up two regions in northern Europe and one of the biggest cities in Brazil, but Lanng envisions something much bigger. He sees dynamic invoices that pay themselves — that constantly monitor exchange rates, say, or the price of lumber, and then automatically send out an order to withdraw funds or to make a purchase just when the price is cheapest. Most of the information is already available — there are plenty of databases that provide real-time pricing information, and he already has all of his clients’ account information and vital data. But Porta doesn’t have the technology or expertise to handle the transactions themselves. That’s why Lanng is coding with X.com.
For now, PayPal has shied away from using revolutionary rhetoric. In discussing its role, company executives sound less like Thiel, bent on overthrowing the system, and more like a would-be thief strolling through a jewelry store, determined to appear nonthreatening. (”We’re not an alternative to credit cards. We use credit cards in the PayPal wallet!” Donahoe says. “That’s part of the beauty of PayPal.”) And consumers, who have traditionally been shielded from credit card companies’ vendor fees and practices, may not care, or even notice, whether vendors use PayPal.
But even if PayPal never fires a shot, it is clear that people are looking for an alternative to credit cards. In 2009, US consumer credit card debt saw a sustained drop for the first time in decades, falling for 10 straight months as the recession took hold. Meanwhile, to fee-socked consumers struggling to make their payments, the credit card companies have become symbols of an uncaring, greedy bureaucracy. “As a longtime participant in the credit card industry, I’m interested to watch what’s going on right now, because credit card companies are actually yanking in credit, they’re raising fees, and people are choosing not to use credit cards,” says Jack Stephenson, PayPal’s head of strategy. “And the attitude a lot of people have about their credit card company is not a warm and fuzzy feeling right now. So I don’t think, at least anytime in the next three to five years, that PayPal needs to do anything to convince people not to use credit cards online. I think people will make that choice on their own.”
A generation ago, when people made the choice to switch to plastic, credit cards did not just replicate cash; they fundamentally changed how we used money. The ease with which people could make purchases encouraged them to buy much more than they had in the past. Entrepreneurs suddenly had access to easy — though high-interest — loans, providing a spark to the economy. Now, while it may be hard to predict what innovations PayPal’s platform will enable, it’s safe to say that the payment industry is going to change dramatically. As money becomes completely digitized, infinitely transferable, and friction-free, it will again revolutionize how we think about our economy.
Daniel Roth (dr@danielroth.net) wrote about Oracle in issue 18.01.
http://www.wired.com/magazine/2010/02/ff_futureofmoney/all/1
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http://www.econlib.org/library/Columns/y2010/HendersonGDP.html
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Can someone explain this to me please?
==========================================================
The Federal Reserve Bank of New York today announced the beginning of a program to expand its counterparties for conducting reverse repurchase agreement transactions. This expansion is intended to enhance the capacity of such operations to drain reserves beyond what could likely be conducted through the New York Fed's traditional counterparties, the Primary Dealers. This announcement is pursuant to the October 19, 2009, Statement Regarding Reverse Repurchase Agreements, which announced that the New York Fed was studying the possibility of expanding its counterparties for these operations. The additional counterparties will not be eligible to participate in transactions conducted by the New York Fed other than reverse repos. This expansion of counterparties for the reverse repo program is a matter of prudent advance planning, and no inference should be drawn about the timing of any prospective monetary policy operation. The initial efforts of the New York Fed will be aimed at firms that typically provide large amounts of short-term funding to the financial markets. This approach will ensure that the Federal Reserve quickly achieves significant capacity for conducting reverse repo operations while allowing the Trading Desk at the New York Fed to utilize its current infrastructure for conducting and settling such operations. Over time, the New York Fed expects it will modify the counterparty criteria to include a broader set of counterparties.
The ultimate size and terms of reverse repo operations will depend on the directive from the Federal Open Market Committee to conduct such operations. In terms of operational details, the New York Fed anticipates that any transactions would be:
offered to primary dealers and the broader set of counterparties,
conducted at auction for a fixed (not floating) rate,
settled through the tri-party repo system, and
held against all major types of collateral in the System Open Market Account (SOMA), including Treasury securities, agency debt securities, and agency MBS securities.
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A savvy friend writes:
Here's my very limited understanding.
Whenever the Fed decides to reduce reserves, it will have to sell its balance sheet assets to somebody for money. When the check written to the Fed clears against the buyer's bank that bank's reserves at the Fed will drop by the same amount. So that is the process the Fed will eventually follow if it does indeed begin to reduce bank reserves.
The Fed has certain "primary dealers" who, as I understand it, must buy Fed assets when they are offered for sale. I presume the primary dealers are buying for resale and, frankly, I don't know how prices are set between the Fed and the primary dealers.
Since the Fed now has a motley bunch of assets on its balance sheet for which it paid more than a trillion dollars, it apparently thinks it needs more "counterparties" who are able to buy such assets. I am not sure why they need a program to identify more buyers in advance; if those assets actually have some value I would think the Fed would only need to offer the assets and wait to see the bids. Maybe the Fed has some scheme which will press more institutions into the "must buy" role?
The "reverse repo" terminology also confuses me. If the Fed sells assets with a repurchase agreement, that would seem to imply only a short term reduction in reserves. A regular "repo" is used by the Fed to temporarily increase bank reserves -- buying an asset to increase reserves but with an agreement to sell it back in a short period of time, thereby reversing the earlier operation.
So ... let me add my voice to the growing chorus: how about a thorough explanation of this Fed announcement?
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Securitization for Dummies
Heidi is the proprietor of a bar in Detroit. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).
Word gets around about Heidi's "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Heidi's bar. Soon she has the largest sales volume for any bar in Detroit. By providing her customers' freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi's gross sales volume increases massively.
A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi's borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.
At the bank's corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don't really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.
One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's bar. He so informs Heidi.
Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since, Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.
Overnight, DRINKBONDS, ALKIBONDS, and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community. The suppliers of Heidi's bar had granted her generous payment extensions and had invested their firms' pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.
Fortunately the bank, the brokerage houses, and their respective executives are saved and bailed out by a multi-billion dollar, no-strings attached cash infusion from their cronies in Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who never have been in Heidi's bar.
Now, you understand.
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Well said!!! :-D :-D :-D :-D :wink:
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Austrian Business Cycle Theory: A Brief
Explanation
Daily Article | Posted on 5/7/2001 by Dan Mahoney
The media’s favorite phony solution to the economic downturn is for the
Fed to drop interest rates lower and lower until the economy registers an
upturn. What is wrong with this approach? Printing money—which is what
reducing interest rates below the market rate amounts to—is an artificial
means of recovering from the very real effects of an artificial boom. This
point, however, is completely lost on most commentators, because they
haven’t the slightest understanding of the Austrian theory of the business
cycle.
This article gives a brief overview of the theory, which provides an
explanation of the recurrent periods of prosperity and recession that seem to plague capitalist societies. As
Salerno (1996) has argued, the Austrian business cycle theory is in many ways the quintessence of Austrian
economics, as it integrates so many ideas that are unique to that school of thought, such as capital structure,
monetary theory, economic calculation, and entrepreneurship. As such, it would be impossible to adequately
explain so rich a theory in a short note. (See Rothbard [1983] for greater details.) However, an attempt will be
made here to indicate how those relevant ideas come together in a unified framework.
Man is confronted with a world of physical scarcity. That is, not all of our wants and needs, which are practically
limitless, can be met. Outside of the Garden of Eden, we must produce in order to consume, and this means that
we must combine our labor with whatever nature-given resources are available to us. As inherently rational
beings, men have come to recognize many ways of solving this problem, such as peaceful cooperation under the
division of labor leading to enhanced productivity, and private property rights permitting economic calculation
so that different courses of action can be meaningfully compared.
(This is not to say that man has perfect foresight and always correctly anticipates the outcome, good or bad, of
his actions; only that man acts purposefully—and so always judges ex ante a course of action to lead to a
preferred state of affairs—and is capable of distinguishing success from failure and acting accordingly.)
However, it would help to consider the course of economic development from a simplified example, that of an
isolated "Robinson Crusoe" situation. The circumstance faced here is that one must somehow combine one’s
labor with available resources to produce goods for consumption (e.g., food, shelter, etc.). For example, I can
pick berries by hand, and this will produce a certain level of consumption. However, if I wish to have a greater
level of consumption, I must create some means of increasing my berry collecting—for example, by building a
rod to knock berries from bushes and a net to collect them as they fall to the ground.
Unless these means are nature-given, however, I must build them myself, and this will take time—time during
which I cannot pick and consume berries with my old method. Thus, during the time I am making my new,
presumably more efficient, method, I must have some way of sustaining myself. This can only come about if I
have saved (i.e., abstained from consuming) a sufficient amount of berries in the past, so that I may work on
other approaches now. (For more on this process, see Rothbard [1993], ch. 1.)
Let us be clear about what is happening here: One is not simply switching from consumption to production;
rather, one is switching from one form of production to another. One cannot consume something until it has been
produced, so all production processes involve foregoing consumption. The question, though, is what must be
done to switch to a supposedly more effective means of production.
Obviously, if the rod-and-net system, presumably more productive, had required the same amount of time to
construct as the hand-picking method, I would have engaged in this approach to begin with. Since acquiring the
increased productivity comes with a cost—namely, time spent away from using the old method to facilitate
production and, thus, consumption—there must be some means of paying that cost.
Of course, not all lengthier production processes are more productive. But at any given time, man always
chooses those production processes that can produce a given amount of output for consumption in the shortest
amount of time. A process that takes longer to arrive at the final stage of output will only be adopted if it is
correspondingly more productive. In the Austrian conception, greater savings permit the creation of more
"roundabout" production processes—that is, production processes increasingly far-removed from the finished
product. This is the role of savings, and we can ask what determines a particular level of savings.
Time preference is the extent to which people value current consumption over future consumption. The key point
of the Austrian business cycle theory is that interventions in the monetary system—and there is some debate over
what form those interventions must take to set in motion the boom-bust process—create a mismatch between
consumer time preferences and entrepreneurial judgments regarding those time preferences.
Let us return to the Crusoe example above, and consider attempts to construct more productive means of berry
extraction. What constrains me in this endeavor is my level of time preference. If I so enjoy current consumption
that the thought of increased future consumption cannot sway me from foregoing sufficient berry-eating now,
my rod-and-net system will not be built. In the context of fractional reserve banking, printing up berry-tickets
cannot change this fact.
As a numerical example, consider the case where hand-picking yields twelve berries a day, and I am simply
unwilling to go without less than ten berries per day. Suppose further that my time preference falls so that I am
willing to save two berries a day for seven days (leaving aside issues such as perishability, which obviously do
not apply to a monetary economy). I will then have a reserve of fourteen berries. Assume I work one-fourth of a
day on my new method of berry production and spend the remaining three-fourths of the day on producing
berries with the old technique. The old method will give me nine berries a day, and I can use one berry from my
savings to meet my current consumption needs.
If I can finish the rod-and-net system in fourteen days (the extent of my reserve), then everything is fine, and I
can go on to enjoy the fruits of my labor (no pun intended). If I misjudge however, and the process takes longer
than fourteen days, I must temporarily suspend production (or at least delay it) to fund my current consumption,
as, by assumption, I value a certain level of current consumption over increased future consumption (the essence
of time preference). The point is, sufficient property must exist for me to lengthen the structure of production,
and this property can only come from (past) savings. If my time preference does not enable sufficient property to
become available for creating this production process, my efforts will end in failure.
Lest it be thought this example is artificial, consider the situation where my needs are nine berries a day. It
would appear that I can still work one-fourth of a day on the new technique without having a previous cache of
savings, since the remaining three-fourths day of labor with the old method will meet those needs. Two things
should be noted, however. First, my time preference must first fall from a daily consumption of twelve berries to
nine berries. Second, and this is the key point, had I saved previously, then I could spend that much more time on
building the new method, thus bringing it into increased production of berries that much sooner. Savings remain
key to this process of capital construction, and savings are driven by time preference. Indeed, time preference
manifests itself in savings.
This same process of using savings to fund current production for future consumption goes on in more complex
economies. (Of course, with the introduction of more than one individual, recognition of increased productivity
under the division of labor becomes possible, thus raising man above the subsistence level and making possible a
pool of savings.) At any given time, the individuals in society are engaged in production to meet some "level" of
consumption needs. In order for more lengthy—and, hence, if they are to be maintained, more productive—
processes to be entered into, it is necessary that some individuals have refrained from consumption in the past so
that other individuals may be sustained and facilitated in assembling this new structure, during which they
cannot produce—and thus, not consume—consumption goods with the methods of the old structure.
The thrust of the Austrian theory of the business cycle is that credit inflation distorts this process, by making it
appear that more means exist for current production than are actually sustainable (at least in some renditions; see
Hülsmann [1998] for a "non-standard" exposition of ABCT). Since this is in fact an illusion (printing claims to
property ["inflation"] is not the same thing as actually having property; see Hoppe et al. [1998]), the endeavors
of entrepreneurs to create a structure of production not reflecting actual consumer time preferences (as
manifested in available savings for the purchase of producer goods) must end in failure.
Any kind of economy above the most primitive does not, of course, engage in barter, but rather uses money as a
medium of exchange to overcome the problem of the absence of a double coincidence of wants. It must be
stressed, though, that apart from this unique role, money is itself a good, the most marketable good. To be sure,
money is valuable to the extent that others are willing to accept it in exchange. However, money itself must first
have originated as a directly serviceable good before it could become an indirectly serviceable good (i.e.,
money). This is the thrust of Mises's regression theorem (Mises [1981]; Rothbard [1993], ch. 4).
Like any other exchange, one may find after the fact that it was not to one's liking; for example, one may find
that the money good is no longer accepted by "society." There is nothing unique about money in these respects.
What is unique about money is its use in economic calculation. Since all exchanges are, ultimately, exchanges
involving property, a common unit for comparing such exchanges is indispensable. In particular, the amount of
money as savings represents a "measure" of the amount of property available for production processes. (Indeed,
to even maintain a given structure of production requires some abstinence from consumption, so that production
dedicated to maintenance instead of consumption may be undertaken.)
Holding cash (in your wallet, in a tin can in the backyard, etc.) is not a form of saving. Cash balances can
increase without time preferences decreasing, as they do when one saves. (In fact, one saves because one's time
preference falls.) One can increase one's cash balances by decreasing one's spending on consumer AND producer
goods. To save is to decrease one's spending on consumer goods and increase one's spending on producer goods.
The fact that saving usually involves an intermediary (i.e., a bank) to permit someone else to spend on producer
goods does not change this fact. Money is inherently a present good; holding it "buys" alleviation from a
currently felt uneasiness about an uncertain future. (See Hoppe [1994] and Hoppe et al. [1998] for a discussion
of the nature of money.) Lending out demand deposits, or claims to current goods, cannot facilitate the purchase
of producer goods (for the creation of future goods at the expense of current goods), apart from the juridical
issues involved.
The crucial thing about money is that it permits economic calculation, the comparison of anticipated revenues
from an action with potential costs in a common unit. That is, one acquires property based on a judgment of the
future by exchanging other property, and this is impossible—or, rather, meaningless—to do without a common
unit for comparing alternatives. Money is property, and under a monetary system which makes it appear that
more property exists for production than actually exists, failure is inevitable.
One need not focus on whether entrepreneurs correctly "read" interest rates or not. Entrepreneurs make
judgments about the future and, of course, can always potentially be in error; success cannot be known now.
However, judgments will be in error when one is confronted with the illusion of a greater pool of savings than
actual consumer time preferences would justify. This is precisely the situation established by the banking
system—as intermediaries between savers and producers, or "investors"—as currently exists in the Western
world. The system ensures error, though of course it does not preclude success; thus, the existence of genuine
economic growth alongside malinvestments.
This analysis is not a moralistic insistence that an economy be ultimately founded on something "real." It is a
recognition that mere subjective wants cannot will more property into existence than actually exists. Should a
monetary system give the illusion that the time preferences of consumers, as providers of property for production
purposes, is smaller than it actually is, then the structure of production thus assembled in such a system is
inherently in error. Whatever plans appear to be feasible during the early phase of a boom will, of necessity,
eventually be revealed to be in error due to a lack of sufficient property. This is the crux of the Austrian business
cycle theory.
------
Dan Mahoney, Ph,D., mathematics, works for Mirant-Americas. danm@iopener.net
References
Hoppe, Hans-Hermann, 1994, "How is Fiat Money Possible? - or, The Devolution of Money and Credit," Review
of Austrian Economics, 7, 2.
Hoppe, Hans-Hermann, Jörg Guido Hülsmann, and Walter Block, 1998, "Against Fiduciary Media," Quarterly
Journal of Austrian Economics, 1, 1.
Hülsmann, Jörg Guido, 1997, "Knowledge, Judgment, and the Use of Property," Review of Austrian Economics,
10, 1.
Hülsmann, Jörg Guido, 1998, "Toward a General Theory of Error Cycles," Quarterly Journal of Austrian
Economics, 1, 4.
Mises, Ludwig von, 1981, The Theory of Money and Credit, Liberty Fund.
Rothbard, Murray N., 1983, America's Great Depression, Richardson and Snyder.
Rothbard, Murray N., 1993, Man, Economy, and State, Ludwig von Mises Institute.
Salerno, Joseph T., 1996, Austrian Economics Newsletter, Fall 1996.
See also The Austrian Theory of the Trade Cycle Study Guide .
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Ten Economic Blunders from History
5. No Smuggling Allowed
Price controls are stupid anytime, but it takes true idiocy to apply them in the middle of a siege. In 1584 forces controlled by Alexander Farnese, the duke of Parma, were besieging Holland's grandest city, Antwerp, in the Dutch War of Independence. At first the siege was ineffectual because the duke's lines were porous and Antwerp could be supplied by sea, but the duke was in luck because the city decided to blockade itself voluntarily. The magistrates of the city declared a maximum on the price of grain. The smugglers who had been running the blockade up to that point became considerably less enthusiastic about making food deliveries after that. Facing starvation, the city surrendered the next year.
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Inflation: How Purchasing Power is Destroyed
[youtube]http://www.youtube.com/watch?v=vAXS74GPFIo[/youtube]
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The Death of Paper Money
As they prepare for holiday reading in Tuscany, City bankers are buying up rare copies of an obscure book on the mechanics of Weimar inflation published in 1974.
By Ambrose Evans-Pritchard
Ebay is offering a well-thumbed volume of "Dying of Money: Lessons of the Great German and American Inflations" at a starting bid of $699 (shipping free.. thanks a lot).
The crucial passage comes in Chapter 17 entitled "Velocity". Each big inflation -- whether the early 1920s in Germany, or the Korean and Vietnam wars in the US -- starts with a passive expansion of the quantity money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is much like lighter fuel on a camp fire before the match is struck.
People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason" , causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks. The shift invariably catches economists by surprise. They wait too long to drain the excess money.
"Velocity took an almost right-angle turn upward in the summer of 1922," said Mr O Parsson. Reichsbank officials were baffled. They could not fathom why the German people had started to behave differently almost two years after the bank had already boosted the money supply. He contends that public patience snapped abruptly once people lost trust and began to "smell a government rat".
Some might smile at the Bank of England "surprise" at the recent the jump in Brtiish inflation. Across the Atlantic, Fed critics say the rise in the US monetary base from $871bn to $2,024bn in just two years is an incendiary pyre that will ignite as soon as US money velocity returns to normal.
Morgan Stanley expects bond carnage as this catches up with the Fed, predicting that yields on US Treasuries will rocket to 5.5pc. This has not happened so far. 10-year yields have fallen below 3pc, and M2 velocity has remained at historic lows of 1.72.
As a signed-up member of the deflation camp, I think the Bank and the Fed are right to keep their nerve and delay the withdrawal of stimulus -- though that case is easier to make in the US where core inflation has dropped to the lowest since the mid 1960s. But fact that O Parsson’s book is suddenly in demand in elite banking circles is itself a sign of the sort of behavioral change that can become self-fulfilling.
As it happens, another book from the 1970s entitled "When Money Dies: the Nightmare of The Weimar Hyper-Inflation" has just been reprinted. Written by former Tory MEP Adam Fergusson -- endorsed by Warren Buffett as a must-read -- it is a vivid account drawn from the diaries of those who lived through the turmoil in Germany, Austria, and Hungary as the empires were broken up.
Near civil war between town and country was a pervasive feature of this break-down in social order. Large mobs of half-starved and vindictive townsmen descended on villages to seize food from farmers accused of hoarding. The diary of one young woman described the scene at her cousin’s farm.
"In the cart I saw three slaughtered pigs. The cowshed was drenched in blood. One cow had been slaughtered where it stood and the meat torn from its bones. The monsters had slit the udder of the finest milch cow, so that she had to be put out of her misery immediately. In the granary, a rag soaked with petrol was still smouldering to show what these beasts had intended," she wrote.
Grand pianos became a currency or sorts as pauperized members of the civil service elites traded the symbols of their old status for a sack of potatoes and a side of bacon. There is a harrowing moment when each middle-class families first starts to undertand that its gilt-edged securities and War Loan will never recover. Irreversible ruin lies ahead. Elderly couples gassed themselves in their apartments.
Foreigners with dollars, pounds, Swiss francs, or Czech crowns lived in opulence. They were hated. "Times made us cynical. Everybody saw an enemy in everybody else," said Erna von Pustau, daughter of a Hamburg fish merchant.
Great numbers of people failed to see it coming. "My relations and friends were stupid. They didn’t understand what inflation meant. Our solicitors were no better. My mother’s bank manager gave her appalling advice," said one well-connected woman.
"You used to see the appearance of their flats gradually changing. One remembered where there used to be a picture or a carpet, or a secretaire. Eventually their rooms would be almost empty. Some of them begged -- not in the streets -- but by making casual visits. One knew too well what they had come for."
Corruption became rampant. People were stripped of their coat and shoes at knife-point on the street. The winners were those who -- by luck or design -- had borrowed heavily from banks to buy hard assets, or industrial conglomerates that had issued debentures. There was a great transfer of wealth from saver to debtor, though the Reichstag later passed a law linking old contracts to the gold price. Creditors clawed back something.
A conspiracy theory took root that the inflation was a Jewish plot to ruin Germany. The currency became known as "Judefetzen" (Jew- confetti), hinting at the chain of events that would lead to Kristallnacht a decade later.
While the Weimar tale is a timeless study of social disintegration, it cannot shed much light on events today. The final trigger for the 1923 collapse was the French occupation of the Ruhr, which ripped a great chunk out of German industry and set off mass resistance.
Lloyd George suspected that the French were trying to precipitate the disintegration of Germany by sponsoring a break-away Rhineland state (as indeed they were). For a brief moment rebels set up a separatist government in Dusseldorf. With poetic justice, the crisis recoiled against Paris and destroyed the franc.
The Carthaginian peace of Versailles had by then poisoned everything. It was a patriotic duty not to pay taxes that would be sequestered for reparation payments to the enemy. Influenced by the Bolsheviks, Germany had become a Communist cauldron. partakists tried to take Berlin. Worker `soviets' proliferated. Dockers and shipworkers occupied police stations and set up barricades in Hamburg. Communist Red Centuries fought deadly street battles with right-wing militia.
Nostalgics plotted the restoration of Bavaria’s Wittelsbach monarchy and the old currency, the gold-backed thaler. The Bremen Senate issued its own notes tied to gold. Others issued currencies linked to the price of rye.
This is not a picture of America, or Britain, or Europe in 2010. But we should be careful of embracing the opposite and overly-reassuring assumption that this is a mild replay of Japan’s Lost Decade, that is to say a slow and largely benign slide into deflation as debt deleveraging exerts its discipline.
Japan was the world’s biggest external creditor when the Nikkei bubble burst twenty years ago. It had a private savings rate of 15pc of GDP. The Japanese people have gradually cut this rate to 2pc, cushioning the effects of the long slump. The Anglo-Saxons have no such cushion.
There is a clear temptation for the West to extricate itself from the errors of the Greenspan asset bubble, the Brown credit bubble, and the EMU sovereign bubble by stealth default through inflation. But that is a danger for later years. First we have the deflation shock of lives. Then -- and only then -- will central banks go too far and risk losing control over their printing experiment as velocity takes off. One problem at a time please.
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Exactly!
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Dr. Keynes Killed the Patient
By Michael Pento
A morbidly obese gentleman labored into Dr. Hayek's office suffering from severe chest pain. The patient also complained that he was unable to consume his usual 10,000 calorie-per-day diet; in fact, he was feeling so sick that he could barely scarf down 9,000 calories. He noted that his love for food remained as strong as ever, but his body just wasn't keeping up with his demands.
After having a thorough look at the patient, the good doctor could not find anything wrong outside of the patient's extreme portliness. After a moment of reflection, he delivered to his patient a troubling diagnosis. He explained that the chest pain stemmed from the strain the patient's 500lb body was putting on his heart, and that the lack of appetite was his body's attempt to protect itself from this imbalance. Dr. Hayek's prescription was simple: the patient had to dramatically reduce his consumption while undertaking a moderate exercise program, with the goal of losing 250lbs as quickly and safely as possible. Dr. Hayek was aware that it would be a physically painful and emotionally difficult process for the man, but it was the only way to avert a life of suffering - or even a heart attack.
Unfortunately, our patient rebelled against such an austere program. He had grown very fond of his high-calorie and high-fat diet and didn't think that now, when he was already depressed from dealing with all these ailments, was a good time to deny himself the few pleasures he had left. In his opinion, the doc's prescription was just too simplistic. He thought there just had to be a way to have his cake and eat it - frequently. So, he waddled out of Dr. Hayek's office as fast as he could, shouting over his shoulder: "I'm getting a second opinion!"
The overweight gentleman sauntered across the street, where he found the office of Dr. Keynes. He told the new doctor about his acute chest pain and lack of appetite, and complained about the previous doctor's "heartless" prescription. After a cursory examination, Dr. Keynes rendered his diagnosis: the patient's condition did not stem from the fact that his gigantic frame was causing undo strain on his heart; instead, the doctor concluded, the patient's chest pain was merely causing a temporary lack of hunger.
Furthermore, Dr. Keynes argued, the stress of cutting weight at the present time would certainly prove detrimental to the man's already weak heart. Therefore, his prescription was for the 500lb man to each as much as possible, as quickly as possible. Anything less might cause the man to suffer a heart attack, he noted. Now the doctor did concede that, at some point in the distant future, it might be a good idea for the man to shed a few pounds. But for the present, the most import thing to do would be to consume as much as he could stomach.
The patient left Dr. Keynes' office with a broad smile. After gorging at an all-you-can-eat buffet, he momentarily forgot about his chest pain. It looked like he had found his solution; except, a week later, he died.
The Hubris of Government
The allegory above discusses the dangers of quackery, whether medical or economic. Right now, economic quackery - in the form of Keynesianism - has overtaken Washington.
American consumers are trying their best to deleverage. In terms of the story, the patient is actually trying to lose weight. But the government is blocking deleveraging and trying to boost consumption. They are forcing food down the patient's throat. According to the Flow of Funds Report, households reduced debt at a 2.4% annualized rate ($330 billion) during Q1 of 2010. Meanwhile, the federal government was piling on debt at an 18.5% annual rate ($1.44 trillion). Since every dollar of government debt is a promise to tax the private sector in the future with interest, this public spending spree effectively negated the Herculean efforts of the private sector to return to a sustainable path.
That's where the arrogance of Washington is really apparent. Scores of millions of American consumers have made the decision that reducing their debt burden is in their best interests right now. But a few hundred individuals in government believe they know better than the collective wisdom of the entire free market. By leveraging up the public sector, they have used their power to confiscate our savings. In short, they are forbidding us from following the common sense path to fiscal health.
Unlike their forbears, modern-day Keynesians do not argue just for mollification in the rate of deleveraging. They seek to significantly increase debt levels in an effort to boost the aggregate demand in the economy. Apparently, only once the mythical recovery takes hold due to government spending, printing, and borrowing does a discussion of deficits become appropriate.
The US has persisted under this theory for close to a century, though with a declining quality of life. Unfortunately, the patient has now gone critical. Curiously, the world has yet to fully recognize our precarious condition, even as they provide us with life support. Washington is now entirely dependent on the reserve currency status of the dollar and the continued hibernation of bond vigilantes. Without these supports, the United States would face complete economic arrest.
Rather than allowing the American people to get back on our feet, Washington is stuffing us with even more debt. It's almost as if the feds are daring our foreign creditors to pull the plug. As a consequence, I predict that just as Dr. Keynes killed his patient, Keynesian economics will kill our economy.
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Great post / analogy Crafty! Our economy burdened with mandates, taxes, spending and regulations is so obese that we cannot reach down to tie our own shoes. Posted under govt. spending is the new analysis that the public sector is eating up 63.4% of the resources available in the economy. Answer: more spending, seriously. It does not even mischaracterize the thought process of the ruling regime and their thought leaders. Amazingly, the same day you posted Dr. Hayek and Dr. Keynes, Paul Krugman wrote another column poking fun at "austerians" and calling for even more government largess - I kid you not.
Dr. Krugman, we are not worshipping the bond Gods, we are just noticing and frightened by the fact that the public sector is consuming all of the oxygen in the room. If we are living beyond our needs today, we will necessarily be living BENEATH our means tomorrow. The current budget is $4 trillion, $2.5 trillion in revenues, 1.5 trillion in new debt added per year, with accumulating interest. To spend below $4 trillion would be "human sacrifice". The economic growth we have acquired from this Keynesian stimulus is ZILCH, well below the 3.1% or so that the economy requires. I think this is one of those math or word problems where the uncluttered mind of a kindergardner can answer it more accurately than a Nobel prize winning economist - with an agenda. Note where Obama gets his straw man argument style from, if we cut back (at all) on government spending it means we are giving up on job creation!
http://www.nytimes.com/2010/08/20/opinion/20krugman.html?_r=1
Paul Krugman
As I look at what passes for responsible economic policy these days, there’s an analogy that keeps passing through my mind. I know it’s over the top, but here it is anyway: the policy elite — central bankers, finance ministers, politicians who pose as defenders of fiscal virtue — are acting like the priests of some ancient cult, demanding that we engage in human sacrifices to appease the anger of invisible gods.
Hey, I told you it was over the top. But bear with me for a minute.
Late last year the conventional wisdom on economic policy took a hard right turn. Even though the world’s major economies had barely begun to recover, even though unemployment remained disastrously high across much of America and Europe, creating jobs was no longer on the agenda. Instead, we were told, governments had to turn all their attention to reducing budget deficits.
Skeptics pointed out that slashing spending in a depressed economy does little to improve long-run budget prospects, and may actually make them worse by depressing economic growth. But the apostles of austerity — sometimes referred to as “austerians” — brushed aside all attempts to do the math. Never mind the numbers, they declared: immediate spending cuts were needed to ward off the “bond vigilantes,” investors who would pull the plug on spendthrift governments, driving up their borrowing costs and precipitating a crisis. Look at Greece, they said.
The skeptics countered that Greece is a special case, trapped by its use of the euro, which condemns it to years of deflation and stagnation whatever it does. The interest rates paid by major nations with their own currencies — not just the United States, but also Britain and Japan — showed no sign that the bond vigilantes were about to attack, or even that they existed.
Just you wait, said the austerians: the bond vigilantes may be invisible, but they must be feared all the same.
This was a strange argument even a few months ago, when the U.S. government could borrow for 10 years at less than 4 percent interest. We were being told that it was necessary to give up on job creation, to inflict suffering on millions of workers, in order to satisfy demands that investors were not, in fact, actually making, but which austerians claimed they would make in the future.
But the argument has become even stranger recently, as it has become clear that investors aren’t worried about deficits; they’re worried about stagnation and deflation. And they’ve been signaling that concern by driving interest rates on the debt of major economies lower, not higher. On Thursday, the rate on 10-year U.S. bonds was only 2.58 percent.
So how do austerians deal with the reality of interest rates that are plunging, not soaring? The latest fashion is to declare that there’s a bubble in the bond market: investors aren’t really concerned about economic weakness; they’re just getting carried away. It’s hard to convey the sheer audacity of this argument: first we were told that we must ignore economic fundamentals and instead obey the dictates of financial markets; now we’re being told to ignore what those markets are actually saying because they’re confused.
You see, then, why I find myself thinking in terms of strange and savage cults, demanding human sacrifices to appease unseen forces.
And, yes, we are talking about sacrifices. Anyone who doubts the suffering caused by slashing spending in a weak economy should look at the catastrophic effects of austerity programs in Greece and Ireland.
Maybe those countries had no choice in the matter — although it’s worth noting that all the suffering being imposed on their populations doesn’t seem to have done anything to improve investor confidence in their governments.
But, in America, we do have a choice. The markets aren’t demanding that we give up on job creation. On the contrary, they seem worried about the lack of action — about the fact that, as Bill Gross of the giant bond fund Pimco put it earlier this week, we’re “approaching a cul-de-sac of stimulus,” which he warns “will slow to a snail’s pace, incapable of providing sufficient job growth going forward.”
It seems almost superfluous, given all that, to mention the final insult: many of the most vocal austerians are, of course, hypocrites. Notice, in particular, how suddenly Republicans lost interest in the budget deficit when they were challenged about the cost of retaining tax cuts for the wealthy. But that won’t stop them from continuing to pose as deficit hawks whenever anyone proposes doing something to help the unemployed.
So here’s the question I find myself asking: What will it take to break the hold of this cruel cult on the minds of the policy elite? When, if ever, will we get back to the job of rebuilding the economy?
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A report from 2007 that I came across today looking up this subject:
http://www.ustreas.gov/press/releases/hp673.htm
50% move up and out of the lower quintile in just 10 years. Please watch for misleading quintile analyses that don't chart the improvement and movement of individuals in the economy. This Treasury data refutes the claim that only the rich got richer.
November 13, 2007
Treasury Releases Income Mobility Study
Washington DC--The Treasury Department today released a study on income mobility of U.S. taxpayers from 1996 through 2005.
The study showed that, just as in the previous 10-year period, a majority of American taxpayers move from one income group to another over time. The study also recognizes that the dynamism of the U.S. economy significantly contributes to income mobility.
The key findings of the study included:
* Income mobility of individuals was considerable in the U.S. economy during the 1996 through 2005 period with roughly half of taxpayers who began in the bottom quintile moving up to a higher income group within 10 years.
* About 55 percent of taxpayers moved to a different income quintile within 10 years.
* Among those with the very highest incomes in 1996--the top 1/100 of one percent--only 25 percent remained in the group in 2005. Moreover, the median real income of these taxpayers declined over the study period.
* The degree of mobility among income groups is unchanged from the prior decade (1987 through 1996).
* Economic growth resulted in rising incomes for most taxpayers over the study period:
*
Median real incomes of all taxpayers increased by 24 percent after adjusting for inflation;
*
Real incomes of two-thirds of all taxpayers increased over this period; and
*
Median incomes of those initially in the lower income groups increased more than the median incomes of those initially in the high income groups.
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Doug:
I have seen this point made in various studies over the years. It is a very good one and one that I had forgotten.
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OK freemarketeers, analyze this:
China is doing moon shots. Yes, that’s plural. When I say “moon shots” I mean big, multibillion-dollar, 25-year-horizon, game-changing investments. China has at least four going now: one is building a network of ultramodern airports; another is building a web of high-speed trains connecting major cities; a third is in bioscience, where the Beijing Genomics Institute this year ordered 128 DNA sequencers — from America — giving China the largest number in the world in one institute to launch its own stem cell/genetic engineering industry; and, finally, Beijing just announced that it was providing $15 billion in seed money for the country’s leading auto and battery companies to create an electric car industry, starting in 20 pilot cities. In essence, China Inc. just named its dream team of 16-state-owned enterprises to move China off oil and into the next industrial growth engine: electric cars.
Josh Haner/The New York Times
Thomas L. Friedman
Go to Columnist Page ».Not to worry. America today also has its own multibillion-dollar, 25-year-horizon, game-changing moon shot: fixing Afghanistan.
This contrast is not good. I was recently at a Washington Nationals baseball game. While waiting for a hot dog, I overheard the conversation behind me. A management consultant for a big national firm was telling his colleagues that his job was to “market products to the Department of Homeland Security.” I thought to myself: “Oh, my! Inventing studies about terrorist threats and selling them to the U.S. government, is that an industry now?”
We’re out of balance — the balance between security and prosperity. We need to be in a race with China, not just Al Qaeda. Let’s start with electric cars.
The electric car industry is pivotal for three reasons, argues Shai Agassi, the C.E.O. of Better Place, a global electric car company that next year will begin operating national electric car networks in Israel and Denmark. First, the auto industry was the foundation for America’s manufacturing middle class. Second, the country that replaces gasoline-powered vehicles with electric-powered vehicles — in an age of steadily rising oil prices and steadily falling battery prices — will have a huge cost advantage and independence from imported oil. Third, electric cars are full of power electronics and software. “Think of the applications industry that will be spun out from electric cars,” says Agassi. It will be the iPhone on steroids.
Europe is using $7-a-gallon gasoline to stimulate the market for electric cars; China is using $5-a-gallon and naming electric cars as one of the industrial pillars for its five-year growth plan. And America? President Obama has directed stimulus money at electric cars, but he is unwilling to do the one thing that would create the sustained consumer pull required to grow an electric car industry here: raise taxes on gasoline. Price matters. Sure, the Moore’s Law of electric cars — “the cost per mile of the electric car battery will be cut in half every 18 months” — will steadily drive the cost down, says Agassi, but only once we get scale production going. U.S. companies can do that on their own or in collaboration with Chinese ones. But God save us if we don’t do it at all.
Two weeks ago, I visited the Coda Automotive battery facility in Tianjin, China — a joint venture between U.S. innovators and investors, China’s Lishen battery company and China National Offshore Oil Company. Yes, China’s oil company is using profits to develop batteries.
Kevin Czinger, Coda’s C.E.O., who drove me around Manhattan in his company’s soon-to-be-in-production electric car last week, laid out what is going on. The backbone of the modern U.S. economy was locally made cars powered by locally produced oil. It started us on a huge growth spurt. In recent decades, though, that industry was supplanted by foreign-made cars run on foreign oil, so “now every time we buy a car we’re exporting $15,000 of capital, paying for it with borrowed money and running it on foreign energy sources,” says Czinger. “We’ve gone from autos being a middle-class-making-machine to a middle-class-destroying-machine.” A U.S. electric car/battery industry would reverse that.
The Coda, 14,000 of which will be on the road in California over the next year and can travel 100 miles on one overnight charge, is a combination of Chinese-made batteries and complex American-system electronics — all final-assembled in Oakland (price: $37,000). It is a win-win start-up for both countries.
If we both now create the market incentives for consumers to buy electric cars, and the plug-in infrastructure for people to drive them everywhere, it will be a win-win moon shot for both countries. The electric car industry will flourish in the U.S. and China, and together we’ll tackle the next challenge: using auto battery innovations to build big storage batteries for wind and solar. However, if only China puts the gasoline prices and infrastructure in place, the industry will gravitate there. It will be a moon shot for them, a hobby for us, and you’ll import your new electric car from China just like you’re now importing your oil from Saudi Arabia.
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China is also planning on building hundreds of state of the art nuke plants to create the electricity for all those green cars. Something you won't see any green advocates allowing CONUS anytime soon, something Thomas Friedman neglects to mention.
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http://www.wired.com/wired/archive/12.09/china.html
Let a Thousand Reactors Bloom
Explosive growth has made the People's Republic of China the most power-hungry nation on earth. Get ready for the mass-produced, meltdown-proof future of nuclear energy.
By Spencer Reiss
China is staring at the dark side of double-digit growth. Blackouts roll and factory lights flicker, the grid sucked dry by a decade of breakneck industrialization. Oil and natural gas are running low, and belching power plants are burning through coal faster than creaky old railroads can deliver it. Global warming? The most populous nation on earth ranks number two in the world - at least the Kyoto treaty isn't binding in developing countries. Air pollution? The World Bank says the People's Republic is home to 16 of the planet's 20 worst cities. Wind, solar, biomass - the country is grasping at every energy alternative within reach, even flooding a million people out of their ancestral homes with the world's biggest hydroelectric project. Meanwhile, the government's plan for holding onto power boils down to a car for every bicycle and air-conditioning for a billion-odd potential dissidents.
What's an energy-starved autocracy to do?
Go nuclear.
While the West frets about how to keep its sushi cool, hot tubs warm, and Hummers humming without poisoning the planet, the cold-eyed bureaucrats running the People's Republic of China have launched a nuclear binge right out of That '70s Show. Late last year, China announced plans to build 30 new reactors - enough to generate twice the capacity of the gargantuan Three Gorges Dam - by 2020. And even that won't be enough. The Future of Nuclear Power, a 2003 study by a blue-ribbon commission headed by former CIA director John Deutch, concludes that by 2050 the PRC could require the equivalent of 200 full-scale nuke plants. A team of Chinese scientists advising the Beijing leadership puts the figure even higher: 300 gigawatts of nuclear output, not much less than the 350 gigawatts produced worldwide today.
To meet that growing demand, China's leaders are pursuing two strategies. They're turning to established nuke plant makers like AECL, Framatome, Mitsubishi, and Westinghouse, which supplied key technology for China's nine existing atomic power facilities. But they're also pursuing a second, more audacious course. Physicists and engineers at Beijing's Tsinghua University have made the first great leap forward in a quarter century, building a new nuclear power facility that promises to be a better way to harness the atom: a pebble-bed reactor. A reactor small enough to be assembled from mass-produced parts and cheap enough for customers without billion-dollar bank accounts. A reactor whose safety is a matter of physics, not operator skill or reinforced concrete. And, for a bona fide fairy-tale ending, the pot of gold at the end of the rainbow is labeled hydrogen.
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Electricity has often been an infrastructure investment that fits within free market concepts, but a goodly part of what Friedman advocates does not. What he advocates is , , , well I suppose fascism would not be far off the mark; it certainly is state directed. We see what economic clusterfcuks such an approach here in the US can produce. Will it be different for the Chinese?
(IIRC we have a thread on nuclear power. Any info about the pebble bed reactor would be a good fit there, hint hint.)
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NEWCASTLE, South Africa — The sheriff arrived at the factory here to shut it down, part of a national enforcement drive against clothing manufacturers who violate the minimum wage. But women working on the factory floor — the supposed beneficiaries of the crackdown — clambered atop cutting tables and ironing boards to raise anguished cries against it.
Thoko Zwane, 43, who has worked in factories since she was 15, lost her job in Newcastle when a Chinese-run factory closed in 2004. More than a third of South Africans are jobless.
“Why? Why?” shouted Nokuthula Masango, 25, after the authorities carted away bolts of gaily colored fabric.
She made just $36 a week, $21 less than the minimum wage, but needed the meager pay to help support a large extended family that includes her five unemployed siblings and their children.
The women’s spontaneous protest is just one sign of how acute South Africa’s long-running unemployment crisis has become. With their own industry in ruinous decline, the victim of low-wage competition from China, and too few unskilled jobs being created in South Africa, the women feared being out of work more than getting stuck in poorly paid jobs.
In the 16 years since the end of apartheid, South Africa has followed the prescriptions of the West, opening its market-based economy to trade, while keeping inflation and public debt in check. It has won praise for its efforts, and the economy has grown, but not nearly fast enough to end an intractable unemployment crisis.
For over a decade, the jobless rate has been among the highest in the world, fueling crime, inequality and social unrest in the continent’s richest nation. The global economic downturn has made the problem much worse, wiping out more than a million jobs. Over a third of South Africa’s workforce is now idle. And 16 years after Nelson Mandela led the country to black majority rule, more than half of blacks ages 15 to 34 are without work — triple the level for whites.
“The numbers are mind-boggling,” said James Levinsohn, a Yale University economist.
As the debate about unemployment intensifies, the government’s failure to produce a plan 16 months after President Jacob Zuma took office promising decent jobs has led analysts to question his leadership, though he has promised to act soon.
Experts debate the causes of the country’s gravest economic problem, with some contending that higher wages negotiated by politically powerful trade unions have suppressed job growth.
But most agree that the roots of the crisis lie deeper, in an apartheid past that consigned blacks to inferior schools, drove many from their land, homes and businesses and forced millions into segregated townships and rural areas where they remain cut off from the engines of the economy.
Then with the advent of democracy in 1994, the African National Congress-led government had to simultaneously rebuild an economy staggered by sanctions and prepare a disadvantaged black majority to compete in a rapidly globalizing world.
Further complicating matters, just as poorly educated blacks surged into the labor force, the economy was shifting to more skills-intensive sectors like retail and financial services, while agriculture and mining, which had historically offered opportunities for common laborers, were in decline.
The country’s leaders invested heavily in schools, hoping the next generation would overcome the country’s racist legacy, but the failures of the post-apartheid education system have left many poor blacks unable to compete in an economy where accountants, engineers and managers are in high demand. The shortage of skilled workers has constrained companies’ ability to expand, economists say, and in some cases, professionals from other African countries have taken the jobs.
The fall of tariff barriers since 1994 has also exposed industries like garment manufacturing to low-wage competition from Asia. As Chinese-made clothing has flooded the domestic market, the number of garment workers employed in South Africa has plummeted to 60,000 from 150,000 in 1996. If the more than 300 factories violating minimum wages ultimately close down, 20,000 more jobs could vanish.
“We’re at a crossroads,” said Leon Deetlefs, national compliance manager for the bargaining council of union and employer representatives that sets minimum wages for the garment manufacturing industry. “There are a huge number of workers who stand to lose their jobs.”
Last year, as South Africa’s economy contracted amid the global financial crisis, unions negotiated wage increases that averaged 9.3 percent. The International Monetary Fund hypothesized in a report last week that companies were unable to pass on higher labor costs during the country’s recession and laid off workers instead, contributing to job losses that were among the highest seen in the G20 industrialized nations.
Mr. Zuma promised last week at a national gathering of the governing party in Durban that the cabinet would act soon.
But it remains unclear how decisively he can move. His party, the African National Congress, conceded in a report last week that its alliance remained divided over what should be done. Eight months ago, Mr. Zuma proposed a wage subsidy to encourage the hiring of young, inexperienced workers. But it ran into vociferous opposition from Cosatu, the two-million-member trade union federation that is part of the governing alliance, which contended that it would displace established workers. The plan has stalled.
While officials wrangle, the unemployment crisis festers in places like Newcastle. During the rowdy protests at the factory last month, the police warned that the situation could turn violent, according to Mr. Deetlefs, the bargaining council official. The sheriff withdrew. The factory closed.
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But broader resistance from Newcastle factory owners and concerns about large job losses led to a monthlong moratorium on factory shutdowns after 26 were closed nationally. Officials from the government and the bargaining council are now pushing offending factories to come up with plans to pay minimum wage.
The shuttered factory here has since reopened. When the clock strikes five, thousands of black women still pour from the factories here and line up at bus stands for the ride back to their townships. But workers fear the reprieve will not last.
Newcastle’s garment industry is a product of apartheid’s social engineering. The apartheid state sought to keep most blacks from moving to dynamic big cities reserved for whites by offering large subsidies to light industry to locate on the borderlands of rural areas.
The Taiwanese began opening clothing factories here in the 1980s. And since the end of apartheid, entrepreneurs from mainland China have joined them. Some of the more successful Chinese factory owners drive BMWs and Mercedes Benzes, but others operate on a shoestring. All say they must be allowed to pay wages on a lower scale to stay in business.
At the Wintong factory, proprietors Ting Ting Zhu and her husband, Hui Cong Shi, who are saving to put their only child through college, say they start a machinist at $36 a week, far less than the minimum wage. They themselves live in a single room in their red brick factory.
The women who work for them, also striving for their families, have seen their industry wither. Some 7,000 people in Newcastle have lost their jobs in recent years as three large factories went out of business. Emily Mbongwa, 52, was one of the casualties. She lost her job in 2004. She never found another one.
“The factory passed away,” she explained sadly, as if describing a death in the family.
During the apartheid years, Ms. Mbongwa, who never learned to read or write, worked as a maid in the home of a white Afrikaaner family, rising at 6 a.m. to make breakfast and finishing at 9 p.m. after the dinner dishes were done. She tended the family’s two boys, but when they got to be 9 or 10 years old, they started called her derogatory names for a black woman.
After the family moved away, she went to work at a garment factory, where she said she was treated with respect. The hours there were shorter, the pay better and she started a small business selling shoes to other workers. She eventually earned enough to build her home.
Now, she is back to where she started, surviving by looking after other women’s children. She charges $14 a month for each of the five children she watches from 6 a.m. to 6 p.m., five days a week. One recent morning, a woman arrived and passed her baby through the back door to Miss Mbongwa, who was wearing a loose house dress and black wool cap.
Holding the baby on her lap, she said wistfully, “Long ago, there was a lot more work in Newcastle.”
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"OK freemarketeers, analyze this [Tom Friedman/NY Times]:
To my thinking, Friedman is always answering the wrong question, in this case - what should we do next assuming we are also a centrally planned economy with no constitutional restriction on having the government participate in our private economy?
The electric car is an interesting idea, a partial solution at best to something. Private transportation is only a part of oil use. All-electric cars will address only a small part of private transportation needs. For propulsion for small distances it has limitations, but also people look to their vehicle to supply heat and defrost capabilities, in some areas air conditioning is a requirement. Go home, Tom Friedman, and try running your most efficient air conditioner or small furnace with a battery.
I am all for electric cars, supplied by the private sector and chosen by the consumer. I could not possibly accomplish all my current transport needs however with one. What Friedman of course is proposing is a mandate, not a choice, made by explicitly destroying our alternatives, namely tax the fuck out of gasoline until people will quit using it and buy into the preferred system. Missing in his logic string besides the tromp on our freedoms is that the destruction of our current system of transport and livelihood would not likely leave us in an economic position to purchase in large numbers the overpriced, under-performing, more desirable alternative.
Comparing our security needs and decisions to a centrally planned dive into one element of technology innovation is a straw man argument. Our technology investment is not in Afghanistan and we did not create all our security needs, our enemies helped with that. In our economy the wars in 2 countries would be barely more than a rounding error if those were our only wasteful and unproductive public policies. If we want more investment in technology, our current system as I understand it provides that we get out of the way and let the private sector filled with free people making free choices do it.
Friedman has an often expressed envy of the totalitarians and rule by the elite though I'm sure he would keep our democratic system and just wish us to choose collectively more central planning and the government interventions by the elites that are obviously so preferable to him than economic freedoms and decentralized choices.
From this 3-time Pulitzer winner I ask, where is the data to support the premise that central planning with massive interventions is more efficient or that a dynamic and free economy? Where is the data to support his contention that a free and unplanned economy cannot innovate fast enough on its own? Absent from anything I have read by him and absent from our experience in a world of data.
FYI to Friedman, we ARE taxing gasoline - heavily. Besides federal and state fuel taxes, the main tax on fuel is the regulation that prevents it from being sufficiently produced domestically and competitively distributed. Meanwhile we are NOT upgrading our electrical capabilities to take on the transportation sector. That is an area where public policy could actually have gotten ahead of the game, but didn't. FYI further, electric cars are not necessarily the only or best alternative to gasoline and diesel fuels. I would refer you to CNG (compressed natural gas) as a very real and plentiful domestic source, but still inferior to a gallon of gas in its energy content and transportability.
Mostly what I would say to Friedman is that a free people operating in free market will out-perform his central planned system. We should go through every tax, regulation, employment law and spending item on the books and see what we can pare down until we unleash a level of creativity, expansion, innovation and production that will blow the lid off the Chinese, rule by the elite, system.
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I should add to my previous, that if China can actually for once develop the very best technology for anything such as electric storage and propulsion, maybe we should copy and freely reproduce it here for less until they begin complying with international patent, trademark and copyright laws.
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Paul Krugman details how and why that is.
October 2, 2010, 9:33 AM
How The Other Half Thinks
Ezra Klein has written in, asking for a post laying out the difference between the more or less Keynesian model Brad DeLong and I work with and the models others have been using – and how their predictions differ. It’s a good request, although the truth is that the other side in this debate doesn’t necessarily agree on a single model, or even use models at all. Still, I think it is possible to describe the general views of the other guys — and to see how off their predictions have been.
So: first of all, the other side in this debate generally adheres, more or less, to something like what Keynes called the “classical theory” of employment, in which employment and output are basically determined by the supply side. Casey Mulligan has been most explicit here, coming up with increasingly, um, creative stories about how what we’re seeing is a choice by workers to work less; but the whole Kocherlakota structural unemployment thing is similar in its implications.
Oh, and the Cochrane-Fama thing about how a dollar of government spending necessarily displaces a dollar of private spending is basically a classical view, although there doesn’t seem to be a model behind it, just a misunderstanding of what accounting identities mean.
Once you have a more or less classical view of unemployment, you naturally have the classical theory of the interest rate, in which it’s all about supply and demand for funds, and something like a quantity theory of money, in which increases in the monetary base lead, in a fairly short time, to equal proportional rises in the price level. This led to the prediction that large fiscal deficits would lead to soaring interest rates, and that the large rise in the monetary base due to Fed expansion would lead to high inflation.
You can see the classical theory of interest and the soaring-rate prediction clearly in Niall Ferguson’s remarks:
After all, $1.75 trillion is an awful lot of freshly minted treasuries to land on the bond market at a time of recession, and I still don’t quite know who is going to buy them … I predict, in the weeks and months ahead, a very painful tug-of-war between our monetary policy and our fiscal policy as the markets realize just what a vast quantity of bonds are going to have to be absorbed by the financial system this year. That will tend to drive the price of the bonds down, and drive up interest rates
and, of course, in many WSJ op-eds, in analyses from Morgan Stanley, and so on.
Meanwhile, you can see the high-inflation prediction in pieces by Meltzer andLaffer — with the latter helpfully titled, “Get Ready for Inflation and Higher Interest Rates”.
While the other side was making these predictions, people like me were saying that classical economics was all wrong in a liquidity trap. Government borrowing did not confront a fixed supply of funds: we were in a paradox of thrift world, where desired savings (at full employment) exceeded desired investment, and hence savings would expand to meet the demand, and interest rates need not rise. As for inflation, increases in the monetary base would have no effect in a liquidity trap; deflation, not inflation, was the risk.
So, how has it turned out? The 10-year bond rate is about 2.5 percent, lower than it was when Ferguson made that prediction. Inflation keeps falling. The attacks on Keynesianism now come down to “but unemployment has stayed high!” which proves nothing — especially because if you took a Keynesian view seriously, it suggested even given what we knew in early 2009 that the stimulus was much too small to restore full employment.
The point is that recent events have actually amounted to a fairly clear test of Keynesian versus classical economics — and Keynesian economics won, hands down.
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If government spending is the solution, then create a government job that pays a million dollars a year for every unemployed person! Bingo, problem solved. Hey, it's worked out well for Zimbabwe.
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Duh. Of course.
But what of the predictions of inflation and high interest rates from some on our side that have come to naught? How do we explain that?
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Because most US consumers are desperately trying to pay down debt rather than purchase goods as they watch their retirements and home values implode. There is a contraction in normal economic activity due to the atypical situation we find ourselves in today, thus we won't see the classical inflationary pattern right now.
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I wanted to answer Krugman point by point but by the 6th or 8th paragraph I realized he so far had nothing of substance. Marc your paraphrase was much more to the point:
"what of the predictions of inflation and high interest rates from some on our side that have come to naught? How do we explain that?"
In Krugman's words,"So, how has it turned out? The 10-year bond rate is about 2.5 percent, lower than it was when Ferguson made that prediction. Inflation keeps falling. The attacks on Keynesianism now come down to “but unemployment has stayed high!” which proves nothing — especially because if you took a Keynesian view seriously, it suggested even given what we knew in early 2009 that the stimulus was much too small to restore full employment. The point is that recent events have actually amounted to a fairly clear test of Keynesian versus classical economics — and Keynesian economics won, hands down."
1) "So, how has it turned out?" Is that where we are? We have the final score from this debacle? That was the policy and here is the result? There is no ticking time bomb left out there to decimate our economy as we know it? What an insincere idiot. Has he seen THIS? http://www.usdebtclock.org/ Instead of arguing about timeframes, let's call this moment of looking at the results so far HALFTIME, not game over. I will concede to him that price increases SO FAR are within normal and reasonable levels.
2) Inflation is not price increases. Inflation is about the currency, more dollars relative to the amount of goods and services in the economy. We have more dollars, an increasing money supply by any measure and we have stagnancy in production of goods in services. Price increases are a lagging consequence of that, ALL OTHER THINGS BEING EQUAL, that can spiral and build for quite a while after the dollar/monetary inflation.
3) All other things being equal is the little qualifier that economists forget to put at the end of EVERY sentence because it starts to sound repetitive, not because it isn't necessary to make the sentence true.
4) As GM already put it, consumer demand is down, unemployment is up. The stagnation in the economy and the soft demand delays the price increases. THAT DOES NOT MEAN THAT THERE ARE NOT MORE DOLLARS / FEWER GOODS and that inflation of our currency has not already occurred.
5) Krugman hit one point right. Supply side economists and other responsible economists have been warning about inflation for about 28 years since it eased last time, not just during the Pelosi-Obama stimulus bailout era. Warning about inflation is what they do and we keep watch over (like guarding the border and warning about invasion). Study the WSJ editorials for that entire time, since the Carter era inflation eased and worry is what they do. I had a short, cordial argument with Scott Grannis about that which I will replay in another post, but our inflation, at a few percent per year, is pretty good IMO under the circumstances of the other factors running out of control in the mis-management of our economy and in a situation where any deflation is far more dangerous than a point or two of inflation.
6) That Krugman is right (IMO) about that historical observation (economists warning about inflation for 28 years that didn't come) does not make him right now. Crazy price increases may be coming. Recall that the Carter inflation had roots back far before Carter. It was Friday the 13th in Aug 1971 when Nixon and 15 advisers at Camp David decided a PRICE WAGE FREEZE was necessary and preferable to a free economy due to unacceptable, out of control inflation. 7% then and double that by the end of the decade. The damage to our currency preceded that, back to the mid to late '60s and resulted in the dollar erosion of the '70s and all the economic carnage of 1981-82, so don't tell me the final chapter of this round is already written and scored! http://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_nixongold.html
7) Interest rates, Krugman again: "the classical theory of the interest rate, in which it’s all about supply and demand for funds, and something like a quantity theory of money, in which increases in the monetary base lead, in a fairly short time, to equal proportional rises in the price level. This led to the prediction that large fiscal deficits would lead to soaring interest rates"
Prof. K, the U.S. economy with U.S. deficits IS NOT A CLOSED SYSTEM. We are not selling all of our borrowings within our economy and (again) it is not with all other things remaining equal. Increases in borrowings are measured or judged against other things least of important of all is what was your previous debt level IF that level was not already dangerously high. If a sober person has a sip of beer, he/she may be fine and live happily ever after whereas a person alreadyintoxicated slams a pitcher of margaritas and dies of alcohol poisoning. A Nobel Peace Laureate seriously does not see that distinction??
In the 1980s debt went up, but revenues doubled and GDP more than doubled and the world economy followed suit with economic growth. In 2010, debt levels are already out of sight, debt is doubling but GDP and revenues have shrunk and stagnated. Again, Prize winning Prof, YOU SEE NO DISTINCTION?? I don't believe you.
Interest rates are partly market driven and partly manipulated by the Fed. The deficits are being partly monetized and partly borrowed. As a government, we pay our bills first with printed money and then sell back 'treasuries' not in the exact amounts or the exact timings of the expenditures, but ease them into the (global) market. If those were forced on the market in real time, and could only be bought with existing funds from within the stagnated US economy, the good Prof thinks the interest rates today would still be low - where they are today?? Bullshit. (Is there a nicer way of saying that?) A smart guy like that, there is no way he believes that! Instead we have foreigners holding our debt and buying our assets, and that has no gathering negative consequence?
8.) Fact is about borrowing, it depends on a) how able you are to afford the burden of the debt and b) how productive was the use of the funds you borrowed. If a business borrows at 5% and generates an internal rate of return at 10% with that money and can afford the cash flow burden of the payments and the interest, maybe no one is hurt and something of value is gained. If a young family borrows within their means to buy a house with a mortgage, they may pay 3-fold with interest for the house still within their means but they have a house to live in with the kids growing up instead of buying it for cash at the end of their life (for 3 times more) and living in a swamp or cave in the meantime. Reagan's debt bought us, for one thing, an end to the cold war and jumpstarted economic growth to the tune of a quarter century of unprecedented economic expansion. Obama's stimulus debt is maybe 7% on infrastructure and 93% pissed away in the wind by most measures. Krugman argues only size of the stimulus, not use. (Perhaps he is compensating for something?) When it is done we are where we were, actually worse off, and owing a trillion and a half a year more, plus interest burden forever.
9) When you live beyond your means now, you will live beneath your means later. Crafty, your kids' share of debt and mine is supposedly 121k each per taxpayer right now. Let's assume that the more productive half of taxpayers pay double that and assume our kids end up in that more productive half, so double that. Depending on their age now and their age when they start being productive, I would say double it again, maybe more, AND THEN ADD INTEREST FOREVER TO IT. Let's say they marry, so for 2 productive people that is roughly a MILLION DOLLAR MORTGAGE in today's dollars BEFORE INTEREST and BEFORE THEY GET A HOUSE and another mortgage or pay a penny on a student loan. No problem Prof. K.(??) I notice that Krugman has no kids. http://en.wikipedia.org/wiki/Paul_Krugman
10) Krugman thought the stimulus was too small. We have $4 T in expenses, 2.5 T in revenues, 1.5 T in new deficits/yr, new debt AND HE THINKS THE STIMULUS IS TOO SMALL!
11) That was so far was in answer to his straw man argument, NOT why supply-siders think Keynesian economics is dead.
12) Keynesian Economics has a few central threads running through it. One is the Phillips curve, that there is a tradeoff between inflation and unemployment. High unemployment or a soft economy brings low inflation and low unemployment brings with it a high demand and higher inflation. That inverse relationship was proven false. Two examples: The Jimmy Carter malaise stagflation of the late 1970s had both high inflation and high unemployment. Then the two pronged fix for that cured both and we had low unemployment and low inflation running simultaneously for years. I doubt Keynes if alive today would want his name on that false theory.
13) The second aspect and central theme of Keynesian thought is that an interventionist government, by adjusting the economy these so-called stimuli, larger and smaller deficits, can ease the pain of the natural business cycles when we move too far to one side or the other of the already proven false Phillips Curve. Again proven false by Krugman's own policy, the current stimulus. He says it didn't work because it was too small by half. But it didn't stimulate us half way to where we want to be either! That is because a shortage of government spending had nothing to do with what was wrong with the economy. One of the problems was too much debt, not helped by more debt. Another problem is/was too big a load the public sector was putting on the private economy with taxes, spending and excess regulations, also not helped by doubling the wasteful spending and cranking up other burdens like healthcare. None of our current problem has anything to do with natural business cycles. So none of his prescription, doubled or not, makes any sense. This downturn was 100% caused by failed public policies and no proposal of Krugman's seeks to redress any of them.
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I should just let Doug answer these questions.
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Good discussion.
In particular I like the point that the US is not a closed economy.
I would also like to draw attention to the issue of velocity. Let us start with the basic tautological equation
MV=PQ
Money times Velocity equals Price time Quantity.
With the bursting of the bubble, the desire to pay off debt has led to a dramatic decline in velocity. As long as this is the case, the dramatic increase in Money is offset.
It seems to me that at some point however, just as the bubble in housing had a rather sudden and ferocious reversal, we may well see a similar reversal from a high propensity to save (which makes sense in a low inflation environment with overtones of deflation) to a high propensity to spend before the money is worth less i.e. an increase in Velocity.
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BOURGEOIS DIGNITY: A REVOLUTION IN RHETORIC
by DEIRDRE MCCLOSKEY
LEAD ESSAY
October 4th, 2010
A big change in the common opinion about markets and innovation, I claim, caused the Industrial Revolution, and then the modern world. The change occurred during the seventeenth and eighteenth centuries in northwestern Europe. More or less suddenly the Dutch and British and then the Americans and the French began talking about the middle class, high or low — the “bourgeoisie” — as though it were dignified and free. The result was modern economic growth.
That is, ideas, or “rhetoric,” enriched us.[1] The cause, in other words, was language, that most human of our accomplishments. The cause was not in the first instance an economic/material change — not the rise of this or that class, or the flourishing of this or that trade, or the exploitation of this or that group. To put the claim another way, our enrichment was not a matter of Prudence Only, which after all is a virtue possessed by rats and grass, too. A change in rhetoric about prudence, and about the other and peculiarly human virtues, exercised in a commercial society, started the material and spiritual progress. Since then the bourgeois rhetoric has been alleviating poverty worldwide, and enlarging the spiritual scope of human life. The outcome has falsified the old prediction from the left that markets and innovation would make the working class miserable, or from the right that the material gains from industrialization would be offset by moral corruption.
In other words, I argue that depending exclusively on materialism to explain the modern world, whether right-wing economics or left-wing historical materialism, is mistaken. The two books to follow will make the positive case for a rhetorical, or ideological, cause of our greatly enlarged human scope. In my current project, the case is negative. The usual and materialist economic histories do not seem to work. Bourgeois dignity and liberty might.
Such a theme is old-fashioned, as old as eighteenth-century political theory. Or it is new-fashioned, as new as twenty-first-century studies of discourse. Either way, it challenges the usual notions about “capitalism.” Most people harbor beliefs about the origins of the modern economy that historical and economic science have shown to be mistaken. People believe, for example, that imperialism explains European riches. Or they believe that markets and greed arrived recently. Or they believe that “capitalism” required a new class or a new self-consciousness about one’s class (as against a new rhetoric about what an old class did). Or they believe that economic events must be explained “ultimately,” and every single time, by material interests. Or they believe that it was trade unions and government protections that have elevated the working class. None of these is correct, as I hope to persuade you. The correct explanation is ideas.
I’ve tried to write a book engaging the educated reader. But the argument has to use the findings of economic and historical specialists, and to get down into some of the details of their arguments. I tell the story of modern economic growth, summarizing what we have thought we knew from 1776 to the present about the nature and causes of the wealth of nations — how we got refrigerators and college degrees and secret ballots. The book tests the traditional stories against the actually-happened, setting aside the stories that in light of the recent findings of scientific history don’t seem to work very well. A surprisingly large number of the stories don’t. Not Karl Marx and his classes. Not Max Weber and his Protestants. Not Fernand Braudel and his Mafia-style capitalists. Not Douglass North and his institutions. Not the mathematical theories of endogenous growth and its capital accumulation. Not the left-wing’s theory of working-class struggle, or the right-wing’s theory of spiritual decline.
Yet the conclusion is in the end positive. As the political scientist John Mueller put it, capitalism — or as I prefer to call it, “innovation” — is like Ralph’s Grocery in Garrison Keillor’s self-effacing little Minnesota town of Lake Wobegon: “pretty good.”[2] Something that’s pretty good, after all, is pretty good. Not perfect, not a utopia, but probably worth keeping in view of the worse alternatives so easily fallen into. Innovation backed by liberal economic ideas has made billions of poor people pretty well off, without hurting other people.[3] By now the pretty good innovation has helped quite a few people even in China and India. Let’s keep it.
The Big Economic Story of our times has not been the Great Recession of 2007–2009, unpleasant though it was. And the important moral is not the one that was drawn in the journals of opinion during 2009 — about how very rotten the Great Recession shows economics to be, and especially an economics of free markets. Failure to predict recessions is not what is wrong with economics, whether free-market economics or not. Such prediction is anyway impossible: if economists were so smart as to be able to predict recessions they would be rich. They’re not.[4] No science can predict its own future, which is what predicting business cycles entails. Economists are among the molecules their theory of cycles is supposed to predict. No can do — not in a society in which the molecules are watching and arbitraging.
The important flaw in economics, I argue here, is not its mathematical and necessarily mistaken theory of future business cycles, but its materialist and unnecessarily mistaken theory of past growth. The Big Economic Story of our own times is that the Chinese in 1978 and then the Indians in 1991 adopted liberal ideas in the economy, and came to attribute a dignity and a liberty to the bourgeoisie formerly denied. And then China and India exploded in economic growth. The important moral, therefore, is that in achieving a pretty good life for the mass of humankind, and a chance at a fully human existence, ideas have mattered more than the usual material causes. As the economic historian Joel Mokyr put it recently in the opening sentence of one of his luminous books, “economic change in all periods depends, more than most economists think, on what people believe.”[5] The Big Story of the past two hundred years is the innovation after 1700 or 1800 around the North Sea, and recently in once poor places like Taiwan or Ireland, and most noticeably now in the world’s biggest tyranny and the world’s biggest democracy. It has given many formerly poor and ignorant people the scope to flourish. And contrary to the usual declarations of the economists since Adam Smith or Karl Marx, the Biggest Economic Story was not caused by trade or investment or exploitation. It was caused by ideas. The idea of bourgeois dignity and liberty led to a rise of real income per head in 2010 prices from about $3 a day in 1800 worldwide to over $100 in places that have accepted the Bourgeois Deal and its creative destruction.
Innovation backed by ideology, then, promises in time to give pretty good lives to us all. Left and right tend to dismiss the other’s ideology as “faith.” The usage devalues faith, a noble virtue required for physics as much as for philosophy, and not necessarily irrational. But maybe both sides are correct. A socialist maintains her faith in governmental planning despite the evidence that it doesn’t work to the benefit of the poor. A conservative maintains his faith that what’s good for the military-industrial complex is good for the country despite the evidence that it impoverishes and coarsens the people.
I claim that a true liberalism, what Adam Smith called “the obvious and simple system of natural liberty,” contrary to both the socialist and conservative ideologue, has the historical evidence on its side. Despite the elements of regulation and corporatism defacing it (and the welfare programs improving it), it has worked pretty well for the poor and for the people for two centuries. I reckon we should keep it — though tending better to its ethics.
When bourgeois virtues do not thrive, and especially when they are not admired by other classes and by their governments and by the bourgeoisie itself, the results are sad. As the economists Virgil Storr and Peter Boettke note about the Bahamas, “Virtually all models of success to be found in the Bahamas’ economic past have to be characterized as piratical,” with the result that entrepreneurs there “pursue ‘rents’ rather than [productive] profits.”[6] It hasn’t worked very well to depend on a piratical greed, which is to say a self-interested prudence without the balance of other virtues such as justice (except, to speak of the actual history of piracy, democratic justice on shipboard among the pirates themselves). Contrary to a widespread opinion on left and right, such piratical Prudence Only is not characteristically bourgeois. Bernard Mandeville and Ivan Boesky got it wrong. Prudence is not the only virtue of an innovative society. People (not to speak of grass and bacteria and rats) have always been prudent, and there have always been greedy people among them unwilling to balance prudence with other virtues. What changed around 1700 was the valuation of economic and intellectual novelties within a system of all the virtues.
Yet innovation, even in a proper system of the virtues, has continued to be scorned by many of our opinion makers now for a century and a half, from Thomas Carlyle to Naomi Klein. At the behest of such a clerisy we can if we wish repeat the nationalist and socialist horrors of the mid-twentieth century. If we imagine only the disruptions of a pastoral ideal, and reject the gains from innovation, we can stay poor shepherds and dirt farmers, with little scope for intellectual and spiritual growth. If we worship hierarchy and violence and the nation, we can hand our lives over to the military-industrial complex. If we abandon economic principles in our worrying about the environment, we can revert to $3 a day, and live in huts on a hillock in the woods by Walden Pond, depending on our friends in town to supply us with nails and books. Now in the early twenty-first century we can even if we wish add for good measure an antibourgeois religiosity, as new as airplanes crashing into the World Trade Center and as old as the socialist reading of the Sermon on the Mount.
But I suggest that we don’t. I suggest instead that we recoup the bourgeois virtues, which have given us the scope, in von Humboldt’s words, to develop the highest and most harmonious of our powers to a complete and consistent whole. We will need to abandon the materialist premise that reshuffling and efficiency, or an exploitation of the poor, made the modern world. And we will need to make a new science of history and the economy, a humanistic one that acknowledges number and word, interest and rhetoric, behavior and meaning.
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Notes
[1] Since the seventeenth century the word rhetoric has often been misunderstood as lies or bloviation. I use it in its ancient sense, “the means of [unforced] persuasion,” which includes logic and metaphor, fact and story. Modern pragmatics, criticism, and social psychology have largely been a reinvention of ancient rhetoric, how words matter. If any of that strikes you as crazy or indefensible, you may wish to consult McCloskey 1985a (1998), 1990, 1994c.
[2] Mueller 1999.
[3] I will use the word liberal throughout not in its confused and twentieth-century American sense (“left-wing”) but in its older and still European sense of “devoted to liberty, especially political and economic liberty.” It is part of my argument that the American sense can be corrosive of true liberalism. (But so can neoconservatism.)
[4] McCloskey 1990.
[5] Mokyr 2010, p. 1.
[6] Boettke and Storr 2002, pp. 180–181. Compare Storr 2006.
References
Boettke, Peter J., and Virgil Henry Storr. 2002. “Post Classical Political Economy.” American Journal of Economics and Sociology 61 (1): 161–191.
Storr, Virgil. 2006. “Weber’s Spirit of Capitalism and the Bahamas’ Junkanoo Ethic.” Review of Austrian Economics 19 (4): 289–309.
Mueller, John. 1999. Capitalism, Democracy, and Ralph’s Pretty Good Grocery. Princeton: Princeton University Press.
Mokyr, Joel. 2010. The Enlightened Economy: An Economic History of Britain 1700–1850. London: Penguin Press; New Haven: Yale University Press.
McCloskey, Deirdre N. 1985a. The Rhetoric of Economics. Madison: University of Wisconsin Press. 2nd rev. ed., 1998.
McCloskey, Deirdre N. 1990. If You’re So Smart: The Narrative of Economic Expertise. Chicago: University of Chicago Press.
McCloskey, Deirdre N. 1994c. Knowledge and Persuasion in Economics. Cambridge: Cambridge University Press.
http://www.cato-unbound.org/2010/10/04/deirdre-mccloskey/bourgeois-dignity-a-revolution-in-rhetoric/
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"...the point that the US is not a closed economy"
Bloomberg yesterday: "International ownership of U.S. municipal bonds jumped 37 percent in the first half of the year from the end of 2009 to $83 billion, a Sept. 17 Federal Reserve report shows."
Besides the international ownership, Krugman conveniently omitted the fact that states and municipalities (and businesses and homebuyers and students) also need room left in the credit markets after the feds buy and steal all of the available funds.
Bloomberg again: "Illinois, with the lowest credit rating of any state from Moody’s Investors Service, dangled yields higher than Mexico" :-o
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Crafty: "MV=PQ". Velocity of money is fascinating to me. As you point out in the equation, it has equal importance with the supply of money. I would point out in return that these are imperfectly measured measures, but extremely important concepts. People's eyes tend to gloss over when you discuss velocity of money. If a dollar changes hands fourteen times in a day or fourteen hundred times, is it still one dollar? lol.
It's hard to cut and paste economic discussions without the charts, but here is a little discussion on the topic from a capital advisory group that reinforces the same point that Crafty just made:
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http://disciplinedinvesting.blogspot.com/2009/01/money-supply-causing-concern-with.html
Having an understanding of the Quantity Theory of Money (QTM) will provide one with an understanding why some strategist are concerned about future inflation. The factor in the QTM that is holding back inflation at the moment is the fact the "velocity" of money has declined substantially. So what is the Quantity Theory of Money?
The QTM is based: "directly on the changes brought about by an increase in the money supply. The quantity theory of money states that the value of money is based on the amount of money in the economy. Thus, according to the quantity theory of money, when the Fed increases the money supply, the value of money falls and the price level increases."
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http://seekingalpha.com/article/222555-money-supply-velocity-and-economic-growth
A great deal has been written recently about the fact that the Fed's effort to provide for more liquidity in the financial system has really not produced much growth as bank's are holding the liquidity in excess reserves (click on chart to enlarge).
The importance of this has to do with the Quantity Theory of Money (QTM) which describes the interplay of nominal GDP, money supply and velocity.
Recently though, the velocity of M2 and the YOY percentage change are showing increases. As the below charts do show (click on each to enlarge), it is not uncommon for velocity to take some time to pick up following an economic recession.
The relationship between velocity, the money supply, the price level, and output is represented by the equation:
* M * V = P * Y where
* M is the money supply,
* V is the velocity,
* P is the price level, and
* Y is the quantity of output.
* P * Y, the price level multiplied by the quantity of output, gives the nominal GDP.
This equation can thus be rearranged as V = (nominal GDP) / M. Conceptually, this equation means that for a given level of nominal GDP, a smaller money supply will result in money needing to change hands more quickly to facilitate the total purchases, which causes increased velocity. In the QTM, velocity is assumed to be constant in the short run since it is not easy to manipulate. If the above equation holds and output is not quickly changed, prices will rise. Additionally, a rise in prices multiplied by an unchanged output will result in higher GDP. The question is whether or not there is demand for the output.
We do believe the consumer demand side of the equation is being restrained for a number of reasons, the uncertain regulatory environment, consumer deleveraging and high unemployment to name just a few. We are cautiously optimistic that higher velocity is being realized and will lead to higher nominal GDP via an upward pressure on prices.
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Krugman and the ‘Other Half’
October 5th, 2010 | Author: Pater Tenebrarum
Paul Krugman – one of the few 'didn't see the bust coming' economists who actually admitted to the complete failure of mainstream economists to make any correct predictions when it would actually have been important to make them – recently ruminated from his perch at the NYT about what he calls the 'other half' – meaning all economists who are not immediately identifiable as members of the Keynesian creed.
You probably won't be surprised to learn that he once again fails to even mention the Austrians, as though they didn't exist. Krugman has along history of simply ignoring Austrian critiques of his writings, which has raised considerable suspicion that he avoids them for lack of cogent arguments.
Not least thanks to the internet, subjectivist economics has luckily been rescued from obscurity, after having been almost successfully buried by decades of propaganda. Propaganda spouted in the main by intellectuals in the service of statism, of which Krugman is one of the more prominent nowadays.
Keynes, whose theories Krugman finds so convincing, wrote what governments wanted to hear: namely that the free market could not be trusted and required constant intervention by the state to function 'properly'. Keynes' major work on economics – the 'General Theory' – is in the main a collection of self-contradictory mumbo-jumbo that has been expertly picked apart by Austrians, most effectively by Henry Hazlitt in 'The Failure of the New Economics', where Keynes' work is refuted almost line by line.
Keynes is in essence an apologist for inflationism, and nothing of what he wrote was really new – it was a warmed-over brew of 'underconsumption' and pro-inflationism theories previously propounded by a plethora of other writers. These theories didn't magically become more correct when restated by Keynes.
Our current predicament – an economic bust so severe that one must look back to the pre- World War 2 period to find something comparable – is in the main the end result of governments hewing to Keynesian economics and variants thereof for many decades.
The compatibility of the Keynesian system with statism has been confirmed by the man himself, who wrote in the preface to the German edition of the 'General Theory':
“The theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire.”
At the time Keynes probably deemed totalitarianism sufficientlyde rigeur in Germany that he could afford to tell the truth.
Krugman's blog entry begins with:
“Ezra Klein has written in, asking for a post laying out the difference between the more or less Keynesian model Brad DeLong and I work with and the models others have been using – and how their predictions differ.”
Given that the Austrians who actually do have a consistent record of correct predictions aren't even mentioned – who cares?
“It’s a good request, although the truth is that the other side in this debate doesn’t necessarily agree on a single model, or evenuse models at all.”
Anyone who doesn't 'use models' in the social science of economics is denounced by Krugman in his back-link as 'thinking in slogans' – as opposed to those who by 'thinking in models' allegedly hew to the scientific method. The main problem with this is that all these models are a waste of time and effort. They can make no correct predictions and are not even accuratedescriptions of economic phenomena. As Murray Rothbard notes in the preface to 'Theory and History' by Ludwig von Mises:
“Is the fact of human purposive action "verifiable?" Is it "empirical?" Yes, but certainly not in the precise, or quantitative way that the imitators of physics are used to. The empiricism is broad and qualitative, stemming from the essence of human experience; it has nothing to do with statistics or historical events. Furthermore, it is dependent on the fact that we are all human beings and can therefore use this knowledge to apply it to others of the same species. Still less is the axiom of purposive action "falsifiable." It is so evident, once mentioned and considered, that it clearly forms the very marrow of our experience in the world.
It is just as well that economic theory does not need "testing," for it is impossible to test it in any way by checking its propositions against homogeneous bits of uniform events. For there are no such events. The use of statistics and quantitative data may try to mask this fact, but their seeming precision is only grounded on historical events that are not homogeneous in any sense. Each historical event is a complex, unique resultant of many causal factors. Since it is unique, it cannot be used for a positivistic test, and since it is unique it cannot be combined with other events in the form of statistical correlations and achieve any meaningful result. In analyzing the business cycle, for example, it is not legitimate to treat each cycle as strictly homogeneous to every other, and therefore to add, multiply, manipulate, and correlate data.”
In short, there is really no use for mathematical models in economics. Meanwhile, Krugman's charge that anyone eschewing the use of models is 'thinking in slogans' is pure polemic. The Austrian method is deductive, logical and coherent. Keynes' followers have constructed 'models' based on his writings, but his writings are neither logical nor coherent (if you don't believe us, read his tome and contrast it with , say, 'Human Action' and its clarity of prose and inescapable logic).
Krugman continues:
“Still, I think it is possible to describe the general views of the other guys — and to see how off their predictions have been.”
They haven't been better or worse than his own, depending on what time frame and specific topic one considers.
“So: first of all, the other side in this debate generally adheres, more or less, to something like what Keynes called the “classical theory” of employment, in which employment and output are basically determined by the supply side. Casey Mulligan has been most explicit here, coming up with increasingly, um, creative stories about how what we're seeing is a choice by workers to work less; but the whole Kocherlakota structural unemployment thing is similar in its implications.”
Now, from what little we know, Mulligan (a Chicago University economics professor) got some things right and some not. In fact, he immediately shot back by listing his correct predictionson his blog. Of course he also once denied that there was actually a housing bubble , which is patently absurd. As to Kocherlakota, for once we agreed with a Fed bureaucrat when he mentioned that the unemployment problem can not be solved by easing monetary policy further because after the bust there isinter alia a mismatch between the skills many of the unemployed workers possess and the skills the market demands. One of the reasons for high unemployment after a boom inevitably gives way to a bust is that the economy's production structure must adjust to the economic reality the bust reveals – and so must workers.
A case in point is that after so much capital has been malinvested in the housing sector due to businessmen erring about the future demand for homes on account of artificially low interest rates, there is now far less demand for construction workers than there used to be. Those who lost their employment in this sector need to do something else and that requires different skills. It takes time to learn what they are and to acquire them. Mind, this is not the only reason for high unemployment during the bust phase, but it is a noteworthy factor.
Krugman continues:
“Oh, and the Cochrane-Fama thing about how a dollar of government spending necessarily displaces a dollar of private spending is basically a classical view, although there doesn’t seem to be a model behind it, just a misunderstanding of what accounting identities mean.”
No model behind it! The horror! Fama is of course most famous for the 'efficient market hypothesis' – which essentially denies that Warren Buffett or any other successful trader or investor can possibly even exist. However, the fact that the government possesses no resources of its own suggests ipso facto that the money it spends must be taken from the private sector (whether by taxation, borrowing or inflation). This means that every dollar employed in government spending/consumption is definitely missing from the private sector.
Furthermore, Ricardian equivalence (yes, a 'classical view') suggests that there is no difference between spending financed by higher taxation or spending by borrowing, since economic actors know enough to expect higher taxes later if government spending is financed by borrowing and will adjust their behavior accordingly. Funny enough, Casey Mulligan has published a paperthat shows that the 'Keynesian multiplier' of government spending is an illusion( we haven't read it, but in essence he seems to be beating them with their own model). This is by the way not the first mainstream study coming to this conclusion – Robert Barro of Harvard has been saying the same – he rightly dubs the government's stimulus policies 'voodoo economics'.
Krugman reveals one of the problems of his approach when he refers to the 'accounting identities' so beloved by the 'modelers'. If purposeful human action could be reduced to accounting identities it would really be easy. However, these tautologies are meaningless in real life. To quote Patrick Barron: C+I+G = Baloney.
Krugman again:
“Once you have a more or less classical view of unemployment, you naturally have the classical theory of the interest rate, in which it’s all about supply and demand for funds, and something like a quantity theory of money, in which increases in the monetary base lead, in a fairly short time, to equal proportional rises in the price level. This led to the prediction that large fiscal deficits would lead to soaring interest rates, and that the large rise in the monetary base due to Fed expansion would lead to high inflation.”
According to Ludwig von Mises the natural, or originary interest rate is really nothing but an expression of time preference. It is a price ratio between the value of a present versus the value of a future good. The market interest rate meanwhile – to quote Hans-Hermann Hoppe (in 'The Misesian Case Against Keynes') is
“[…] the aggregate sum of all individual time-preference rates, reflecting, so to speak, the social rate of time preference and equilibrating social savings (i.e., the supply of present goods offered for exchange against future goods) and social investment (i.e., the demand for present goods capable of yielding future returns).”
As Hoppe further notes in explicating Mises' theory of interest (which is contrary to the Keynesian view of the interest rate as a purely monetary phenomenon):
“While interest (time preference) thus has a direct praxeological relationship to employment and social income, it has nothing whatsoever to do with money. To be sure, a money economy also includes a monetary expression for the social rate of time preference. Yet this does not change the fact that interest and money are systematically independent and unrelated and that interest is essentially a "real," not a monetary phenomenon.”
With regards to the 'quantity theory of money' we hold with Hayek's bon-mot that 'one of the greatest misfortunes would be if people ceased to believe in the quantity theory of money – except if they were to take it literally'. In the video below Hayek criticizes Milton Friedman as an 'apostle of macro-economics' who is in 'one respect still a Keynesian' and notes his disagreement with Friedman's contention that there is a demonstrable and measurable direct relationship between the general price level and the total quantity of money.
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We have in the past often mentioned that an increase in the money supply – also known as inflation – percolates through the economy over time and unevenly, and that a rise in the general level of prices is merely one of its eventual effects, and not necessarily the most important or most damaging one. We actually know of no-one off the cuff who ever asserted that an 'increase in the monetary base would lead to an equal proportionate rise in the price level in a fairly short time' as Krugman asserts.
Krugman then criticizes the view of economic historian Niall Fergusson, a vocal and well-known critic of deficit spending, as well as the remarks of Allan Meltzer and Arthur Laffer, all of whom predicted that higher interest rates and a considerable rise in prices would eventually result from too loose monetary policy and large deficit spending:
“You can see the classical theory of interest and the soaring-rate prediction clearly in Niall Ferguson’s remarks:
'After all, $1.75 trillion is an awful lot of freshly minted treasuries to land on the bond market at a time of recession, and I still don’t quite know who is going to buy them … I predict, in the weeks and months ahead, a very painful tug-of-war between our monetary policy and our fiscal policy as the markets realize just what a vast quantity of bonds are going to have to be absorbed by the financial system this year. That will tend to drive the price of the bonds down, and drive up interest rates', and, of course, in many WSJ op-eds, in analyses from Morgan Stanley, and so on. Meanwhile, you can see the high-inflation prediction in pieces by Meltzer and Laffer — with the latter helpfully titled, “Get Ready for Inflation and Higher Interest Rates”.
Note here that Meltzer explicitly closes his remarks by noting that there is a big difference between the near term effects and the long range effects of monetary policy – in other words, the fact that the easily discernible effects of soaring interest rates and rising prices have not yet arrived is not necessarily proof that they never will. Of course in Keynes' world, 'we're all dead in the long run' anyway. Unfortunately the current bust shows that the long run has a nasty habit of catching up with us now and then.
Krugman takes a position akin to that of a stock market trader who buys the Nasdaq at 5,000 points in the year 2000, while declaring 'it hasn't crashed yet – and that means it never will.'
“While the other side was making these predictions, people like me were saying that classical economics was all wrong in a liquidity trap. Government borrowing did not confront a fixed supply of funds: we were in a paradox of thrift world, where desired savings (at full employment) exceeded desired investment, and hence savings would expand to meet the demand, and interest rates need not rise. As for inflation, increases in the monetary base would have no effect in a liquidity trap; deflation, not inflation, was the risk.”
To this it must be noted that Krugman regards 'inflation' as a synonym for 'rising prices' – this is to say he semantically confuses cause and effect. This misuse of terms is nowadays so widespread that even dictionaries provide 'rising prices' as the definition of inflation.
There is of course no 'paradox of thrift' (thrift, i.e. saving, can not ever be 'paradoxical' given that it is the sine qua nonprecondition for genuine economic growth and wealth creation) and the concept of the 'liquidity trap' is equally misguided. It is true that the demand for cash balances has been rising and that the household savings rate has increased, but this is not a negative event, it is a necessary precondition for healing the boom-distorted economy. In fact, a rise in the demand for money has no bearing on real consumption and investment, it merely has an effect on money prices.
Deflation meanwhile is not a risk, it would actually be a desirable outcome. At the very least it would stop further malinvestment in its tracks as no new bubble activities could be started if a genuine deflation of the money supply were to occur, i.e. if deposit liabilities previously created from thin air were to vanish due to a net repayment of credit to the fractionally reserved banking system.
Krugman neglects to consider that the problem is not the bust but the preceding boom – it was during the boom when malinvestment and consumption of capital occurred on a grand scale, whereas the bust is the economy's attempt to heal itself from these distortions.
Krugman continues:
“So, how has it turned out? The 10-year bond rate is about 2.5 percent, lower than it was when Ferguson made that prediction. Inflation keeps falling. The attacks on Keynesianism now come down to “but unemployment has stayed high!” which proves nothing — especially because if you took a Keynesian view seriously, it suggested even given what we knew in early 2009 that the stimulus was much too small to restore full employment.”
When pointing to the fact that interest rates on US government debt have not risen in spite of soaring deficit spending and inflation , Krugman neglects the often asymmetric nature of such events. Greek bond yields were barely different from German bond yields until they weren't anymore and it happened very quickly and 'unexpectedly', as the market reassessed the prospects of the Greek state's ability to ever pay back its debts. Now don't get us wrong – we were bullish on US government bonds as well , mainly because we expected that the market would not doubt the US government's solvency for some time and because we thought that in view of private sector defaults and deleveraging, more and more funds would be directed toward this perceived 'safest debtor'.
This will eventually change if the government's profligacy is not stopped. As to deflation, none has occurred as of yet: money TMS has increased by about 27% since the onset of the crisis in August 2008, which is a huge amount of inflation in a very short time. That this has happened in spite of private sector deleveraging is testament to the effectiveness of the government's inflationary efforts so far.
The claim that 'the stimulus was too small' is a typical Keynesian excuse, always invoked when the Keynesian deficit spending recipe fails. Consider here for a moment that under the Obama administration, the US budget deficit has so far been the highest ever in peace time, whether measured in monetary terms or relative to economic output. How much more would have been enough?
Robert Murphy has recently noted that Krugman's case for deficit spending not only fails theoretically, but clearly also failsempirically.
Says Murphy:
“And of course, today's Keynesians point to our current economy as "proof" of how good massive deficits are. Why, thisshould have been the Second Great Depression, but thanks to Obama's willingness to spend — in contrast to Herbert Hoover — we are only suffering through the Great Recession. Phew! Do you notice the pattern? The anti-Keynesians point to actual success stories as evidence of the potency of their policies. The Keynesians, in contrast, point to awful economies and claim that they'd be even worse were it not for the Keynesian "medicine."”
Krugman closes by saying:
“The point is that recent events have actually amounted to a fairly clear test of Keynesian versus classical economics — and Keynesian economics won, hands down.”
Krugman mentions quite a few Chicago School proponents in his article at first. These he later conflates with 'classical' economists. His main bone of contention with the Chicago School seems to be that it is not enamored with monetary inflation and casts doubt on the efficacy of deficit spending. The Austrians are in the same boat with regards to these things, but curiously remain unmentioned – presumably due to their refusal to employ 'models'.
While Krugman concentrates on the alleged predictive powers of Keynesianism – which were so sorely absent when it would have really mattered – Keynesian economics is certainly at the root of our predicament and continues to be practiced regardless of a still growing and quite large body of damning empirical evidence against it (leaving aside its theoretical flaws for the moment).
In that sense it has surely 'won', as its acceptance as a viable body of ideas to 'guide economic policy' curiously continues in spite of its evident failure. Its precepts to combat recession haveinter alia been tried in spades and in vain in Japan for over two decades, with the well-known outcome of seemingly never-ending economic stagnation (Krugman would argue that they 'didn't spend enough').
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This is the kind of victory that reminds one fatally of Pyrrhus of Epirus, who commented on his battlefield successes against the Romans: “If we are victorious in one more battle with the Romans, we shall be utterly ruined."
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Paul Krugman is the very embodiment of intellectual dishonesty.
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"Paul Krugman is the very embodiment of intellectual dishonesty."
I seriously would like to someday read whatever he once wrote in the past that earned him the clout he seems to carry. He is the front man for the NY Times editorial thought on (distorted) economics and they are the blueprint for the editorials for our paper, the Red Star-Tribune and so many other echo chambers across the country. I so far haven't found any depth that goes beyond a Joe Biden level analysis or Bill Clinton level honesty. You would think he would run and hide facing these results from his policies.
Crafty, I like very much the lengthy Tenebrarum piece. He touched on enough of my points to wonder if he reads the DB forum. :-) I would like to come back to some important points he adds to the discussion but have no time right now.
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Heh heh :lol:
Something I do from time to time is take a look at the read/post ratio i.e. how many reads on there for every post? 30-50 is very common, but some threads seem to generate more than that; there are a few that have over 100 reads per post.
Although I sometimes wonder who our lurkers are :wink: :lol: I ALWAYS appreciate each and every one of us who comes to play and by so doing make this the forum that it is.
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Smartest martial arts board on the planet!
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Amen!!
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Tenebrarum correctly points out that an economic bust brings with it new realities.
"A case in point is that after so much capital has been malinvested in the housing sector due to businessmen erring about the future demand for homes on account of artificially low interest rates, there is now far less demand for construction workers than there used to be. Those who lost their employment in this sector need to do something else and that requires different skills. It takes time to learn what they are and to acquire them."
A VERY important point. The politics of usual is how can we get unemployed auto workers back to making bad cars, how can we get hard working home builders back to building huge, beautiful homes of the wrong size in the wrong place for the demographics of today and the future, and how can we make unemployed workers more comfortable unemployed and less likely to ever adapt to new economic realities.
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I love his rip on economic models. Economic models "can make no correct predictions and are not even accurate descriptions of economic phenomena."
Basically what you have are poorly measured phenomena put into highly complex mathematical equations spitting out nonsense because of the inaccuracies and what I wrote earlier, not all other factors are ever held constant.
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To me it boils down simply to choices between to pro-growth and anti-growth policies. Our best CBO and OMB forecasters were wrong to the tune of hundreds of billions of dollars recently underestimating the the economic energy unleashed by slight improvements with pro-growth policies and worng to the tune of TRILLIONS of dollars of wealth destruction that resulted from anti-growth policies.
When we as a nation decided to change course in Nov 2006, we had 50 consecutive growth and 4.6% unemployment, along with some some false positives, like unrealistic, unsustainable values on housing. The electoral choice was in denial to the reality that growth comes crashing down with in an anti-growth climate. Now we have some version of bust and we get to pick up the pieces from here. We don't get to go back. Not with trillions of printed dollars dropped from airplanes, and not from pretending to go back to that time. I don't ever care to read or argue out the details of a model with a 400 page mathematical analysis of the implications of a bunch of bad policies that we know inhibit growth, risk taking, hiring or profit making. We only need to choose again now going forward a set of policies favorable to economic growth, including a friendly but necessary regulatory environment, an efficient but necessary non-punishing tax system, law and order, level playing fields, a healthy environment for investment and risk taking, clear sets of rules with long term predictable continuity, with no accommodation for those who covet, badmouth, punish or curtail legal, successful, productive activities.
As a famous radio host use to say: 'Now go do the right thing'.
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Continuing a thought going back to Crafty's mention that MV=PQ. (or MV=PY: money supply, velocity, price level and real output) Among many poorly measured and poorly defined terms in economics, inflation is often described as:
'More money chasing fewer goods.' (http://internationalecon.com/Finance/Fch40/F40-14.php)
Note that the verb 'chase' is your velocity. We have more money, we have static output, but we also have no chase (velocity), so we do not yet have general price level increases. Money is largely sitting idle on the sidelines, waiting.
If/when economic activity picks up again, the reality of an increased money supply will multiply with new velocity, at least back to normal or historic levels, and could very easily result in spiraling price level increases *** depending on changes in all other variables. That is the fear of all economists except Krugman who already knows the results of these policies.
Milton Friedman's license plate: http://gribeco.free.fr/article.php3?id_article=12
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That license plate is very funny.
Mine is "TAOJONZ" :lol:
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For those with an interest, here is a brief powerpoint presentation for free worth thousands in tuition:
http://www.auburn.edu/~garriro/mvpq1.ppt
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Another perspective on polymath Deirdre McClokey's work, and essay derived from her first book which I posted earlier.
Don’t Dismiss the Materialist Explanation
by Matt Ridley
The first volume of Deirdre McCloskey’s quartet The Bourgeois Virtues, so enthralled me that my copy is littered with enthusiastic marginalia. I had never read something that combined such apothegmatic writing with such perceptive ideas — at least not in the field of economics. The skewering of the clerisy’s hypocrisy was especially delicious.
I look forward immensely to the second volume. To judge by McCloskey’s target essay there is much that will once again have me writing “yes!” in the margins. But there is also something here that troubles me, that has me fearing I may occasionally scribble “No!” Maybe I am too much of a materialist to take the final step she urges. Maybe I am reading too much into brief hints. But I fear she has fallen among thieves; I hope I am wrong.
Start with the bits I agree with. “Innovation backed by liberal economic ideas has made billions of poor people pretty well off, without hurting other people…Let’s keep it.” Yes!
“A true liberalism, what Adam Smith called ‘the obvious and simple system of natural liberty,’ contrary to both the socialist and conservative ideologues, has the historical evidence on its side.” Yes!
So let’s agree that absolutely key to the economic success of the last 200 years is that people are free to innovate in an undirected way. What I cannot bring myself to agree with is that this was an idea that had to be invented. I cannot agree that “what changed around 1700 was the valuation of economic and intellectual novelties within a system of all the virtues.”
Because, let us face the fact squarely, bursts of innovation — bush fires, I call them — have been happening in some place or other for hundreds of thousands of years. Britain’s industrial miracle was preceded by Holland’s, which was preceded by Italy’s, China’s, Greece’s, India’s, Phoenicia’s, Sumer’s. And before that there was the Neolithic revolution of 10,000 years ago, the Upper Paleolithic Revolution of 40,000, the Blombos explosion of 70,000, and the Pinnacle Point one of 160,000. It defies Occam’s Razor to argue that there was something utterly, qualitatively different about the mindset of the innovator then than now. I daresay that is not what McCloskey means, but I think she is drifting in that direction, if only unintentionally.
Apart from anything else, my suspicions are always aroused by claims that human nature suddenly came up with a new feature at a certain point in history. This was a common habit of Marxist anthropologists, for example, when they distinguished pre-industrial economies based on “reciprocity” from modern economies based on markets. Stephen Shennan has satirized the attitude thus: “We engage in exchanges to make some sort of profit; they do so in order to cement social relationships; we trade commodities; they give gifts.” Like Shennan, I think this is patronizing bunk. So I am not happy conceding that eighteenth-century Englishman were the first people to value novelty or see the world in scientific terms or whatever.
I would argue forcefully that the record shows quite clearly that the thing that always causes innovation is trade, because it encourages specialization. When networks of exchanging human beings grow dense enough, technology advances. That explanation works at every point in history and prehistory, too. It explains not only the great leaps forward, but also why technology went backwards in Tasmania when it became an island; it explains why China’s great boom petered out when it became an autarkic autarchy under the Ming. And so on.
So why did every one of these booms come to naught, whereas the one that began in 1700 is still transforming lives, if, as I say, the human nature that it requires is always there? Surely, there is clue in the same paragraph of McCloskey’s essay where she identifies what happened around 1700. She talks of the piratical economy of the Bahamas. Dead right. Piracy, or predation, or parasitism, or plunder — this is what prevented or brought to an end every other boom. What kept France from being an economic superpower? Pirates: tax farmers, kings, armies, emperors, officials. What finished Holland’s golden age? War: endless, exhausting, life-sapping, liberty-killing war. Louis XIV was a pirate, and so was Alexander, and the first Ming emperor.
I am saying that there have always been liberals, who want to be free to trade in ideas as well as things, and there have always been predators, who want to extract rents by force if necessary. The grand theme of history is how the crushing dominance of the latter has repeatedly stifled the former. As Joel Mokyr puts it: “Prosperity and success led to the emergence of predators and parasites in various forms and guises who eventually slaughtered the geese that laid the golden eggs.” The wonder of the last 200 years is not the outbreak of liberalism, but the fact that it has so far fought off the rent-seeking predators by the skin of its teeth: the continuing triumph of the Bourgeoisie.
It has been a close-run thing. Napoleon, Hitler, Stalin, and Mao came close to handing the world economy to rentier pirates. On local scales and much less effectually, Peron and Nehru, Khomeini and Putin have tended in the same direction. Perhaps even Nixon did too. And Blair.
But we have seen just how quickly the innovation machine whirs back into action when you liberalize: that is the story of the booms sparked by Deng Xiaoping, Manmohan Singh, Ludwig Erhard, Sir John Cowperthwaite (the founder of Hong Kong’s liberal economy), and Ronald Reagan. Surely McCloskey does not disagree with this. If all she is saying is that those with liberal ideas got the upper hand at the start of the Industrial Revolution, then I am with her, but this was hardly the only time in history this happened.
But if she is saying, as I fear, something much more Mokyrian, then I am worried. As I see it, Joel Mokyr (whom I greatly admire) argues in his book The Gifts of Athena that although the Scientific Revolution did not start the Industrial Revolution, nonetheless the broadening of the epistemic base of knowledge — the sharing and generalization of understanding — allowed a host of new applications of knowledge, which escaped diminishing returns and enabled the Industrial Revolution to continue indefinitely. I am unconvinced by this. It seems to me to put the philosophical cart before the technological horse: to this day thinkers follow rather than precede doers in the innovation story. From cotton weaving to software, the innovative industries have been ones barely influenced by natural philosophers. Examination of any innovation usually leads to the conclusion that theory played second fiddle to practice.
Likewise, I think McCloskey risks getting cause and symptom confused. I agree with her that one of the glories of the modern age is its liberal tolerance, its virtue and its rhetoric. But I think these are products of an innovation-rich society as much as they are its enabler. To keep the pirates at bay, it is necessary to sustain tolerance and the bourgeois virtues. But is that sufficient? I do not think so.
So the thing that made the Industrial Revolution unique, that was different about the British bush fire of 200 years ago, was that it did not stop. It continues to spread to this day. And what was the cause of that? My answer is a single word, and McCloskey rejects it in a single word: coal. I am sorry, but the more I study the Industrial Revolution’s failure to peter out, the more convinced I become that energy is crucial.
Hear me out. Or rather, hear out Robert Allen, professor of economic history at Oxford, whose new book The British Industrial Revolution in Global Perspective, is a tour de force.
The point about fossil fuels is not that they produce special energy. Joules are joules. With suitable machinery, there is nothing that coal can do that wood, wind or water cannot. Nor is it that the British discovered coal and everybody else missed it. This is not a discovery-push story but a demand-pull one.
The point is that fossil fuels were the only power source that did not show diminishing returns. In sharp contrast to wood, water and wind, the more you mined them the cheaper they became. Energy amplifies human work, and Britain found itself able to amplify the productivity of its labor long after its population and its technology would have exhausted all other sources of power. Fossil fuels therefore kept the innovation machine running so that profits from commerce just kept ahead of profits from piracy.
Coal did not start Britain’s boom any more than it started Holland’s or ancient Greece’s. As Allen tells the story, Britain’s success in the 1700s was caused by London, and London’s success was caused by trade. Like Tyre, Athens, Venice and Amsterdam, London did exchange and specialization with the world, got rich and — thanks to the Reformation and the Glorious Revolution — kept the pirates (chiefs, priests, and thieves) at bay. That drove up its wages, which spurred on labor-saving innovation in machinery.
“The coal trade took off,” says Allen, “when London got big enough to drive the price of wood fuel high enough to make it profitable to mine coal in Northumberland and ship it to London.” That mining then created abundant cheap energy in northern districts, which rewarded inventors of steam engines. (Declaration of interest here: My ancestor was a Newcastle coal trader who installed and improved some of the first steam engines.) The result was that Britain’s boom in living standards did not run out of steam in 1800 when it had dammed every Pennine stream and felled every Cumbrian forest. Instead Britain went on to be the world’s workshop, and by 1830 it was consuming coal equivalent to wood from an impossible 15 million acres of forest.
Not only did this coal get cheaper and cheaper the more that was mined, but machines grew more and more effective at turning its heat into work. “The cheap energy economy,” says Allen, “was the foundation of Britain’s economic success.” As Gregory Clark has reminded us, it was only in the nineteenth century, when fossil fuels amplified human labor, that wages really began to rise. The rest of the world then borrowed this innovation — fossil energy — and its ability to produce increasing returns through new technology. Today the average citizen of planet earth uses fossil energy equivalent to having 150 slaves working continuous eight-hour shifts on his or her behalf. That is why we are all so rich and that is why per capita economic growth turned upwards so sharply after 1800.
As I say, a materialist explanation.
http://www.cato-unbound.org/2010/10/08/matt-ridley/dont-dismiss-the-materialist-explanation/
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"apothegmatic"? Anyone have the URL of a good dictionary?
Matt Ridley is an interesting guy with a very strong background in evolutionary biology/psychology see e.g. "The Red Queen" (an excellent discussion of the Darwinian logic and consequences of the existence of sex to reproduce) and "Nature via Nurture" which sits still unread on my shelf.
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I know of no lookup better than google. :-)
ap·o·thegm also ap·o·phthegm (p-thm)
n.
A terse, witty, instructive saying; a maxim.
[Greek apophthegma, from apophthengesthai, to speak plainly : apo-, intensive pref.; see apo- + phthengesthai, phtheg-, to speak.]
apo·theg·matic (-thg-mtk), apo·theg·mati·cal (--kl) adj.
apo·theg·mati·cal·ly adv.
http://www.thefreedictionary.com/Apothegmatic
I always say if none of your friends has ever used it in a sentence, it doesn't belong on the scrabble board.
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His columns come out so often I should try to ignore ridiculous points, but knowing that:
"non-defense discretionary funding has increased by 57 percent since Obama took office"
http://www.house.gov/budget_republicans/press/2007/pr20091218yearend.pdf
(and remember, spending was outrageous under Bush)
or as Krugman put it yesterday: "the big government expansion everyone talks about never happened."
http://www.nytimes.com/2010/10/11/opinion/11krugman.html?_r=1
Besides ignoring the 57% increase, Krugman says: "Health care reform, for the most part, hasn’t kicked in yet, so that can’t be it."
But Pelosi-Obama-Care coming already IS a job killer. So is Cap-Trade pending though without being passed. It inserts risk, cost and uncertainty into business expansion and investment decisions.
Current budget is roughly 2.5 trillion revenues in with $4 trillion out in federal government spending alone: a trillion and a half a year of deficit spending. Krugman says: "the key problem with economic policy in the Obama years: we never had the kind of fiscal expansion that might have created the millions of jobs we need." What would a large stimulus be to Krugman? 2.5 trillion revenues with $5 or 6 trillion in spending??
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Buttonwood
Losing confidence
Looking at the dollar in the old-fashioned way
Jul 22nd 2010
WHEN the Bretton Woods system was cracking in the early 1970s the price of a troy
ounce of gold, in dollar terms, was raised in two steps from $35 to $42.22. This
was, in effect, a devaluation of the dollar.
The authorities then still thought it worth expressing the shift in terms of
bullion, rather than against another currency like the Japanese yen or French franc.
In the 1930s Franklin Roosevelt had a specific policy of devaluing the dollar
against gold, pushing the price from $20.67 to $35 in the belief this would push
commodity prices (and thus farm incomes) higher and reduce the burden of debt
service.
Nowadays the price of gold is set by the market rather than by official diktat. When
explaining shifts in the bullion market people tend to think in terms of supply and
demand. Perhaps, however, they should view gold-price movements in terms of
investors’ confidence in the dollar, and in paper money in general.
After gold was set loose in 1973 its price rose at a rapid rate for the rest of the
decade, peaking at $850 an ounce in 1980. In other words the dollar had lost around
90% of its value since the demise of Bretton Woods. The 1970s was a period when
economic policy in the developed world seemed to be in disarray, with inflation and
unemployment high, and confidence in central bankers low.
The appointment of Paul Volcker as chairman of the Federal Reserve in 1979 appeared
to be a turning-point. He broke the inflationary spiral in the early 1980s, albeit
at the cost of a double-dip recession. From 1982 onwards developed economies seemed
to enter the “great moderation”: inflation was low or falling, and recessions were
rare and mild. The authorities developed the knack of delivering stability with
paper money, thanks to independent central banks committed to a low inflation
target. Gold fell from $850 to $253 by 1999. With confidence in economic policy
restored, the dollar was revalued by 236% over almost two decades.
By the late 1990s, however, belief in the eternal wisdom of central bankers was
nearing its peak: “Maestro”, Bob Woodward’s portrait of Alan Greenspan, came out in
2000. The dotcom and housing bubbles led to a reappraisal of Mr Greenspan’s career.
Many commentators now feel he paid too little attention to credit growth and asset
prices. As Charles Dumas of Lombard Street Research tartly remarks, Mr Greenspan
displayed “asymmetric ignorance”. He claimed not to know when asset prices were in a
bubble but he did always claim to know when falling asset prices were likely to
cause havoc. Investors were given a one-way bet.
http://www.economist.com/sites/default/files/images/images-magazine/2010/30/fn/201030fnc871.gif
The credit crunch also laid bare a conflict in central banking that goes back to the
days of the gold standard. As well as safeguarding the value of the currency,
central banks act as lenders of last resort. When push comes to shove the latter
duty seems to outweigh the former, and the bankers turn on the monetary taps. The
result has been a loss of confidence in the dollar. Gold’s rise since 1999 in effect
means a near-80% devaluation of the dollar over the past decade (see chart).
What is striking about the history of the past 40 years is that these three swings
in the value of the dollar (ranging from a rise of 236% to a fall of 90%) are huge
by previous standards. But they have not been noticed because the dollar is now
compared with other paper currencies—like the euro and yuan—where shifts have been
nothing like as extreme.
This raises a further puzzle. One reason why countries tried so hard to maintain the
gold standard and the Bretton Woods system was to reassure creditors that they would
be repaid in sound money. Since 1971 most countries have had the right to repay
creditors in money they could print at will. The likes of America and Britain are
now perceived as “lucky” because they, unlike Greece, can devalue their currencies
and default in real terms.
That prospect did alarm creditors in the 1980s when the real yields on government
debt shot up. But it does not seem to now. America and Britain are paying only
3-3.5% to borrow for ten years. That may be because deflation seems the more
immediate threat. It may be because bond markets are now dominated by other central
banks, which are more interested in managing exchange rates than in raising returns.
But it is not stable to combine low yields, high deficits and governments that are
happy to see their currencies depreciate. Something has to give.
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http://mises.org/daily/4536
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http://mises.org/daily/4536
11. Obamacare
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I liked that one :-D
I wonder what the ingredients were in the magic powder?
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FASB Surrenders - America Wins To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 2/7/2011
If an accounting rule falls down and decays in the woods, and the business punditry and politicians completely ignore it, does it still have an impact on the economy?
The answer is YES. Especially when that rule is Mark-To-Market Accounting – aka: Fair Value Accounting. Everyone should breathe a huge sigh of relief…we are.
The Financial Accounting Standards Board (FASB) wanted to broaden the reach of its fair value accounting rules. Somehow it believes that marking everything to market (even when that market is illiquid) will somehow make the world a better and safer place. So, even after almost destroying the economy in 2008, FASB was pushing to have banks mark their loans – yes their loans – to a bid in the market place.
The good news, which went virtually un-reported on January 25, 2011, was that FASB surrendered on fair value accounting for loans. In the face of overwhelming opposition, banks will be allowed to carry loans on their books at amortized cost, reflecting cash flow (payments), as well as reasonable estimates of likely loan losses.
This decision is a huge win for the markets and the economy. Like the sword of Damacles, mark-to-market accounting has been hanging over the head of the economy. As long as it could be broadened, or brought back in the form it took in 2008, the risk of turning the next recession into a panic or even a depression was very real.
Most people don’t know this, but mark-to-market accounting played a role in the Great Depression. According to Milton Friedman (in his book The Great Contraction), fair value accounting was the predominant force for bank closures in the early stages of the Depression. These bank failures fed on themselves making the Depression worse.
In 1938, Franklin Roosevelt ended mark-to-market accounting and the economy recovered. There is absolutely no academic research on the role of MTM accounting in the Great Depression, but the more we study the issue the more convinced we become that it played a major role in that fiasco and the recovery from it.
One reason that its role is ignored is that government wants the story of economic crisis to be a simple one that blames business and praises government (or at least blames government for something that requires more government). Conventional wisdom blames a bubble in the stock market, greedy business people and a lack of government oversight for the Great Depression. This story-line led to the creation of the SEC and many other government agencies, programs and regulations.
Nothing has changed. Back in 2009, Congress passed the Dodd-Frank financial regulation bill based on a flimsy theory of the crisis’s causes even before the report from The Financial Crisis Inquiry Commission. But that report would not have changed much policy anyway. On January 24, 2011 – the same week as FASB’s surrender - the FCIC said that the debacle was caused by a combination of stupid and unscrupulous business practices mixed with lax oversight by regulators. No surprise there.
Clearly, some people in the private sector made mistakes in assessing the riskiness of loans. That’s easy to see in hindsight. But, government’s role was much more detrimental than this, but was totally ignored by the FCIC majority.
A dissenting opinion was penned by Peter Wallison. He blames Fannie Mae, Freddie Mac, the Community Reinvestment Act, and mark-to-market accounting for creating the crisis. We completely agree, but we would also add the policy of 1% interest rates by Alan Greenspan to the list. If the federal funds rate would have been left at 3.5% or above, the bubble in housing would have likely never existed or would have been much, much smaller.
It was on March 9, 2009 that Barney Frank’s committee announced a hearing on fair value accounting. FASB was brought to the table and forced to correct its misguided rule. The stock market bottomed on that day and has virtually doubled since then. The recession was not ended by stimulus, TARP, regulations, PPIP, or any of the other alphabet soup government programs. It was ended by the correction of mark-to-market accounting. The risk of another Depression ended on that day and the economy and market have done nothing but move higher ever since.
With FASB finally giving in on the issue for good, the future looks a lot brighter than most people suspect. The accounting rule fell, it has been ignored by most, but the impact of that fall is very good for America.
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How the middle class became the underclass
The average American's income has not changed much, while the richest 5% of Americans have seen their earnings surge. This chart includes capital gains.
By Annalyn Censky, staff reporterFebruary 16, 2011: 9:28 AM ET
NEW YORK (CNNMoney) -- Are you better off than your parents?
Probably not if you're in the middle class.
Incomes for 90% of Americans have been stuck in neutral, and it's not just because of the Great Recession. Middle-class incomes have been stagnant for at least a generation, while the wealthiest tier has surged ahead at lighting speed.
In 1988, the income of an average American taxpayer was $33,400, adjusted for inflation. Fast forward 20 years, and not much had changed: The average income was still just $33,000 in 2008, according to IRS data.
Meanwhile, the richest 1% of Americans -- those making $380,000 or more -- have seen their incomes grow 33% over the last 20 years, leaving average Americans in the dust.
Experts point to some of the usual suspects -- like technology and globalization -- to explain the widening gap between the haves and have-nots.
But there's more to the story.
A real drag on the middle class
One major pull on the working man was the decline of unions and other labor protections, said Bill Rodgers, a former chief economist for the Labor Department, now a professor at Rutgers University.
Because of deals struck through collective bargaining, union workers have traditionally earned 15% to 20% more than their non-union counterparts, Rodgers said.
But union membership has declined rapidly over the past 30 years. In 1983, union workers made up about 20% of the workforce. In 2010, they represented less than 12%.
"The erosion of collective bargaining is a key factor to explain why low-wage workers and middle income workers have seen their wages not stay up with inflation," Rodgers said.
Without collective bargaining pushing up wages, especially for blue-collar work -- average incomes have stagnated.
International competition is another factor. While globalization has lifted millions out of poverty in developing nations, it hasn't exactly been a win for middle class workers in the U.S.
Factory workers have seen many of their jobs shipped to other countries where labor is cheaper, putting more downward pressure on American wages.
"As we became more connected to China, that poses the question of whether our wages are being set in Beijing," Rodgers said.
Finding it harder to compete with cheaper manufacturing costs abroad, the U.S. has emerged as primarily a services-producing economy. That trend has created a cultural shift in the job skills American employers are looking for.
Whereas 50 years earlier, there were plenty of blue collar opportunities for workers who had only high school diploma, now employers seek "soft skills" that are typically honed in college, Rodgers said.
A boon for the rich
While average folks were losing ground in the economy, the wealthiest were capitalizing on some of those same factors, and driving an even bigger wedge between themselves and the rest of America.
For example, though globalization has been a drag on labor, it's been a major win for corporations who've used new global channels to reduce costs and boost profits. In addition, new markets around the world have created even greater demand for their products.
"With a global economy, people who have extraordinary skills... whether they be in financial services, technology, entertainment or media, have a bigger place to play and be rewarded from," said Alan Johnson, a Wall Street compensation consultant.
As a result, the disparity between the wages for college educated workers versus high school grads has widened significantly since the 1980s.
In 1980, workers with a high school diploma earned about 71% of what college-educated workers made. In 2010, that number fell to 55%.
Another driver of the rich: The stock market.
The S&P 500 has gained more than 1,300% since 1970. While that's helped the American economy grow, the benefits have been disproportionately reaped by the wealthy.
And public policy of the past few decades has only encouraged the trend.
The 1980s was a period of anti-regulation, presided over by President Reagan, who loosened rules governing banks and thrifts.
A major game changer came during the Clinton era, when barriers between commercial and investment banks, enacted during the post-Depression era, were removed.
In 2000, President Bush also weakened the government's oversight of complex securities, allowing financial innovations to take off, creating unprecedented amounts of wealth both for the overall economy, and for those directly involved in the financial sector.
Tax cuts enacted during the Bush administration and extended under Obama were also a major windfall for the nation's richest.
And as then-Federal Reserve chairman Alan Greenspan brought interest rates down to new lows during the decade, the housing market experienced explosive growth.
"We were all drinking the Kool-aid, Greenspan was tending bar, Bernanke and the academic establishment were supplying the liquor," Deutsche Bank managing director Ajay Kapur wrote in a research report in 2009.
But the story didn't end well. Eventually, it all came crashing down, resulting in the worst economic slump since the Great Depression.
With the unemployment rate still excessively high and the real estate market showing few signs of rebounding, the American middle class is still reeling from the effects of the Great Recession.
Meanwhile, as corporate profits come roaring back and the stock market charges ahead, the wealthiest people continue to eclipse their middle-class counterparts.
"I think it's a terrible dilemma, because what we're obviously heading toward is some kind of class warfare," Johnson said.
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Ohhh, Class warfare!
That's the path to prosperity!
I bet the unions helped the great state of Michigan!
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JDN, Thanks for sharing. IMO that is the worst kind of economic journalism that I know of. They throw a very limited amount of economic generalizations out there - with partial true, to see how many false inferences they can get the reader to make. Since they make no economic study themselves, they really just are a reader who also fell for false inferences off of someone else's distorted study. I have written extensively about this in the past and will be happy to take it up again (but not today).
A few quick observations:
When they say one group is "stuck in neutral", what percentage of their readers stop to think on their own that is not 'a group' but an ever changing composition where the vast majority have extreme income mobility? http://www.ustreas.gov/press/releases/hp673.htm http://www.house.gov/jec/middle/mobility/mobility.htm http://online.wsj.com/article/SB117988547410811664.html
When they say that one other group benefited more (the rich), I wonder how many draw the intended inference that group was taking winnings that otherwise would have gone to the middle class? Total falsehood, just not explicitly stated in the article. Imagine the plunge the middle class would take if not for the risk investment made by others. See Republic of the Congo for one example. Instead it is inferred that the middle class are perfectly justified in taking up "warfare" against those who are more productive in this economy than themselves. Or did I read that wrong?
Here's one of my favorite of the loser arguments: "the wealthiest people continue to eclipse their middle-class counterparts."
If an economic study were to link income to height, weight, age, religion, race, hair color, eye color, marital status or left handedness to income - that would be newsworthy. Instead the disparity alarmists link income disparity to people making more money - am I the only one to see a redundancy in that? Teams that score more goals than their opponents are winning the most games, the best fighters keep winning fights, it is wettest out on rainy days...
They compare group to group over an extended time period but don't ever disclose that the results measured later are NOT the people from the original group, no matter what time frame is chosen.
In America, no one is branded middle class or any other class. You can join any class you want to and people do exactly that every day. You can also move BACKWARDS in income as you enjoy some of your previous years' accomplishments.
Questions: How can we manage or minimize disparity while maximizes wealth creation, revenues to the Treasury, economic growth employment, etc.? We can't. Reminds me of the Fed dual mission. We need to encourage money making, open up opportunities, prohibit unfair roadblocks, and let people run with it.
What is the correct or optimum level of disparity? Zero? Some reasonable multiple between richest and poorest? High growth requires high disparity. Do the disparity alarmists oppose high growth? In many cases, yes.
Where in the following did God get it wrong regarding disparity and class warfare- (King James version) Deuteronomy 5:21: Neither shalt thou desire thy neighbour's wife, neither shalt thou covet thy neighbour's house, his field, or his manservant, or his maidservant, his ox, or his ass, or any [thing] that [is] thy neighbour's.
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AMEN!!!
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It is a truth universally acknowledged that education is the key to economic success. Everyone knows that the jobs of the future will require ever higher levels of skill. That’s why, in an appearance Friday with former Florida Gov. Jeb Bush, President Obama declared that “If we want more good news on the jobs front then we’ve got to make more investments in education.”
But what everyone knows is wrong.
The day after the Obama-Bush event, The Times published an article about the growing use of software to perform legal research. Computers, it turns out, can quickly analyze millions of documents, cheaply performing a task that used to require armies of lawyers and paralegals. In this case, then, technological progress is actually reducing the demand for highly educated workers.
And legal research isn’t an isolated example. As the article points out, software has also been replacing engineers in such tasks as chip design. More broadly, the idea that modern technology eliminates only menial jobs, that well-educated workers are clear winners, may dominate popular discussion, but it’s actually decades out of date.
The fact is that since 1990 or so the U.S. job market has been characterized not by a general rise in the demand for skill, but by “hollowing out”: both high-wage and low-wage employment have grown rapidly, but medium-wage jobs — the kinds of jobs we count on to support a strong middle class — have lagged behind. And the hole in the middle has been getting wider: many of the high-wage occupations that grew rapidly in the 1990s have seen much slower growth recently, even as growth in low-wage employment has accelerated.
Why is this happening? The belief that education is becoming ever more important rests on the plausible-sounding notion that advances in technology increase job opportunities for those who work with information — loosely speaking, that computers help those who work with their minds, while hurting those who work with their hands.
Some years ago, however, the economists David Autor, Frank Levy and Richard Murnane argued that this was the wrong way to think about it. Computers, they pointed out, excel at routine tasks, “cognitive and manual tasks that can be accomplished by following explicit rules.” Therefore, any routine task — a category that includes many white-collar, nonmanual jobs — is in the firing line. Conversely, jobs that can’t be carried out by following explicit rules — a category that includes many kinds of manual labor, from truck drivers to janitors — will tend to grow even in the face of technological progress.
And here’s the thing: Most of the manual labor still being done in our economy seems to be of the kind that’s hard to automate. Notably, with production workers in manufacturing down to about 6 percent of U.S. employment, there aren’t many assembly-line jobs left to lose. Meanwhile, quite a lot of white-collar work currently carried out by well-educated, relatively well-paid workers may soon be computerized. Roombas are cute, but robot janitors are a long way off; computerized legal research and computer-aided medical diagnosis are already here.
And then there’s globalization. Once, only manufacturing workers needed to worry about competition from overseas, but the combination of computers and telecommunications has made it possible to provide many services at long range. And research by my Princeton colleagues Alan Blinder and Alan Krueger suggests that high-wage jobs performed by highly educated workers are, if anything, more “offshorable” than jobs done by low-paid, less-educated workers. If they’re right, growing international trade in services will further hollow out the U.S. job market.
So what does all this say about policy?
Yes, we need to fix American education. In particular, the inequalities Americans face at the starting line — bright children from poor families are less likely to finish college than much less able children of the affluent — aren’t just an outrage; they represent a huge waste of the nation’s human potential.
But there are things education can’t do. In particular, the notion that putting more kids through college can restore the middle-class society we used to have is wishful thinking. It’s no longer true that having a college degree guarantees that you’ll get a good job, and it’s becoming less true with each passing decade.
So if we want a society of broadly shared prosperity, education isn’t the answer — we’ll have to go about building that society directly. We need to restore the bargaining power that labor has lost over the last 30 years, so that ordinary workers as well as superstars have the power to bargain for good wages. We need to guarantee the essentials, above all health care, to every citizen.
What we can’t do is get where we need to go just by giving workers college degrees, which may be no more than tickets to jobs that don’t exist or don’t pay middle-class wages.
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An internet friend writes:
I have a couple of thoughts on the subject of books, and how to more quickly gain exposure to the Austrian ideas.
First of all, probably the most important thing to grasp is the fundamental difference between Misean thought and the currently dominant neo-classical economists. The mainstream has tried to turn economics into an empirical science like physics. They believe they can observe the economic world, craft hypotheses to explain the observed phenomena, and then test those hypotheses by measuring how well they can forecast future events. Many people seem to think Popper's ideas about "falsification" are relevant for economic science. For economics and other social sciences, however, Mises argued that empiricism is an impossible process. Controlled experimentation is impossible in this realm, but more importantly man's actions are not determined by invariant physical facts -- as are the actions and reactions of inanimate objects.
Mises offered a completely different method of constructing economic science, a method that was employed and articulated by a number of great economists before Mises' time -- but one that Mises himself developed more fully and explicitly than anybody before him. So here is my suggestion for getting this idea painlessly and quickly: read Robert P. Murphy's new book "Lessons for the Young Economist". Murphy wrote this book for high school and even younger people, but I have read it cover to cover and it is not a baby's book. He keeps the vocabulary at an appropriate level, but that is a good thing; when reading Mises I find myself looking up word definitions several times per page. This book can be read very quickly, and in my opinion, presents the key ideas faithfully and very well.
I will attach the ePub to this email, but you can also download it and several other formats from the link above. If this doesn't appeal to you, there are other options, but I sincerely feel that reading this simple work quickly might be the most painless way to get the most important and fundamental concepts. Economics is a much simpler discipline than the high priests in the Fed would have us believe.
Tom
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http://jammiewearingfool.blogspot.com/2011/04/leftwing-drone-cites-nobel-prize.html
He's earned it.
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Keynes vs. Hayek
Round One
http://www.youtube.com/watch?v=d0nERTFo-Sk
Round Two (this is the current one)
http://www.youtube.com/watch?v=GTQnarzmTOc
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Crafty, very impressive. The Keynes character is very persuasive, except for the fact that he is proven wrong at every turn. Glen Beck was just talking on radio yesterday about working on a project to reach out to young people. Do we really have to put it to music to get them to pay attention? Same type of video could be done with depictions of the two main candidates and their arguments in 2012, not much different than the economic argument.
GM, refreshing to see people across the heartland know Krugman is a political hack and Nobel has lost some of its shine. I would someday like to read the serious work Krugman did before becoming a cartoon character at the NY Times.
He literally was calling for a doubling of the stimulus (deficit) at the time that all the trillions so far were proven to be failed policy, both economically and politically.
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We are borrowing $188 million per hour (plus future interest costs), fact checked at Huff Post: http://www.huffingtonpost.com/social/projustice/white-house-deficit-talks_n_851198_85116795.html. Out of 300 million people and the 50% rule (only 50% will be contributing/producing), that is a dollar an hour per person round the clock.
Can't we make a case to any young person that while they were out playing, while they were at prom, while they were in math class, while they were on spring break, while they were burning a joint or playing a video game, while they were at soccer practice, while they were hanging with friends and while they were sleeping in ... the advocates of our current policies were and still are piling up another dollar of debt, every hour, in their name, for everyone, accumulating interest.
Why isn't that reason enough to advance the idea of smaller government? What part of generational theft don't they get??
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uh ohhh, let the hounds loose !!!
The Triumphant Return of John Maynard Keynes
Joseph E. Stiglitz
http://www.project-syndicate.org/commentary/stiglitz107/English
NEW YORK – We are all Keynesians now. Even the right in the United States has joined the Keynesian camp with unbridled enthusiasm and on a scale that at one time would have been truly unimaginable.
:evil: :evil:
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Hard to know how to address this, as for academics they don't care if it works or not in practice, they want to know if it works in theory. :evil:
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When I read that last night (Stiglitz) I did not notice the date, Dec. 2008, and kept wondering when and where I have heard the before - "We are all Keynesians now". I knew it was right before some major policy blunders were about to occur.
I will be happy to return to this later to answer this demand side only thinking point by point, but we didn't just "shun" Keynsianism for three decades, it proved itself WRONG 3 decades ago, and again.
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Where do you start and where do you end with Keynesian thinking? Let's see, savings is bad, deficits are good. Unearned money falling to people is good, increasing the incentives to not produce is inconsequential. Temporary is permanent and permanent is temporary. And Obama is another market fundamentalist, lol, I fell off my chair on that one. Assuming Prof. Stiglitz stands by his '08 analysis, we now have at least 3 Nobel winners favoring interventionism over markets with this guy, Krugman and Obama. Sounds to me like written from the George Orwell Chair of economics over at Columbia. I noticed that he didn't get his co-worker Robert Mundell, a Nobel winner with a different view, to sign on with this piece.
Keynes own works do not contemplate conditions like we have today. Would he really give a 'tax cut' further to the poor in a place where the lower 51% already are at zero or lower? What is the capability of the government to inject fiscal stimulus further when we are already printing 200 million an hour? Keynes contemplated THAT? What is the capability of the central bank to inject further monetary stimulus when real interest rates are already NEGATIVE?
If fiscal stimulus is the Keynes answer, but we are already at a trillion a year, do another trillion a year, for how long, then what? How do you withdraw temporary spending in today's political scheme?? I guess we will see. Keynes died in 1946. It is crazy to think we know what his view would be now with 65 years of new data.
I did not see from Stiglitz and have not ever seen elsewhere anything to show that this situation was the failure of a free market. Quite the opposite. I know people make that statement, but the failure and breakdowns always happen in the most intervened of all markets already, today it is healthcare, banking, energy, housing, higher education and manufacturing. Government is the largest force in all the problem sectors.
The trade off between unemployment and inflation was proven false during the stagflation of the Jimmy Carter years when both worsened simultaneously, and proven false again when both were cured nearly simultaneously. That was why Keynesianism was 'shunned' 3 decades ago.
If the problem isn't a nail, the answer isn't always a hammer...
The problem is whole plethora of screwed up incentives, roadblocks and uncertainties for potential producers in the economy in every direction that they turn. What good does turn on another faucet do when we face all these other hurdles.
What collapsed in 2008 was an unsustainable imbalance propped up by a series of misguided government policies. The worst was the inducements and covering of financial institutions to make housing loans based on criteria other than creditworthyness and likelihood of paying back. When it collapsed it took down housing and banking in a free fall. End of housing value meant end of construction and the loss of jobs feeds back into more houses lost and banks in jeopardy. Who knew? True that both parties favored the initial government intervention to stop the free fall of the consequences of our previous failed government interventions, but the larger question remains: What have we learned and what do we do now?
The answer is real, pro-growth policies, aka supply side economics, the exact opposite mindset from the elite interventionists who failed us, IMHO.
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You miss the important points, Doug.
Was Stiglitz published in the right journals? Did he cite the right people? Is he well thought of in academic circles?
Worrying about practical matters is for lesser beings.
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'Fair trade' is a crock
By DALIBOR ROHAC
Last Updated: 3:55 AM, May 13, 2011
NY Post
If you want to help out Third World farm workers, ignore the "Wake up the World" campaign. Don't have a "fair trade" breakfast -- or anything else. The "fair trade" label is a crock.
You're likeliest to see the "fair trade" label at high-end coffee shops and grocery stores -- especially ones with a "progressive" clientele. The certification is supposed to let you enjoy your latte without feeling guilty for exploiting the Ethiopian or Ecuadoran who harvested the beans.
Oh, the likes of Angelina Jolie and Colin Firth endorse it -- but the main value it brings is the consumer's feeling of socially conscious satisfaction.
Fair-trade-certified products -- coffee, bananas, cocoa, etc. from developing countries -- have boomed this last decade. US sales of fair-trade goods rose from $15 million to $48 million from 2005 to 2009.
Most people think "fair trade" guarantees better pay for agricultural workers in developing countries. The Fair Trade USA Web site insists, "We can change the world by changing our breakfast."
Sorry: What the organized fair-trade movement actually does is simply provide selected producers of cash crops in such nations with guaranteed minimum prices for their products. The direct benefits are small and rarely go to the least well-off. Worse, fair trade can hinder economic development.
Consider how it all works.
Again, "fair trade" merely guarantees certain producers a minimum price for a commodity. This gives farmers a safeguard against price drops, which can come in handy if they can't access more sophisticated forms of financial hedging.
But how much does fair trade actually help poor people? Most fair-trade producers are outside Sub-Saharan Africa, the world's poorest region. Mexico has 51 fair-trade cooperatives; Ethiopia has four and Burundi just one.
And the main benefit flows to fair-trade cooperatives -- groups of landowners, not laborers. The certification includes no incentives for the owners to pay higher wages to farmworkers, who tend to be poorer and more vulnerable.
It even tends to exclude the poorer landowners. Certification involves significant up-front costs -- $2,000 to $4,000 -- and annual inspections that require paying sizable fees. In a developing nation, that's a big hurdle.
And the folks shut out of the scheme are worse off. With a minimum price guaranteed, the fair-trade insiders can produce more with lower risks -- increasing the overall size of the crop and thus depressing prices for the folks who couldn't afford to buy their way in.
Even fair-trade supporters must admit that the scheme doesn't solve the problem of underdevelopment. No nation has become rich by earning a slightly higher return on a cash crop. Most developed countries have succeeded by allowing their economies to grow more sophisticated and diversified -- adding areas of production that pay more to workers and owners.
That is, there's more money in making chocolate than in growing cocoa -- and 90 percent of the world's cocoa, but only 4 percent of its chocolate, is produced in developing countries.
But "fair trade" -- guaranteeing a minimum price for certain crops -- locks part of the labor force into basic agriculture, discouraging it from moving "higher up the ladder" to better long-term opportunities in manufacturing, services or more sophisticated forms of agriculture. A study of Guatemala's fair-trade coffee industry by the Mercatus Center at George Mason University concluded that fair trade strongly encouraged production mediocrity.
Finally, "fair trade" encourages a particular business model at the expense of others. To qualify for registration in the fair-trade scheme, farmers need to form cooperatives that satisfy certain requirements of communal decision-making and transparency. Why, exactly -- other than badly dated ideology -- should we prefer landowner cooperatives over private companies that adhere to high standards of workers' welfare and social and environmental responsibility?
Ultimately, only private entrepreneurship and businesses can pull the developing world out of poverty. But entrepreneurs flourish only in a situation of good governance, stable property rights and business-friendly legal institutions. Rather than falling for marketing ploys that use poor people as pawns, we should work to improve the business environment in developing countries.
Low-income countries around the world don't need our pity and handouts; they need economic policies that work. "Fair trade" may mean well, but that's just not good enough.
Dalibor Rohac is a research fellow at the Legatum Institute in London.
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You miss the important points, Doug.
Was Stiglitz published in the right journals? Did he cite the right people? Is he well thought of in academic circles?
Worrying about practical matters is for lesser beings.
I'm not saying I agree, Doug has some very good points, but Stiglitz won the Nobel Prize in Economics. Obviously he will well thought of in academic circles.
And obviously he published in the "right" journals.
Don't take him lightly. He had influence.
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You miss the important points, Doug.
Was Stiglitz published in the right journals? Did he cite the right people? Is he well thought of in academic circles?
Worrying about practical matters is for lesser beings.
I'm not saying I agree, Doug has some very good points, but Stiglitz won the Nobel Prize in Economics. Obviously he will well thought of in academic circles.
And obviously he published in the "right" journals.
Don't take him lightly. He had influence.
Two words: Paul Krugman.
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The observation Stiglitz made was that "We are all Keynesians now" at the financial crisis point of roughly Sept 2008.
That meant Bush the outgoing President, McCain and Obama which means the incoming President no matter who wins, the entire Pelosi-Reid congress that was destined for one reelection and all the columnists and Ivy league economists that he knows.
My point was that before that and after that they were all proven wrong, no matter who they cocktail with.
Making money available during a financial contraction (Monetary policy) is different than running multiple trillions of dollars of deficits for multiple years (Keynesian fiscal policy) with no measurable positive affect. It is hitting the wrong problem with the wrong solution.
FYI for JDN, Stiglitz colleague at Columbia Robert Mundell has a Nobel prize in Economics as well and holds a very different policy view, unless he has done an about face since designing the Reagan-Volcker two pronged solution to the two-pronged problems of stagflation last time we went down this road. http://www.columbia.edu/~ram15/
http://www.bloomberg.com/news/2010-12-27/mundell-sees-u-s-growing-2-at-most-in-2011-after-confidence-devastated-.html
Mundell Sees U.S. Growing 2% at Most in 2011 After Confidence `Devastated'
Dec 27, 2010 3:51 PM CT
Robert Mundell, Nobel Prize winning economist and Columbia University professor.
Dec. 27 (Bloomberg) -- Nobel Prize-winning economist Robert Mundell of Columbia University and Bloomberg Businessweek's Peter Coy talk about the outlook for the U.S. economy. They speak with Carol Massar on Bloomberg Television's "Street Smart." (Source: Bloomberg)
The U.S. economy will probably grow no more than 2 percent in 2011, less than what’s needed to lower unemployment, Nobel-prize winning economist Robert Mundell said.
“I don’t see economic growth as being any better than 2 percent,” the Columbia University economics professor said in an interview today on Bloomberg Television’s “Street Smarts” with Carol Massar. “You had this financial shock to the economy which devastated confidence, and there is nothing around the corner that looks like it’s going to be a strong push for the economy.”
The economy grew at an average 2.9 percent annual rate in the five quarters since the worst recession in seven decades ended in June 2009. That pace of recovery has lowered unemployment from a peak of 10.1 percent in October 2009 to 9.8 percent last month.
Mundell, 78, said the Fed’s unconventional monetary policy actions, known as quantitative easing, had the undesired effect of strengthening the dollar.
“The Fed policy was working three or four times before, but then it was cut off because the dollar soared and that’s what really broke the back of the economy,” he said. The Fed has been “negligent” in not taking into account the influence a rising dollar would have on the economy, he said.
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Mundell, with very good reason, was the darling of the editorial page of the WSJ in its mighty heyday in the 1980s and '90s and was a huge influence on Jude Wanniski in writing his seminal book "The Way the World Works".
That said,
a) He's saying fed policies have strengthened the dollar?!?
b) Now that we are more than 1/3 the way through the year, how is his prediction of growth rate doing?
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Mundell: On the first point, that surprised me too. Brilliant guy, I will look into what he was saying. On the second point , no more than 2% growth which is horrible, he was right on the money so far. Q1 was 1.8%, surprising everyone else.
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"You can see how the types of pro-growth policies in the [Pawlenty] plan would work toward the goal by reducing spending growth enough to balance the budget without tax increases and thereby remove threats of a debt crisis; by lowering marginal tax rates to spur hiring and job growth; by scaling back unnecessary new regulations which impede private investment and higher productivity, and by restoring sound monetary policy to remove uncertainty about inflation or another financial crisis."
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Note: I looked him up because Gov. Pawlenty referred to him this morning on Fox News Sunday
Prof. John B. Taylor
Mary and Robert Raymond Professor of Economics at Stanford University
George P. Shultz Senior Fellow in Economics at the Hoover Institution
Home page: http://www.stanford.edu/~johntayl/
Blog: http://www.johnbtaylorsblog.blogspot.com/
Saturday, June 11, 2011
Why Not Go For 5% Growth?
Some skeptics have complained about the 5% national economic growth target put forth by former Minnesota Governor Tim Pawlenty in his speech this week about his economic plan. They say it can’t be done. But I think the goal makes a great deal of sense. It would focus policymakers like a laser beam on the great benefits that come from higher growth and on the pro-growth policies needed to achieve it. As with any goal, if you take it seriously, you’ll choose policies that work toward that goal and reject those that don’t.
As stated in the speech, “5% growth is not some pie-in-the-sky number.” One way to see why is by dissecting the number into its two parts using basic economics. As we teach in Economics 1, economic growth equals employment growth plus productivity growth. Productivity is the amount of goods and services that workers produce on average in a given period of time. Thus, higher economic growth can come from higher employment growth or from higher productivity growth. Now consider some examples of average growth rates over the next ten years.
First, look at employment growth. Given the dismal jobs situation, that’s the highest priority. Currently the percentage of the working-age population (age 16 and over) that is actually working is very low at 58.4 percent. In the year 2000 it reached 64.7 percent, so that is at least a feasible number. Raising the employment-to-population ratio to 64.7 means an employment increase of 10.8 percent (64.7-58.4/58.4 = .108) or about 1 percent per year over 10 years, even without any growth of the population. Adding in about 1 percent for population growth (from Census projections), gives employment growth of 2 percent per year.
Now consider productivity growth. Since the productivity resurgence began around 1996, productivity growth in the United States has averaged 2.7 percent according to the Bureau of Labor Statistics. So numbers in that range are not pie in the sky. As Harvard economist Dale Jorgenson and his colleagues have shown, the IT revolution is part of the explanation for the productivity growth, and, if not stifled, is likely to continue, as is pretty clear to me as I sit a few hundred yards from Facebook and other high-tech firms.
Now if we add the 2.7 percent productivity growth to the 2 percent employment growth, we get 4.7 percent economic growth, which is within reaching distance of—or simply rounds up to—the 5 percent target set by Governor Pawlenty. Thus, five percent growth is a good goal to aspire to, whereas 3 or 4 percent would be too little and 6 or 7 percent too much. Of course, one can fine-tune these calculations--for example, by estimating changes in hours per worker or the difference between nonfarm business (which BLS productivity numbers refer to) and total GDP--or raise questions about demographic effects on the employment-to-population ratio. And one could use different examples, perhaps lower employment growth and higher productivity growth, but the basic point about the goal would be the same.
You can see how the types of pro-growth policies in the Pawlenty plan would work toward the goal by reducing spending growth enough to balance the budget without tax increases and thereby remove threats of a debt crisis; by lowering marginal tax rates to spur hiring and job growth; by scaling back unnecessary new regulations which impede private investment and higher productivity, and by restoring sound monetary policy to remove uncertainty about inflation or another financial crisis.
Posted by John B. Taylor at 1:34 PM
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From Doug's link from cognitive dissonance of the left moved here:
****No, Paul Krugman, WWII Did Not End The Great Depression
“There are three kinds of lies: lies, damned lies, and statistics.” – Benjamin Disraeli
It’s a recurring fantasy for left wing academics fascinated by central planning that in cyclical downturns government should act decisively on a scale equivalent to war. Nobel Prize recipient Paul Krugman exemplifies this intellectual longing to steer our lives.
Krugman effortlessly slides into a war footing espousing intervention comparable to America’s crusade against Hitler, who, take note, centrally planned an economy himself:
“World War II is the great natural experiment in the effects of large increases in government spending, and as such has always served as an important positive example for those of us who favor an activist approach to a depressed economy.”
After WWII until its glaring failures manifest in the Seventies, Keynesianism inundated economic thought. Paul Samuelson’s textbooks became mainstays across the academy. Samuelson championed mathematical analysis, which transformed macroeconomics into a pseudo science spawning waves of budding planners infatuated with statistics.
From this basis the myth prevails that WWII finally overcame the Great Depression. History has revised Hoover, easily the most meddlesome peacetime president before FDR, into a laissez-faire reactionary. The New Deal – a disastrous example of everything not to do during downturns became beneficial, only it supposedly wasn’t aggressive enough.
Hoover tinkered with the economy throughout his term. The Smoot-Hawley Act of 1929 launched the trade war many believe precipitated the stock-market crash and the Depression. Then, fearing falling prices, he signed Norris-LaGuardia, Davis-Bacon and other acts, formed business cartels and farming associations all striving to arrest falling prices. Hoover also authored massive public works as he increased federal spending by 50%.
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Bill Flax
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After campaigning on fiscal discipline, FDR promptly accelerated Hoover’s initiatives, devising new economic experiments almost daily. As FDR’s economist Rexford Tugwell conceded, “We didn’t admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started.” Despite ridiculing Hoover’s “extravagance,” FDR increased spending another 83% in his first three years.
The best unemployment result prior to WWII was 14% in 1937. European unemployment was far lower. By 1939, unemployment was back at 19% as FDR increased taxes and cut spending in preparation for war. As the government reined in its make-work projects, rather than weaning a sustainable recovery off the Keynesian incubator, the recovery reversed. The New Deal clearly failed to prime the private pump.
On the surface, wartime spending finally propelled America from the Depression’s pits. As war production expanded from roughly 2% of GDP to almost 40%, statistically, America rebounded. In 1940 dollars, GDP shot from $101.4 billion to $120.7 billion in 1941 up to $174.8 billion by 1945 while unemployment fell below 2%.
America didn’t officially enter the fray until December 1941. FDR had by then rescinded most New Deal regulations, scuttled the WPA and similar agencies and ceased his incessant public bickering with private business. Some surmise he stopped attacking industry recognizing he needed their help attacking fascism.
The pre Pearl Harbor boost stems from three factors: wartime spending by others, which does not reflect stimulus on Washington’s part; Lend-Lease, but giving away munitions abroad promotes no prosperity here, and the demise of the New Deal.
After netting out federal spending, GDP surged 17% from $91.9 billion in 1940 to $107.7 billion in 1941. Once engaged, our non-federal output trickled down to $101.4 billion by WWII’s conclusion in 1945. The private economy reflected little improvement, partly because private consumption was curbed. Living standards didn’t regain 1929 levels until America restored a market based economy in the aftermath of victory.
FDR dreaded the recession’s return as Keynesian theory suggested severe trouble when ten million plus soldiers returned home unemployed. The president proposed a “Bill of Economic Rights” predicated on aggregate demand maintenance. Congress thankfully repudiated it. Tax rates were slashed while war time rationing, price controls and regulations receded.
America was one of few industrial nations with its productive infrastructure intact. Despite federal spending falling from $93 billion in 1945 to under $30 billion by 1948 (in 1945 dollars), unemployment stabilized around 4% as Americans, free of New Deal shackles, launched an economic boom.
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Portraying WWII as bounteous economically because statistical measures bettered is like confusing a high batting average with winning championships. You can hit well and still lose. Normally, hitting safely and decreased joblessness reflect success, but war is different. Unemployment lessened because the draft sent men into combat. Increasing production because women were forced into factories building bombs is deceptive.
Economics studies the transformation of scarce resources into that which best fulfills our unlimited desires. How does blowing up Germany boost American living standards? How is making men sleep in frigid fox holes under enemy fire enriching? How did rationing everything from the enjoyment of luxuries to our clothing and diets lift anyone’s material standing?
The military doesn’t jumpstart the economy, it protects producers. This represents patriotic sacrifice, not prosperity.
Production is the progenitor of wealth, but making things unvalued by markets doesn’t improve life. Neither does working harder to achieve the same result. Repairing damage caused by war or natural calamity through debt encumbrance does nothing to support sustainable growth. Once said project completes, we’re back where we started with debts to boot.
During the postwar era, both parties believed spending was stimulating and thought government intervention essential during downturns. But we almost invariably recovered before the spending packages even passed Congress. Unfortunately, rather than conclude that intervention is unnecessary, now, we rush spending bills through as if racing a deadline to preempt the natural ricochet so politicians can take credit.
Stimulus spending doesn’t augment aggregate demand unleashing our “animal spirits” towards growth. It invites crony capitalism, patronage and dependency. As funds flow through Washington, producers reorient from satisfying customers to lobbying politicians. War spending leads to the dreaded Military-Industrial Complex Republicans like Ike feared, but Neo-Cons today relish.
If resources were unlimited or little effort was necessary to extract value, we could consume at will. Instead, markets prioritize output by channeling resources via price signals. Government spending fails because politicians lack the vital feedback mechanism of profits and losses. It’s not their money. Military outlays exemplify this faulty prioritization. Once Congress gets involved, we can’t even cut defense projects the military finds redundant. What the military does demand is often exorbitantly overpriced.
Stimulus efforts allow politicians to dispense dollars in patronage schemes conferring power upon themselves at taxpayer expense. Congress buys votes with your money. Even if public spending did stimulate, such corruption is too repugnant to condone.
As government grows, it becomes increasingly self serving. Bureaucracy inevitably seeks its own expansion. Businesses succeed by producing efficiently and pleasing customers. Bureaucracies thrive via inefficiency. Exceeding one’s budget makes it easier to ask for more. Failure allows sinecures to grovel before Congress that greater funding can achieve what lower funding merely wasted.
Deficit spending has never once successfully stimulated recovery. Like our failed war on poverty or public education, interventionists consistently claim we haven’t spent sufficiently. Mimicking the New Deal’s failure, Keynesians today decry that the Bush and Obama stimulus bills were half-hearted.
Dr. Krugman so desperately seeks more spending that he wishes Congress would pretend aliens are invading. Washington could then control the economy – for our good, not theirs, he’d have us assume. Krugman assures us liberals have a conscience.
Whether they have any common sense is less certain.
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An additional insight to the economics of the FDR and the Great Depression is to be found in a chapter dedicated to it in Jude Wanniski's "The Way the World Works". Highly recommended.
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Trying to figure out what cured the previous great depression and how that could apply today.
WPA spending, the largest new deal program, peaked in 1938 and there were no new 'New Deal' initiatives passed after 1938. FDR's power was declining. Unemployment was still 19% at the start of 1939 because programs then, like cash for clunkers and shovel ready projects today, failed in any real way to stimulate private economic growth. Then, strangely and coincidentally, the unemployment and economic growth situation started improving exactly as the emphasis was shifting away from government-based programs. (Who knew?)
They say it was the war that brought back the economy but the growth really surged two years before Pearl Harbor and America's direct investment in the war. The war brewing elsewhere was boosting foreign demand. Increased demand only has an effect if you are in a position to build and supply what they need and cannot build for themselves. What products would that be today - as we ban drilling for oil, use up our corn wastefully as energy, close our pipelines, put a noose around coal mining, attack new methods of extracting natural gas, add an extra layer of direct taxation to medical devices, chase out semiconductor fabrication and put federal restrictions on aircraft manufacturers to keep them from addressing their uncompetitive cost structure - what will we build that they will need?
In 1939, we were rich with ready-to-go supplies of natural resources in demand elsewhere and we were filled with idle manufacturing capacity ready to produce the specific goods in demand.
How does that measure up in 2011-2012? Not very well. In the current case the rest of the world is already doing pretty well largely without using many of our products. They are especially unlikely to purchase from us anything that we are unwilling to produce.
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Winniski says the Smoot Hawley Tariff Act and its analogues abroad (including beggar thy neighbor devaluations) caused the Depression by fragmenting the world economy and that the world economy got going again after its re-integration e.g. the Bretton Woods accords and related agreements.
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By HOLMAN W. JENKINS, JR.
Let's face it, the "Chicago School" of economics—the one with all the Nobel Prizes, the one associated with Milton Friedman, the one known for its trust of markets and skepticism about government—has taken a drubbing in certain quarters since the subprime crisis.
Sure, the critique depends on misinterpreting what the word "efficient" means, as in the "efficient markets hypothesis." Never mind. The Chicago school ought to be roaring back today on another of its great contributions, "rational expectations," which does so much to illuminate why government policy is failing to stimulate the economy back to life.
Robert E. Lucas Jr., 74, didn't invent the idea or coin the term, but he did more than anyone to explore its ramifications for our model of the economy. Rational expectations is the idea that people look ahead and use their smarts to try to anticipate conditions in the future.
Duh, you say? When Mr. Lucas finally won the Nobel Prize in 1995, it was the economics profession that said duh. By then, nobody figured more prominently on the short list for the profession's ultimate honor. As Harvard economist Greg Mankiw later put it in the New York Times, "In academic circles, the most influential macroeconomist of the last quarter of the 20th century was Robert Lucas, of the University of Chicago."
Mr. Lucas is visiting NYU for a few days in early September to teach a mini-course, so I dash over to pick his brain. He obligingly tilts his computer screen toward me. Two things are on his mind and they're connected. One is the failure of the European and Japanese economies, after their brisk growth in the early postwar years, to catch up with the U.S. in per capita gross domestic product. The GDP gap, which once seemed destined to close, mysteriously stopped narrowing after about 1970.
The other issue on his mind is our own stumbling recovery from the 2008 recession.
For the best explanation of what happened in Europe and Japan, he points to research by fellow Nobelist Ed Prescott. In Europe, governments typically commandeer 50% of GDP. The burden to pay for all this largess falls on workers in the form of high marginal tax rates, and in particular on married women who might otherwise think of going to work as second earners in their households. "The welfare state is so expensive, it just breaks the link between work effort and what you get out of it, your living standard," says Mr. Lucas. "And it's really hurting them."
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.Turning to the U.S., he says, "A healthy economy that falls into recession has higher than average growth for a while and gets back to the old trend line. We haven't done that. I have plenty of suspicions but little evidence. I think people are concerned about high tax rates, about trying to stick business corporations with the failure of ObamaCare, which is going to emerge, the fact that it's not going to add up. But none of this has happened yet. You can't look at evidence. The taxes haven't really been raised yet."
By now, the Krugmanites are having aneurysms. Our stunted recovery, they insist, is due to government's failure to borrow and spend enough to soak up idle capacity as households and businesses "deleverage." In a Keynesian world, when government gooses demand with a burst of deficit spending, the stick figures are supposed to get busy. Businesses are supposed to hire more and invest more. Consumers are supposed to consume more.
But what if the stick figures don't respond as the model prescribes? What if businesses react to what they see as a temporary and artificial burst in demand by working their existing workers and equipment harder—or by raising prices? What if businesses and consumers respond to a public-sector borrowing binge by becoming fearful about the financial stability of government itself? What if they run out and join the tea party—the tea party being a real-world manifestation of consumers and employers not behaving in the presence of stimulus the way the Keynesian model says they should?
Mr. Lucas and colleagues in the early 1960s were not trying to undermine the conventional prescriptions when they began to think about how the public might respond—possibly in inconvenient ways—to signals about government intentions. As he recalls it, they were just trying to make the models work. "You have somebody making a decision between the present and the future. You get a college degree and it's going to pay off in higher earnings later. You make an investment and it's going to pay off later. Ok, you can't do that without this guy taking a position on what kind of future he's going to be living in."
'If you're going to write down a mathematical model, you have to address that issue. Where are you supposed to get these expectations? If you just make them up, then you can get any result you want."
The solution, which seems obvious, is to assume that people use the information at hand to judge how tomorrow might be similar or different from today. But let's be precise, not falling into the gap between "word processor people" and "spreadsheet people," as Mr. Lucas puts it. Nothing is assumed: Data are interrogated to see how changes in tax rates and other variables actually influence decisions to work, save and invest.
Mr. Lucas is quick to credit the late John Muth, who would later become a colleague for a while at Carnegie Mellon, with inventing "rational expectations." He also cites Milton Friedman, with whom Mr. Lucas took a first-year graduate course.
"He was just an incredibly inspiring teacher. He really was a life-changing experience." Friedman, he recalls, was a skeptic of the Phillips curve—the Keynesian idea that when businesses see prices rising, they assume demand for their products is rising and hire more workers—even if the real reason for higher prices is inflation.
"Milton brought this [Phillips curve] up in class and said it's gotta be wrong. But he wasn't clear on why he thought it was wrong." In his paper for Friedman's class, Mr. Lucas remembers reaching for a very rudimentary notion of expectations to try to explain why the curve could not operate as predicted.
Growing up in the Seattle area, Mr. Lucas recalls a road trip he took as a youngster that terminated in Chicago, a city with two baseball teams! Chicago, in his mind, became "the big city," a gateway to a wider world. That, and a scholarship, is how he would end up spending most of his career at the University of Chicago.
We are sitting in an inauspicious guest office at NYU. A late summer sprinkle dampens the city. Mr. Lucas describes his parents as intelligent, reading people, neither of whom finished college—he suspects the Great Depression had something to do with it. "They got into left-wing politics in the '30s, not really to do anything about it, but to talk about. That was our background—me and my siblings—relative to our neighbors and relatives, who were all Republicans." In a community not noted for its diversity, his parents were especially committed to civil rights, his mother giving talks on the subject.
I ask about a report that he voted for Barack Obama in 2008, supposedly only the second time he had voted for a Democrat for president. "Yeah, I did. My parents are dead for a long time, but my sister says, 'You have to vote for Obama, for what it would have meant for Mom and Dad.' I felt that too. It's a huge thing. This [history of racism] has been the worst blot on this country. All of a sudden this charming, intelligent guy just blows it away. It was great."
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Steve Moore and Mary O'Grady discuss the week's economic news.
..A complementary consideration was John McCain's inability to say anything cogent about the financial crisis then engulfing the nation. "He didn't have a clue about the economy. I just assumed the guy [Obama] could do it. I thought he was going to be more Clinton-like in his economics and politics. I was caught by surprise by how far left the guy is and how much he's hung onto it and, I would say, at considerable cost to his own standing."
Refreshing, even bracing, is Mr. Lucas's skepticism about the "deleveraging" story as the sum of all our economic woes. "If people start building a lot of high-rises in Chicago or any place and nobody is buying the units, obviously you're going to shut down the construction industry for a while. If you've overbuilt something, that's not the problem, that's the solution in a way. It's too bad but it's not a make-or-break issue, the housing bubble."
Instead, the shock came because complex mortgage-related securities minted by Wall Street and "certified as safe" by rating agencies had become "part of the effective liquidity supply of the system," he says. "All of a sudden, a whole bunch of this stuff turns out to be crap. It is the financial aspect that was instrumental in the meltdown of '08. I don't think housing alone, if it weren't for these tranches and the role they played in the liquidity system," would have been a debilitating blow to the economy.
Mr. Lucas believes Ben Bernanke acted properly to prop up the system. He doesn't even find fault with Mr. Obama's first stimulus plan. "If you think Bernanke did a great job tossing out a trillion dollars, why is it a bad idea for the executive to toss out a trillion dollars? It's not an inappropriate thing in a recession to push money out there and trying to keep spending from falling too much, and we did that."
But that was then. In the U.S. at least, the liquidity problems that manifested themselves in 2008 have long since been addressed. To repeat the exercise now with temporary tax and spending gimmicks is to produce the opposite of the desired effect in consumers and business owners, who by now are back to taking a longer view. Says
Mr. Lucas: "The president keeps focusing on transitory things. He grudgingly says, 'OK, we'll keep the Bush tax cuts on for a couple years.' That's just the wrong thing to say. What I care about is what's the tax rate going to be when my project begins to bear fruit?"
Mr. Lucas pulls up a bit when I ask him what specific advice he'd give President Obama (this is before Mr. Obama's two back-to-back speeches, one promising temporary tax cuts and the other permanent tax hikes, which mysteriously fail to levitate the economy). Unlike many of his colleagues, Mr. Lucas has not spent stints in Washington advising politicians, or on Wall Street cashing in on his Nobel laureate reputation. "No, that doesn't interest me at all," he says. "Now I've taken a salary cut. I don't go to faculty meetings. I don't teach undergraduates. I just write papers. It's great. I feel lucky about this."
Still, an answer comes. Mr. Lucas launches into a brisk dissertation on the work of colleagues—Martin Feldstein, Michael Boskin, others—whom he credits with disabusing him and fellow economists of a youthful assumption that taxes have little effect on the overall amount of capital in society. A lesson for Mr. Obama might be: If you want to stimulate growth in investment, productivity and income, cut taxes on capital.
Alas, don't look for this idea to feature in the next Obama speech on the economy, due any minute now.
Mr. Jenkins writes the Journal's Business World column.
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IMHO this article has genuine insight and explains something important which has been a mystery to me:
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By RONALD MCKINNON
In past decades, tense political disputes over actual or projected fiscal deficits induced sharp increases in interest rates—particularly on long-term bonds. The threat of economic disruption by the so-called bond market vigilantes demanding higher interest rates served to focus both Democratic and Republican protagonists so they could more easily agree on some deficit-closing measures.
For example, in 1993 when the Clinton administration introduced new legislation to greatly expand health care without properly funding it ("HillaryCare"), long-term interest rates began to rise. The 10-year rate on U.S. Treasury bonds touched 8% in 1994. The consequent threat of a credit crunch in the business sector, and higher mortgage rates for prospective home buyers, generated enough political opposition so that the Clinton administration stopped trying to get HillaryCare through the Congress.
In the mid-1990s, Democrats and Republican cooperated to cap another open-ended federal welfare program—Aid to Families with Dependent Children—by giving block grants to the states and letting the states administer the program. Interest rates came down, and the Clinton boom was underway.
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.In contrast, after the passage of ObamaCare in March 2010, long-term bond rates remained virtually unchanged at around 3%. This was despite great doubt about the law's revenue-raising provisions, and the financial press bemoaning open-ended Medicare deficits and the mandated huge expansion in the number of unfunded Medicaid recipients. Even with great financial disorder in the stock and commodity markets since late July 2011, today's 10-year Treasury bond rate has plunged below 2%. The bond market vigilantes have disappeared.
Without the vigilantes in 2011, the federal government faces no immediate market discipline for balancing its runaway fiscal deficits. Indeed, after President Obama finally received congressional approval to raise the debt ceiling on Aug. 2, followed by Standard & Poor's downgrade of Treasury bonds from AAA to AA+ on Aug. 5, the interest rate on 10-year Treasurys declined even further.
Since Alexander Hamilton established the market for U.S. Treasury bonds in 1790, they have been the fulcrum for the bond market as a whole. Risk premia on other classes of bonds are all measured as so many basis points above Treasurys at all terms to maturity. If their yields are artificially depressed, so too are those on private bonds. The more interest rates are compressed toward zero, the less useful the market becomes in reflecting risk and allocating private capital, as well as in disciplining the government.
To know how to restore market discipline, first consider what caused the vigilantes to disappear. Two conditions are necessary for the vigilantes to thrive:
(1) Treasury bonds should be mainly held within the private sector by individuals or financial institutions that are yield-sensitive—i.e., they worry about possible future inflation and a possible credit crunch should the government's fiscal deficits get too large. Because private investors can choose other assets, both physical and financial, they will switch out of Treasurys if U.S. public finances deteriorate and the probability of future inflation increases.
(2) Private holders of Treasurys must also be persuaded that any fall in short-term interest rates is temporary—i.e., that the Fed has not committed itself to keeping short-term interest rates near zero indefinitely. Long rates today are the mean of expected short rates into the future plus a liquidity premium.
The outstanding stock of U.S. Treasury bonds held outside American intergovernment agencies (such as the Social Security Administration but excluding the Federal Reserve) is about $10 trillion. The proportion of outstanding Treasury debt held by foreigners—mainly central banks—has been increasing and now seems well over 50% of that amount. Since 2001, emerging markets alone have accumulated more than $5 trillion in official exchange reserves. And in the last two years the Fed itself, under QE1 and QE2, has been a major buyer of longer-term Treasury bonds to the tune of about $1.6 trillion—and that's before the recently announced "Operation Twist," whereby the Fed will finance the purchase of still more longer-term bonds by selling shorter-term bonds. So the vigilantes have been crowded out by central banks the world over.
Central banks generally are not yield-sensitive. Instead, under the world dollar standard, central banks in emerging markets are very sensitive to movements in their dollar exchange rates. The Fed's near-zero short-term interest rates since late 2008 have induced massive inflows of hot money into emerging markets through July 2011. This induced central banks in emerging markets to intervene heavily to buy dollars to prevent their currencies from appreciating versus the dollar. They unwillingly accept the very low yield on Treasurys as a necessary consequence of these interventions.
True, in the last two months, this "bubble" of hot money into emerging markets and into primary commodities has suddenly burst with falls in their exchange rates and metal prices. But this bubble-like behavior can be traced to the Fed's zero interest rates.
Beyond just undermining political discipline and creating bubbles, what further economic damage does the Fed's policy of ultra-low interest rates portend for the American economy?
First, the counter-cyclical effect of reducing interest rates in recessions is dampened. When interest rates dipped in the past, at least part of their immediate expansionary impact came from the belief that interest rates would bounce back to normal levels in the future. Firms would rush to avail themselves of cheap credit before it disappeared. However, if interest rates are expected to stay low indefinitely, this short-term expansionary effect is weakened.
Second, financial intermediation within the banking system is disrupted. Since early 2008, bank credit to firms and households has declined despite the Fed's huge expansion of the monetary base—almost all going into excess bank reserves. The causes are complex, but an important part of this credit constraint is that banks with surplus reserves are unwilling to put them out in the interbank market for a derisory low yield. This bank credit constraint, particularly on small- and medium-size firms, is a prime cause of the continued stagnation in U.S. output and employment.
Third, a prolonged period of very low interest rates will decapitalize defined-benefit pension funds—both private and public—throughout the country. In California, for example, pension actuaries presume a yield on their asset portfolios of about 7.5% just to break even in meeting their annuity obligations, even if they were fully funded.
Perhaps Fed Chairman Ben Bernanke should think more about how the Fed's near-zero interest rate policy has undermined fiscal discipline while corrupting the operation of the nation's financial markets.
Mr. McKinnon is a professor at Stanford University and a senior fellow at the Stanford Institution for Economic Policy Research.
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http://sethgodin.typepad.com/seths_blog/2011/09/the-forever-recession.html
The forever recession (and the coming revolution)
There are actually two recessions:
The first is the cyclical one, the one that inevitably comes and then inevitably goes. There's plenty of evidence that intervention can shorten it, and also indications that overdoing a response to it is a waste or even harmful.
The other recession, though, the one with the loss of "good factory jobs" and systemic unemployment--I fear that this recession is here forever.
Why do we believe that jobs where we are paid really good money to do work that can be systemized, written in a manual and/or exported are going to come back ever? The internet has squeezed inefficiencies out of many systems, and the ability to move work around, coordinate activity and digitize data all combine to eliminate a wide swath of the jobs the industrial age created.
There's a race to the bottom, one where communities fight to suspend labor and environmental rules in order to become the world's cheapest supplier. The problem with the race to the bottom is that you might win...
Factories were at the center of the industrial age. Buildings where workers came together to efficiently craft cars, pottery, insurance policies and organ transplants--these are job-centric activities, places where local inefficiencies are trumped by the gains from mass production and interchangeable parts. If local labor costs the industrialist more, he has to pay it, because what choice does he have?
No longer. If it can be systemized, it will be. If the pressured middleman can find a cheaper source, she will. If the unaffiliated consumer can save a nickel by clicking over here or over there, then that's what's going to happen.
It was the inefficiency caused by geography that permitted local workers to earn a better wage, and it was the inefficiency of imperfect communication that allowed companies to charge higher prices.
The industrial age, the one that started with the industrial revolution, is fading away. It is no longer the growth engine of the economy and it seems absurd to imagine that great pay for replaceable work is on the horizon.
This represents a significant discontinuity, a life-changing disappointment for hard-working people who are hoping for stability but are unlikely to get it. It's a recession, the recession of a hundred years of the growth of the industrial complex.
I'm not a pessimist, though, because the new revolution, the revolution of connection, creates all sorts of new productivity and new opportunities. Not for repetitive factory work, though, not for the sort of thing ADP measures. Most of the wealth created by this revolution doesn't look like a job, not a full time one anyway.
When everyone has a laptop and connection to the world, then everyone owns a factory. Instead of coming together physically, we have the ability to come together virtually, to earn attention, to connect labor and resources, to deliver value.
Stressful? Of course it is. No one is trained in how to do this, in how to initiate, to visualize, to solve interesting problems and then deliver. Some see the new work as a hodgepodge of little projects, a pale imitation of a 'real' job. Others realize that this is a platform for a kind of art, a far more level playing field in which owning a factory isn't a birthright for a tiny minority but something that hundreds of millions of people have the chance to do.
Gears are going to be shifted regardless. In one direction is lowered expectations and plenty of burger flipping... in the other is a race to the top, in which individuals who are awaiting instructions begin to give them instead.
The future feels a lot more like marketing--it's impromptu, it's based on innovation and inspiration, and it involves connections between and among people--and a lot less like factory work, in which you do what you did yesterday, but faster and cheaper.
This means we may need to change our expectations, change our training and change how we engage with the future. Still, it's better than fighting for a status quo that is no longer. The good news is clear: every forever recession is followed by a lifetime of growth from the next thing...
Job creation is a false idol. The future is about gigs and assets and art and an ever-shifting series of partnerships and projects. It will change the fabric of our society along the way. No one is demanding that we like the change, but the sooner we see it and set out to become an irreplaceable linchpin, the faster the pain will fade, as we get down to the work that needs to be (and now can be) done.
This revolution is at least as big as the last one, and the last one changed everything.
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The insight in that piece is a good one to keep in mind.
What did you make of the bond vigilante piece I posted?
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My understanding is that back when the Fed operated under some set of rules, markets dictated interest rates. Prices and yields of Treasury bonds today are not real because, as he put it, "the Fed's huge expansion of the monetary base" and that a good part of the rest is going to central banks who are looking for storage of funds more than yield. If we had to sell debt up to the entire revenue shortfall, interests rates would be through the roof. he is right that the masking of the underlying problem enables it to continue and escalate and he shows how it causes other problems, the pension system collapse and the drying up of private lending and investment as examples prolonging and worsening what is already wrong. It is a ticking time bomb.
He says in closing: "Perhaps Fed Chairman Ben Bernanke should think more about how the Fed's near-zero interest rate policy has undermined fiscal discipline while corrupting the operation of the nation's financial markets."
Yes, but when tight money precedes growth policies, like when Paul Volcker tightened while Tip O'Neill's congress delayed tax cuts, the temporary unemploymentsurge was huge. Today it would be catastrophic. We need to solve both.
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The insight in that piece is a good one to keep in mind.
What did you make of the bond vigilante piece I posted?
Doesn't gov't intervention in the economy always result in a distortion of some kind that eventually results in a negative outcome?
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Exactly so.
And here we have the disappearance of the discipline imposed on both spending and monetization!
This is not good. How are ordinary people to protect themselves from this war on savings and money itself?
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"How are ordinary people to protect themselves from this war on savings and money itself?"
Change course. :-)
Unfortunately, ordinary people right now don't have savings. Open equity lines with low interest became the new savings and now people have neither.
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"How are ordinary people to protect themselves from this war on savings and money itself?"
Tangible assets and tangible skillsets.
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A reader from Germany has questions regarding the role of credit in my deflation thesis. Josef writes:
Hello Mish
I am trying to understand your reasoning in the discussion about inflation vs. deflation. One of the things I don't understand is the role of "credit". You write that "the market value of credit is collapsing at an amazing rate". But isn't "credit" the same as "debt"? When the market value of debt falls, then I wouldn't I need less "real estate" to get rid of my debt? Please, can you spend a minute to clarify this contradiction.
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No Contradiction
Hello Josef,
An accepted offer for credit is a loan, resulting in debt for the borrower, and an asset (the loan) on the balance sheet of the lender (typically a bank or finance company). So yes debt = credit extended (plus agreed upon interest).
When the value of assets (loans) drop significantly, banks become capital impaired and cannot lend. This is happening now even though banks are hiding losses by not marking assets to market prices.
We have heard absurd statements from the Central bank of France that there are no toxic assets on French bank balance sheets. The market price of Greek debt says otherwise.
Plunge in Mark-to-Market Prices of Bank Assets
We can infer marked-to market plunges in value of bank assets by the enormous drops in financial stocks this year. We know the value of debt on the balance sheets of banks has collapsed, even if banks deny it.
Inability to pay back debt also shows up in credit default swaps, sovereign debt ratings, and soaring bond yields of Greece, Portugal, Spain, and Italy vs. Germany.
These credit actions show a demand for safe hiding places such as US and German government bonds and cash. We can see that in record low US treasury yields and German government bond yields.
Debt Not Marked-to-Market
The second question is where your error is "wouldn't I need less real estate to get rid of my debt?"
The debt remains until it is written off. In the US, people still owe more on their houses than they can pay back. The money is owed but will not be paid back. The same applied to may types of loans including auto loans, credit card debt, home equity lines, etc.
Enormous Foreclosure Backlog
US Banks have the value of their assets (mortgage loans, commercial real estate loans, consumer credit loans), at prices that do not reflect likelihood of default and thus that debt is not marked-to-market.
Writedowns are deflation in action, and they are coming.
In many instances, people walk away from mortgage debt. In those cases banks eventually foreclose. The key word is "eventually" as the list of pending foreclosures is measured in decades at the current rate.
Please see First Time Foreclosure Starts Near 3-Year Lows, However Bad News Overwhelms; Foreclosure Pipeline in NY is 693 months and 621 Months in NJ for details.
US Writedowns Coming on REOs
When homeowners walk away or go bankrupt, generally they are relieved of debt. However the problem for banks does not go away.
After foreclosure, banks have a different asset on the books. It is no longer a loan, but rather REO (Real Estate Owned).
What do you think those houses on the balance sheets of banks are worth vs. the value banks hypothesize they are worth?
Once again, this capital impairment shows up in banks inability and unwillingness to lend. When banks don't lend, businesses don't expand, and when businesses don't expand unemployment stays high.
This deflationary cycle feeds on itself until home prices fall to the point where there is genuine demand for them and banks are recapitalized.
European Writedowns
The biggest debt problem in Europe is in regards to loans made by French and German banks to Greece, Spain, Portugal, and Italy.
The ECB, EU, and IMF compounded the problem by throwing more money at Greece, on terms and timelines Greece cannot possibly pay back.
Europe has other huge structural issues regarding productivity in Spain and Greece vs. Germany, and in currency union that cannot possibly work given the lack of a fiscal union.
Poor Policies by IMF, EU, ECB, Fed
EU, IMF, ECB, and Fed policies in the US and Europe were designed to hide losses on real estate loans, to hide losses on sovereign debt loans to Greece, Spain, Portugal etc, and to prevent losses to banks and bondholders.
Barry Ritholtz had an excellent column on that yesterday called Banking’s Self Inflicted Wounds.
Policies of governments and central banks that bail out private banks are wrong because they place more burden on already over-extended and deep in debt taxpayers who are not equipped to take on more debt.
The deflationary backdrop will persist until debt is written off, consumer deleveraging peaks, home prices fall to affordable values, and global structural imbalances fixed. The situation is not encouraging because of five critical problems.
Five Critical Problems
Keynesian clowns everywhere refuse to accept the fact that debt is the problem and one cannot possibly spend one's way out of debt crisis.
Europe has structural problems related to the currency union, productivity, union work rules, pensions, retirement, and country-specific fiscal problems.
The US has structural problems related to prevailing wages, collective bargaining of public unions, corporate tax policies, etc.
Stimulus and bailouts are bad enough in and of themselves, but stimulus and bailouts without fixing structural problems is insanity.
Politicians on both continents refuse to address structural issues
Process is Important, Not the Term
It's important to not get hung up on the term "deflation" but rather to understand the process I am describing, the implications of that process, and why the policy actions taken have not worked (and cannot possibly work), all called well in advance.
For more on the process of deflation (regardless of what one wants to call it), please see Bizarro World Inflation; About that 2011 Hyperinflation Call ...
Yes Virginia, U.S. Back in Deflation; Inflation Scare Ends; Hyperinflationists Wrong Twice Over
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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5 minutes, vintage, very interesting, still relevant. Bringing it here from the political side by request.
Economics: Equality of rights or results? Sowell, Piven, Friedman 1980
http://www.youtube.com/watch?feature=player_embedded&v=26QxO49Ycx0
Discussion between Thomas Sowell and Frances Fox Piven with Milton Friedman
http://miltonfriedman.blogspot.com/
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http://reason.com/archives/2011/11/29/we-dont-face-any-good-options
‘We Don’t Face Any Good Options’
Nobel Prize–winning economist Vernon Smith on the financial crisis, Adam Smith’s underrated insights, and his journey from socialist to libertarian
Nick Gillespie from the December 2011 issue
“I remember the ’30s like it was yesterday,” says economist Vernon Smith. And he’s not kidding. In 1935, when the future Nobel Prize winner was 7 years old, his family decamped to their Kansas farm to wait out the hard times. “On the farms,” Smith explains, “you can eat.” His parents only made it to eighth grade, but “they were people who read,” and they expected their son to go to college. They got their wish—and then some.
Smith’s higher education began with remedial work at a local Quaker college (“I was not a good student in high school,” he says) but eventually took him from a Caltech electrical engineering degree to an economics Ph.D. at Harvard. Beginning at Purdue University, and then at the University of Arizona and George Mason University, Smith founded and developed the pioneering field of experimental economics, which studies actual human behavior—a major breakthrough in a discipline obsessed with abstract models. This work culminated in 2002, when Smith was awarded the Nobel Memorial Prize in Economic Sciences “for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms.”
Over that time span, Smith’s political views evolved in tandem with his economic insights. He left behind the socialism he learned at his mother’s knee for a more libertarian outlook. He says “experimental economics destroyed whatever was left in me of the notion that somehow you could do better than to find institutions that organized this decentralized information and create.” Now continuing his lab work at Chapman University, Smith is riding out the second most serious economic crisis of his 84 years in sunny California.
In July, Smith sat down with reason.tv Editor in Chief Nick Gillespie to discuss his ideological journey, how FDR (and perhaps George W. Bush) saved capitalism, why some of Adam Smith’s most important intellectual contributions are overlooked, and what experimental economics has to say about the collapse of the housing market.
reason: We’re sitting in your office at Chapman University, a beautiful campus in Orange County, California. Tell us about your setup here, what kind of experiments you’re running, and what you’re hoping to find with them.
Vernon Smith: We’re asking some questions that came out of the economic crisis. We started doing asset-trading experiments in the ’80s and discovered bubbles, quite unintentionally.
reason: In your experiments, you were able to create bubbles, or did they just pop up?
Smith: They popped up. We thought we would create bubbles, but we never had to.
reason: How does a bubble take place?
Smith: Right now, we don’t understand why people get caught up in self-reinforcing expectations of rising prices. The first time you’re in this experiment, you may have bought early and you may have sold before the break. Bring those same people back in another two or three days, put them in the same environment, and we get a lower-volume bubble. Typically, it booms earlier and crashes earlier; they are expecting a bubble. Bring them back a third time, and they tend to trade fairly close to fundamental value.
reason: How does this type of experiment map onto, say, the last five years in America?
Smith: If you think about the housing bubble, buyers, sellers, borrowers, lenders, real estate agents, government regulators—everybody believed that prices would rise and continue to rise. And that is the essence of a bubble. Suppose a regulator in 2003 or 2004 said, “Hey, this thing is not sustainable. We’ve got to do something to stop it.” I think he’d have been fired. If the bubble had been stopped in 2003 or 2004, it probably would have been a lot less damaging. But who’s going to know that?
(Interview continues below video.)
reason: Why has it taken so long for economics to become more seriously empirical in its operations? It really seems like it’s taken forever for economists to want to observe actual human beings trading either in an experimental setting or in the real world.
Smith: Economics enjoyed a major breakthrough in the 1870s: the marginal revolution.
reason: Give us the short definition of the marginal revolution.
Smith: If you go back to Adam Smith, he was puzzled as to why diamonds command a higher price than water, whereas water is more useful. The key idea he didn’t have is the notion of marginal utility or marginal value. Unfortunately, I think we lost a lot of the other insights of Adam Smith because we’d solved this intellectual problem of understanding better the determination of prices. Equilibrium economics really [took] the driver’s seat.
reason: Which holds…
Smith: The idea is an economy consists of preferences and technology for producing goods. This gives you a conjunction of supply and demand where demand depends not on the price of this particular good but the price of the alternatives, because the concept of opportunity cost comes in on both the demand side and the supply side. So it’s a complex problem mathematically and intellectually, but this problem got solved and it helped them to understand the operation of a static, equilibrium world.
Of course the great insight of [economist F.A.] Hayek and his criticism of equilibrium theory was that it began with a bunch of givens that are not, in fact, given to any one mind in the economy. The essential thing about a real economy is that all this information is dispersed. So the name of the game is how people discover this equilibrium. And that’s where I think the experimental work has importantly dramatized the essence of Hayek’s critique. Given the institutions of trading, people are very good in the laboratory at finding these equilibria that they don’t have any understanding of—and they get there by repetition.
reason: You say you’re a libertarian with a lot of reservations. The experiments you have run and the research you’ve done over the years really argue that institutions create good and bad behavior.
Smith: As a libertarian, I’d like to emphasize the property rights aspect of it. People say what we need is more regulation. All markets are regulated in terms of property rights, the dos and don’ts. The important thing is that those property rights provide people with the right incentives. What was so devastating in the mortgage market is this separation of mortgage originations from the lender without properly incentivizing the mortgage originator. What’s your incentive to do due diligence if you get your fee up front and then it goes out the back door and down the line?
reason: You say we got away from understanding that everyone needs to have skin in the game. What was driving that loss of knowledge? Was it federal policy? Was it collective amnesia?
Smith: The way I would describe it is: We created new mortgage and financial institutions too fast. No one had an incentive to think it through. Not only were there bad incentives up front with mortgage origination, but those mortgages then would be packaged, mortgage-backed securities issued, and then they were rated and “insured.” But they weren’t collateralized. They were exempt, you see. And exempt meant that they were exempt from the property rights rules that would have applied if derivatives had been classified as securities.
reason: This has been a very long recession, and whether it has ended or not, we’re facing slow economic growth and high unemployment. What are the forces extending this crisis?
Smith: The main thing is the negative equity problem in households. Or near negative equity. You have something like 22 percent of homeowners now who owe more on their house than the current market value. You don’t feel like spending money; you’re paying down debt.
reason: What do you do? Do you just sit it out until enough of the debt is paid down?
Smith: That’s probably the way we’re going to do it. It was a mistake to subsidize new home buyers. Existing homeowners—many of them have been given a break in their payments, but they’ve done it by giving them a lower interest rate and stretching the loans. They haven’t even changed the principal.
reason: But that’s a disturbing intervention, isn’t it?
Smith: Of course it’s disturbing! Forgiving debt is not a good idea. But you have to realize we don’t face any good options. If it hadn’t been done, the banking system likely would have collapsed. We’d have the same problem we had in the ’30s.
reason: If this is the second worst economic crisis—except for the Great Depression—how does it stack up?
Smith: I remember the ’30s like it was yesterday. See in 1932, I was 5 years old. My father worked for the Bridgeport Machine Company in Wichita, Kansas. He was a machinist. We had a farm. So in 1935 we moved to that farm. In times of stress there often is this reverse migration from cities to farms, because on the farms you can eat. We grew our own vegetables, chickens, hogs, all of that. They were very, very difficult years in terms of wheat harvests and that sort of thing.
reason: You grew up in Kansas in the ’30s and then, in terms of high school—
Smith: I finished high school in January 1944. I was working at Boeing at the time and continued until the following August, and then I went to Friends University, a Quaker college not many blocks from where I lived. And the reason that I went there was to make up for my high school education. I was not a good student in high school, and I did not have the math, physics, chemistry that I needed if I was going to go into science. I made up for all of that at Friends University.
reason: Did either of your parents go to college?
Smith: No.
reason: So how did you gravitate to even thinking of that as a possibility?
Smith: My parents always expected it of me, even though they only had an eighth-grade education. They were people who read. My mother was a socialist and was a political activist.
reason: When you say socialist—she believed that the means of production should be collectively owned by the state, etc.?
Smith: Oh, yes! But that was really common of people in the 1930s.
reason: Especially in that part of the country.
Smith: Oh, yes.
reason: You got a master’s in economics from Kansas, and then you went to Harvard for your Ph.D. What were they teaching in economics classes?
Smith: General equilibrium theory. The course I took from Wassily Leontief, which was the first-year theory class at Harvard, was a very good one. We read Irving Fisher. I’m still a great admirer.
reason: What do you like about him?
Smith: Fisher was a very clear writer. I remember a student once asked Leontief in class why there was no school of economics built around Fisher. And Leontief said: Well, it’s because he wrote so clearly—everyone could understand what he was saying.
reason: Were people free market enthusiasts at that point? Or were they all talking about a command economy?
Smith: I think the only clear-cut free market enthusiast at Harvard would have been Gottfried Haberler. He’d come out of the Austrian school. There was a tremendous exodus, of course, out of Germany and Austria of not only physicists but economists—Fritz Machlup, Jacob Marschak, [Joseph] Schumpeter, of course. And when I got to Harvard, Schumpeter had died only two years earlier and his legacy was very strong.
reason: Was there a sense that FDR’s economic policies had succeeded and that economists could just sort of follow through on that project?
Smith: Yes. Roosevelt, in a way, kind of saved capitalism.
reason: Just like George Bush did more recently.
Smith: Yeah. He kind of saved it. In fact, my grandfather, my mother’s father, who had been a supporter of Eugene Victor Debs in 1932, became a Roosevelt fan, and I think that tells you a lot about what happened in the ’30s.
reason: Let’s talk about that then. It’s also a personal journey for you. And I know you said your first presidential vote went to Norman Thomas, the Socialist in 1948. And then the other presidential vote that was easy for you to make was Ed Clark in 1980, the Libertarian candidate. In a way, your journey—as demarcated by those votes—is part of a larger American story of leaving behind a kind of rule by elites, or control by elites, where “we’ll take care of everything,” to a much more individualistic understanding that it’s a libertarian country.
Smith: Experimental economics destroyed whatever was left in me of the notion that somehow you could do better than to find institutions that organized this decentralized information and create. That’s the engine of wealth creation.
reason: In America since 1950, there’s been a vast increase in the appreciation of and understanding of economics. Will we be better at not being stupid about how we’re acting if we know more about economics?
Smith: The work that has to be done to keep us from getting off track has to be expressed in terms of institutional constraints, when what we do has serious implications for innocent other parties. Margin rules in the stock market confine the damage for the people who are doing it. There’s no external blindsiding of all kinds of people that are innocent. I see it as a property rights problem. And you know what? We got it right in most markets. The vast majority of markets work fine. And the reason why they work is that you can’t steal; you have to trade. Essentially, what we’re doing is asking whether there was a type of theft going on that was not being controlled by the right property rights regime.
reason: Federal spending is currently 25 percent of the economy, a figure that hasn’t been seen since World War II. Deficits loom large in absolute numbers as well as a percentage of the economy. Is that a form of theft as well? Is that something that concerns you and needs to be reined in?
Smith: We’re primarily going to solve that problem by inflating out of it.
reason: I’m very sorry to hear that.
Smith: I’m sorry to say it! But I think that will be the way we reduce the burden of the debt. It won’t be intended. [Federal Reserve Chairman] Ben Bernanke talks about the tools he has. One of the tools he has is to raise the interest rate he pays on excess reserves—in other words, pay them to not expand loans rapidly. But right now he’s got the other problem.
reason: But is this also the delusion of the economic planner, that once things start happening—he’s very smart, he’s going to be able to control this? We’ve seen this before, where inflation isn’t a problem until it’s beyond control.
Smith: It’s really interesting to look at the Federal Open Market Committee press releases in 2007. On August 7, 2007, the press release said the housing market is going through an adjustment; we’re still concerned about inflation. Three days later, because of the collapse in the credit default market, that completely changed. The Federal Reserve, Bernanke realized they had a financial crisis on their hands. That’s how quickly it happened, and the signal came from a market. It did not come from the econometric models. I think to Bernanke’s credit that he changed. He turned on a dime. How many times had he said it was not the business of the Federal Reserve to rescue investors from the consequences of their own decisions? That’s exactly what he ended up doing. I don’t believe he wanted to do it. I think he meant the earlier statements, but he had no choice.
reason: If we hadn’t bailed out the banks, if we hadn’t passed TARP, the economy would have ceased to exist?
Smith: I think the more important thing is what the Federal Reserve did, not the Treasury program. You can always go back and say, well things should have been done earlier to prevent that from happening. Yes, yes, I agree. But the point is, what do you do in that case? Here it is, in spite of whatever mistakes had been made before. And Bernanke is testing the Friedman-Schwartz hypothesis right now—that if the Fed had acted and flooded the system with liquidity in the early ’30s, that we’d have prevented the Great Depression.
reason: Economists enjoy a possibly unprecedented kind of cultural power now. They can write best-selling books. They can run the world economy. Where does economics as a serious discipline need to be moving next?
Smith: To me, the major problem in economic theory is the preoccupation with modeling for its own sake and not asking the fundamental questions. These fundamental questions have to do with dynamics; they have to do with property rights. Basic questions like: “How can it be that specialization, exchange, and property rights came about?” You can’t have one without the other. We think today of property rights as something that comes from the state. That couldn’t possibly be how they originated. Our small-group experiments are trust games. Imagine a trust game in which I’m a first mover and you’re the second mover. I move first. I can choose $10 for each of us, or I can pass to you. If I pass to you, the $20 becomes $40. You can give me 15 and keep 25, or you can give me nothing and get the whole 40. Game theory says I should never pass to you, because if you’re self-interested, you’ll take the 40. But what’s remarkable is half the people we recruit in the undergraduate lab—half of the first movers [pass] to the second. And two-thirds to three-quarters reciprocate with 15/25—they don’t take the total. You can’t understand that with game theory. You can understand it by reading The Theory of Moral Sentiments.
reason: Is that a learned behavior, or is that an innate behavior? Or is that dichotomy not really relevant?
Smith: It’s Adam Smith! He says imagine a human being is brought up in complete isolation from any member of the species. That person can’t have an idea of what it means for his mind to be deformed any more than he has an idea for what it means for his face to be deformed. Bring him into society, and you give him the mirror he needs. In The Theory of Moral Sentiments, Adam Smith is saying munificence is the only thing that requires reward. You don’t reward justice; what you do is punish injustice. Justice is what’s left over after you prevent injustice. Property rights come out of human sociality and then eventually get into civil government. But they arise originally in small groups.
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In 1987, Mrs Thatcher flew to Moscow to meet the Soviet leader Mikhail Gorbachev. In their famous conversations (not shown in the film), Gorbachev rounded on her. As she recalled it, “His view was that the British Conservative Party was the party of the 'haves’ in Britain and that our system of 'bourgeois democracy’ was designed to fool people about who really controlled the levers of power.” But she hit back: “I explained that what I was trying to do was to create a society of 'haves’, not a class of them.”
http://www.telegraph.co.uk/finance/financialcrisis/8915711/Margaret-Thatcher-knew-that-capitalism-must-deliver-for-the-masses.html
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http://www.youtube.com/watch?feature=player_embedded&v=xWAgt_YCNuw
Myths of the New Deal
This video by the Center for Freedom and Prosperity does a good job of exploding the key myths that have surrounded the Great Depression and the New Deal for decades. It is remarkable that the facts this video sets forth are starting to become well known, after many years of obfuscation, due to the work of Amity Shlaes and others http://www.powerlineblog.com/archives/2011/12/myths-of-the-new-deal.php
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An extension of the Keyfabe post, that pro wrestlers may not really be trying to destroy their opponent, is the misunderstanding of the concept of greed in economics. An implication is falsely made that in a free market we are all trying to destroy each other, and the rich will take all and leave you with nothing if we don't stop them. But that doesn't make any sense.
Greed in economics means acting in your own self interest and may include providing for your spouse and your children, maybe your parents, other family members and your place of worship, your charities, your neighborhood, community, your boy scout troop, your environment, your nation, etc and the need to keep your own business interests moving forward to provide for all those 'self' interests.
The fact that people act in their own long term self interest in business and economics is a central tenet in a logic based system that allows the players in the economic system to understand what the other players will do and to make adjustments so that transactions take place and business relationships prosper. The successful business (the butcher, the baker and the candlestick maker) will seek to get the best price (low) from his suppliers and labor, etc. and to get the best price (high) from his customers in a competitive environment, not to destroy them but to keep them as suppliers and customers and to grow the business with them.
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BOE: A Very Model of Dismal Forecasting
By SIMON NIXON
"Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist." Keynes's words today seem truer than ever. In the early stages of the crisis, there was a lot of talk of "model risk". Banks were said to have relied too heavily on models based on flawed assumptions, fuelling a disastrous misallocation of capital. But what of the models used by policy makers to guide their decisions? These rely heavily on similar academic theories about how economies behave. Yet the longer the crisis continues, it is becoming clear that central banks are also susceptible to model risk—not least the Bank of England.
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Bloomberg
Mervyn King, governor of the Bank of England,
The BOE's dismal forecasting record is now a matter of serious concern. Official data last week showed inflation actually rose in March to 3.5% from 3.4% in February, putting it not only well above the BOE's 2% target for the 28th consecutive month, but also more than one percentage point higher than the BOE had forecast as recently as November. Indeed, the BOE has got all the big calls consistently wrong. This time last year, it expected the economy would now be growing by around 3%; this week, the Office for National Statistics is likely to confirm the U.K. barely grew in the first quarter and may even have slipped into technical recession. Indeed, throughout the past five years, the BOE has never stopped predicting the economy will be growing by at least 2.5% two years later.
True, some of this is down to bad luck rather than bad judgment. The BOE couldn't have been expected to predict last year's escalation in the euro crisis or the Arab Spring. But the BOE must take the blame for grossly over-estimating the impact of sterling's devaluation. It has also badly under-estimated the weakness of the money supply: Despite pumping £325 billion ($523.98 billion) into the economy, equivalent to 20% of GDP, the U.K. broad money supply suffered its biggest quarterly drop in February since records began in 1963. Add the BOE's failure to predict the crisis—even in May 2008 it was still attaching a virtual zero probability of a recession—and it is clear something is wrong with it's models.
[AGENDA] in combo
Of course, the BOE is not alone in struggling to make sense of the crisis. Few forecasters have done much better—hardly surprising since most rely on similar academic theories. The International Monetary Fund seems similarly adrift, judging by its latest World Economic Outlook. Until recently, it was a leading advocate of austerity in the euro zone. Now it is hard to know what it believes; it still says fiscal retrenchment is essential while warning it may prove counter-productive. Similarly, the IMF led calls for European bank recapitalization yet now warns bank deleveraging could knock 1.4 percentage points off euro-zone growth by the end of 2013.
Where did the economics professsion go wrong? One answer was offered by BOE Deputy Governor Charlie Bean in a speech last year: Modern economic theory largely ignores the role of banks. "The canonical macroeconomic model for thinking about the design of monetary policy is that of the New Keynesian synthesis. This focuses on the consequences of real and nominal rigidities in goods and labor markets… The behavior of financial intermediaries was seen as being of marginal relevance to the understanding of macroeconomic fluctuations."
Some U.K. policy makers now privately admit their biggest mistake was to underestimate the dynamics and impact of bank deleveraging. No wonder, then, that BOE chief economist Spencer Dale announced this month that the BOE has adopted a new model, partly to address this deficiency. Even so, the role of banks won't be hard-wired into the new "framework" but will be offered as a separate "suite" to provide the Monetary Policy Committee with alternative "insights". Indeed, the new model is apparently unlikely to make much difference to BOE forecasts—not least because it could be 10-15 years before the academic literature is sufficiently advanced to assign a meaningful role for banks into macroeconomic models.
To a layman, this seems extraordinary. Didn't modern economics grow out of a financial crisis? The profession claimed to have learned all the lessons from the 1930s and subsequent crises about how to engineer a recovery. After this crisis, history may need to be rewritten. Perhaps devaluation is a double-edged sword in an open economy. Maybe Keynesian fiscal stimuluses don't work in economies with debt to GDP ratios approaching 100% and deficits in double figures—a situation Keynes could barely have imagined. Perhaps trying to drive down the price of money by buying government bonds is ineffective if a broken banking system is pushing up lending rates—and may even be counter-productive if it boosts inflation. Perhaps the real significance of the collapse of the gold standard was that it paved the way for an expansion of credit—whereas this generation of BOE officials is presiding over an ongoing contraction.
Either way, the BOE shows little sign of changing its approach despite its new model: Astonishingly, the words "deleverage" or deleveraging" haven't appeared once in the last five Inflation Reports, notes Citigroup. The MPC is still not consulted on crucial decisions regarding the banking system: The decision to force banks to repay early emergency funding provided under the Special Liquidity Scheme—arguably the BOE's most successful policy since the start of the crisis—was taken without reference to the MPC. Policies on bank capital and liquidity ratios are the preserve of the separate Financial Policy Committee. And BOE Governor Mervyn King refuses to allow the MPC a say on whether it should buy private-sector assets as part of its quantitative easing program or engage in other measures to ease the pressure on bank funding costs.
Meanwhile five years after the crisis hit, the U.K. is in the midst of the biggest squeeze on living standards in modern history, with output still well below its peak, weak-to-non-existent growth, a deteriorating debt profile, and inflation so far above target the BOE may no longer have scope to deploy its sole policy tool. But don't worry: In two years, inflation will be back below 2% and the economy will be ticking along nicely, growing by 3%. At least, that's what the model says.
Write to Simon Nixon at simon.nixon@wsj.com
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Maybe the economy is not so bad.....
http://www.thedailybeast.com/newsweek/2012/04/29/myth-of-decline-u-s-is-stronger-and-faster-than-anywhere-else.html
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Maybe the economy is not so bad.....
http://www.thedailybeast.com/newsweek/2012/04/29/myth-of-decline-u-s-is-stronger-and-faster-than-anywhere-else.html
http://www.usdebtclock.org/
Let me know when the red numbers start moving backwards.
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GM, It would be interesting to get a version of that clock that shows the debt since Democrats took power in Nov 2006 / Jan 2007 - and the 'growth' we bought with it. The new Senators that year are up for discipline (re-election) this year. The majority of women in 2010 already voted the first woman Speaker. The de facto leaders of the Senate then and Executive Branch now, Obama, Hillary and even Biden are also up for second thoughts by the electorate.
All they can say it was worse before they "got here' and point to when they instead controlled congress.
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Though I find JDN's posted article to be rather vapid and glib, the larger question remains and it is one of America, not just its government. We remain a rather fg amazing country. If, for example, Romney wins and the Reps do well in Congress, there is a LOT of money sitting on the sidelines just waiting to jump in. The energy sector e.g. natural gas, is VERY promising and holds profound implications. Anyway, this thread is more for Economic theory than this. A better place for this discussion would be the Decline? thread at
http://dogbrothers.com/phpBB2/index.php?topic=2123.0
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This statement of Crafty's in the Calif thread makes a great point that has widespread implications in economics:
"...the high unemployment rate and the closely related decline in discretionary income with its attendant decline in discretionary spending-- which unfortunately for me is how most wives see martial arts-- are really hitting the portion of my income based upon local spending"
We keep trying to target groups for taxation, only the rich, only the business owner, only the other business owner. But you cannot tax or punish the other guy ("crucify" in the case of coal companies) without taxing yourself or your own family.
In this particular case, let's say we design a big tax increase so carefully that it hits every business except martial arts schools. Up goes unemployment, down goes take home and discretionary income and instantly the martial arts school is taxed in lost income.
It isn't trickle down; it is interconnectedness. Tax the business owner, the employees suffer. Tax the store, the customer gets hit. Tax the energy used in manufacturing driving costs up, factory jobs go overseas.
If we spend to excess and then don't tax anyone to pay for it, just borrow and print money, everyone is still hurt by the declining value of everything else in diluted dollars.
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This statement of Crafty's in the Calif thread makes a great point that has widespread implications in economics:
"...the high unemployment rate and the closely related decline in discretionary income with its attendant decline in discretionary spending-- which unfortunately for me is how most wives see martial arts-- are really hitting the portion of my income based upon local spending"
We keep trying to target groups for taxation, only the rich, only the business owner, only the other business owner. But you cannot tax or punish the other guy ("crucify" in the case of coal companies) without taxing yourself or your own family.
In this particular case, let's say we design a big tax increase so carefully that it hits every business except martial arts schools. Up goes unemployment, down goes take home and discretionary income and instantly the martial arts school is taxed in lost income.
It isn't trickle down; it is interconnectedness. Tax the business owner, the employees suffer. Tax the store, the customer gets hit. Tax the energy used in manufacturing driving costs up, factory jobs go overseas.
If we spend to excess and then don't tax anyone to pay for it, just borrow and print money, everyone is still hurt by the declining value of everything else in diluted dollars.
What? There is no magical money tree? When did that happen?
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http://www.realclearpolitics.com/video/2012/04/30/ron_paul_vs_paul_krugman_on_economics.html
http://www.forbes.com/sites/michaelpollaro/2012/04/27/the-bernanke-bust-the-why-how-and-when/
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http://www.thedailybeast.com/articles/2012/05/06/paul-krugman-austerity-is-so-wrong.html
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By ROBERT J. BARRO
The weak economic recovery in the U.S. and the even weaker performance in much of Europe have renewed calls for ending budget austerity and returning to larger fiscal deficits. Curiously, this plea for more fiscal expansion fails to offer any proof that Organization for Economic Cooperation and Development (OECD) countries that chose more budget stimulus have performed better than those that opted for more austerity. Similarly, in the American context, no evidence is offered that past U.S. budget deficits (averaging 9% of GDP between 2009 and 2011) helped to promote the economic recovery.
Two interesting European cases are Germany and Sweden, each of which moved toward rough budget balance between 2009 and 2011 while sustaining comparatively strong growth—the average growth rate per year of real GDP for 2010 and 2011 was 3.6% for Germany and 4.9% for Sweden. If austerity is so terrible, how come these two countries have done so well?
The OECD countries most clearly in or near renewed recession—Greece, Portugal, Italy, Spain and perhaps Ireland and the Netherlands—are among those with relatively large fiscal deficits. The median of fiscal deficits for these six countries for 2010 and 2011 was 7.9% of GDP. Of course, part of this pattern reflects a positive effect of weak economic growth on deficits, rather than the reverse. But there is nothing in the overall OECD data since 2009 that supports the Keynesian view that fiscal expansion has promoted economic growth.
For the U.S., my view is that the large fiscal deficits had a moderately positive effect on GDP growth in 2009, but this effect faded quickly and most likely became negative for 2011 and 2012. Yet many Keynesian economists look at the weak U.S. recovery and conclude that the problem was that the government lacked sufficient commitment to fiscal expansion; it should have been even larger and pursued over an extended period.
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.This viewpoint is dangerously unstable. Every time heightened fiscal deficits fail to produce desirable outcomes, the policy advice is to choose still larger deficits. If, as I believe to be true, fiscal deficits have only a short-run expansionary impact on growth and then become negative, the results from following this policy advice are persistently low economic growth and an exploding ratio of public debt to GDP.
The last conclusion is not just academic, because it fits with the behavior of Japan over the past two decades. Once a comparatively low public-debt nation, Japan apparently bought the Keynesian message many years ago. The consequence for today is a ratio of government debt to GDP around 210%—the largest in the world.
This vast fiscal expansion didn't avoid two decades of sluggish GDP growth, which averaged less than 1% per year from 1991 to 2011. No doubt, a committed Keynesian would say that Japanese growth would have been even lower without the extraordinary fiscal stimulus—but a little evidence would be nice.
Despite the lack of evidence, it is remarkable how much allegiance the Keynesian approach receives from policy makers and economists. I think it's because the Keynesian model addresses important macroeconomic policy issues and is pedagogically beautiful, no doubt reflecting the genius of Keynes. The basic model—government steps in to spend when others won't—can be presented readily to one's mother, who is then likely to buy the conclusions.
Keynes worshipers' faith in this model has actually been strengthened by the Great Recession and the associated financial crisis. Yet the empirical support for all this is astonishingly thin. The Keynesian model asks one to turn economic common sense on its head in many ways. For instance, more saving is bad because of the resultant drop in consumer demand, and higher productivity is bad because the increased supply of goods tends to lower the price level, thereby raising the real value of debt. Meanwhile, transfer payments that subsidize unemployment are supposed to lower unemployment, and more government spending is good even if it goes to wasteful projects.
Looking forward, there is a lot to say on economic grounds for strengthening fiscal austerity in OECD countries. From a political perspective, however, the movement toward austerity may be difficult to sustain in some countries, notably in France and Greece where leftists and other anti-austerity groups just won elections.
Consequently, there is likely to be increasing diversity across countries in fiscal policies, and this divergence will likely make it increasingly hard to sustain the euro as a common currency. On the plus side, the differing policies will provide better data to analyze the economic consequences of austerity.
Mr. Barro is a professor of economics at Harvard and a senior fellow at Stanford's Hoover Institution.
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Monday Morning Outlook
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Let's Stress Test Governments To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 5/14/2012
Several years ago, Treasury Secretary John Snow was testifying to Congress about the federal budget. He worked for President Bush and, after a long career of opposing deficits, was trying to justify a deficit of about 3% of GDP.
Representative Barney Frank was incredulous. He asked Snow how he could now justify deficits. Frank then came up with a theory: He said Snow was opposed to deficits when the president was a Democrat, but didn’t care about them when the president was a Republican.
Frank was being sarcastic, but he had a good point. Nonetheless, his theory is also true when the roles are reversed.
It now seems that deficits don’t matter all over again. Paul Krugman, a leading apostle of fiscal liberalism, consistently denounced President Bush for deficits. Now he is aggressively arguing against austerity around the world and asking for a substantial boost in federal spending despite the largest peacetime deficits in US history. He doesn’t just say “deficits don’t matter,” he suggests that “deficits are necessary.”
If you can’t see the political nature of all this, you are not looking. Barney Frank was certainly right – it depends on which side is in power.
No matter who is in office, our view has been consistent. Deficits themselves don’t matter. Ultimately, what matters is how much of the nation’s resources are being spent by the government. Spending is the key…it is what crowds out the private sector.
The deficit itself is huge, but interest rates are very low today, emerging market countries have a huge appetite for US debt to back their own expanding currencies, the US has a massive asset base ($150 trillion in the private sector alone), and a budget which freezes spending could eradicate the deficit in five or six years.
In other words, right now the deficit itself is not the problem. It is, however, indicative of the problem – that leaders (of both political parties) cannot control their spending habits. This is not about the economy. If spending created wealth, Greece, Italy, Spain, or even California, would be booming. But they aren’t. They are falling apart.
California recently announced it’s looking at a $16 billion deficit, not the $9 billion it forecasted in January. The new projected deficit is about 18% of revenues. California already has some of the highest tax rates in the country. It’s not taxes or the deficit that matters, it’s the spending.
And the problems go deeper than just money. Big government tends to erode the character traits – motivation, thrift, self-reliance – that make progress and economic growth possible. The bottom line is that the last thing the economy needs now is more government spending.
In light of these budget issues, it’s interesting that a recent series of bad trades at JP Morgan generated a current loss of $2 billion for a company that earned about $5 billion last quarter. The stress tests forced on big banks suggested that losses like this could be absorbed and they were right.
But the federal government is running a deficit of more than $3 billion per day, European countries are going bankrupt and California is falling apart financially.
Instead of arguing about deficits, why don’t we stress test governments? And then get spending down to fix the problem.
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How The U.S. Dollar Will Be Replaced
Thursday, 17 May 2012 05:03 Brandon Smith
After being immersed in the world of alternative economic analysis for several years, it sometimes becomes easy to forget that most people do not track forex markets, or debt to GDP ratio, or true unemployment, or hunch over IMF white-papers highlighting subsections which expose the trappings of the globalist ideology. Sometimes, you just assume the average person knows what the heck you are talking about. This is, of course, a mistake. However, it is a mistake that is borne from the inadequacy of our age and our culture, and is not necessarily a product of weak character, either of the analyst, or the casual reader.
The great frustration of being actively involved in the Liberty Movement is the fact that many people are rarely on the same page (or even the same book) during political and economic discussion. Where we see the nature of the false left/right paradigm, they see “free democracy”. Where we see a tidal wave of destructive debt, they see a “responsible government” printing and spending in order to protect our “best interests”. Where we see totalitarianism, they see “safety”. Where we see dollar devaluation, they see dollar strength and longevity. Ultimately, because the average unaware citizen is stricken by the disease of normalcy bias and living within the doldrums of a statistical fantasy world, they simply have no point of reference by which to grasp the truth when exposed to it. It’s like trying to explain the concept of ‘color’ to a man who has been blind since birth.
Americans in particular are prone to reactionary dismissal when exposed to facts that disrupt their misconceptions. Our culture has experienced a particularly prosperous age, not necessarily free from all trouble, but generally spared from widespread mass tragedy for a generous length of time. This tends to breed within societies an overt and unreasonable expectation of ease. It generates apathy, and laziness. A crushing blubberous slothful cynicism subservient to the establishment and the status quo. Even the most striking of truths struggle to penetrate this smoky forcefield of duplicitous funk.
In recent articles, I have outlined the very immediate dangers of several potential economic events that are likely to take place this year, including the exit of peripheral countries from the European Union, the conflict between austerity and socialist spending in France and Germany, the developing bilateral trade agreements between China and numerous other countries which cut out their reliance on the U.S. dollar, and the likelihood that the Federal Reserve will announce QE3 before the end of 2012. All of these elements are leading in one very particular direction: the end of the Greenback as the world reserve currency.
In response to these assertions I have received letters from some people (some of them indignant) questioning how it would be even remotely possible that the dollar could be replaced at all. The concept is so outside their narrow world view that many cannot fathom it.
To be sure, the question is a viable one. How could the dollar be unseated? That said, a few hours of light research would easily produce the answer, but this tends to be too much work for the fly-by-night financial skeptic. Sometimes, the job of the alternative analyst is to make the obvious even more obvious.
So, let’s begin…
The Dollar A Safe Haven?
This ongoing lunacy is based on multiple biases. For some, the dollar represents America, and a collapse of the currency would suggest a failure of the republic, and thus, a failure by them as individual Americans who live vicariously through the exploits of their government. By extension, it becomes “patriotic” to defend the dollar’s honor and deny any information that might suggest it is on a downward spiral.
Others see how the investment world clings to the dollar as a kind of panic room; a protected place where one’s saving will be insulated from crisis. However, just because a majority of day trading investors are gullible enough to overlook the Greenback’s pitfalls does not mean those dangerous weaknesses disappear.
There is only one factor that shields the dollar from implosion, and that is its position as the world reserve currency. Without this exalted status, the currency’s value vanishes. Backed by nothing but massive and unpayable debt, it sits frighteningly idle, like a time bomb, waiting for the moment of ignition.
The horrifying nature of the dollar is that it is only valuable so long as foreign investors believe that we will pay back the considerable debts that we (the American taxpayer at the behest of our criminally run Treasury) owe, and that we will not hyperinflate in the process. If they EVER begin to see their purchases of dollars and treasuries as a gamble instead of an investment, the façade falls away. Yet again this year Congress and the Executive Branch are “at odds” over the expansion of the debt ceiling, which has been raised to levels beyond the 100% of GDP mark:
http://www.nytimes.com/2012/05/17/us/politics/obama-presses-congress-to-act-on-his-priorities.html
Barack Obama has made claims that increases in the debt ceiling are “normal”, and that most presidents are prone to hiking the barrier every once in a while. Yet, back in 2006, when George W. Bush increased debt limits, Obama had this to say:
"The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is a sign that the U.S. Government can't pay its own bills…Instead of reducing the deficit, as some people claimed, the fiscal policies of this administration and its allies in Congress will add more than $600 million in debt for each of the next five years…Increasing America's debt weakens us domestically and internationally. Leadership means that 'the buck stops here.' Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better."
For once, Barack and I agree on something. Too bad the man changes his rhetoric whenever it’s to his advantage.
Today, Obama now asserts that raising the debt ceiling is not an opening for more government spending, but an allowance for the government to pay bills it has already accrued. This is disingenuous and hypocritical prattle. Obama is well aware as are many in Congress that as long as the Federal Government is able to raise the debt ceiling whenever it suits them, they can increase spending with wild abandon. It’s like handing someone a credit card with no maximum limit. For most men, the temptation would be irresistible. Therefore, one can predict with 100% certainty that U.S. spending will never truly be reduced, and that our national debt will mount in tandem until we self destruct.
How has this trend been able to continue for so long? Our private central bank has created the fiat machine by which all economic depravity is possible. Currently, the Federal Reserve is the number one holder of U.S. debt. The Federal Reserve creates its own capital. It prints its wealth from thin air. The dollar, thus, has become its own lynchpin. The secretive institution which has never been subject to a full audit is now monetizing endless debt mechanisms with paper promises. What value would any intelligent investor put on such a fraudulent economic system?
The epic dysfunction of the dollar is rooted in its reliance on perception rather than tangible wealth or strong fundamentals. It is, indeed, like any other fiat unit, with all the inevitable pitfalls built into its structure.
Ironically, the value of the Dollar Index is measured not by its intrinsic buying power, or its historical buying power, but its arbitrary buying power in comparison with other collapsing fiat currencies.
The argument I hear most often when pointing out the calamitous path of the dollar is that it is the go-to safe haven in response to the crisis in Europe. What the financially inept don’t seem to grasp is that the shifting of savings back and forth between the euro and the dollar is just as irrelevant to our currency’s survival as it is to Europe’s. BOTH currencies are in decline, and this is evident by the growing inflationary pressures on both sides of the Atlantic. Ask any consumer in Greece, Spain, France, or the UK how shelf prices have changed in the past four years, and they will say the exact same thing as any consumer in the U.S.; costs have gone way up. Therefore, it makes sense to compare the dollar’s value not to the euro, or to the Yen, but something more practical, like the dollar of the past….
In 1972, just as Nixon was removing the dollar from the last vestiges of the gold standard, a new car cost an average of $4500. A home cost around $40,000. A gallon of gas was .36 cents. A loaf of bread was .25 cents. A visit to the doctor’s office was $25. Wages were certainly lower, but they kept much better pace with the prices of the era. Today, the gap between wages and inflation is insurmountable. The average family is unable to keep up with the flashflood of rising prices.
According to the historic buying power of the dollar, the currency is a poor safe haven investment. With the advent of bailout efforts and debt monetization through quantitative easing, its devaluation has been expedited dramatically. The Fed has left the door open for what I believe will be a final destructive round of publicly announced QE, weakening the dollar to near death:
http://www.reuters.com/article/2012/05/16/us-usa-fed-idUSBRE84F12320120516
The question then arises; why do foreign countries continue to buy in on the greenback?
The Dollar Dump Has Already Begun
One of my favorite arguments by those defending the dollar is the assertion that no foreign country would dare to dump the currency because they are all too dependent on U.S. trade. To answer the question above, the reality is that foreign countries ARE already calmly and quietly dumping the dollar as a global trade instrument.
To those people who consistently claim that the dollar will never be dropped, my response is, it already has been dropped! China, in tandem with other BRIC nations, has been covertly removing the greenback as the primary trade unit through bilateral deals since 2010. First with Russia, and now with the whole of the ASEAN trading bloc and numerous other markets, including Japan. China in particular has been preparing for this eventuality since 2005, when they introduced the first Yuan denominated bonds. The bonds were considered a strange novelty back then, especially because China had so much surplus savings that it seemed outlandish for them to take on treasury debt. Today, the move makes a whole lot more sense. China and the BRIC nations today openly call for a worldwide shift away from the dollar:
http://news.xinhuanet.com/english2010/indepth/2011-08/06/c_131032986.htm
With the global proliferation of the Yuan, and the conversion of the Chinese economy away from dependence on exports (especially to the West) towards a more consumer based system, the Chinese have effectively decoupled from their reliance on U.S. markets. Would a collapse in the U.S. hurt China’s economy? Yes. Would they still survive? Oh yes. Far better than America would, at least…
In 2008, I warned of this development and was attacked on all sides by more mainstream economists and Keynesian proponents who stated that such a development was impossible. Today, it’s common knowledge that our primary creditors are “diversifying” away from the dollar, though MSM talking heads and those who parrot them still claim that this is not a threat to our economy.
To be clear, the true threat to the dollar’s supremacy is not only due to the constant printing by the private Federal Reserve (though that is a nightmare in the making), but the loss of faith in our currency as a whole. The Fed does not need to throw dollars from helicopters to annihilate our currency; all they have to do is create doubt in its viability.
The bottom line? A dollar collapse is not “theory” but undeniable fact in motion at this moment, driven by concrete actions on the part of the very nations that have until recently propped up our debt obligations. It is only a matter of time before the dollar diminishes and fades away. All signs point to a loss of reserve status in the near term.
What Will Replace The Dollar?
My next favorite argument in defense of the Greenback is the assertion that there is “no currency in a position to take the dollar’s place if it falls”. First of all, this is based on a very naïve assumption that the dollar will not fall unless there is another currency to replace it. I’m not sure who made that rule up, but the dollar is perfectly able to be flushed without a replacement in the wings. Economic collapse does not follow logical guidelines or the personal pet peeves of random man-child economists.
Though, to be fair, and to educate those unaware, there IS a replacement already conveniently ready to roll forward. The IMF has for a couple of years now openly called for the retirement of the dollar as the world reserve currency, to be supplanted by the elitist organization’s very own “Special Drawing Rights” (SDR’s):
http://www.guardian.co.uk/business/2011/feb/10/imf-boss-calls-for-world-currency
The SDR is a paper mechanism created in the early 1970’s to replace gold as the primary means of international trade between foreign governments. Today, it has morphed into a basket of currencies which is recognized by almost every country in the world and is in a prime position to take the dollar’s place in the event that it loses reserve status. This is not theory. This is cold hard reality. For those who claim that the SDR is not considered a “real currency”, they should probably warn the U.S. Post Office, which now uses conversion tables that denominate costs in SDR’s:
http://pe.usps.com/text/imm/immc3_007.htm
So, now that we know a replacement for the dollar is ready to go, the next obvious question would be:
Why would global elites destroy a useful monetary tool like the dollar? Why kill the goose that "lays the golden eggs"?
People who ask this question are simply unable to see outside the fiscal box they have been placed in. For global bankers, a paper currency is not important. It is expendable. Like a layer of snake skin; as the snake grows, it sheds the old and dawns the new.
At bottom, men who promote the philosophies of globalization greatly desire the exaltation of a global currency. The dollar, though a creation of a central bank, is still a semi-sovereign monetary unit. It is an element that is getting in the way of the application of the global currency dynamic. I find it rather convenient (at least for those who subscribe to globalism) that the dollar is now in the midst of a perfect storm of decline just as the IMF is ready to introduce its latest fiat concoction in the form of the SDR. I find the blind faith in the dollar’s lifespan to be rife with delusion. It is not a matter of opinion or desire, but a matter of fact that currencies in such tenuous positions fall, and are in the end replaced. I believe that the evidence shows that this is not random chance, but a deliberate process, leading towards the globalist ideal; total centralization of the world under an unaccountable governing body which operates a global monetary system utterly devoid of transparency and responsibility.
The dollar was a median step towards a newer and more corrupt ideal. Its time is nearly over. This is open, it is admitted, and it is being activated as you read this. The speed at which this disaster occurs is really dependent on the speed at which our government along with our central bank decides to expedite doubt. Doubt in a currency is a furious omen, costing not just investors, but an entire society. America is at the very edge of such a moment. The naysayers can scratch and bark all they like, but the financial life of a country serves no person’s emphatic hope. It burns like a fire. Left unwatched and unchecked, it grows uncontrollable and wild, until finally, there is nothing left to fuel its hunger, and it finally chokes in a haze of confusion and dread…
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For all the criticism here, actually, the dollar looks pretty strong lately. We have our problems, but IMHO they are a lot less than the rest of the world. Others seem to agree.
http://www.google.com/finance?hl=en&client=safari&rls=en&q=CURRENCY:EURUSD&ei=Xd3OT9vBDOGW2QWIhdilDA&sa=X&oi=currency_onebox&ct=currency_onebox_chart&resnum=1&ved=0CHUQ5QYwAA
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Certainly there are reasoned arguments to be made contrary to this piece (and if I have time tomorrow I will share my conversation with Scott Grannis about this specific piece) but the one you raise is not amongst them. As the article itself notes:
"The argument I hear most often when pointing out the calamitous path of the dollar is that it is the go-to safe haven in response to the crisis in Europe. What the financially inept don’t seem to grasp is that the shifting of savings back and forth between the euro and the dollar is just as irrelevant to our currency’s survival as it is to Europe’s. BOTH currencies are in decline, and this is evident by the growing inflationary pressures on both sides of the Atlantic. Ask any consumer in Greece, Spain, France, or the UK how shelf prices have changed in the past four years, and they will say the exact same thing as any consumer in the U.S.; costs have gone way up."
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I have Scott's permission to quote his thoughts:
SCOTT GRANNIS:
(From an earlier email: Interest rates will only go up if the economy does better. Meanwhile, look at Japan where their debt burden and their deficit are both much bigger than ours relative to GDP and yet interest rates are even lower than ours
If the economy strengthens then the tax base expands and tax revenues go up. Meanwhile the average maturity of federal debt is very short. The yield curve is positively sloped so that means that higher interest rates are already factored in to some degree, so higher rates are not a death sentence by any stretch. Moreover, a stronger economy would likely happen if policies improved, so even as interest rates rose the deficit could shrink as a percent of GDP.
The way out of the current predicament is growth. The election this year has a good chance to deliver that.)
Part of his responce to the end of the dollar article I just posted here:
"I'm an original gold bug and no fan of fiat currencies, but I do think you have to acknowledge that the fears of many--including yours truly--that the Fed would print massively and destroy the value of the dollar have not been realized. In fact, the dollar has been rising against most currencies for the past year, and it has been rising against gold and most commodities as well. And inflation has gone down in the past year. To be sure, the dollar is still very weak, but it is most definitely not collapsing against any objective standard in the past year.
"Thank goodness the Fed undertook QE 1 and QE 2, otherwise there would have been a massive shortage of dollar liquidity at a time when the entire world was attempting to deleverage (i.e., when the entire world's demand for dollar liquidity was skyrocketing). If the Fed had not acted, we would have most likely suffered a replay of the Great Depression. The Fed greatly expanded the availability of dollars at a time when the world wanted a ton of extra dollars. That's exactly what they are supposed to do, and it would appear to have worked."
MARC:
I’d be in over my head even more than usual in a discussion with you of QE1-2 (though perhaps Tom can chime in) (and I do wonder at the costs of it to savers) Yes gold has backed off from over $1800, yet it has not been so long since gold was $250 (back when Glen Beck first recommended IIRC LOL) and it is now well above $1500. A six-fold increase seems rather dramatic to me , , , Though I cannot cite chapter and verse, I’m rather confident that similar numbers can be found with regard to food, energy, and other commodities.
If I have my numbers right, the Feds borrow 40% of what they spend and get 60-70% of that by printing it! Each trillion dollars of debt run up by the Feds means about $3333 per citizen and we are projected to run deficits of that magnitude as far as the eye can see and that is with straight line assumptions of revenue increases starting with 1/1/13’s taxageddon. Baseline budgeting creates an Orwellian newspeak that makes developing understanding of WTF is going on impossible. Then there is the matter of unfunded liabilities of entitlements in the face of the realities of American demographics. Oh, , , and California is bankrupt.
Is The Market efficient (I used to believe so) or is it some giant casino wherein ordinary people like me are pigeons to be plucked and fuct as we are whipsawed by the winds of computer trading programs and other forces having not so much to do with merit?
How does all this end well?
SCOTT: "To be sure there are all kinds of problems out there. The U.S. economy would be booming right now if it weren't for all the fucted up policies coming out of Washington for the past many years. Big Government is smothering economies all over the world. It's awful. The Fed is scaring the sh*t out of everyone because we've never seen them do anything like this.
"But before you jump out the window of the nearest skyscraper, consider the following. There are a number of things that are actually improving.
"To begin with, the Fed has not been printing money, contrary to what everyone seems to believe. The Fed has bought $1.6 trillion of notes and bonds, but they have paid for them not with printed-up dollar bills, but with bank reserves. The vast majority of those reserves have never seen the light of day (in the form of actual money used to run the economy). They are sitting on the Fed's balance sheet. What the Fed has effectively done is to to a massive swap with the rest of the world: the Fed has handed out massive amounts of T-bill substitutes (i.e., reserves that pay interest equivalent to T-bills) in exchange for an equal amount of notes and bonds. Since the dollar has not collapsed and inflation has not gone to the moon and the M2 money supply has not exploded to the upside, we can pretty confidently conclude that the Fed's actions were almost exactly what the world demanded. In short, the Fed expanded the supply of safe-haven dollar liquidity in order to accommodate the world's almost insatiable desire for such liquidity. When money supply rises in line with money demand, this is not inflationary.
"As for federal government finances, it seems to be a well-kept secret that the deficit as a % of GDP (the only sensible way to measure it) has dropped by a lot: from 10.4% to 7.4% in the past two and a half years. That's almost a 30% reduction! And thanks mainly to the fact that federal spending has barely increased at all over that period. Congress has been gridlocked, thank goodness. If we can keep this up the deficit will sooner or later come back down to earth and the world as we know it will not end.
"Imagine if Romney wins (which he will, in a landslide I think) and we get spending restraint and meaningful tax reform (lower rates and a bigger base). And Obamacare gets thrown out (as it will, I predict). And Scott Walker doesn't get recalled (looking very likely at this point). We could get a sea-change in the outlook: a shrinking of Big Government. The possibilities are fantastic.
"As for the market, I really don't think that computer trading programs are distorting things. Logic alone can tell you that. Speculators (or computer programs) cannot survive if they add to the market's volatility, because they can only do that if they buy high and sell low. Before too long, anyone doing that in size will end up bankrupt. They can only survive if they buy low and sell high, and that is a very good thing, since it adds liquidity to the market and minimizes volatility."
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Very interesting series of posts, many valid points going in all directions. I don't buy that there is some currency to take the place of the dollar, IMF special drawing rights or anything else. The world IMO does not have an economic plan that does not include a safe, strong America leading. A short term chart of the dollar gaining strength against the Euro while the EU implodes is very unpersuasive. Same for Crafty's point that gold has retreated but from what levels.
I see things more simply. Fix what we know is wrong and quit trying to figure how far we can drive with a broken engine and a missing suspension. A couple of years ago it was agreed widely on the board that this is a two election fix. Grannis sees the second leg of that coming, even uses the L-word (landslide). I see that too but my certainty level is way too low.
Interesting that the deficit to GDP ratio shrank, but the debt of the earlier years is still there along with the trillion a year plus still accumulating. Borrowing 7.4% of GDP on top of our tax burden is still outrageous. What is the debt burden of the current projection after interest rates return to 5-6% if not 13%.
Beyond whether the policy arrow can shift in Nov, the question becomes what kind of medium growth policies can follow in a still bitterly divided country and a closely divided Senate?
On the regulatory front, repeal of Obamacare is one big piece but only gets us back to where we were when we imploded. What other regulatory changes can happen on the employment front? None? Some movement on energy is about all that I see and maybe repeal of the administrative ruling that CO2 is a poison.
On the spending front, the Ryan plan is getting badly demagogued. Maybe holding spending at record high levels is what we will call victory on 'spending restraint' and the rest comes down to growing our way back to sane ratios.
On the tax side, is there going to be a consensus for sweeping reforms that come out of this election? Is there going to a lowering of marginal rates, removal of loopholes and an end to this terrible tradition of making tax rates temporary and uncertain? I don't know.
What about the other electoral outcome. Obama is still ahead in polls; Dems could take the House and hold pretty steady in the Senate. How do we survive this then?
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This following exchange excerpt was particularly interesting, excellent question Crafty!
"...If I have my numbers right, the Feds borrow 40% of what they spend and get 60-70% of that by printing it!..."
SG: "To begin with, the Fed has not been printing money, contrary to what everyone seems to believe. The Fed has bought $1.6 trillion of notes and bonds, but they have paid for them not with printed-up dollar bills, but with bank reserves. The vast majority of those reserves have never seen the light of day (in the form of actual money used to run the economy). They are sitting on the Fed's balance sheet. What the Fed has effectively done is to to a massive swap with the rest of the world: the Fed has handed out massive amounts of T-bill substitutes (i.e., reserves that pay interest equivalent to T-bills) in exchange for an equal amount of notes and bonds. Since the dollar has not collapsed and inflation has not gone to the moon and the M2 money supply has not exploded to the upside, we can pretty confidently conclude that the Fed's actions were almost exactly what the world demanded. In short, the Fed expanded the supply of safe-haven dollar liquidity in order to accommodate the world's almost insatiable desire for such liquidity. When money supply rises in line with money demand, this is not inflationary.
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In that he knows more than me that is partly reassuring. My theory is that when we are not taxing 40% of what we spend, there is no monetary policy that covers for that kind of fiscal irresponsibility. It sounds like they did as well as they could, though that is very hard to follow. We are now invested in Europe's failure too, so one currency is no longer much of a hedge against the other? My theory further is to judge things like gas prices, interest rates and inflation after demand is restored. If gas is $4 while people are not working or buying it, what will be the price at these levels of supply in a fully functioning economy? The amount of liquidity injected matched the shortfall in a disastrous downturn. How will those expansions look later, assuming we correct our other problems and re-start robust growth?
One of Crafty's points remains unaddressed, the whole concept of saving has been destroyed for a generation if not forever. Money to loan doesn't come from savers anymore, it comes from something like that paragraph above of Scott's, "the Fed has handed out massive amounts of T-bill substitutes", etc. Another consequence of artificially low interest rates is that home mortgages are still being Fed subsidized. The bubble is far less inflated than it was, but still these phenomena are not free markets but public policy constructs with no end or phase out in sight.
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http://www.realclearpolitics.com/video/2012/06/05/john_b_taylor_on_economy_the_problem_is_policy.html
(Video at the link)
John B. Taylor On Economy: "The Problem Is Policy"
John B. Taylor, the Mary and Robert Raymond Professor of Economics at Stanford University and the George P. Shultz Senior Fellow in Economics at Stanford's Hoover Institute, delivers the Manhattan Institute's Eighth Annual Hayek Lecture.
(Transcript begins at 2:10)
"Let me start and talk a little bit about this book, 'First Principles.' It starts with the fact that the American economy is just not doing very well. That's pretty obvious. We had a growth rate of just 1.9 percent [according to] the most recent data, unemployment is very high, long-term unemployment astronomically high. We've just gone through a deep financial crisis and a very serious recession, and the recovery is by any definition unprecedentedly weak compared to American history. So, we've got a problem here. And, also, as Paul [Gigot] mentioned in his introduction, our debt is exploding.
"And my view, looking at this and thinking of alternative explanations, I think the problem is policy. And the way I put it simply is that policy has deviated from the basic principles of economic freedom. Now, if Hayek were here, he'd be saying, 'Tell us what you mean. What do you mean by economic freedom, Taylor?' What I mean is the situation where individuals, families decide what to buy, what to produce -- they decide where they will work, they decide how they're going to help other people. But they do this within a framework. It's kind of the American vision, if you like. And that framework involves five things: 1) predictable policy, 2) rule of law, 3) a reliance on markets, which generates 4) good incentives, and 5) a limited role of government.
"And when you think about America, those five principles have pretty much defined the country since its founding, and I think that's why it's done well. That's why so many people have come here and how so many people have done well by coming here. And we're certainly, over the long span of time, much better than any other country. But we've had our ebbs and flows in the degree to which we adhere to these principles of economic freedom. And I think we can learn a lot from those ebbs and flows, see what happens when you move one way or the other in terms of policy.
"So, just think of it, just think of history. The Great Depression. We deviated from a reasonably predictable policy by cutting money growth. The Federal Reserve did that. Friedman and Schwartz pointed that out long ago. Started things off, made what may have been a minor downturn much worse. So, that's the first deviation, if you like, from good principles. We raised taxes, we raised tariffs big time, and then we put in place this National Industrial Recovery Act, which was price controls, discouraging competition by allowing collusion, all the things that you would define, I would define, based on that definition, as deviations from basic economic freedom. Well, what's happened? Of course, we don't have to repeat that mess in describing it.
"Another example: In the mid-60s all through the 70s, policy also deviated from these principles. We started these kind of temporary stimulus packages, the Federal Reserve was go-stop, go-stop, we had wage and price controls for this entire economy. The performance was terrible. Double-digit inflation came, double-digit unemployment came, growth slowed down dramatically. Of course, interest rates were astronomical.
"OK? Next period: The 1980s, 90s until recently, we seemed to move back, if you like, towards these principles. Temporary stimulus packages of the unpredictable variety, discretionary variety were out. Long-term tax reduction, tax reform was in. Go-stop monetary policy was out. Steady as you go monetary policy came in, focused on price stability, largely under [Paul] Volcker. The remnants of price controls were removed. A major federal welfare program was devolved to the states, a reflection on more limited federal government power. The performance was unbelievably good. Unemployment trickled down all that period, inflation came down, growth started to pick up pretty dramatically, productivity growth. Economists call it the Great Moderation. It was such a good time for performance.
"Unfortunately, now, we've drifted back, in my view, away from these principles. And I can go on with a long, long list in this case. The Federal Reserve, I think, in leading up to the crisis deviated from the kind of rules it was using by and large for most of the 80s and 90s. And they held interest rates too low. The mantra these days is 'too low for too long.' That set off some of the excesses, the housing boom, in my view, particularly. Regulators, I think, of financial institutions failed to enforce the rules. That's a deviation from a rule. On the major financial institutions, risk-taking rules, and especially on institutions like Fannie Mae and Freddie Mac.
"Then the crisis came, and we had massive deviations from predictable policy with the bailouts. I'll come back to the bailouts in a few minutes, but whatever what you think about those, they were massive deviations from predictable kinds of policies. Then we had the stimulus packages. We had one in 2009, but don't forget, we had one in 2008. We had 'cash for clunkers' and first-time home buyers. And we had temporary reductions in the payroll tax…for two months. We had quantitative easing, unprecedented amount of intervention by the Federal Reserve. And policies which will apparently try to hold interest rates to zero through 2014.
"If you look at just some data here, in the three years around 2000, there were 11 provisions in the tax code that were up for grabs, up for a change. Now, there's 131, a massive amount of increase in unpredictability, if you like. And just think of this 'fiscal cliff' everyone's talking about. That just wasn't dropped on us. That is a self-inflicted policy. That is sort of the epitome of unpredictable policy put in place, and rightly, people are concerned about that.
"So, as I look at this situation, it seems to me the evidence is pretty clear, and you can debate this and go back and forth, but I just think it's so powerful, the evidence. And the implications are very clear, aren't they? We should apply those principles, and we should apply them to the current circumstances that we're in."
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The death of banks – and the future of money
BY DETLEV SCHLICHTER ON JUNE 20, 2012 • LEAVE A COMMENT
Photo: Ballista/wikimedia
UK Chancellor George Osborne and Bank of England Governor Mervin King last week announced another round of fiscal and monetary stimulus measures, including steps to ease the funding for banks and allow them to extend more loans.
If these measures were hoped to instil confidence they must be classified as a failure. We have lived through quite a few years of unprecedented and fairly persistent monetary accommodation and occasional rounds of QE by now, and I doubt that yet another dose of the same medicine will cause great excitement. Furthermore, observers must get confused as to what our most pressing problems really are. Have we not had a real banking crisis in the UK in 2008 because banks were over-extended and in desperate need of balance sheet repair? Is a period of deleveraging and a rebuilding of capital ratios not urgently required and unavoidable? Let’s not forget that the government is still a majority-owner of RBS and holds a large chunk of Lloyds-TSB. If banks are still on life-support from the taxpayer and the central bank, is it wise to already prod them to expand their balance sheets again and create more credit to ‘stimulate’ growth?
The same confusion exists on fiscal policy. Is the Greece crisis not a stark warning to all other sovereign borrowers out there, which are equally and without exception on a slippery slope toward fiscal Armageddon, that it is high time for drastic reduction in spending and fundamental fiscal reform? If the Bank of England or the government assume any of the risk of the latest additional credit measures, then the taxpayer is on the hook.
None of this will instil confidence, not in the economy and not in the banks, and certainly not in politics. UK newspaper ‘The Independent’ headlined: “King pushes the panic button”, which I consider a pretty apt description.
Banks are parastatal dinosaurs
One thing is now clear to even the most casual observer: banks are not capitalist businesses. In their present incarnation they have little to do with the free market and no place in it. They are constantly oscillating between two positions: One moment, they are a state protectorate, in desperate need of support from the state printing press or unlimited taxpayer funds, as, in the absence of such support, we are supposedly faced with the dreaded social fallout of complete financial collapse; the next moment they are a convenient tool for state policy, simply to be fed with ample bank reserves and enticed with low interest rates to create yet more cheap credit and help manufacture some artificial growth spurt. Either the banks are the permanent welfare queens of the fiat money systems, or convenient policy levers for the macro-economic central planners. In any case, capitalist businesses look different.
Central banks and modern fiat money banks are quite simply a blot on the capitalist system. In order for capitalism to operate smoothly they will ultimately have to be removed. I believe that the underlying logic of capitalism will work in that direction. Personally, I believe that trying to ‘reform’ the present system is a waste of time and energy. It is particularly unbecoming for libertarians as they run the risk of getting infected with the strains of statism that run through the system. Let’s replace this system with something better. With a market-based monetary system.
When and how exactly the present system will end, nobody can say. I believe we are in the final inning. Around the world, all major central banks have now established zero or near-zero interest rates and are using their own balance sheets in a desperate attempt to avoid their highly geared banking systems from contracting or potentially collapsing. If you think that this is all just temporary and that it will be smoothly unwound when the economy finally ‘recovers’, then you are probably on some strong medication, or have been listening for too long to the mainstream economists who are, in the majority, happy to function as apologists for the present system.
I still believe that chances are we will, at some point, get the full throttle, foot-on-the pedal monetary overkill, the ultimate Ueber-QE that will push the system over the edge. This will be the moment when central bankers discover – and discover the hard way – that their ability to print their fiat money may well be unlimited but that the public’s confidence in this fiat money certainly is not. The whole system will blow up in some hyperinflationary fireball, which has been the end of most previous experiments with complete fiat money systems, all others having ended with a voluntary return to commodity money before the public had lost complete faith in the system. And the prospect for a voluntary and official return to a gold standard seems slim at present. However, this is not the topic of this essay.
The future of money
I am often asked what will come next after the present system collapsed? Will we have to go back to barter? – No. Obviously, a modern capitalist economy needs a functioning monetary system. My hope is that from the ashes of the current system a new monetary system arises that is entirely private and not run by states – and that does not have the unholy state-bank alliance at its core, an alliance that exists in opposition to everything that the free market stands for. Nobody can say what this new system will look like precisely. Its shape and features will ultimately be decided by the market. In this field, as in others, there are few limits to human inventiveness and ingenuity. But we can already make a few conceptual points about such a system, and we should contemplate working on such a system now while the old system is in its death throes.
A private gold ‘standard’…
Free market monetary systems, in which the supply of money is outside political control, are likely to be systems in which money proper is a commodity of limited and fairly inelastic supply. It seems improbable that a completely free market would grant any private entity the right to produce (paper or electronic) money at will and without limit. The present system is unusual in this respect and it is evidently not a free market solution. Neither is it sustainable.
The obvious candidates are gold and silver, which have functioned as money for thousands of years. We could envision a modern system at whose centre are private companies that offer gold and silver storage, probably in a variety of jurisdictions (Zurich, London, Hong Kong, Vancouver). Around this core of stored monetary metal a financial system is built that uses the latest information and payment technology to facilitate the easy, secure and cheap transfer of ownership in this base money between whoever chooses to participate in this system (Yes, there would be credit cards and wire transfers, and internet or mobile phone payments. There would, however, be no FOMC meetings, no Bank of England governor writing letters to the Chancellor, and no monetary policy!).
Are these gold and silver storage companies banks? — Well, they could become banks. In fact, this is how our present banking system started out. But there are important differences about which I will say a few things later. In any case this would be hard, international, private and apolitical money. This would be capitalist money.
…or Bitcoin
Another solution would be private virtual money, such as Bitcoin.
Bitcoin is immaterial money, internet money. It is software.
Bitcoin can be thought off as a cryptographic commodity. Individual Bitcoins can be created through a process that is called ‘mining’. It involves considerable computing power, and the complex algorithm at the core of Bitcoin makes the creation of additional Bitcons more difficult (and thus more expensive) the more Bitcoins are already in existence. The overall supply of Bitcoins is limited to 21 million units. Again, this is fixed by the algorithm at the core of it, which cannot be altered.
Thus, creating Bitcoin money is entirely private but not costless and not unlimited. Most people will, of course, never ‘mine’ Bitcoins, just as under the gold standard most people didn’t mine gold. People will acquire Bitcoins through trade, by exchanging goods and services for Bitcoins, then using the Bitcoins for other transactions.
Bitcoin is hard money. Its supply is inelastic and not under the control of any issuing authority. It is international and truly capitalist ‘money’ – of course this assumes that the public is willing to use it as money.
There are naturally a number of questions surrounding Bitcoin that cannot be covered in this essay: Is it safe? Can the algorithm be changed or corrupted and Bitcoins thus be counterfeited? Are the virtual “wallets” in which the Bitcoins are stored safe? – These are questions for the computer security expert or cryptographer, and I am neither. My argument is conceptual. My goal is not to analyze Bitcoin as such but to speculate on the consequences of a virtual commodity currency, which I consider feasible in principle, and I simply assume – for the sake of the argument – that Bitcoin is already the solution. Whether that is indeed the case, I cannot say. And it is – again – for the market to decide.
There is one question for the economist, however: Could Bitcoin become widely accepted as money? Would this not contradict Mises’ regression theorem, which states that no form of money can come into existence as a ready medium of exchange; that whatever the monetary substance (or non-substance), it must have had some other commodity-use prior to its first use as money. My counterargument here is the following: the analogy is to the banknote, which started life not as a commodity but as a payment device, i.e. a claim on money proper which was gold or silver at the time. Banknotes were initially used as a more convenient way to transfer ownership in gold or silver. Once banknotes circulated widely and were generally accepted as media of exchange in trade, the gold-backing could be dropped and banknotes still circulated as money. They had become money in their own right.
Similarly, Bitcoin can be thought off, initially, as payment technology, as a cheap and convenient device to transfer ownership in state paper money. (Bitcoins can presently be exchanged for paper money at various exchanges.) But as the supply of Bitcoins is restricted while the supply of state paper money constantly expands, the exchange-value of Bitcoins is bound to go up. And at some stage, Bitcoin could begin to trade as money proper.
A monetary system built on hard, international and apolitical money, whether in form of a private gold-system or Bitcoin, would be a truly capitalist system, a system that facilitates the free and voluntary exchange between private individuals and corporations within and across borders, a system that is stable and outside of political control. It would have many advantages for the money user but there would be little role for present-day banks, which goes to show to what extent banks have become a creature of the present state-fiat money system and all its inconsistencies.
Banks profit from money creation
Banks conduct fractional-reserve banking (FRB), which means they take deposits that are supposed to be safe and liquid and therefore pay the depositor little interest, and use them to fund loans that are illiquid and risky and thus pay the bank high interest. Through the process of fractional-reserve banking, banks expand the supply of money in the economy; they become money producers, which is, of course, profitable. Many mainstream economists welcome FRB as a way to expand money and credit and ‘stimulate’ extra growth but as the Currency School in Britain in the 19th century and in particular the Austrian School under Mises and Hayek in the early 20th century have argued convincingly (and as I explain in detail in Paper Money Collapse – The Folly of Elastic Money and the Coming Monetary) this process is not only risky for the individual banks it is destabilizing for the overall economy. It must cause boom-bust cycles.
It cannot be excluded that banks could conduct FRB even on the basis of a private system of gold-money or Bitcoin. However, in the absence of a backstop by way of a central bank that functions as a lender-of-last resort the scope for FRB would be very limited, indeed. It would be too dangerous for banks to lower their reserve ratios (at least to fairly low levels) as that would increase the risk of a bank-run.
I am sometimes told that I am too critical of the central banks and the state, and that I should direct my ire toward the ‘greedy’ ‘private’ banks, for it is the ‘private’ banks that create all the money out there through FRB. Of course, they do. But FRB is only possible on the scale it has been conducted over recent decades because the banks are supported – and even actively encouraged – in their FRB activities by a lender-of-last resort central bank, in particular as the central bank today has full and unlimited control over fiat money bank reserves. Under a system of hard money (gold or Bitcoin), even if the banks themselves started their own lender-of-last resort central bank, that entity could not create more gold reserves or Bitcoin reserves and thus provide unlimited support to the banks.
FRB is particularly unlikely to develop in a Bitcoin economy, as there is no need for a depository, for safe-keeping and storage services, and for any services that involve the transfer of the monetary system’s raw material (be it gold or state paper tickets) into other, more convenient forms of media of exchange, such as electronic money that can facilitate transactions over great distances. The owner of Bitcoin has an account that is similar to his email account. He manages it himself and he stores his Bitcoin himself. And Bitcoin is money that is already readily usable for any transaction, anywhere in the world, simply via the internet. The bank as intermediary is being bypassed. The Bitcoin user takes direct control of his money. He can access his Bitcoins everywhere, simply via the SIM card in his smartphone.
The tremendous growth in FRB was made possible by the difficulty of transacting securely over long distances with physical gold or physical paper tickets. This created a powerful incentive to place the physical money with banks, and once the physical money was in the banks it became ‘reserves’ to be used for the creation of additional monetary assets.
Channeling true savings into investment is very important, but remember that FRB is something entirely different. It involves the creation of money and credit without any real, voluntary saving to back it. FRB is not only not needed, it is destabilizing for the overall economy. Under gold standard conditions, it created business cycles. Under the system of unlimited fiat money and lender-of-last-resort central banks, it created the super-cycle, which is now in its painful endgame.
Banks make money from payment systems
When I recently made arrangements for a trip to Africa I dealt directly with local tour operators there, which, today, can be done easily and cheaply with the help of email, the internet and skype. Yet, when it came to paying the African tour operators I had to go through a process that has not changed much from the 1950s. Not only were British and African banks involved, but also correspondence banks in New York. This took time and, of course, cost money in form of additional fees.
Imagine we could have used gold or Bitcoin! The payment would have been as easy and fast as all the email-communication that preceded it. There would have been no exchange rates and little fees (maybe in the case of gold) or no fees (in the case of Bitcoin).
Another example: Last year I gave a webinar at the Ludwig von Mises Institute (LvMI). The LvMI is located in Auburn, Alabama, I did the seminar from my home in London, the LvMI’s technology officer sat in Taiwan, and the seminar attendants were spread all over the world. All of this is now possible – cheaply, quickly and conveniently – thanks to technology. Yet, when the LvMI paid me a fee it had to go through a few banks – again, correspondence banks in New York – it took quite some time and it incurred additional costs. And the fee from LvMI was paid in a currency that I cannot use directly in my home country.
Banks make money from monetary nationalism
Future economic historians will pity us for having worked under a strange and inefficient global patchwork of local paper currencies – and for having naively believed that this represented the pinnacle of modern capitalism. Today, every government wants to have its own local paper money and its own local central bank, and run its own monetary policy (of course, on the basis of perfectly elastic local fiat money). This is naturally a great impediment to international trade and the free flow of capital.
If I want to spend the money I got from the LvMI and spend it where I live (in Britain), I have to exchange the LvMI’s dollars for pounds. I can only do that if I find someone who is willing to take the opposite side of that transaction, someone who is willing to sell pounds for dollars. The existence of numerous monies necessarily re-introduces an element of partial barter into money-based commerce. Sure, the 24-hour, multi-trillion-dollar a day fx market can accommodate me, and do so quickly and cheaply, but this market is only a second-best solution, a highly developed make-shift to cope as best as possible with the inefficiencies of monetary nationalism. The better, most efficient and capitalist solution would be to use the same medium of exchange around the world. The gold standard was a much superior monetary system in this respect. Moving from the international gold standard to a system of a multitude of state-managed paper currencies meant economic regression, not progress.
One hundred years ago, you could take the train from London to Moscow and use the same gold coins all along the way for payment. There was no need to change your money even once. (Incidentally, neither did you need a passport!)
The notion of the ‘national economy’ that needs a ‘national currency’ was always a fiction. So was the idea that economies work better if money, interest rates and exchange rates are carefully manipulated by local bureaucrats. (This fiction is still spread by many economists who make a living off this system.) The biggest problem with monetary policy is that there is such a thing as monetary policy. But in today’s increasingly globalized world, these fictions are entirely untenable. Capitalism transcends borders, and what it needs to flourish is simply hard, apolitical and thus international money. Money that is a proper tool for voluntary human interaction and cooperation and not a tool for politics.
Banks benefit from the present monetary segregation. They profit from constantly exchanging one paper money for another and from trading foreign exchange. Non-financial companies that operate internationally are inevitably forced to speculate in currency markets or to pay for expensive hedging strategies (again paying the banks for providing them).
Banks make money from speculation
There is, of course, nothing wrong with speculation in a free market. However, in a truly free market there would be few opportunities for speculation. Today the heavy involvement of the state in financial markets, the existence of numerous paper currencies, all managed for domestic political purposes, and the constant volatility that is generated by monetary and fiscal policy create outsized opportunities for speculation. Additionally, the easy money that central banks provide so generously to prop up their over-extended FRB-industry is used by many banks to speculate in financial assets themselves, often by anticipating and front-running the next move of the monetary authorities with which these banks have such close relationships. And to a considerable degree, banks pass the cheap money from the central banks on to their hedge fund clients.
Remember that immediately after the Lehman collapse, investment banks Goldman Sachs and Morgan Stanley, which previously had shun deposit and retail banking but have always been heavily involved in securities trading, quickly obtained banking licenses in order to benefit from the safety-net the state provides its own fiat-money-deposit banks.
Banks channel savings into investment
Yes, to some degree they still do this, and this is indeed an important function of financial intermediaries. However, asset managers can do the same thing, and they do it without mixing this services with FRB and money-creation. In general, the asset management industry is much more transparent about how it allocates its clients’ assets, it has a clear fiduciary responsibility for these assets, and it cannot use them as ‘reserves’. In the gold or Bitcoin economy of the future, you will, of course, be free to allocate some of your money to asset managers who mange investments for you.
Conclusion
Have I been too harsh on the banks? – Maybe. The bankers, in their defense, will say that they are not the source of all these inefficiencies, that they simply help their clients deal with the inefficiencies of a state-designed and politicized monetary system – and that they reap legitimate rewards for the help they provide. – Fair enough. To some degree that may be true. But it is very clear that the size, the business models, the sources of profitability, and the problems of modern banks are uniquely and intimately linked to the present, fully elastic paper money system. As I tried to show, even if the paper money system was meant to last – and it certainly is not – the forces of capitalism, the constant search for better, more efficient and durable solutions, coupled with technological progress, would put enormous market pressures on the present banking industry in the years to come in any case. But given that our present system is not the outcome of market forces to begin with, that a system of fully elastic, local state monies is not necessary, that it is suboptimal, inefficient, unstable, and unsustainable, and that it is already in its endgame, I have little doubt that modern banks will go the way of the dodo. They are to the next few decades what the steel and coal industries were to the decades from 1960 to 1990. They are parastatal dinosaurs, joined at the hip with the bureaucracy and politics, bloated and dependent on cheap money and state subsidy for survival. They are ripe for the taking.
The demise of the paper money system will offer great opportunities for a new breed of money entrepreneurs. In that role, I could see gold storage companies, payment technology companies, Bitcoin service providers and asset management companies. If some of these join forces, the opportunities should be great. The world is ready for an alternative monetary system, and when the present system collapses under the weight of its own inconsistencies, there would be something there to take its place.
The present fiat money economy is ripe for some Schumpeterian ‘creative destruction’.
In the meantime, the debasement of paper money continues.
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Dr. B made a very bold play that cleaned up when the bubble burst. It takes this commencement speech a few minutes to get going and his delivery is not the greatest, but the content is good.
http://www.youtube.com/watch?feature=player_embedded&v=1CLhqjOzoyE
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By JOHN B. TAYLOR
At its annual meeting of the world's central bankers in Switzerland last week, the Bank for International Settlements—the central bank of central banks—warned about the harmful "side effects" of current monetary policies "in the major advanced economies" where "policy rates remain very low and central bank balance sheets continue to expand." These policies "have been fueling credit and asset price booms in some emerging economies," the BIS reported, noting the "significant negative repercussions" unwinding these booms will have on advanced economies.
The BIS emphasizes the view that international capital flows stirred up by monetary policy were a primary factor leading to the preceding crisis and that these flows would lead to the next one. This is in stark contrast to the "global saving glut" hypothesis—which says that the funds pouring into the U.S. in the previous decade originated largely from the surplus of exports over imports in emerging market economies.
The BIS should be taken seriously. It warned long in advance about the monetary excesses that led to the financial crisis of 2008.
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.The capital-flow story starts during extended periods of low interest rates, as in the U.S. Federal Reserve's low rates from 2003 to 2005 and its current near-zero interest rate policy, which began in 2008 and is expected to last to 2014. These low interest rates cause investors to search elsewhere for yield, and they buy foreign securities—corporate as well as sovereign—for that reason. Global bond funds in the U.S. thus shift their portfolios to these higher-yielding foreign securities and investors move to funds that specialize in such securities.
Low U.S. interest rates also encourage foreign firms to borrow in dollars rather than in local currency. U.S. branch offices of foreign banks play a key part in this process: As of 2009, U.S. branches of over 150 foreign banks had raised $645 billion to make loans in their home countries, making special use of U.S. money-market funds, where about one half of these funds' assets are liabilities of foreign banks.
This increased flow of funds abroad—whether through direct securities purchases or through bank lending—puts upward pressure on the exchange rate in these countries, as the foreign firms sell their borrowed dollars and buy local currency to expand their operations and pay workers. That's when foreign central banks enter the story. Concerned about the negative impact of the appreciating currency on their country's exports or with the risky dollar borrowing of their firms, they respond in several ways.
First, they impose restrictions on their firms' overseas borrowing or on foreigners investing in their country. But the differences in yield provide strong incentives for market participants to circumvent the restrictions.
Second, central banks buy dollar assets, including mortgage-backed securities and U.S. Treasurys, to keep the value of their local currency from rising too much as against the dollar. One consequence of these purchases is a foreign government-induced bubble in U.S. securities markets, as we saw in mortgage markets leading up to the recent crisis, and as we may now be seeing in U.S. Treasurys.
The flow of loans from the U.S. to foreign borrowers is effectively matched by a flow of funds by central banks back into the U.S. There is no change in the current account, and no role for the so-called savings glut.
Third, in order to discourage the inflow of funds seeking higher yields—which would drive up the exchange rate of their own currency—foreign central banks hold their interest rates lower than would be appropriate for domestic economic stability. There is much statistical evidence for this policy response, and, when you roam the halls of the BIS and talk to central bankers, as I did last week, you get even more convincing anecdotal evidence. Call it the lemming effect: Central banks tend to follow each other's interest rates down.
This is what happened in the lead up to the 2008 financial crisis, and it has helped fuel Europe's current debt crisis. In the 2003-2005 period, low interest rates led to a flow of funds into U.S. mortgage markets as foreign central banks bought dollars, aggravating the housing boom and the subsequent bust.
Moreover, the European Central Bank's interest rate moves during 2003-2005 were influenced by the Fed's low rates. By my estimates, the interest rate set by the ECB was as much as two percentage points too low, which also had the effect of spurring housing booms in Greece, Ireland and Spain. Ironically, the European debt crisis, which originated in the booms and busts in Greece, Ireland and Spain, now has come around to threaten the U.S. economy.
The Fed's current near-zero interest rate policy, designed to stimulate the U.S. economy, has made it harder for other central banks to combat credit and asset price booms. A group of 18 emerging market central banks—including Brazil, China, India, Mexico and Turkey—held their interest rates on average as much as five percentage points below widely used policy benchmarks—and global commodity prices doubled from 2009 to 2011, a boom rivaling the excesses leading up to the 2008 financial crisis. This global, loose monetary policy was likely a big factor pushing up commodity prices. The current sharp slowdown in most emerging markets coincides with an inevitable bust of this easy-money induced boom, and the decline of foreign demand for American goods is now feeding back to the U.S. economy.
The Fed needs to pay closer attention to global capital flows and the reactions of other central banks to its decision to set interest rates very low for long periods of time. This does not mean taking one's eye off the U.S. economy, but rather preventing booms and busts abroad from slowing growth at home precisely when we need it most.
Mr. Taylor, a professor of economics at Stanford University and a senior fellow at the Hoover Institution, is the author of "First Principles: Five Keys to Restoring America's Prosperity (Norton, 2012).
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Excellent insights. Please put Prof. Taylor on the short list for Bernancke replacement.
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http://spectrum.ieee.org/at-work/innovation/a-brief-history-of-money/0
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I found this piece to be very interesting. Comments?
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July 8, 2012, 11:52 pm201 Comments
The Hollowing Out
By THOMAS B. EDSALL
Menlo Park, Calif.
It has become a campaign ritual. Immediately after the release of unemployment figures on the first Friday of every month, Democratic and Republican spin shifts into high gear.
“Our mission is not just to get back to where we were before the crisis. We’ve got to deal with what’s been happening over the last decade, the last 15 years — manufacturing leaving our shores, incomes flat-lining — all those things are what we’ve got to struggle and fight for,” Obama declared at the Dobbins School in Poland, Ohio.
Romney took the opposite tack in Wolfeboro, N.H.: “This is a time for America to choose whether they want more of the same; whether unemployment above 8 percent month after month after month is satisfactory or not. It doesn’t have to be this way. America can do better and this kick in the gut has got to end.”
Both candidates are only tinkering at the edges of the most important issue facing the United States: the hollowing out of the employment marketplace, the disappearance of mid-level jobs.
The issue of the disappearing middle is not new, but credible economists have added a more threatening twist to the argument: the possibility that a well-functioning, efficient modern market economy, driven by exponential growth in the rate of technological innovation, can simultaneously produce economic growth and eliminate millions of middle-class jobs.
Michael Spence, a professor at N.Y.U.’s Stern School of Business, and David Autor, an economist at M.I.T., have argued that this “hollowing out” process is a result of twin upheavals: globalization and the hyper-acceleration of technological progress.
Just two weeks ago at the Aspen Ideas Festival, Alan Krueger, Chairman of the Council of Economic Advisers, stressed this theme:
If you look at the decade before the recession, the U.S. economy was not creating enough jobs, particularly not enough middle class jobs, and we were losing manufacturing jobs at an alarming rate even before the recession. And I would also put together, combined with those two problems, the polarization of the U.S. job market, the fact that we are getting more and more people at the very top and the very bottom and the middle has been shrinking.
In recent months, Erik Brynjolfsson, a professor at the M.I.T. Sloan School of Management, and Andrew McAfee, a research scientist at M.I.T.’s Center for Digital Business, have raised the stakes in this discussion with the publication of “Race Against the Machine” and a collection of accompanying essays and papers by the authors.
McAfee has graphically illustrated the key findings that worry him and Brynjolfsson. The red line in the figure below, the employment to population ratio, tracks the ratio of the number of people working to the total number of working-age men and women in the United States.
CLICK TO ENLARGEOn his blog, McAfee explains the graphic:
Since the Great Recession officially ended in June of 2009 G.D.P., equipment investment, and total corporate profits have rebounded, and are now at their all-time highs. The employment ratio, meanwhile, has only shrunk and is now at its lowest level since the early 1980s when women had not yet entered the workforce in significant numbers. So current labor force woes are not because the economy isn’t growing, and they’re not because companies aren’t making money or spending money on equipment. They’re because these trends have become increasingly decoupled from hiring — from needing more human workers. As computers race ahead, acquiring more and more skills in pattern matching, communication, perception, and so on, I expect that this decoupling will continue, and maybe even accelerate.
This view is controversial — especially McAfee’s argument that the decoupling of jobs from other positive economic developments “will continue, and maybe even accelerate.” In other words, the downward employment and jobs spiral will keep going, driven by structural forces. Policies to ameliorate the process – a shorter work week, a massive investment in education (for example, at the community college level), the disaggregation of complex tasks into simple functions that could be executed by mid-skill workers — may only slow the decline, not stop it. This is a deeply pessimistic vision.
“In my dystopian vision of the future, that red line (in the chart) keeps falling down – or suddenly drops off a cliff,” McAfee told The Times, adding: “All of the trends that I see and can identify are contributing to the hollowing out of the economy.”
In a videotaped interview on Bloomberg News, Brynjolfsson was somewhat more cautious:
I have to be brutally honest, I don’t think Andy and I are sure whether it’s different this time around. If you look at the data, this time it seems to be a lot more difficult. So it’s possible we are facing a regime change, a fundamental change in the way technology and employment interact with each other.
The Brynjolfsson-McAfee message has been generally well received in the high-tech community. On July 5, McAfee held the attention of an audience of young researchers and prospective entrepreneurs here at Singularity University. For over an hour after his lecture, students met with McAfee to explore the consequences of his argument.
The students’ questions:
How much can wealth accumulate for a small slice of the population at the top, while large numbers of people are forced to work for ever lower pay or to drop out of the workforce altogether? For such a future society to function, would wealth need to be (coercively) redistributed from the top to those below, in order for the mass of the jobless population to survive? Who would have power and how would tax and spending policies be determined in such a radically bifurcated, automated, workless society?
Many reviews of “Race Against The Machine” have been favorable, including those in publications supportive of free markets, including the Economist and the Financial Times.
McAfee noted in our interview that some critics have accused him and Brynjolfsson of accepting the “lump of labor fallacy” (the idea that there is a fixed amount of work available) in defiance of economic history. In the aftermath of major periods of technological advance, including the transition from agriculture to industry, employment has grown enormously.
James Hamilton, an economist at the University of California, San Diego, challenged the “Race Against The Machine” thesis in an e-mail to The Times:
I am very skeptical of the claim that technology itself is the problem. In 2005, the average U.S. worker could produce what would have required 2 people to do in 1970, what would have required 4 people in 1940, and would have required 6 people in 1910. The result of this technological progress was not higher unemployment, but instead rising real wages. The evidence from the last two centuries is unambiguous — productivity gains lead to more wealth, not poverty. The unemployment since 2007 was not caused by gains in productivity or increased automation, but instead by loss of demand for the product that the workers had been producing, for example, a plunge in the demand for new home construction.
Amar Bhidé, author of the book “The Venturesome Economy,” and senior fellow at the Center for Emerging Market Enterprises at Tufts, did not mince words responding to a request for comment from The Times:
As you might guess I find the storyline rather unconvincing and Luddite. What’s new about automation? I’ve been banging away for years about the phenomenon of non-destructive creation as a vital complement to creative destruction. The two don’t move in lock step but I have no reason to believe that non-destructive creation has ceased. Until someone persuades me it has, I will limit my anxieties to global warming, financial misregulation, a screwed up health care system, etc.
McAfee countered in an e-mail that “this time really is different,” arguing:
All previous waves of automation affected only a small subset of human skills and abilities. To oversimplify a bit, the industrial revolution was about building machines that had (much) more brute strength than we did. For all mental work, the industrial revolution was meaningless — you still needed people.
Until recently, the digital revolution also didn’t affect that many human skills and abilities. Computers became better at math, and at some clerical abilities, but we people were still miles ahead in other areas. So employers needed to hire humans if they wanted to listen to people speak and respond to them, write a report, pattern-match across a large and diverse body of information, and do all the other things that modern knowledge workers do.
Employers also needed people if they wanted lots of physical tasks done, including driving a truck or vacuuming a floor. The same with most tasks involving sensory perception, such as determining if a soccer ball has crossed a goal line.
All of the above abilities have now been demonstrated by digital technologies, and not just in the lab, but in the real world. So employers are going to switch from human labor to digital labor to execute tasks like those above. In fact, they’re already doing so. I expect this process of switching to accelerate in the future, perhaps rapidly, because computers get cheaper all the time, are very accurate and reliable once they’re programmed properly, and don’t demand overtime, benefits, or health care.
Brynjolfsson, who is more optimistic, said in an interview with The Times, “we are hopeful that that (job growth) will happen, but there is no guarantee of it. There is no economic law that says everyone benefits from technological improvement.” He also pointed out that the surge in inequality driven by rising incomes at the very top of the distribution suggests strongly that the benefits of digitization have not been widely spread.
“The problem is not tech stagnation,” as some have argued, “but the opposite,” Brynjolfsson contends. “Technology is rushing ahead faster than humans can adapt.” The difficulty of human adaptation is, in turn, likely to get worse, he added, because technological innovation — as in Moore’s Law (predicting a doubling of computer capacity roughly every two years) — grows exponentially in scope. The total number of non-farm jobs in the country is now 5 million less than in January, 2008. The 3.7 million jobs added to the economy have not been enough to make up for the 8.7 million jobs lost in 2008-9.
Brynjolfsson and McAfee have a list of 19 proposals that they support — which range from massive investment in education, infrastructure and basic research, to lowering barriers to business creation, eliminating the mortgage interest deduction and changing copyright and patent law to encourage new (as opposed to protecting old) innovations.
Any effort to ameliorate the damaging consequences to the employment marketplace stemming from technological innovation, according to Brynjolfsson, requires substantial government action at a time when “the political system is the most dysfunctional part of our society.”
McAfee and Brynjolfsson argue that in a race against machines, humans will lose. In their view, “the key to winning the race is not to compete against machines but to compete with machines.” The question, then, will be whether humans can adapt at anywhere near the pace needed to keep up.
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I posted this on the Banking thread, but I post it here (which is more for fundamental questions than matters of the moment) as well for the deep theoretical questions it presents:
http://londonbanker.blogspot.co.uk/2012/07/lies-damn-lies-and-libor.html
Lies, Damn Lies and LIBOR
I've been hesitant to write about the LIBOR scandal because what I want to say goes so much further. We now know that Barclays and other major global banks have been manipulating the calculation of LIBOR through the quotation data they provided to the British Bankers Association. What I suspect is that this is not a flaw but a feature of modern financial markets. And if it was happening in LIBOR for between 5 and 15 years, then the business model has been profitably replicated to many other quotation-based reference prices.
Price discovery is not a sexy function of markets, but it is critical to the efficient allocation of scarce capital and resources, and to the preservation of the long term wealth of investors and the economy as a whole. If price discovery is compromised by manipulation, then we will all be gradually impoverished and the economy will be imbalanced and unstable.
Over the past 25 years the forces of regulatory liberalisation and demutualisation of markets have allowed the largest global banks to set the rules, processes and infrastructure of global markets to their own self-interested requirements. Regulatory complexity and harmonisation benefit the biggest banks disproportionately, eroding the competitive stance of smaller, local banks and market participants. This has led to a very high degree of concentration in a very few banks in most markets that determine global reference rates for interest rates, currencies, commodities and investments. If those few collude with each other - as Adam Smith warned was always the result - then they impoverish us all.
We have allowed markets to evolve in ways that make supervision of markets almost impossible. Many instruments trade off-exchange or in multiple venues, making it nearly impossible for any single investor or regulator to supervise trading to prevent or detect manipulation or abuse. Many financial instruments are now synthetic compilations of underlying assets and derivatives, with multiple pricing components determined by reference to other prices or rates. Demutualisation and regualtory reforms stripped exchanges of the self-regulating interest in preventing manipulation and abuse by their members as mergers, profits and market share came to dominate governance objectives.
Off-exchange trading has been allowed to proliferate, creating massive ill-transparent and largely illiquid markets in almost every sector of finance. Pricing in these markets is based around calculated reference rates which, like LIBOR, are open to abusive quotation and data input practices. Many OTC derivatives are priced and margined using reference rates calculated against quotations unrelated to actual reported transactions. Synthetic securities such as ETFs are another example of an instrument that prices off a reference rate rather than the actual contents of an underlying asset portfolio. These instruments are open to consistent abusive pricing as a means of incrementally impoverishing those market participants who are the krill on which the global banks thrive.
How has it been possible for banks to grow from less than 4 per cent of the global economy to more than 12 per cent of the global economy without impoverishing others? How has it been possible for profits in the financial sector to be consistently higher than profits from other human endeavors with more tangible products or impacts on our daily lives - such as agriculture, transport, health care or utilities? How has it been possible that banks derive their profits not from the protected and regulated activities of deposit-taking and lending, but from the unsupervised and often unknowable escalation of off-balance sheet assets and liabilities? How has it been possible that pension savings have increased while pension returns have declined to the point where only bankers can expect a comfortable old age? Global banks have built the casinos and tilted the odds in the house's favour by rigging the data that determines the outcomes of most of the bets on the table. Every one of us that sits at the table long enough - whether saver, investor, borrower, taxpayer or pensioner - will be a loser. It is not a flaw; it is feature.
There is a reason that financial infrastructure used to be dominated by mutuals. Mutual gain and mutual liability created a natural discipline on excess and on rogue elements that would impoverish their peers.
There is a reason why trading was restricted to exchanges, and exchanges and clearing houses used to be self-regulating, and even had responsibility for resolution and liquidation of their members. Direct responsibility, authority and financial control meant that they could exert very powerful and immediate consequences on those members identified as abusing the market or investors.
The investigations into market rigging are just beginning. Paul Tucker opened the box yesterday when he admitted that he could not know whether the abuses discovered in setting LIBOR had spread to other synthetically calculated reference rates. As events unfold, it may be that we begin to appreciate just how deeply vulnerable we have become to predation by bankers with no stake in a local economy or in the local quality of life of the people they impoverish. A reckoning is needed, and then a rebalancing toward more local and mutual provision of essential services and market infrastructure that servers markets rather than those few bankers on the board.
As a start, regulators should consider punitive restrictions on the sale of instruments which price on reference rates unrelated to reported market transactions or underlying asset portfolios. Pricing should reflect real market transactions rather than guesstimates talking the banker's book.
We need to rethink as a society what banks are for, what exchanges are for, and what clearing houses are for. If they are for the profit of the few at the expense of the many now, that is because it is the business model we have permitted. If banks, markets and clearing are protected because they have a social function, we should make certain that social function is adding value. If it isn't, then we need some new models and some new rules.
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I think this article really misses the mark. It is not the lack of regulatory oversight which ruins markets, it is exactly the opposite. Markets that are heavily regulated are inefficient, and like this Libor story, can be manipulated easily. In contrast, futures markets and over the counter markets are very efficient. Only the big boys play in those markets, and if you're stupid you don't last very long. The bond market itself is a great example. There is no government regulatory body which supervises the bond market. It's mostly over the counter, with lots of private exchanges popping up. No exchanges. People trade billions of dollars with a phone call and they write down their deal with pencil on paper. If you are not good for your word, you are forever banned. If you try to cheat people, you are history. When government regulators step in to intermediate, then the bond between buyer and seller is broken, and corruption can enter. Just like with charity: when the government gets into the business of charity, then people get out. Families don't take care of each other because that's the government's job. Society breaks down. You get the picture.
All those who complain that markets are flawed and inefficient and corrupt and need more regulation are completely wrong. Free markets always work. The problem comes when they aren't free to begin with, which is the case, unfortunately, for more and more markets these days.
Scott Grannis
http://scottgrannis.blogspot.com
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Thanks Crafty for the original post and the Scott Grannis reply, I was hoping someone like that would answer it. I have not followed LIBOR but with other crises and scandals of the past, the worst situations seem to arise out of the botched regulation/ partial deregulation combinations. S&L's in the past completely had their hands tied down to interest rates defined to the quarter of a point, then they had more discretion but still with their hands tied for failure. The more recent banking collapse is a similar example. Insist on lending for criteria other than creditworthiness, pass laws that disrupt investment and asset markets then watch them collapse. Not really puzzling.
"How has it been possible for banks to grow from less than 4 per cent of the global economy to more than 12 per cent of the global economy without impoverishing others? "
I don't think it is the impoverished that pay most banking fees, but prices and fees get exorbitant when government blocks competition with all the licensing and regulations, some necessary and appropriate and some not. I try to pay no direct fees to banks, but if you are trying to take your company public or entering into mergers and acquisitions, paying a bank a reasonable fee for competent handling of those transactions and for access to liquidity may add quite a lot of value. Maybe you choose or require the best, a Morgan Stanley or whoever is still out there. But if their fees are outrageous, doesn't that open the door to competition, newer smaller firms who can do the same service for less. The question really is - why is the door closed to aggressive price competition that all real markets experience? And the answer to that for sure is the government regulations and compliance complexities that go with them.
As Grannis suggests, the fees and scope of it all is so expensive because the regulations are so multi-layered and complex that only a few elite firms are able to handle the most complex transactions.
Note how at the end, after all that detail and expertise, the greater regulations solution is left totally vague: "...then we need some new models and some new rules."
Isn't that exactly how we got Dodd-Frank? We needed new rules because we needed new rules so here they are, more and more layers of complexity and so what of the consequences.
What I don't exactly get in banking today is the collusion between the Fed and the private banks. They aren't lending money that other people saved anymore. They are lending nothing but manufactured or printed money. Good luck putting that toothpaste back in the tube.
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Here's a response to Scott from , , , elsewhere. Its content could be posted on the Burearucracy thread, but in the interest of continuity I post it here:
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Amen, Scott. The complexity cited in the article just reinforces the point that regulation is impossible. Regulation of an industry is de facto central planning. Centrally planned economies do not work, period.
Perhaps not relevant, but consider some lessons out of aviation, something I know a bit about as I now teach classes on portions of aviation regulation here in Australia.
Aviation is probably even more regulated than banking, but a radical increase in regulation a few years ago did not increase safety, the objective of most aviation regulations. Bureaucrats wrote more and more specific and voluminous rules about WHAT to do and HOW to do it down to the finest detail, and then inspected and wrote lots of violations that focussed on paperwork, reporting, detail, etc. It yielded negligible improvement.
Indeed, since (inevitably) the ultra detailed regulations were written by lawyers, they were incomprehensible to others. In Australia the regulations for how to coordinate maintenance when doing a "C check" (major inspection) on an airliner are pages long, and despite my attempts to read them, proved to be incomprehensible.
Yet mechanics are supposed to comply with chapter and verse of gobbledygook text.
Airlines spent millions writing procedures manuals understandable by mere mortals and then getting them checked out to assure they stayed legal. There was no room for improvement or innovation. Slavish adherence to procedure was required.
Now, introduce a new change in technology, and it all starts over again. Huge amounts of paper, huge amounts of money not focussed on the core issues, and no benefits derived. Ass hole government inspectors (and t hey are a round) had a field day writing violations for the slightest infractions.
Then another approach emerged and is now filtering through the system. Instead of detailing down to the finest level how and what to do, regulations are being shifted to become "performance requirements." In this mode, the regulation indicates what RESULT is desired. The regulation is then supported by an "advisory document" prepared by the same folks who wrote the performance requirement. It outlines one way to achieve the desired level of performance if you are not sure how to do so. If you do it in accordance with the advisory document, you know you are legal.
BUT, the regulation also indicates that "alternative means of compliance" are also OK as long as they achieve the desired level of performance.
Surprise, surprise, this option for an alternative means of compliance has led to lots of innovation as new ideas are floated and reviewed and then implemented. Periodic audits make sure alternative methods are still working and the desired performance levels are being achieved.
And it works. Surprise surprise.
I am not sure if such lessons can be transferred to bank regulation, but it is clear that what has thoroughly pissed everyone off is that banks have failed to satisfy our general expectations regarding performance of an important element of our society (banking). So a focus on how to achieve performance would seem to be the key.
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EBay reputation tracking is a public market version of what Scott G posted for bond traders' reputations, keeping their word off a phone call and a hand written note. I wouldn't argue for no regulation but I would guess that would be more effective than what we have now.
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Read, learn, discuss and vote, please! :-)
http://www.city-journal.org/2012/22_3_friedrich-hayek.html
City Journal Summer 2012.
Table of Contents
A quarterly magazine of urban affairs, published by the Manhattan Institute.
• • • • • • • • • • • • • • •
Praise for City Journal.
ipad-vertical-ad-no-logo-01.jpg
John B. Taylor
The Road to Recovery
As Hayek taught, freedom and the rule of law drive prosperity.
Friedrich Hayek, second from left, at the London School of Economics in 1948
Paul Popper/Popperfoto/Getty Images
Friedrich Hayek, second from left, at the London School of Economics in 1948
Burdened by slow growth and high unemployment—especially long-term unemployment—the American economy faces an uncertain future. We have endured a painful financial crisis and recession, the recovery from which has been nearly nonexistent. Federal debt is exploding and threatening our children and grandchildren. In my view, the reason for this predicament is clear: we have deviated from the principles of economic freedom upon which America was founded.
Few thinkers of the past century understood the importance of economic freedom better than the Austrian economist Friedrich Hayek did. As we confront our current situation, Hayek’s work has much to tell us, especially about policy rules, the rule of law, and the importance of predictability—topics that he discussed in his classic The Road to Serfdom (1944) and in greater detail in The Constitution of Liberty (1960). But his work in these areas goes beyond economics into fundamental issues of freedom and the role of government. That’s why reading Hayek is more important than ever.
As Hayek would insist, we need to be careful about what we mean by economic freedom. The basic idea is that people are free to decide what to produce, what to buy, where to work, and how to help others. The American vision, as I explain in my book First Principles, held that people would make these choices within a policy framework that was predictable and based on the rule of law, with strong incentives emanating from a reliance on markets and a limited role for government. Historically, America adhered to these principles more than most countries did, a major reason why the nation prospered and so many people came to these shores.
But we haven’t always followed the principles consistently. Leading up to the Great Depression, the Federal Reserve cut money growth sharply, deviating from a predictable policy framework. The federal government then worsened the Depression by raising tax rates and tariffs and by passing the National Industrial Recovery Act, which overrode market principles and went well beyond sensible limits on government. From the mid-1960s through the 1970s, federal policy again deviated from the principles of economic freedom: the era saw unpredictable short-term stimulus packages, discretionary “go-stop” monetary policies, and wage and price controls—the antithesis of an incentive-based market system. The results: double-digit unemployment, a severe slowdown in economic growth, and the Great Inflation. Well before that time, Hayek had rightly lamented such short-term approaches: “I cannot help regarding the increasing concentration on short-run effects . . . not only as a serious and dangerous intellectual error, but as a betrayal of the main duty of the economist and a grave menace to our civilization.”
In the 1980s and 1990s, America moved back toward its first principles, a restoration that lasted until recently. Temporary stimulus programs were out; permanent tax reform was in. Steady-as-you-go monetary policy replaced go-stop monetary policy. We removed the last vestiges of price controls and reduced inappropriate regulations. The major federal welfare program devolved to the states. The results this time: declining unemployment, lower inflation, and eventually a revival of economic growth.
Now we have tragically gone off the path again. Leading up to the latest downturn, the Federal Reserve held interest rates too low for too long, deviating from the rules-based monetary policy that had worked so well in the 1980s and 1990s. Government regulators failed to enforce existing rules on banks and other financial institutions, including Fannie Mae and Freddie Mac. The resulting crisis prompted the Wall Street bailouts, which soon extended beyond their original mission. The auto-company bailouts resulted in arbitrary infringements on creditors’ rights and interventions into business operations. Then came the return of the failed stimulus packages of the 1970s, the Fed’s quantitative easing, and the regulatory uncertainty associated with the 2010 health-care legislation and the Dodd-Frank financial-reform law—which gives government the discretionary authority to take over any failing financial firm and rescue its creditors.
One sign of the increase in policy uncertainty is that over the past 12 years, the number of provisions of the tax code expiring annually has increased tenfold. Another is that the number of federal workers engaged in regulatory activities (excluding those in the Transportation Security Administration) has grown by 25 percent from 2007 to 2012. Most emblematic of the deviation from our basic principles is the self-inflicted fiscal cliff that we face at the end of this year, when virtually the entire tax code will change. And the Fed has effectively replaced the money market with itself, setting a zero-percent interest-rate policy through 2014.
Government policy has largely caused these problems. It follows that we can restore prosperity by changing the policy and implementing a plan based on our core economic principles. We should reduce federal spending, as a share of GDP, to what it was in 2007, which would let us balance the budget and stop the debt explosion with revenue-neutral, pro-growth tax reform. We should unwind our monetary excesses and normalize monetary policy, using a rules-based system of the kind that worked well in the 1980s and 1990s. We should halt the rapid expansion of the entitlement state, keeping entitlement spending growth close to GDP growth and doing it in a way that gives decision-making responsibility to people and states, rather than to the federal government. And we should replace most of Dodd-Frank with bankruptcy reform and simpler regulations, with the goal of ending government bailouts.
In implementing this new economic strategy, policymakers should be guided by Hayek, especially by his emphasis on the rule of law and the predictability of policy. As he wrote in The Road to Serfdom, “Nothing distinguishes more clearly conditions in a free country from those in a country under arbitrary government than the observance in the former of the great principles known as the Rule of Law. Stripped of all technicalities, this means that government in all its actions is bound by rules fixed and announced beforehand—rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge.”
Rules-based policies produce more stable economies and stronger economic growth. When people make decisions, they look to the future. Prices that convey information and provide incentives reflect the future. So good decisions as well as the prices that guide them depend on the predictability of future policy—and thus on clear policy rules.
But Hayek emphasized that rules for government policy do something more. The rule of law protects freedom, as the title of Hayek’s The Constitution of Liberty suggests. Hayek traced this idea through the ages—first to Aristotle, then to Cicero, about whom Hayek wrote: “No other author shows more clearly . . . that freedom is dependent upon certain attributes of the law, its generality and certainty, and the restrictions it places on the discretion of authority.” Hayek also cited John Locke, who wrote that the purpose of the law was “not to abolish or restrain, but to preserve and enlarge freedom. . . . Where there is no law, there is no freedom.” Finally, Hayek pointed to James Madison and other American statesmen who put these ideas into practice in a new nation. These thinkers distrusted government officials as protectors of freedom; the rule of law, they believed, was more reliable.
So rules have a dual purpose: encouraging economic growth and protecting freedom. The best way to understand the two advantages of rules is to examine what happens in their absence, as in the case of wage and price controls. Such controls are arbitrary: they require decisions by people at the top about virtually every price and wage; they distort economic signals and incentives; they create shortages and surpluses. These effects occur whether the price controls are imposed on the whole economy or on a particular sector, such as health care.
Many wonder how a system of rules can work in practice, with politicians and government officials continually pressured to “do something” about economic problems. Rules mean that you do nothing, say the skeptics, and that’s impossible in today’s charged political climate and hour-to-hour, even minute-to-minute, news cycle. My colleague George Shultz calls the problem “the urge to intervene.”
Hayek had an answer to that challenge. In The Road to Serfdom, he pointed out the need to clear up a “confusion about the nature of this system” of formal rules: “the belief that its characteristic attitude is inaction of the state.” Offering one example of a rules-based system, he noted that “the state controlling weights and measures (or preventing fraud or deception in any other way) is certainly acting.” By contrast, a system in which the rule of law was flouted wasn’t necessarily characterized by action: “The state permitting the use of violence, for example, by strike pickets, is inactive.” Similarly, simple rules for monetary policy don’t mean that the central bank, in response to events, takes no action at all with interest rates or the money supply. The bank might provide loans in the case of a bank run, for instance. But these actions can be taken in a predictable manner. For that matter, deviation from the rules sometimes results in inaction. A decision by government regulators not to act when financial institutions take on unreasonable risks, for example, constitutes both inaction and a violation of the rule of law.
Some argue that crises like the present one force policymakers to deviate from rules and the rule of law. But a crisis may be the worst time to do so. In a crisis, what is vital is increased strategic clarity, not increased unpredictability. That fact became clear following the first bailout of the recent crisis, the Bear Stearns intervention: few knew what to expect the next time a financial institution wanted help, since no strategy had been articulated. The crisis worsened. The sooner people can make decisions with knowledge of the rules, the sooner recovery will come about.
To get America back on track, we must choose leaders who believe in the principles of economic freedom and will implement them. But here, Hayek issued a warning. In a chapter in The Road to Serfdom called “Why the Worst Get on Top,” he suggested that people with the ambition to become leaders, either by election or by appointment, are often interventionists, since their tendency is to do whatever it takes to succeed. Further, those who benefit directly from discretionary government interventions naturally support such officials. Industries and firms that benefit from bailouts will favor officials comfortable with bailouts, for example, and even academic research on economic policy will become biased toward interventionism. Perhaps the answer to Hayek’s warning is to elect or appoint people regarded as overly committed to the principles of economic freedom. Then, after experiencing the heavy pressure pushing them toward intervention, they may emerge with a sensible balance. In the 1980s, Ronald Reagan took this tack, appointing many Ph.D.s from the University of Chicago’s free-market school of economics to positions of leadership.
John Maynard Keynes took a different view. In a famous letter to Hayek about The Road to Serfdom, Keynes expressed his preference for more interventionist appointees—but he wanted only those whom he viewed as beneficent interventionists. “What we want is not no planning, or even less planning, indeed I should say we almost certainly want more,” Keynes wrote. “But the planning should take place in a community in which as many people as possible, both leaders and followers, wholly share your own moral position.” Milton Friedman later cited this letter to illustrate Keynesianism’s defining characteristic: its focus on discretionary interventions taken by people in powerful government positions.
Even those who support the principles of economic freedom can sometimes get off track. One might argue that such deviations were needed in the fall of 2008; perhaps the actions taken then prevented a more serious panic. But that’s no reason to embrace the discretionary policies that led to the mess in the first place. Such an argument is like saying that the person who set fire to a house should be exonerated because he then put out the fire and saved a few rooms.
Is today’s departure from economic freedom any less serious than the assault on freedom that Hayek wrote about in The Road to Serfdom? Am I exaggerating when I say that the future of American prosperity—or even global prosperity—is at stake?
While central planning may not be the right term for it, consider the 2010 health-care law, which gave the federal government the power to mandate the terms of everyone’s health-insurance package and which created an Independent Payment Advisory Board to determine the price, quantity, and quality of the medical services—from number of MRIs to the necessary accuracy of CT scans—that a medical professional provides. Is that so different from the way centrally planned economies determine the price, quantity, and quality of livestock, wheat, or steel that can be produced? Or consider monetary policy. A few years ago, I coined the term “mondustrial policy” to describe the Fed’s practice of quantitative easing, which combined industrial policy (discretionary assistance to certain firms and industries) with monetary policy (printing money to finance that assistance). Since then, the Fed has purchased $1.25 trillion of mortgage-backed securities. In fiscal year 2011, it purchased 77 percent of the newly issued federal debt, long after panic conditions had subsided.
Hayek argued that inflationary monetary policy undermines economic freedom, in part because it hits the elderly and the poor particularly hard, rationalizing more discretionary interventions. Though the inflation problem is less severe now than in the 1970s—at least so far—the impact of the Fed’s multiyear, zero-percent interest-rate policy resembles that of the Great Inflation era: it significantly cuts real incomes for those who have saved over a lifetime for retirement.
By moving away from the basic principles of economic freedom, government policy has caused our recent economic malaise. It should be no consolation that some of our friends in Europe are facing worse economic struggles, often because they moved even further away from those principles. The good news is that a change in government policy will alleviate the problems and help restore economic prosperity. Understanding Hayek’s work, written during similar circumstances, will help us greatly as we undertake that difficult task.
John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and the George P. Shultz Senior Fellow in Economics at the Hoover Institution. His article is adapted from the 2012 Friedrich Hayek Lecture, which he delivered on winning the Manhattan Institute’s Hayek Prize.
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Milton Friedman would be 100 this week, so a number of articles are circulating to honor him.
Thomas Sowell: http://www.realclearpolitics.com/articles/2012/07/31/milton_friedmans_centenary_114960.html
Stephen Moore: http://online.wsj.com/article/SB10000872396390444226904577558882802335216.html
Donald J. Boudreaux, professor of economics at George Mason University http://www.startribune.com/opinion/commentaries/164326876.html?refer=y
'Free to Choose' television series: http://www.youtube.com/watch?v=D3N2sNnGwa4&feature=player_embedded
Greed smackdown: http://www.youtube.com/watch?v=RWsx1X8PV_A&feature=player_embedded
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Reagan biographer and Powerline contributor Steven Hayward:
http://www.powerlineblog.com/archives/2012/07/milton-friedman-at-100.php
Posted on July 31, 2012 by Steven Hayward in Conservatism, Economy
Milton Friedman at 100
Today is Milton Friedman’s 100th birthday. It is one of the great privileges of my life to have known him some, and to have spent some time with him in San Francisco back in the 1990s. Driving with him up and down the hills of San Francisco was not for the faint of heart. All of his rational calculations of risk seemed to go out the window when he was behind the wheel of his Lexus. And one of my cherished possessions is the very kind note Milton sent to tell me how much he enjoyed the first volume of my Age of Reagan books, where he makes several appearances.
Thomas Sowell, a student of Milton’s at Chicago, recalls him here. My pal Steve Moore also recalls his importance in the Wall Street Journal today, calling him “The Man Who Saved Capitalism.”
In the 1960s, Friedman famously explained that “there’s no such thing as a free lunch.” If the government spends a dollar, that dollar has to come from producers and workers in the private economy. There is no magical “multiplier effect” by taking from productive Peter and giving to unproductive Paul. As obvious as that insight seems, it keeps being put to the test. Obamanomics may be the most expensive failed experiment in free-lunch economics in American history.
Equally illogical is the superstition that government can create prosperity by having Federal Reserve Chairman Ben Bernanke print more dollars. In the very short term, Friedman proved, excess money fools people with an illusion of prosperity. But the market quickly catches on, and there is no boost in output, just higher prices.
I might (but might not) quarrel slightly with Steve’ second paragraph here, as it seems velocity—one of the key terms of Friedman’s basic equation of monetarism (MV=PQ) fell sharply during the recession and may still be off, though it is hard for the layman to tell. We visited this subject once before, and it brings vividly to mind a dinner I once enjoyed with Milton and the president of a regional Fed bank in the early 1990s in San Francisco, and I was immediately in way over my head as they argued the virtues and defects of the M1, M2, and M3 measures of the money supply. Even among monetarist economists, there are serious and honest differences in evaluating the economy and prescribing the right monetary course. (Though one thing Milton was absolutely against was the gold standard. I learned that in my very first conversation with him way back in the 1980s.)
Easier to grasp is Milton’s piercing of the pretentions of things like Obama’s stimulus. My all time favorite Milton story involves the time he was motoring in Europe, and noticed a large group of men digging in a field with shovels. Milton asked someone why they didn’t use a steam shovel or earth mover, and was told that digging with shovels was an employment measure, and if they used an earth mover it would put people out of work. To which Milton naturally followed up: “Then why don’t you give them spoons?”
There are lots of good videos of Milton on YouTube, many of them drawn from his fabulous “Free to Choose” television series. But my favorite for today is this very short smackdown of Phil Donahue on the subject of “greed.” Enjoy! (UPDATE: A faithful correspondent reminds me about the Milton Friedman Choir, singing about the corporation, so I’ve added this one, too.)
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Arthur Laffer: The Real 'Stimulus' Record
In country after country, increased government spending acted more like a depressant than a stimulant.
By ARTHUR B. LAFFER
Policy makers in Washington and other capitals around the world are debating whether to implement another round of stimulus spending to combat high unemployment and sputtering growth rates. But before they leap, they should take a good hard look at how that worked the first time around.
It worked miserably, as indicated by the table nearby, which shows increases in government spending from 2007 to 2009 and subsequent changes in GDP growth rates. Of the 34 Organization for Economic Cooperation and Development nations, those with the largest spending spurts from 2007 to 2009 saw the least growth in GDP rates before and after the stimulus.
The four nations—Estonia, Ireland, the Slovak Republic and Finland—with the biggest stimulus programs had the steepest declines in growth. The United States was no different, with greater spending (up 7.3%) followed by far lower growth rates (down 8.4%).
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Close..Still, the debate rages between those who espouse stimulus spending as a remedy for our weak economy and those who argue it is the cause of our current malaise. The numbers at stake aren't small. Federal government spending as a share of GDP rose to a high of 27.3% in 2009 from 21.4% in late 2007. This increase is virtually all stimulus spending, including add-ons to the agricultural and housing bills in 2007, the $600 per capita tax rebate in 2008, the TARP and Fannie Mae and Freddie Mac bailouts, "cash for clunkers," additional mortgage relief subsidies and, of course, President Obama's $860 billion stimulus plan that promised to deliver unemployment rates below 6% by now. Stimulus spending over the past five years totaled more than $4 trillion.
If you believe, as I do, that the macro economy is the sum total of all of its micro parts, then stimulus spending really doesn't make much sense. In essence, it's when government takes additional resources beyond what it would otherwise take from one group of people (usually the people who produced the resources) and then gives those resources to another group of people (often to non-workers and non-producers).
Often as not, the qualification for receiving stimulus funds is the absence of work or income—such as banks and companies that fail, solar energy companies that can't make it on their own, unemployment benefits and the like. Quite simply, government taxing people more who work and then giving more money to people who don't work is a surefire recipe for less work, less output and more unemployment.
Yet the notion that additional spending is a "stimulus" and less spending is "austerity" is the norm just about everywhere. Without ever thinking where the money comes from, politicians and many economists believe additional government spending adds to aggregate demand. You'd think that single-entry accounting were the God's truth and that, for the government at least, every check written has no offsetting debit.
Well, the truth is that government spending does come with debits. For every additional government dollar spent there is an additional private dollar taken. All the stimulus to the spending recipients is matched on a dollar-for-dollar basis every minute of every day by a depressant placed on the people who pay for these transfers. Or as a student of the dismal science might say, the total income effects of additional government spending always sum to zero.
Meanwhile, what economists call the substitution or price effects of stimulus spending are negative for all parties. In other words, the transfer recipient has found a way to get paid without working, which makes not working more attractive, and the transfer payer gets paid less for working, again lowering incentives to work.
But all of this is just old-timey price theory, the stuff that used to be taught in graduate economics departments. Today, even stimulus spending advocates have their Ph.D. defenders. But there's no arguing with the data in the nearby table, and the fact that greater stimulus spending was followed by lower growth rates. Stimulus advocates have a lot of explaining to do. Their massive spending programs have hurt the economy and left us with huge bills to pay. Not a very nice combination.
Sorry, Keynesians. There was no discernible two or three dollar multiplier effect from every dollar the government spent and borrowed. In reality, every dollar of public-sector spending on stimulus simply wiped out a dollar of private investment and output, resulting in an overall decline in GDP. This is an even more astonishing result because government spending is counted in official GDP numbers. In other words, the spending was more like a valium for lethargic economies than a stimulant.
In many countries, an economic downturn, no matter how it's caused or the degree of change in the rate of growth, will trigger increases in public spending and therefore the appearance of a negative relationship between stimulus spending and economic growth. That is why the table focuses on changes in the rate of GDP growth, which helps isolate the effects of additional spending.
The evidence here is extremely damaging to the case made by Mr. Obama and others that there is economic value to spending more money on infrastructure, education, unemployment insurance, food stamps, windmills and bailouts. Mr. Obama keeps saying that if only Congress would pass his second stimulus plan, unemployment would finally start to fall. That's an expensive leap of faith with no evidence to confirm it.
Mr. Laffer, chairman of Laffer Associates and the Laffer Center for Supply-Side Economics, is co-author, with Stephen Moore, of "Return to Prosperity: How America Can Regain Its Economic Superpower Status" (Threshold, 2010).
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What's in your wallet?
By Robert Klose
from the March 31, 2008 edition
People carry money about, save it, and spend it, but often know almost nothing about it.
I teach biology at a college here in Maine. Sometimes the lessons proceed in unanticipated directions.
This is exactly what happened recently during a laboratory exercise. The topic was taxonomy – the classification of living things. Using American money as an example of how things are logically ordered, I asked my students to write a classification scheme that would divide the various denominations into groups with related features. "Think of characteristics shared by different coins and bills," I instructed. "For example, the coins have a Latin motto."
What Latin motto? Most had never heard of a Latin motto. So I told them to take out a coin and look for something that wasn't in English. They found it, but it was as if they had never seen it before. "E Pluribus Unum." Out of many, one. A beautiful motto. One of the best. It certainly has more gravity than Aruba's motto, "One Happy Island."
My students' lack of knowledge about the national motto piqued my curiosity. I told them to put their money away. Then I took out a handful of change and a few bills. "Who's on the penny?" I asked. Most of them knew that it was Lincoln.
Then I asked the next logical question: What's on the back of the penny? Two people said, "A house." Not one of the 20 named the Lincoln Memorial.
All right, then. On to the nickel. Who's the guy on the nickel? Two people got Jefferson right, but none of them knew what was on the back of this coin: Monticello. My biology laboratory was quickly becoming a lesson in numismatics, US history, and literacy.
"Don't you folks ever read your money?" I chided.
One replied (and I should have seen this coming), "No, we just spend it!"
There it was, then. My students took money completely for granted. They carried it about, saved it, spent it, lost it, sought it, but knew almost nothing about it. As an erstwhile coin collector, I was happy to share my expertise. "Why do some coins have grooved edges?" I asked. What I got in return was the obvious answer: so blind people can tell them apart. While this is certainly one of its benefits, it wasn't the original impetus for the feature. Grooved, or reeded, coins were introduced as a guard against people shaving the edges of gold and silver pieces and then passing the coins back into circulation.
From there, we went on to a conversation about hairdos. Why did George Washington wear a wig? A few shrugs from my audience gave way to one suggestion that it was "just the style" back then. Well, this is partially correct, but it had more to do with hygiene. Colonials did not believe in frequent bathing, for fear it would wash away the body's essential oils. The result was lice. In many men, this unseemly condition was compounded by natural hair loss, so it was easier to shave one's head and care for a wig, which was often made from the hair of horses or goats.
At this point, my students were leaning forward, their eyes bright. It was clear that the idea of a president wearing a wig with a ponytail and bow – a real hepcat – was far more interesting than a discussion of the taxonomic position of the blowfish.
We moved on to paper money. "Who's on the dollar?" I asked, as if positing the opening question of "Who Wants to be a Millionaire?" Washington was a no-brainer for them. Lincoln on the five-spot was also an easy one, Hamilton on the $10 stumped a few, Jackson on the $20 a few more, and only one person placed Grant on the $50. None of them knew that Hamilton was the only one of these men who was never president.
How about the $100 bill? Interestingly, most knew Ben Franklin. But I left them in the dust when I asked them about the now-extinct $500, $1,000, and $5,000 notes (William McKinley, Grover Cleveland, James Madison). And then, as a sort of coup de grâce, I brought out the big gun: "Who," I asked, "is on the $100,000 bill?"
This one unsettled them. "There's no such thing!" one bold male exclaimed, to cheers of approbation for his taking a stand against the suggestion that such a large note could possibly exist.
"At one time there was," I said, calming the crowd. "And the portrait was of a First World War-era president."
You mean, there was a war before the Second World War? Well, yes. But none of my students knew the name of the chief executive at the time (Woodrow Wilson).
Our excursion through US currency and its lore was time well spent because the unspoken message it conveyed was that in science, it's important to be good observers, to look closely, and to ask questions. As we ended the topic, one student asked why a person would want to own a $100,000 bill.
"Actually, it's illegal for a private citizen to own one," I said. "They were used only for transactions between Federal Reserve banks."
"What if I find one lying around?" asked the class wisecracker, generating a few supportive laughs.
"That's easy," I said. "Give it to me. I'll take care of it." And I certainly would.
THE UNITED STATES $1 BILL
Look at a $1 bill, which first came off the presses in 1957 in its then-current design. (Just a few years ago. A few changes since. -- dmg)
This so-called paper money is in fact a cotton and linen blend, with red and blue minute silk fibers running through it; it is actually material. We've all washed it without it falling apart. A special blend of ink is used, the contents we will never know. It is overprinted with symbols and then it is starched to make it water resistant and pressed to give it that nice crisp look.
If you look on the front of the bill, you will see the United States Treasury Seal...
On the top you will find the scales for a balanced budget.
In its center is a carpenter's square, a tool used for an even cut.
Beneath is the Key to the United States Treasury.
That's all pretty easy to figure out, but on the back of the dollar bill are items we all should know.
Turn the bill over, you will see two circles; both circles, together, comprise the Great Seal of the United States...
The First Continental Congress requested that Benjamin Franklin and a group of men come up with a Seal. It took them four years to accomplish this task and another two years to get their design approved.
Look at the left-hand circle, and see a Pyramid...
Notice...
• The face is lighted, and the western side is dark. This country was just beginning. We had not begun to explore the West or decided what we could do for Western Civilization.
• The Latin above the pyramid, ANNUIT COEPTIS, means, "God has favored our undertaking."
• The Latin below the pyramid, NOVUS ORDO SECLORUM, means, "a new order has begun."
• At the base of the pyramid is the Roman Numeral, MDCCLXXVI, or 1776.
• The Pyramid is uncapped, again signifying that we were not even close to being finished.
• Inside the capstone you have the all-seeing eye, an ancient symbol for divinity. It was Franklin's belief that one man couldn't do it alone, but that a group of men, with the help of God, could do anything.
• "IN GOD WE TRUST" is on this currency.
Look closely at the right-hand circle...
which seal is on every National Cemetery in the United States, on the Parade of Flags Walkway at the Bushnell, Florida National Cemetery, and is the centerpiece of most hero's monuments. Slightly modified, it also serves as the seal of the President of the United States, always visible whenever he speaks, yet very few people know what the symbols mean.
The Bald Eagle was selected as a symbol for victory for two reasons...
• He is not afraid of a storm; he is strong, and he is smart enough to soar above it.
• He wears no material crown. We had just broken from the King of England.
Note the shield...
• Is unsupported. This country can now stand on its own.
• At the top of that shield you have a white bar signifying Congress, a unifying factor. We were coming together as one nation.
• In the Eagle's beak you will read, E PLURIBUS UNUM, meaning, "one nation from many people."
• Above the Eagle, you have thirteen stars, representing the thirteen original colonies, and any clouds of misunderstanding rolling away. Again, we were coming together as one.
• Notice the Eagle holds in his talons an olive branch and arrows:
o This country wants peace, but we will never be afraid to fight to preserve peace.
o The Eagle always wants to face the olive branch, but in time of war, his gaze turns toward the arrows.
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http://www.acting-man.com/?p=19212#more-19212
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It's been two years since I posted this , , ,
http://www.youtube.com/watch?v=d0nERTFo-Sk
Milton Friedman vs. Michael Moore
http://www.youtube.com/watch?v=cD0dmRJ0oWg&feature=related
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http://globaleconomicanalysis.blogspot.com/2012/09/fair-trade-is-unfair-in-praise-of-cheap.html
Does this analysis hold with regard to US workers in the presence of Chinese capital and currency controls?
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http://globaleconomicanalysis.blogspot.com/2012/09/fair-trade-is-unfair-in-praise-of-cheap.html
Does this analysis hold with regard to US workers in the presence of Chinese capital and currency controls?
I agree with the analysis of the author. It is true that Romney is sounding complaints with unfair practices in China. That is fine to negotiate tough, but not to the point of imposing tariffs or closing off trade. A tariff would be a tax imposed on the American consumer, not the Chinese producer. Tasking our bureaucrats to even out all production irregularities in the world before you can buy a product is no solution. Our competitive disadvantage right now is mostly of our own making.
Posted before, globalization is both a) inevitable and b) beneficial. If you don't agree with b) please see a). We don't want international control over our own businesses and industries and we can't control theirs. Pollution is another matter from trying to control their labor market. We are also very capable of competing with and against the Chinese and everyone else. There are levers of negotiation in the complex relationships of the countries short of stopping trade.
I like to call it freedom to trade, the freedom to buy or sell almost anything almost anywhere in the world. (Not arms to enemies etc.) Both imports and exports are beneficial and both lead to a higher standard of living at home. The freest economies will compete the best and benefit the most. Hard to say if that is the US or China right now; I know they have a lower corporate tax rate.
Questions posed in the article:
"Are bad jobs at bad wages better than no jobs at all?" - Yes and I'm not including any kind of slave or involuntary labor as a job.
"Should the US demand third world economies pay "living wages"?" No.
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I remain open to the idea that beggar-thy-neighbor exchange rate policies and capital controls present a problem. Yes? If so, how to solve?
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(http://media.hotair.com/wp/wp-content/uploads/2012/09/Whats-So-Great-About-EF-Infographic-for-Web-e1348598222262.jpg)
18th and falling!
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GM, Nice charts. Welcome back! Ironic that the least free countries have the highest income inequality. You would think the chart showing the 25 most free countries with 7-fold more GDP per capita that the 25 least free countries telling it all would have some effect on policy makers somewhere...
Crafty: "I remain open to the idea that beggar-thy-neighbor exchange rate policies and capital controls present a problem. Yes? If so, how to solve?"
Probably mentioned before but there was quite a debate between some economic legends about fixed versus floating exchange rates between Robert Bartley former WSJ editor and Milton Friedman. We have a floating and only partially manipulated exchange rate between the US and Europe. Rates within the Euro are fixed thanks to some work by another legend Robert Mundell who thought that rigidity would force fiscal discipline in places like Greece etc. Oops. China and the growth economies of Asia pegged to the US$ and that worked well for them. By beggar thy neighbor I assume you refer to our accusation that China's rate is locked in too low. If true, and it probably is, it skews things but in total is no great advantage for China in the long run; that is is my understanding. So my answer to how to solve is jawbone them like Romney is doing but otherwise what is there? Devalue back? In a sense we are with QE. The real answer is in those charts from GM. Pursue economic freedom, compete in a global market like we mean business and let the chips fall where they may. If China prospers then they will start spending and consuming and caring what they have to pay for imports as part of their own standard of living.
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"To combat depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection -- a procedure which can only lead to a much more severe crisis as soon as the credit expansion comes to an end." --economist Friedrich August von Hayek (1899-1992)
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Guest Post: Gold And Triffin's Dilemma
Submitted by Tyler Durden on 10/05/2012 19:34 -0400
Submitted by Joe Yasinksi and Dan Flynn of GBI,
Have you seen Robert Triffin?
"It was the outcome of an unbelievable collective mistake, which, when people become aware of it, will be viewed by history as an object of astonishment and scandal"
-Jaques Reuff 1972
The obscure Belgian economist Robert Triffin is not only very dead he also isn't exactly a household name, yet. Triffin, who died in 1993 studied at Harvard, taught at Yale, worked at the Federal Reserve, the IMF, and was a key contributor to the formation of the European monetary system.Triffin exposed serious flaws in the Bretton Woods monetary system and perfectly predicted it's inevitable demise yet his work remains largely ignored and unstudied by today's mainstream economists. This "flaw" became known as the Triffin dilemma, and many believe Triffin's dilemma has as serious implications today as it did 50 years ago. In short, Triffin proposed that when one nations currency also becomes the worlds reserve asset, eventually domestic and international monetary objectives diverge. Have you ever wondered how it's possible that the USA has run a trade deficit for 37 consecutive years? Have you ever considered the consequences on the value of your Dollar denominated assets if it eventually becomes an unacceptable form of payment to our trading partners? Thankfully for those of us trying to navigate the current financial morass, Robert Triffin did.
Prior to the 1944 Bretton Woods agreement, central banks used gold as the asset to back their currencies. By the end of World War II, the United States had established itself as the world's creditor and largest holders of gold. Under the 1944 Bretton Woods agreement, the US Dollar was fully backed by gold at a fixed value of 1/35th an ounce per dollar, and foreign Central Banks could use US Dollar assets as reserves backing their currency, in lieu of gold. This agreement avoided the inevitable deflationary pressure a return to pre-war gold/currency ratios would have forced just as Europe was beginning to rebuild, and allowed US debt held abroad to be used as an asset by central banks against their local currencies.
In the 1960's Triffin observed that there existed an excess of dollars offshore relative to the gold available to tender at the set $35 price. He hypothesized that given foreign central bank demand for dollars as reserves, the trend of a growing and continuing glut of dollars was going to continue unabated. It would continue until the excess reserves would so clearly be many multiples of the gold available to satisfy them that enough countries would start tendering dollars for gold and eventually the entire scheme would collapse. Triffin went as far as congress in 1960 to testify that the system as currently devised could not possibly maintain both liquidity and a stable value in the dollar and eventually, the agreement would prove unsustainable. As Triffin predicted, on August 15, 1971 the United States closed the gold window as Richard Nixon came on national television and defaulted on US gold obligations while national gold reserves drained from over 20,000 tons to 8,133 tons. Up until Nixons actions, foreign sovereigns tendered their dollars for gold at an increasing pace. On that day, nations that were holding US dollars because they were "as good as gold" were left with paper promises and nothing more.
At that time, the world was at a crossroads. Would foreign governments and trade partners continue to accept fully fiat US Dollars? The alternative was a deflationary return to a hard (pre-Bretton Woods) gold standard. It can be argued that structural support was granted to the dollar given the fact that with cheap oil, the US economy was expanding at a pace far more rapid than the growth in US government debt. They rationalized that US dollar was still a claim on future growth and production and the rest of the world was lifting it's standard of living as well.Going backwards to the last failed monetary regime was politically unappealing.
And so the US dollar hegemony continues to this day. The dollar is fully entrenched as the settlement currency for international trade. As of today if any nation wants to buy oil, the lifeblood of the global economy, they pay in dollars. This alone, along with demand for foreign reserves create an unnatural demand for US assets, specifically treasury debt. Robert Triffin opined that the collapse of Bretton woods did not solve his dilemma because the country that supplies the world with it's reserve asset in the form of their currency and debt will still be forced to supply an excess of this reserve to satisfy world demand and thus, run a trade deficit in perpetuity. Such a dynamic can not exist under the natural laws of economics, it can only survive only with active and unanimous political support and intervention.
The issue facing the modern United States is that since the rest of the world uses the US dollar as a reserve behind their own currencies, that demand has allowed the United States to run a deficit in perpetuity and the mechanics of this trade has allowed the US to export price inflation abroad. Quite simply, the US imports real goods in excess of the real goods it exports. The deficit balance minus service exports is made up with printed US dollars. Our trade partners ship/recycle the same dollars back to the United States in exchange for US Treasury Debt. The US Treasuries are held as reserves on the balance sheet of their central bank, and local currency printed against those new reserves. This process, although inflationary for our trade partner, allows them to keep their currency weak vs the US Dollar and prices cheap for US consumers.
Every nation on earth other than the United States has a limit to their potential trade deficit confined by their existing reserves plus their borrowing capacity. Not only does the US have the capacity to run a perpetual and growing trade deficit but the rest of the world actually demands us to run a balance of payment deficit or else their reserves will have to shrink, along with their credit, currency and economy. Good deal for us, no? This situation means that for 40 years our trade partners have not only tolerated, but dysfunctionally enabled our perpetual deficits. The United States has had the "exorbitant privilege" of being the issuer of the worlds' reserve currency. We've all enjoyed the benefits, now comes the pain.
Sure enough as Triffin foretold the US trade surplus began shrinking immediately after the collapse of Bretton Woods and transitioned to a permanent trade deficit by 1975, never to return to a surplus to date, 37 years later. The previously stable national debt (with a permanent ceiling of $400 billion dollars) has ballooned to over $16 trillion dollars, a multiple of 40 times what it was during the previous monetary regime. Given this 4-decade perpetual trade deficit with the rest of the world and "hyperinflation" of US dollar credits and claims, many have wondered how the US has avoided massive price inflation at home.
Triffin's dilemma continues to play an important role in the ongoing financial crisis the world has found itself in since 2008. The governor of the Peoples Bank of China specifically referenced Triffin's Dilemma as the root cause of the current financial disorder and suggested an immediate effort to transition away from the US dollar to avoid more catastrophic consequences.
The US Council on Foreign Relations aptly describes why Triffin's dilemma becomes unsustainable:
"To supply the world's risk-free asset, the center country must run a current account deficit and in doing so become ever more indebted to foreigners, until the risk-free asset that it issues ceases to be risk free. Precisely because the world is happy to have a dependable asset to hold as a store of value, it will buy so much of that asset that its issuer will become unsustainably burdened."
Have we reached the day when the United States has become unsustainably burdened? Can US debt honestly be considered to still be risk free? S&P certainly doesn't think so, neither does our second largest creditor, China (after our own Federal Reserve) who has been a net seller of US government debt for some time now. And where will the world go to find another dependable asset to hold as a store of value?
Triffin's endgame is simple. A rapid diversification of reserves out of the dollar by foreign central banks. This diversification out of the dollar is only possible given a viable alternative. More and more nations are agreeing to unilateral trade agreements settled in their individual currencies. With each new agreement, global demand for the dollar wanes. It is no coincidence that QE1 coincided with China and the rest of the world backing off demand for US treasury debt. The amounts of QE2 and QE3 match perfectly (or close enough for government work) with US trade deficits from 2009 to today. Given the US Government's seemingly permanent addiction to "free" foreign goods, the trade deficit appears to be irreversible. The extreme danger for those of us in the United States, holding assets denominated in US dollars, is that the Fed is actively creating base money to feed the addiction. As the monetary base grows, the value of existing US dollar denominated assets and credit is devalued. One way to protect against this debasement of your savings is to do as the central banks do – acquire and hold physical gold bullion.
The blueprint for this alternative has been in plain sight since the late 1990's, and if you watch what central banks do – not what they say – you can benefit.
For the first time in FOUR DECADES, global central banks have become net buyers of gold.This central bank demand has been driven by countries that previously had an insatiable appetite for US treasury debt – most notably China. After 40 years, the political and structural support for US dollar holdings abroad is slipping away. Foreign central banks know that the only way to protect their reserves (and defend the value of their home currency), is by holding gold. Their preparations are well under way.
Just as central banks are increasing their gold purchases, private citizens also are exercising their right to diversify their own private reserves. But given the still infinitesimal rates of gold ownership (1% tops most estimates) there is a long way to go. Why shouldn't the average person do what the big boys are doing? Diversifying out of the dollar, out of paper currencies and making sure their assets aren't someone else's liability seem prudent for everyone in times like there. Here at GBI, we see ourselves as a way for every investor to have the choice on how to save their stored labor. We want to make it as easy to buy and sell gold as it is to move money from your savings account to your checking account. We can all walk in the footsteps of the giants, as a Friend and mentor is apt to say.
As a bonus, if gold was to become the worlds foremost reserve asset, would that not finally solve good old Triffins dilemma? Wouldn't gold serving as the preferred global saving vehicle and fiat continuing to serve as the worlds spending vehicle finally break the natural tension Triffin has so aptly illuminated for us? Perhaps, but given golds stable supply and other unique features (see our next essay titled "Forget Supply and Demand, it's all Stock to Flow."), it would by necessity be at a much higher price to function in that reserve role. Some estimates put that potential price into the many tens of thousands of dollars, and given a monetary and fiscal path that seems to be following Triffin's fateful trajectory, how could any price be ruled out?
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"There are two fundamental problems with this argument. The dollar is not the world's sole reserve currency, and the dollar is no longer pegged to good. The dollar is free floating, and euros and yen and increasingly the yuan are alternatives. Consequently the Triffin dilemma no longer applies"
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"There are two fundamental problems with this argument. The dollar is not the world's sole reserve currency, and the dollar is no longer pegged to [gold]. The dollar is free floating, and euros and yen and increasingly the yuan are alternatives. Consequently the Triffin dilemma no longer applies"
True. I would add though that the original piece was filled with good background information; it just doesn't support the theory advanced.
Our problems are political, not structural. We are using unsustainable monetary tricks like quantitative expansion to cover the gap created by fiscal irresponsibility and a fiercely anti-growth agenda. The fact that other places are doing even worse provides temporary cover for the relatively value of our currency, but does not offset our declining prosperity.
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It’s (austerity) Multiplier Failure
Kate Mackenzie | Oct 09 09:42 | 8 comments |
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The IMF’s forecasters are terribly worried about global growth – its new report not only contains further downward revisions to global growth forecasts, but talks of an alarming risk of a deeper slump, rising uncertainty, and so on.
Its latest World Economic Outlook features a special box, co-authored by chief economist Olivier Blanchard himself, which notes that “activity has disappointed in a number of economies undertaking fiscal consolidation”. It then examines the key assumption — ie, the fiscal multipler — used for estimating the effect of fiscal consolidation (aka austerity, debt retrenchment etc) upon aggregate output (aka GDP):
The main finding, based on data for 28 economies, is that the multipliers used in generating growth forecasts have been systematically too low since the start of the Great Recession, by 0.4 to 1.2, depending on the forecast source and the specifics of the estimation approach. Informal evidence suggests that the multipliers implicitly used to generate these forecasts are about 0.5. So actual multipliers may be higher, in the range of 0.9 to 1.7.
So… why did the IMF (among others) get it so wrong on the fiscal multiplier?
Antonio Fatás, an economics professor at INSEAD, has a theory. In the early 2000s Fatás and various other economists published papers considering the fiscal multiplier and concluding it was somewhere in the range of 1 to 1.5. More papers were published, including one co-authored by Blanchard. Fatás believes that, while some papers which “used events such as wars” tended to find multipliers of <1, the consensus was broadly around the multiplier being about 1 or a little higher.
And then, somehow, everything went wrong, writes Fatás:
The main finding, based on data for 28 economies, is that the multipliers used in generating growth forecasts have been systematically too low since the start of the Great Recession, by 0.4 to 1.2, depending on the forecast source and the specifics of the estimation approach. Informal evidence suggests that the multipliers implicitly used to generate these forecasts are about 0.5. So actual multipliers may be higher, in the range of 0.9 to 1.7.
So… why did the IMF (among others) get it so wrong on the fiscal multiplier?
Antonio Fatás, an economics professor at INSEAD, has a theory. In the early 2000s Fatás and various other economists published papers considering the fiscal multiplier and concluding it was somewhere in the range of 1 to 1.5. More papers were published, including one co-authored by Blanchard. Fatás believes that, while some papers which “used events such as wars” tended to find multipliers of <1, the consensus was broadly around the multiplier being about 1 or a little higher.
And then, somehow, everything went wrong, writes Fatás:
But these new (and old) academic results have simply be displaced by the ideological debate that followed the fiscal policy stimulus of the 2008-2009 period, which somehow led to the conclusion that those policies did not work and that what we now needed was more austerity. And when over the last two years we forecasted GDP growth rates in the face of coordinated austerity by many governments we somehow forgot to consider that multipliers can be large.
Fatas may well be right to say that the consensus was for a 1 or >1 fiscal multiplier, but the Blanchard paper he cites, which was first published in 1998 and co-authored with Roberto Perotti, is a little more ambivalent. It says, for example, that there is no consistent evidence for the Keynesian view that the tax multiplier is smaller than the fiscal multiplier. And more interestingly, the paper points out that the size of both tax or fiscal multipliers vary widely if one removes a single decade between 1960 and 1997. Depending which decade is removed, the result can be quite different:
<tax_fiscal_multiplier_blanchard-272x249.png>
The IMF special box on multiplier miscalculations notes that “earlier analysis by the IMF staff suggests that, on average, fiscal multipliers were near 0.5 in advanced economies during the three decades leading up to 2009″. That may be true too, but the uncertainty indicated by Blanchard’s own paper above suggests that assumptions about the multiplier are hardly safe.
The IMF says more work is warranted to examine the causes of this failure of multiplier assumptions. Perhaps monetary policy at the zero bound has some effect? Maybe it’s commodities prices? Who knows. But assumptions of a fiscal multiplier below 1 seem to be misplaced, at least right now. And the IMF is urging that countries who have ‘room to maneuvre’ such as the UK, France and the Netherlands, should “smooth their planned adjustment over 2013 and beyond” if growth falls significantly below the IMF’s increasingly gloomy forecasts.
Scott Grannis
http://scottgrannis.blogspot.com
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In a new Focal Point, Project Syndicate contributors assess the global economy's future. Commentaries include Joseph Stiglitz on why the US and EU are relying excessively on their central banks, Daniel Gros on why government spending won't help countries recover, Martin Feldstein on the return of inflation, Kenneth Rogoff on the future of interest rates, and Jeffrey Frankel on the next black swan event.
Read the full Focal Point here.
Http://www.project-syndicate.org/focal-points/zombie-growth?utm_source=MadMimi&utm_medium=email&utm_content=Project+Syndicate+October+2012+Newsletter&utm_campaign=20121018_m113720958_Project+Syndicate+October+2012+Newsletter&utm_term=Focal+Point
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http://www.nytimes.com/2012/10/25/us/liberty-dollar-creator-awaits-his-fate-behind-bars.html?nl=todaysheadlines&emc=edit_th_20121025
MALIBU, Calif. — High above the cliff tops and the beach bars, up a winding mountain road, in a borrowed house on someone else’s ranch, an unusual criminal is waiting for his fate.
Mr. von NotHaus was convicted of using precious metals to back a currency he called the Liberty Dollar, which he says was “a private voluntary currency” for those conducting business outside the government’s purview.
His name is Bernard von NotHaus, and he is a professed “monetary architect” and a maker of custom coins found guilty last spring of counterfeiting charges for minting and distributing a form of private money called the Liberty Dollar. Described by some as “the Rosa Parks of the constitutional currency movement,” Mr. von NotHaus managed over the last decade to get more than 60 million real dollars’ worth of his precious metal-backed currency into circulation across the country — so much, and with such deep penetration, that the prosecutor overseeing his case accused him of “domestic terrorism” for using them to undermine the government.
Of course, if you ask him what caused him to be living here in exile, waiting with the rabbits for his sentence to be rendered, he will give a different account of what occurred.
“This is the United States government,” he said in an interview last week. “It’s got all the guns, all the surveillance, all the tanks, it has nuclear weapons, and it’s worried about some ex-surfer guy making his own money? Give me a break!”
The story of Mr. von NotHaus, from his beginnings as a hippie, can sound at times as if Ken Kesey had been paid in marijuana to write a script on spec for Representative Ron Paul. At 68, Mr. von NotHaus faces more than 20 years in prison for his crimes, and this decisive chapter of his tale has come, coincidentally, at a moment when his obsessions of 40 years — monetary policy, dollar depreciation and the Federal Reserve Bank — have finally found their place in the national discourse.
A native of Kansas City, Mr. von NotHaus first became enticed by making money while living with his companion, Talena Presley, without a car or electric power in a commune of like-minded dropouts in a nameless village on the Big Island in Hawaii. It was 1974, and Mr. von NotHaus, 30 and ignorant of economics, experienced “an epiphany,” he said, which resulted in the writing of a 20-page financial manifesto titled “To Know Value.”
In it he described his conviction that money has a moral aspect and that any loss in its value will cause a corresponding loss in social and political values. It was only three years after President Richard M. Nixon had removed the country from the gold standard, and Mr. von NotHaus, a gold enthusiast, began buying gold from local jewelers and selling it to his friends.
One day, he recalled, “we were all sitting around thinking, ‘Wow, we ought to do something with this gold.’ And I said: ‘Yeah, we could make coins. People love coins. We could have our own money!’ ”
Within a year, he had established the Royal Hawaiian Mint, a private — not royal — producer of collectible coins. Hitchhiking to a library in the county seat of Hilo, he said, he looked up “minting” in the encyclopedia and soon was turning out gold and silver medallions with images of volcanos and the Kona Coast.
So went the better part of 20 years. Then came 1991, which saw the emergence of a successful local currency in Ithaca, N.Y., called the Ithaca Hour. The 1990s were a time of great ferment in the local-money world with activists and academics writing books and papers, like Judith Shelton’s “Money Meltdown.” Mr. von NotHaus, traveling with his sons, Random and Xtra, to adventuresome locations, like Machu Picchu, read these seminal works.
“I had been working on it since 1974,” he testified at his federal trial in North Carolina. “It was time to do something.”
The Constitution grants to Congress the power “to coin money” and to “regulate the Value thereof” — but it does not explicitly grant an exclusive right to do such things. There are legal-tender laws that regulate production of government currency and counterfeiting laws that prohibit things like “uttering” gold or silver coins “for use as current money.”
Mr. von NotHaus claims he never meant the Liberty Dollar to be used as legal tender. He says he created it as “a private voluntary currency” for those conducting business outside the government’s purview. His guiding metaphor is the relationship between the Postal Service and FedEx. “What happened in the FedEx model,” he testified, “is that they” — a private company offering services the government did not — “brought competition to the post office.”
To introduce the Liberty Dollar in 1998, Mr. von NotHaus moved from Hawaii to Evansville, Ind., where he joined forces with Jim Thomas, who for several years had been publishing a magazine called Media Bypass, whose pages were filled with conspiracy theories and interviews with militia members, even Timothy McVeigh.
Working from the magazine’s office, Mr. von NotHaus lived in a mobile home and promoted his nascent currency to “patriot groups” on Mr. Thomas’s mailing list while reaching an agreement with Sunshine Minting Inc., in Idaho, to produce the Liberty Dollar. His marketing scheme was simple: he drove around the country in a Cadillac trying to persuade local merchants like hair salons and restaurants to use his coins and to offer them as change to willing customers.
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Banks, of course, did not accept his money; however, to ensure that it found its way only into hands that wanted to use it, Mr. von NotHaus placed a toll-free number and a URL address on the currency he produced. If people mistakenly got hold of it, they could mail it back to Evansville and receive its equivalent in actual dollar bills.
Now jump ahead to 2004. A detective in Asheville, N.C., learned one day that a client of a credit union had to tried to pass a “fake coin” at one its local branches. An investigation determined that some business acquaintances of Mr. von NotHaus were, court papers say, allied with the sovereign citizens’ movement, an antigovernment group.
Federal agents infiltrated the Liberty Dollar outfit as well as its educational arm, Liberty Dollar University.
In 2006, with millions of the coins in circulation in more than 80 cities, the United States Mint sent Mr. von NotHaus a letter advising that the use of his currency “as circulating money” was a federal crime.
He ignored this advice,and in 2007, federal agents raided the offices in Evansville, seizing, among other things, copper dollars embossed with the image of Mr. Paul.
Two years later, Mr. von NotHaus was arrested on fraud and counterfeiting charges, accused of having used the Liberty Dollar’s parent corporation — Norfed, the National Organization for Repeal of the Federal Reserve — to mount a conspiracy against the United States.
At his federal trial, witnesses testified to the Liberty Dollar’s criminal similitude to standard American coins. They said his coins included images of Lady Liberty and cheekily reversed “In God We Trust” to “Trust in God.” Then again, his coins were made of real gold and silver, as American coins are not, and came in different sizes and unusual denominations of $10 and $20.
In his own defense, Mr. von NotHaus testified about a “philanthropic mission” to combat devaluation with a currency based on precious metals and asserted that he was not involved in “a radical armed offense against the government or their money.”
It was, of course, to no avail; and in 2011, a jury found him guilty after a 90-minute deliberation.
These days, Mr. von NotHaus paces shoeless in a mansion, in the hills above the ocean, that was lent to him by a friend. His sentencing has yet to be scheduled, and this leaves time for reflection. He feeds the hummingbirds outside his window. He reads books on fiat currency. He is even writing a book — on the gold standard, of course.
“The thing that fires me up the most,” he will say, “is this is what happens: When money goes bad, people go crazy. Do you know why? Because they can’t exist without value. Value is intrinsic in man.”
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In the same vein, but going deeper
http://www.forbes.com/sites/jonmatonis/2012/10/04/bitcoin-prevents-monetary-tyranny/
also
http://www.forbes.com/sites/steveforbes/2012/10/03/gold-can-save-us-from-disaster/
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POTH
November 3, 2012
A Capitalist’s Dilemma, Whoever Wins on Tuesday
By CLAYTON M. CHRISTENSEN
WHATEVER happens on Election Day, Americans will keep asking the same question: When will this economy get better?
In many ways, the answer won’t depend on who wins on Tuesday. Anyone who says otherwise is overstating the power of the American president. But if the president doesn’t have the power to fix things, who does?
It’s not the Federal Reserve. The Fed has been injecting more and more capital into the economy because — at least in theory — capital fuels capitalism. And yet cash hoards in the billions are sitting unused on the pristine balance sheets of Fortune 500 corporations. Billions in capital is also sitting inert and uninvested at private equity funds.
Capitalists seem almost uninterested in capitalism, even as entrepreneurs eager to start companies find that they can’t get financing. Businesses and investors sound like the Ancient Mariner, who complained of “Water, water everywhere — nor any drop to drink.”
It’s a paradox, and at its nexus is what I’ll call the Doctrine of New Finance, which is taught with increasingly religious zeal by economists, and at times even by business professors like me who have failed to challenge it. This doctrine embraces measures of profitability that guide capitalists away from investments that can create real economic growth.
Executives and investors might finance three types of innovations with their capital. I’ll call the first type “empowering” innovations. These transform complicated and costly products available to a few into simpler, cheaper products available to the many.
The Ford Model T was an empowering innovation, as was the Sony transistor radio. So were the personal computers of I.B.M. and Compaq and online trading at Schwab. A more recent example is cloud computing. It transformed information technology that was previously accessible only to big companies into something that even small companies could afford.
Empowering innovations create jobs, because they require more and more people who can build, distribute, sell and service these products. Empowering investments also use capital — to expand capacity and to finance receivables and inventory.
The second type are “sustaining” innovations. These replace old products with new models. For example, the Toyota Prius hybrid is a marvelous product. But it’s not as if every time Toyota sells a Prius, the same customer also buys a Camry. There is a zero-sum aspect to sustaining innovations: They replace yesterday’s products with today’s products and create few jobs. They keep our economy vibrant — and, in dollars, they account for the most innovation. But they have a neutral effect on economic activity and on capital.
The third type are “efficiency” innovations. These reduce the cost of making and distributing existing products and services. Examples are minimills in steel and Geico in online insurance underwriting. Taken together in an industry, such innovations almost always reduce the net number of jobs, because they streamline processes. But they also preserve many of the remaining jobs — because without them entire companies and industries would disappear in competition against companies abroad that have innovated more efficiently.
Efficiency innovations also emancipate capital. Without them, much of an economy’s capital is held captive on balance sheets, with no way to redeploy it as fuel for new, empowering innovations. For example, Toyota’s just-in-time production system is an efficiency innovation, letting manufacturers operate with much less capital invested in inventory.
INDUSTRIES typically transition through these three types of innovations. By illustration, the early mainframe computers were so expensive and complicated that only big companies could own and use them. But personal computers were simple and affordable, empowering many more people.
Companies like I.B.M. and Hewlett-Packard had to hire hundreds of thousands of people to make and sell PC’s. These companies then designed and made better computers — sustaining innovations — that inspired us to keep buying newer and better products. Finally, companies like Dell made the industry much more efficient. This reduced net employment within the industry, but freed capital that had been used in the supply chain.
Ideally, the three innovations operate in a recurring circle. Empowering innovations are essential for growth because they create new consumption. As long as empowering innovations create more jobs than efficiency innovations eliminate, and as long as the capital that efficiency innovations liberate is invested back into empowering innovations, we keep recessions at bay. The dials on these three innovations are sensitive. But when they are set correctly, the economy is a magnificent machine.
For significant periods in the last 150 years, America’s economy has operated this way. In the seven recoveries from recession between 1948 and 1981, according to the McKinsey Global Institute, the economy returned to its prerecession employment peak in about six months, like clockwork — as if a spray of economic WD-40 had reset the balance on the three types of innovation, prompting a recovery.
In the last three recoveries, however, America’s economic engine has emitted sounds we’d never heard before. The 1990 recovery took 15 months, not the typical six, to reach the prerecession peaks of economic performance. After the 2001 recession, it took 39 months to get out of the valley. And now our machine has been grinding for 60 months, trying to hit its prerecession levels — and it’s not clear whether, when or how we’re going to get there. The economic machine is out of balance and losing its horsepower. But why?
The answer is that efficiency innovations are liberating capital, and in the United States this capital is being reinvested into still more efficiency innovations. In contrast, America is generating many fewer empowering innovations than in the past. We need to reset the balance between empowering and efficiency innovations.
The Doctrine of New Finance helped create this situation. The Republican intellectual George F. Gilder taught us that we should husband resources that are scarce and costly, but can waste resources that are abundant and cheap. When the doctrine emerged in stages between the 1930s and the ‘50s, capital was relatively scarce in our economy. So we taught our students how to magnify every dollar put into a company, to get the most revenue and profit per dollar of capital deployed. To measure the efficiency of doing this, we redefined profit not as dollars, yen or renminbi, but as ratios like RONA (return on net assets), ROCE (return on capital employed) and I.R.R. (internal rate of return).
Before these new measures, executives and investors used crude concepts like “tons of cash” to describe profitability. The new measures are fractions and give executives more options: They can innovate to add to the numerator of the RONA ratio, but they can also drive down the denominator by driving assets off the balance sheet — through outsourcing. Both routes drive up RONA and ROCE.
Similarly, I.R.R. gives investors more options. It goes up when the time horizon is short. So instead of investing in empowering innovations that pay off in five to eight years, investors can find higher internal rates of return by investing exclusively in quick wins in sustaining and efficiency innovations.
In a way, this mirrors the microeconomic paradox explored in my book “The Innovator’s Dilemma,” which shows how successful companies can fail by making the “right” decisions in the wrong situations. America today is in a macroeconomic paradox that we might call the capitalist’s dilemma. Executives, investors and analysts are doing what is right, from their perspective and according to what they’ve been taught. Those doctrines were appropriate to the circumstances when first articulated — when capital was scarce.
But we’ve never taught our apprentices that when capital is abundant and certain new skills are scarce, the same rules are the wrong rules. Continuing to measure the efficiency of capital prevents investment in empowering innovations that would create the new growth we need because it would drive down their RONA, ROCE and I.R.R.
It’s as if our leaders in Washington, all highly credentialed, are standing on a beach holding their fire hoses full open, pouring more capital into an ocean of capital. We are trying to solve the wrong problem.
Our approach to higher education is exacerbating our problems. Efficiency innovations often add workers with yesterday’s skills to the ranks of the unemployed. Empowering innovations, in turn, often change the nature of jobs — creating jobs that can’t be filled.
Today, the educational skills necessary to start companies that focus on empowering innovations are scarce. Yet our leaders are wasting education by shoveling out billions in Pell Grants and subsidized loans to students who graduate with skills and majors that employers cannot use.
Is there a solution? It’s complicated, but I offer three ideas to seed a productive discussion:
• CHANGE THE METRICS We can use capital with abandon now, because it’s abundant and cheap. But we can no longer waste education, subsidizing it in fields that offer few jobs. Optimizing return on capital will generate less growth than optimizing return on education.
• CHANGE CAPITAL-GAINS TAX RATES Today, tax rates on personal income are progressive — they climb as we make more money. In contrast, there are only two tax rates on investment income. Income from investments that we hold for less than a year is taxed like personal income. But if we hold an investment for one day longer than 365, it is generally taxed at no more than 15 percent.
We should instead make capital gains regressive over time, based upon how long the capital is invested in a company. Taxes on short-term investments should continue to be taxed at personal income rates. But the rate should be reduced the longer the investment is held — so that, for example, tax rates on investments held for five years might be zero — and rates on investments held for eight years might be negative.
Federal tax receipts from capital gains comprise only a tiny percentage of all United States tax revenue. So the near-term impact on the budget will be minimal. But over the longer term, this policy change should have a positive impact on the federal deficit, from taxes paid by companies and their employees that make empowering innovations.
• CHANGE THE POLITICS The major political parties are both wrong when it comes to taxing and distributing to the middle class the capital of the wealthiest 1 percent. It’s true that some of the richest Americans have been making money with money — investing in efficiency innovations rather than investing to create jobs. They are doing what their professors taught them to do, but times have changed.
If the I.R.S. taxes their wealth away and distributes it to everyone else, it still won’t help the economy. Without empowering products and services in our economy, most of this redistribution will be spent buying sustaining innovations — replacing consumption with consumption. We must give the wealthiest an incentive to invest for the long term. This can create growth.
Granted, mine is a simple model, and we face complicated problems. But I hope it helps us and our leaders understand that policies that were once right are now wrong, and that counterintuitive measures might actually work to turn our economy around.
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A friend of the Austrian school comments:
It's easy to agree with some of his points and a few of his conclusions. Surely, for example, no politician or political party is going to be able to set economic things right in the next few years. And it's always desirable to make some changes in tax policy. But beyond that, though, this piece offers up some wildly wrong ideas -- ideas that lead to bad conclusions and terrible "advice" to both politicians and business people.
Perhaps the most fundamentally wrong point is contained in this sentence: "The Fed has been injecting more and more capital into the economy because — at least in theory — capital fuels capitalism." This author seems to completely misunderstand the nature of both money and capital. And this is darned important if you are trying to understand a market economy.
The Fed cannot create any capital at all. None. The Fed creates money. "Capital" includes all the goods that an entrepreneur might want to acquire with money: goods and services that facilitate his production of additional goods. The Fed can print money all it wants, but that only increases the monetary spending against the existing supply of available goods.
And then Christensen goes on to say "And yet cash hoards in the billions are sitting unused on the pristine balance sheets of Fortune 500 corporations. Billions in capital is also sitting inert and uninvested at private equity funds."
The very best thing we can say about such a statement is that it represents careless thinking. The simple fact is that every single US dollar created by the Fed or the banking system must be held by somebody. Once they are created, those dollars must appear in the aggregate bank balance data until they are destroyed. The existence of "billions sitting idle," in other words, is a direct consequence of the Fed's policy and there is nothing that will change that short of the Fed removing money from the economy.
Consider, for example, that if a large holder of dollars decides to invest his money in something, anything -- those dollars will simply be transferred to another person's bank balance. When somebody like Mr. Christensen totals up the aggregate money balances, the result will be exactly the same as before the investment. Mr. Christensen will still be worried about the magnitude of "idle balances."
These fundamental errors in thinking lead toward the grievously bad ideas expressed later in this article. Capital is no more plentiful in our contemporary environment than it ever was. And there is no problem with the way business people or investors calculate profits. The problem with our economy is precisely the fact that people believe "capital" is more plentiful than it is. The Fed's distortions of interest rates and its creation of ever growing dollar balances causes bad investments and distorted market prices across the board. As a consequence, we have severely damaged the market's ability to direct both human effort and capital toward those economic sectors and projects that will deliver the best value to consumers now and in the long run.
The solution is simple: we need to remove as many government interventions as is politically possible. It is particularly important to stop the Fed's catastrophic inflationary policies. The price system, given a more nearly free market environment, will solve all of the problems that Christensen is lamenting, and then some. Based on this article, it appears to me that Christensen is just another misguided "statist" -- a person who thinks that every problem he identifies must require further central planning. Now, it seems, he wants to send out an instruction book to entrepreneurs explaining the nature of investments with guidelines regarding what is scarce and what is not! The man should have a seat within the Politburo.
Tom
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My friends continue their conversation:
Every one of Hussman’s funds proves the author’s point. They hold large amounts of cash. They invest mainly in companies that sell sustaining innovations like Radio Shack or health care companies like Wellpoint. Hussman judges their effectiveness on the basis of IRR, yield and other statistics. Each fund holds 30-34% of its assets in cash or cash equivalents. His Strategic Total Return Fund holds 54% of its assets in US Treasury securities and 30% of its assets in cash or money market funds.
Tom, you have become hung up on his comment about capital. As a result, you have gotten sidetracked on an issue that is immaterial to the author’s hypothesis. Christensen says that capital is abundant, but is being misallocated due to an inefficient educational system that subsidizes the wrong skill sets, a tax code that encourages this misallocation, and modern business theory that encourages companies to invest the largest percentage of their capital into sustaining and efficiency innovations because those investments produce the best results on the income statement. He argues that unless the US is able to reallocate capital to empowering innovations, its economy will never recover. He is talking about the use of capital. You cannot get beyond the amount of capital.
Also, Tom, you are thinking secondary securities markets. Christensen is thinking about the primary securities markets; ie., private equity in start-ups, IPO’s, direct bank lending, venture capital. If your hypothesis is true and the current policy has prompted the holders of capital to use it to bid up the prices of securities in the secondary markets, then your observation also proves Christensen’s hypothesis. Capital is abundant, but it is being misallocated.
From my own recent experience, I can say that the prices of securities in the primary markets are attractively low. For example, I recently purchased preferred shares of a small private Israeli start-up that has developed a chip that can make any device talk to any other device regardless of the network or regardless of the protocol. This has the potential to be an empowering device because it will enable any smartphone or tablet user to be able to use any network. The price per share was dirt cheap and the cost of the investment was the cost of the bank wire. But why did I have to go to Israel to find this venture? And why has this and other start-up companies encountered so many problems accessing capital that it would consider me? I think that Christensen provides a good starting point for such discussions. And that is all his column was intended to do.
R.
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My point, R., is that the pricing system has been distorted by Fed actions. Without all these interventions, surely the price mechanism will be more efficient in allocating capital than any other process. There is no way to figure these things out on a centralized basis. Why are capital markets causing the problems you describe? Isn't it quite possible that it has something to do with a Fed that thinks short term rates should be zero, and that it should spend trillions in an attempt to manipulate longer term rates?
If I am giving too much attention to this issue, you are giving it too little. Market interventions have consequences. If everybody is being stupid, there has to be a reason for it -- markets are distorted and the resulting economy is dysfunctional.
It's the price mechanism that coordinates individual and independent economic decisions. Decentralized decision making is the only way for a large economy to work, and Christensen's thesis is valid only if individual entrepreneurs and business people find the ideas to be helpful.
T.
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Crafty, That is a good discussion on all 3 sides. Most simply, we need to end the war against starting and growing companies.
I only agree partly with Prof. Christensen's idea of making more tiers for time length held on capital gains taxation and for different reasons. My reason would be because of the declining value of each dollar of return.
Tweaking the system with a goal of favoring one type of innovation over another is not simplicity.
His calls for more education focus is interesting, a topic in itself. Mostly the solution is just changing the mindset against businesses and enterprises, addressing simple competitiveness issues that we keep getting wrong. If we want investment, employment and innovation, why do we slap 50,000 new regulations down in the last 45 months. Don't have the highest corporate taxes in the world with capital gains tax rates scheduled to triple. Don't place new burdens on employers like Obamacare, new medical device taxes, war against energy/ new war against fracking coming, etc. These are anti-growth, anti startup measures.
Look at the criteria Heritage uses to measure economic freedom and start removing the obvious, unnecessary burdens.
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This could go under 'Founders' as well. I have been looking for a published account of this story. Found this in Stanford's Hoover Digest, published Jan. 1999:
http://www.hoover.org/publications/hoover-digest/article/6580
Hoover Digest » 1999 no. 1 » Private Property
How Private Property Saved the Pilgrims
When the Pilgrims landed in 1620, they established a system of communal property. Within three years they had scrapped it, instituting private property instead. Hoover media fellow Tom Bethell tells the story.
There are three configurations of property rights: state, communal, and private property. Within a family, many goods are in effect communally owned. But when the number of communal members exceeds normal family size, as happens in tribes and communes, serious and intractable problems arise. It becomes costly to police the activities of the members, all of whom are entitled to their share of the total product of the community, whether they work or not. This is the free-rider problem, and it is the most important institutional reason tribes and communes cannot rise above subsistence level (except in special circumstances, such as monasteries).
State ownership, as we saw in the Soviet Union, has its own problems. For these reasons, private property is the only institutional arrangement that will permit a society to be productive, peaceful, free, and just. The free-rider problem was plainly demonstrated at Plymouth Colony in 1620, when the Mayflower arrived in the New World. Contrary to the Pilgrims’ wishes, their initial ownership arrangement was communal property.
Desiring to practice their religion as they wished, the Pilgrims emigrated in 1609 from England to Holland, then the only country in Europe that permitted freedom of worship. They found life in Holland to be in many respects satisfactory. But war with Spain was a constant threat, and the Pilgrims did not want their children to grow up Dutch. They longed to start afresh in “those vast and unpeopled countries of America,” as William Bradford would later write in his history, Of Plymouth Plantation. There, they could look forward to propagating and advancing “the gospel of the kingdom of Christ.”
Thirty years old when he arrived in the New World, Bradford became the second governor of Plymouth (the first died within weeks of the Mayflower’s arrival) and the most important figure in the early years of the colony. He recorded in his history the key passage on property relations in Plymouth and the way in which they were changed. His is the only surviving account of these matters.
DRIVING A HARD BARGAIN
The Pilgrims knew about the early disasters at Jamestown, but the more adventurous among them were willing to hazard the Atlantic anyway. First, however, they sent two emissaries, John Carver and Robert Cushman, from Leyden to London to seek permission to found a plantation. This was granted, but finding investors was a problem. Eventually Carver and Cushman found an investment syndicate headed by a London ironmonger named Thomas Weston. Weston and his fifty-odd investors were taking a big risk in putting up the equivalent of hundreds of thousands of dollars in today’s money. The big losses in Jamestown had scared off most “venture capital” in London.
Those waiting for news in Leyden were concerned that their agents in London would, in their eagerness to find investors, agree to unfavorable terms. Carver and Cushman were admonished “not to exceed the bounds of your commission.” They were particularly enjoined not to “entangle yourselves and us in any such unreasonable [conditions as that] the merchants should have the half of men’s houses and lands at the dividend.”
Eventually, however, Carver and Cushman did accept terms stipulating that at the end of seven years everything would be divided equally between investors and colonists. Some historians claim that those who came over on the Mayflower were exploited by capitalists. In a sense, they were. But of course they came voluntarily.
The colonists hoped that the houses they built would be exempt from the division of wealth at the end of seven years; in addition, they sought two days a week in which to work on their own “particular” plots (much as collective farmers later had their own private plots in the Soviet Union). The Pilgrims would thereby avoid servitude. But the investors refused to allow these loopholes, undoubtedly worried that if the Pilgrims—three thousand miles away and beyond the reach of supervision—owned their own houses and plots, the investors would find it difficult to collect their due. How could they be sure that the faraway colonists would spend their days working for the company if they were allowed to become private owners? With such an arrangement, rational colonists would work little on “company time,” reserving their best efforts for their own gardens and houses. Such private wealth would be exempt when the shareholders were paid off. Only by insisting that all accumulated wealth was to be “common wealth,” or placed in a common pool, could the investors feel reassured that the colonists would be working to benefit everyone, including themselves.
The investors unquestionably had profit in mind when they insisted on common property. The Pilgrims went along because they had little choice.
Those waiting in Leyden objected to this arrangement. If the Pilgrims were not permitted private dwellings, “the building of good and fair houses” would be discouraged, they wrote back to London. Robert Cushman was thus caught in a cross-fire between profit-seeking investors in London and his worried Leyden brethren, who accused him of “making conditions fitter for thieves and bondslaves than honest men.”
Cushman responded with an artful case for common ownership: “Our purpose is to build for the present such houses as, if need be, we may with little grief set afire and run away by the light. Our riches shall not be in pomp but in strength; if God send us riches we will employ them to provide more men, ships, munition, etc.”
Common ownership would also “foster communion” among the Pilgrims, he thought (wrongly). Having held discussions with the investors, who seem to have been unyielding, Cushman wanted to close the deal. So he tried to persuade his brethren not to worry about the property arrangements. Those still in Leyden remained unconvinced and unreconciled to the terms, but there was little they could do. Many had already sold their property in Holland and so had no bargaining power.
It is worth emphasizing all this because it is sometimes said that the Pilgrims in Massachusetts established a colony with common property in emulation of the early Christians. Not so. It is true that their agent Cushman used arguments that were calculated to appeal to Christians—in particular warning them against the perils of prosperity—in order to justify his acceptance of unpopular terms. No doubt he felt that a bad deal was better than none. But the investors themselves unquestionably had profit in mind when they insisted on common property. The Pilgrims went along because they had little choice.
The Pilgrims may have been “exploited,” but a greater source of hardship was the harsh environment of the North American continent. This needs to be stressed, given the tendency to regard the wealth of the United States as a product of “abundant natural resources” and the equally erroneous association of the Mayflower and those who arrived in it with the idea of privilege.
THE COMMUNAL EXPERIMENT
The Mayflower arrived at Cape Cod in November 1620 with 101 people on board. About half of them died within the first few months, probably of scurvy, pneumonia, or malnutrition. It is not easy for us to grasp the hardships that the first settlers in this country experienced, even in New England, where the native American Indians were relatively friendly.
By the spring of 1623, the population of Plymouth can have been no larger than 150. But the colony was still barely able to feed itself, and little cargo was returning for the investors in England. On one occasion newcomers found that there was no bread at all, only fish or a piece of lobster and water. “So they began to think how they might raise as much corn as they could, and obtain a better crop than they had done, that they might not still thus languish in misery,” Bradford wrote in his key passage on property.
Having tried what Bradford called the “common course and condition”—the communal stewardship of the land demanded of them by their investors—Bradford reports that the community was afflicted by an unwillingness to work, by confusion and discontent, by a loss of mutual respect, and by a prevailing sense of slavery and injustice. And this among “godly and sober men.” In short, the experiment was a failure that was endangering the health of the colony.
Historian George Langdon argues that the condition of early Plymouth was not “communism” but “an extreme form of exploitative capitalism in which all the fruits of men’s labor were shipped across the seas.” In this he echoes Samuel Eliot Morison, who claims that “it was not communism . . . but a very degrading and onerous slavery to the English capitalists that was somewhat softened.” Notice that this does not agree with the dissension that Bradford reports, however. It was between the colonists themselves that the conflicts arose, not between the colonists and the investors in London. Morison and Langdon conflate two separate problems. On the one hand, it is true that the colonists did feel “exploited” by the investors because they were eventually expected to surrender to them an undue portion of the wealth they were trying to create. It is as though they felt that they were being “taxed” too highly by their investors—at a 50 percent rate, in fact.
But there was another problem, separate from the “tax” burden. Bradford’s comments make it clear that common ownership demoralized the community far more than the tax. It was not Pilgrims laboring for investors that caused so much distress but Pilgrims laboring for other Pilgrims. Common property gave rise to internecine conflicts that were much more serious than the transatlantic ones. The industrious (in Plymouth) were forced to subsidize the slackers (in Plymouth). The strong “had no more in division of victuals and clothes” than the weak. The older men felt it disrespectful to be “equalized in labours” with the younger men.
This suggests that a form of communism was practiced at Plymouth in 1621 and 1622. No doubt this equalization of tasks was thought (at first) the only fair way to solve the problem of who should do what work in a community where there was to be no individual property: If everyone were to end up with an equal share of the property at the end of seven years, everyone should presumably do the same work throughout those seven years. The problem that inevitably arose was the formidable one of policing this division of labor: How to deal with those who did not pull their weight?
The Pilgrims had encountered the free-rider problem. Under the arrangement of communal property one might reasonably suspect that any additional effort might merely substitute for the lack of industry of others. And these “others” might well be able-bodied, too, but content to take advantage of the communal ownership by contributing less than their fair share. As we shall see, it is difficult to solve this problem without dividing property into individual or family-sized units. And this was the course of action that William Bradford wisely took.
PROPERTY IS PRIVATIZED
Bradford’s history of the colony records the decision:
At length, after much debate of things, the Governor (with the advice of the chiefest amongst them) gave way that they should set corn every man for his own particular, and in that regard trust to themselves; in all other things to go in the general way as before. And so assigned to every family a parcel of land, according to the proportion of their number.
So the land they worked was converted into private property, which brought “very good success.” The colonists immediately became responsible for their own actions (and those of their immediate families), not for the actions of the whole community. Bradford also suggests in his history that more than land was privatized.
The system became self-policing. Knowing that the fruits of his labor would benefit his own family and dependents, the head of each household was given an incentive to work harder. He could know that his additional efforts would help specific people who depended on him. In short, the division of property established a proportion or “ratio” between act and consequence. Human action is deprived of rationality without it, and work will decline sharply as a result.
Under communal land stewardship, Bradford reports, the community was afflicted by an unwillingness to work, by confusion and discontent, by a loss of mutual respect, and by a prevailing sense of slavery and injustice.
William Bradford died in 1657, having been reelected governor nearly every year. Among his books, according to the inventory of his estate, was Jean Bodin’s Six Books of a Commonweale, a work that criticized the utopianism of Plato’s Republic. In Plato’s ideal realm, private property would be abolished or curtailed and most inhabitants reduced to slavery, supervised by high-minded, ascetic guardians. Bodin said that communal property was “the mother of contention and discord” and that a commonwealth based on it would perish because “nothing can be public where nothing is private.”
Bradford felt that, in retrospect, his real-life experience of building a new society at Plymouth had confirmed Bodin’s judgment. Property in Plymouth was further privatized in the years ahead. The housing and later the cattle were assigned to separate families, and provision was made for the inheritance of wealth. The colony flourished. Plymouth Colony was absorbed into the Commonwealth of Massachusetts, and in the prosperous years that lay ahead, nothing more was heard of “the common course and condition.”
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Economist Russ Roberts writing at CaféHayek.com, Dec. 20:
When I was younger, everyone knew that the New Deal had saved the US economy from the ravages of the Great Depression. Everyone knew that Keynes was right—look what had happened when Roosevelt implemented his ideas—the Great Depression ended! Eventually, everyone knew that story was false. The New Deal wasn't that big and the Great Depression didn't really end when the New Deal was implemented.
Now everyone knows that World War II ended the Great Depression. Of course, private consumption fell during WWII and the vaunted Keynesian multiplier seemed to only work for the defense industry. Someday, perhaps, people will understand that when a war takes over most of the industrial sector, you don't get much stimulus. And it's not hard to reduce unemployment when you force a huge chunk of the male working-age population into the army.
When the war ended, all the Keynesians predicted disaster and a horrible depression because of the cuts in government spending and men coming home from Europe and the Pacific. Well, when that didn't happen, people should have known that there isn't a simple relationship between government spending and prosperity. But somehow, people didn't learn that lesson.
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It being Thomas Friedman of course there is the fascist public-private partnership horsefeathers nonsense, but the larger point here seems relevant to me:
It’s P.Q. and C.Q. as Much as I.Q.
By THOMAS L. FRIEDMAN
Published: January 29, 2013 340 Comments
President Obama’s first term was absorbed by dealing with the Great Recession. I hope that in his second term he’ll be able to devote more attention to the Great Inflection.
Dealing with the Great Recession was largely about “Yes We Can” — about government, about what we can and must do “together” to shore up the safety nets and institutions that undergird our society and economy. Obama’s Inaugural Address was a full-throated defense of that “public” side of the unique public-private partnership that makes America great. But, if we’re to sustain the kind of public institutions and safety nets that we’re used to, it will require a lot more growth by the private side (not just more taxes), a lot more entrepreneurship, a lot more start-ups and a lot more individual risk-taking — things the president rarely speaks about. And it will all have to happen in the context of the Great Inflection.
What do I mean by the Great Inflection? I mean something very big happened in the last decade. The world went from connected to hyperconnected in a way that is impacting every job, industry and school, but was largely disguised by post-9/11 and the Great Recession. In 2004, I wrote a book, called “The World Is Flat,” about how the world was getting digitally connected so more people could compete, connect and collaborate from anywhere. When I wrote that book, Facebook, Twitter, cloud computing, LinkedIn, 4G wireless, ultra-high-speed bandwidth, big data, Skype, system-on-a-chip (SOC) circuits, iPhones, iPods, iPads and cellphone apps didn’t exist, or were in their infancy.
Today, not only do all these things exist, but, in combination, they’ve taken us from connected to hyperconnected. Now, notes Craig Mundie, one of Microsoft’s top technologists, not just elites, but virtually everyone everywhere has, or will have soon, access to a hand-held computer/cellphone, which can be activated by voice or touch, connected via the cloud to infinite applications and storage, so they can work, invent, entertain, collaborate and learn for less money than ever before. Alas, though, every boss now also has cheaper, easier, faster access to more above-average software, automation, robotics, cheap labor and cheap genius than ever before. That means the old average is over. Everyone who wants a job now must demonstrate how they can add value better than the new alternatives.
When the world gets this hyperconnected, adds Mundie, the speed with which every job and industry changes also goes into hypermode. “In the old days,” he said, “it was assumed that your educational foundation would last your whole lifetime. That is no longer true.” Because of the way every industry — from health care to manufacturing to education — is now being transformed by cheap, fast, connected computing power, the skill required for every decent job is rising as is the necessity of lifelong learning. More and more things you know and tools you use “are being made obsolete faster,” added Mundie. It’s as if every aspect of our lives is now being driven by Moore’s Law. This is exacerbating our unemployment problem.
In their terrific book, “Race Against the Machine: How the Digital Revolution Is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy,” Erik Brynjolfsson and Andrew McAfee of the Massachusetts Institute of Technology note that for the last two centuries it happened that productivity, median income and employment all tracked each other nicely. “So most economists have had this feeling that if you just boost productivity, the pie grows, and, in the long run, everything else takes care of itself,” explained Brynjolfsson in an interview. “But there is no economic law that says technological progress has to benefit everyone. It’s entirely possible for the pie to get bigger and some people to get a smaller slice.” Indeed, when the digital revolution gets so cheap, fast, connected and ubiquitous you see this in three ways, Brynjolfsson added: those with more education start to earn much more than those without it, those with the capital to buy and operate machines earn much more than those who can just offer their labor, and those with superstar skills, who can reach global markets, earn much more than those with just slightly less talent.
Put it all together, he added, and you can understand, why the Great Recession took the biggest bite out of employment but is not the only thing affecting job loss today: why we have record productivity, wealth and innovation, yet median incomes are falling, inequality is rising and high unemployment remains persistent.
How to adapt? It will require more individual initiative. We know that it will be vital to have more of the “right” education than less, that you will need to develop skills that are complementary to technology rather than ones that can be easily replaced by it and that we need everyone to be innovating new products and services to employ the people who are being liberated from routine work by automation and software. The winners won’t just be those with more I.Q. It will also be those with more P.Q. (passion quotient) and C.Q. (curiosity quotient) to leverage all the new digital tools to not just find a job, but to invent one or reinvent one, and to not just learn but to relearn for a lifetime. Government can and must help, but the president needs to explain that this won’t just be an era of “Yes We Can.” It will also be an era of “Yes You Can” and “Yes You Must.”
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Whenever I get ready to rip Friedman for his emptyness, I read closer that you already did: "the fascist public-private partnership horsefeathers nonsense".
Yes, he intermixes truth and insight in with his distortions to stay relevant.
The reason a growing economy with foundations in technological advancements does not help everyone is because we pay half the people to NOT participate in our productive economy and put ropes, weights and anchors on all the rest.
"if we’re to sustain the kind of public institutions and safety nets that we’re used to, it will require a lot more growth by the private side (not just more taxes), a lot more entrepreneurship, a lot more start-ups and a lot more individual risk-taking "
Every policy out of the current power structure is about thwarting all this and it has succeeded. As visionary Rush L famously and controversially said, I hope he fails (to kill off entrepreneurship, start-ups, individual risk-taking, and private sector growth).
"things the president rarely speaks about"
He spoke about it to Joe the Plumber. He said fuck you Joe. He said I'm going a different direction and I got bigger fish to fry. He said you are not my problem and you are not my voter.
It isn't that the President rarely speaks, it is that the President rarely listens. I continue my unrefuted contention that this Ivy-League President has not read a book on economics that was not about opposing and dismantling the world's most successful system.
"The winners won’t just be those with more I.Q. It will also be those with more P.Q. (passion quotient) and C.Q. (curiosity quotient) to leverage all the new digital tools to not just find a job, but to invent one or reinvent one, and to not just learn but to relearn for a lifetime."
This President is about taking down winners, not finding and motivating more of them. You can succeed if you want in spite of him and his government but the deck is stacked against you. It is mostly insiders only who can win now. To take private initiative you need to fight off 9 layers of government working against you and still have the time and resources left that Edison and Bell had to invent, reinvent, set up shop, mass produce, market and sell your goods. Those guys were few and far between enough. Today your first ten million need to all go toward lawyers, lobbyists and accountants, good luck paying enough software engineers to stay ahead of your foreign competition before revenues come in. Who has that kind of money? Far less than one percent of us.
This doesn't get solved by pressing Obama to do more. Friedman thinks Obama could change a couple words, just say yes you can, or whip inflation now, lol. Good f'ing grief. If he thinks America could stand to slant a little more toward private initiative, how about taking that unpopular NYT stand PRE-election?!
(My frustrations are aimed at the author, not the poster. :wink: )
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http://thomasfriedmanopedgenerator.com/Obama%27s+Moment+3f2015#
http://thomasfriedmanopedgenerator.com/The+World+is+Flatter+1783c5
http://thomasfriedmanopedgenerator.com/Time+for+Leadership+b34dc5
Now someone needs to set one up for Wesbury.
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Doug:
All true, well and good, but what do you make of his point about a fundamental economic change due to "the great inflection"?
GM:
Do I have it right that all of those were published today? :? Is the man really plagiarizing himself (an oxymoron I know) that flagrantly? :?
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Doug:
All true, well and good, but what do you make of his point about a fundamental economic change due to "the great inflection"?
GM:
Do I have it right that all of those were published today? :? Is the man really plagiarizing himself (an oxymoron I know) that flagrantly? :?
Someone appears to have written a program that generates Tom Friedman OpEds. It just grabs chunks of hack phrases from TF and mixes them together, much like the original.
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"what do you make of his point about a fundamental economic change due to "the great inflection"?"
Like GM says, Friedman from the old neighborhood sees very profound things in his own thinking and writing. The inflection point is where the curve begins to turn a different direction, where concavity changes sign. From or to where did it turn?
What is the fundamental economic change due to the great inflection?
He is saying (I think) that because of globalization, technological advancement and hyper connectedness that a few can get extremely wealthy (Bill Gates, Apple, Qualcomm, google, etc) because when you invent something you can sell it to a zillion people instead of a thousand like a local butcher or a million like a good regional supplier. The corollary is that the rest of us get left behind and for that we get no evidence.
The middle class did not get left behind in the last 2-3 expansions, that was false math and measurements exposed recently. If people around me get richer in a global market and I mow lawns, paint houses or remodel kitchens, then more people around me can better afford to do those things and pay well. It also means that if I want to follow them I can find niches and do apps that run on google, apple, microsoft or innovate with other product and service ideas that a richer world can now better afford to buy.
"In 2004, I wrote a book, called “The World Is Flat,” (Freidman said for the five thousandth time) about how the world was getting digitally connected so more people could compete, connect and collaborate from anywhere". - Nothing in that or his other random sentences about the world changing more quickly leads to his big conclusion: "This is exacerbating our unemployment problem."
Obama says the ATM caused unemployment too and it is complete bunk.
Freidman you blockhead (I reply with all due respect), the unemployment is caused by the policy war against business, investment, expansion and innovation that you seem to support and is caused by nothing else. Are things less connected, technologized or globalized in Singapore at 1.9% unemployment and at less than half the rate of taxation, with a culture that says you work instead of ride? These amazing developments help us to employ people; they don't keep us from employing people. Where in his empty logic string did he even think he made that case?
These super successful, hyper-connected companies, here it is 3M for example, turn down business opportunities everyday that don't meet their corporate requirements for expected IRR, internal rate or return, leaving millions to be made by others because the big guys can only think in billions. Again, I just don't follow how everything getting more productive leads to bad economic outcomes. It is our political, policy choices, stupid.
There is an emerging new middle class numbering in the billions in India, China and Brazil wanting to buy your products. You will need an eBay and Paypal account to sell there. That takes 10 minutes and costs nothing. Crafty's seminars the world over are a great example of connectness leading to business opportunities. When I started in export you needed telex, hundreds of dollars an hour for phone service, plus export licenses, letters of credit, sight drafts and translators. Good grief, it's not getting harder to make a living, there are just too many people taking from your income, and when did you NOT have to keep your skills up with the times to be considered a professional of any kind?
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"Someone appears to have written a program that generates Tom Friedman OpEds. It just grabs chunks of hack phrases from TF and mixes them together, much like the original."
Oh. Duh. That is very, very funny.
Doug:
I get your point but at the same time I confess to having a similar notion to TF's e.g. when I read of outsourcing reading depositions to lawyers in India.
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Doug:
I get your point but at the same time I confess to having a similar notion to TF's e.g. when I read of outsourcing reading depositions to lawyers in India.
Global trade increases employment at both ends just like local trade does. Comparative advantage. As Rbt Bartley, former WSJ editor put it, it is both a) beneficial and b) inevitable. If you don't like a) see b). Examples, the traders of the exploring eras, Denmark, Netherlands etc. increased wealth. See Hong Kong. See Germany. West Germany I think used to be the leading exporter in the world. Why wasn't it East Germany with lower wagers? Germany even after absorbing the East is still the strongest economy in Europe. Dubai in the Middle East. The alternative I used to call the Albania plan. I forget the details, let's say a hundred years of closed borders and a dollar and per capita GDP the worst around. See North Korea, their not outsoursing jobs to China or anyone else and have no wealth. How to convince people who aren't convinced of this is another matter. Singapore, already mentioned, perfect example. They aren't lower wage than Vietnam, India, China or anyone around them, but they are a free trade port. 1.9% unemployment. Show me the exception, the free trade port that is losing out to cheap labor.
If you limit a study to one thing at a time, let's say hand stenographers or 8-track tape manufacturing, then maybe we lose. We do not lose with open trade in a dynamic economy, not with India, nor do they lose trading with us. It is by definition mutually beneficial on every consensual transaction.
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I get all that, Ricardo's benefits of comparative advantage and all that. I get that it is inevitable too. I'm just noting that in the process a lot of people here in the US may wind up quite a bit worse because they now have to compete with low wage labor and/or high skill labor because previous barriers to entry have been smashed.
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Forced to adapt in an open, dynamic economy, but not worse off. Actually worse off when artificially sheltered from real competition. It's not a fixed pie and someone else working does not take from yours/ours. Someone else working means one more potential customer, supplier or employer
When able minded people fail to adapt it is because we pay them not to. Then the problem is with that program, not the increased comnectedness.
Freidman showed no mstj, no graph and no inflectiom point. All fiction and cliche.
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No math, that should read and JMHO.
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More competition equals lower prices for one's labor/services. Of course the low wage worker from elsewhere benefits, but exactly how does a lawyer who has to compete with Indian lawyers for reading depositions benefit? Yes the partners of the firm benefit, and to the extent that the cost to the clients decreases, they benefit, but my point at the moment is addressed to, for example, the young associates in the firm who have lost this work.
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"More competition equals lower prices for one's labor/services."
Yes, for the stagnant supplier who refuses to change, improve, expand.
"Of course the low wage worker from elsewhere benefits, but exactly how does a lawyer who has to compete with Indian lawyers for reading depositions benefit? Yes the partners of the firm benefit, and to the extent that the cost to the clients decreases, they benefit, but my point at the moment is addressed to, for example, the young associates in the firm who have lost this work."
I wrote that the able-minded people in a dynamic economy will adapt - and you bring me lawyers helping people sue and be sued as the test of that? (so many emoticons...) With sarcasm, how could they possibly change or grow in the face of low cost competition? They are only lawyers capable of one thing. Reminds me of the Michael Moore movie out of Flint Michigan where no one has done anything else but work (overpaid) for General Motors for four generations. There is nothing else they could do. (Especially if we pay them to do nothing else.)
How about put energy into something that has a bright future instead of dying one? If that part of their job wasn't going away today, it was going away tomorrow. I gave the example of 8 track tape manufacturers. Disruption was going to occur, what then? Move on, move forward, innovate. Use these new tools to YOUR advantage.
Let's say the young lawyers were getting $200 an hour for a task, reading the deposition, that can be done just as well by lawyers(?) not even in the room, in the country...
It is beyond my pay scale to write everyone's innovation by here are a few ideas. Let's start with acknowledging that they didn't deserve that money if they weren't adding value and were so easily replaced. They could do what other professionals have to do, sell the idea that their service is worth it, their knowledge and experience is unique and valuable.
Lawyer friends of mine have taken hot topics of the moment, asbestoes and mold defense are examples, they assembled the research, wrote the papers, set up the seminars across the country that other lawyers need to be up to speed, for a considerable fee I presume. A room full of paid seminar attendees pays more and provides more value than one lawyer taking one deposition.
Innovation in every industry is possible, or resources move elsewhere - to their most productive use.
Lawyers, like people, can do things other than law. (A worldwide martial arts operation comes to mind.) Back to the others, take the years of accumulated $200 shakedowns and invest in a new idea, hire people, build a product, offer a service that is in demand and can't be done just as well someone less qualified 8000 miles away.
I did not say (or mean to say) a dynamic economic has no dislocations in the short run. I said everyone is better off with the competition and with the dynamic aspect of it. For the lawyer, maybe he loses a low end task but gains more clients, bigger clients, from the increased success from Freidmanesque connectnedness running wild in other sectors.
Back to inevitable, what is the alternative to letting the low cost competitor compete and force the high lost provider to adapt and innovate. Legislate away the freedom of the client to transact a better deal and enable the high cost supplier to stagnate, to collect those fees another year? Then look at those protected economies putting up those barriers and tell me they are more prosperous with lower unemployment than the free zones I mentioned. They aren't.
Does it mean the people don't have to constantly innovate and sharpen their skills, change and improve their product or service in a dynamic situation, and constantly question and tweak their business plan to survive and prosper? No, it means precisely that they must, and that it is a very good thing.
(I'm enjoying this Crafty, but on vacation, won't be very timely in a back and forth.)
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And I won't be timely right now :lol:
Here's a completely unrelated piece from the Economist
The next supermodel
Politicians from both right and left could learn from the Nordic countries
Feb 2nd 2013 |From the print edition
SMALLISH countries are often in the vanguard when it comes to reforming government. In the 1980s Britain was out in the lead, thanks to Thatcherism and privatisation. Tiny Singapore has long been a role model for many reformers. Now the Nordic countries are likely to assume a similar role.
That is partly because the four main Nordics—Sweden, Denmark, Norway and Finland—are doing rather well. If you had to be reborn anywhere in the world as a person with average talents and income, you would want to be a Viking. The Nordics cluster at the top of league tables of everything from economic competitiveness to social health to happiness. They have avoided both southern Europe’s economic sclerosis and America’s extreme inequality. Development theorists have taken to calling successful modernisation “getting to Denmark”. Meanwhile a region that was once synonymous with do-it-yourself furniture and Abba has even become a cultural haven, home to “The Killing”, Noma and “Angry Birds”.
In this section
The next supermodel
Let them stay, let them in
Tahrir squandered
Shake ’em up, Mr Carney
Guilty as charged
Reprints
Related topics
United States
Norway
Europe
Denmark
Nordic countries
As our special report this week explains, some of this is down to lucky timing: the Nordics cleverly managed to have their debt crisis in the 1990s. But the second reason why the Nordic model is in vogue is more interesting. To politicians around the world—especially in the debt-ridden West—they offer a blueprint of how to reform the public sector, making the state far more efficient and responsive.
From Pippi Longstocking to private schools
The idea of lean Nordic government will come as a shock both to French leftists who dream of socialist Scandinavia and to American conservatives who fear that Barack Obama is bent on “Swedenisation”. They are out of date. In the 1970s and 1980s the Nordics were indeed tax-and-spend countries. Sweden’s public spending reached 67% of GDP in 1993. Astrid Lindgren, the inventor of Pippi Longstocking, was forced to pay more than 100% of her income in taxes. But tax-and-spend did not work: Sweden fell from being the fourth-richest country in the world in 1970 to the 14th in 1993.
Since then the Nordics have changed course—mainly to the right. Government’s share of GDP in Sweden, which has dropped by around 18 percentage points, is lower than France’s and could soon be lower than Britain’s. Taxes have been cut: the corporate rate is 22%, far lower than America’s. The Nordics have focused on balancing the books. While Mr Obama and Congress dither over entitlement reform, Sweden has reformed its pension system (see Free exchange). Its budget deficit is 0.3% of GDP; America’s is 7%.
On public services the Nordics have been similarly pragmatic. So long as public services work, they do not mind who provides them. Denmark and Norway allow private firms to run public hospitals. Sweden has a universal system of school vouchers, with private for-profit schools competing with public schools. Denmark also has vouchers—but ones that you can top up. When it comes to choice, Milton Friedman would be more at home in Stockholm than in Washington, DC.
All Western politicians claim to promote transparency and technology. The Nordics can do so with more justification than most. The performance of all schools and hospitals is measured. Governments are forced to operate in the harsh light of day: Sweden gives everyone access to official records. Politicians are vilified if they get off their bicycles and into official limousines. The home of Skype and Spotify is also a leader in e-government: you can pay your taxes with an SMS message.
This may sound like enhanced Thatcherism, but the Nordics also offer something for the progressive left by proving that it is possible to combine competitive capitalism with a large state: they employ 30% of their workforce in the public sector, compared with an OECD average of 15%. They are stout free-traders who resist the temptation to intervene even to protect iconic companies: Sweden let Saab go bankrupt and Volvo is now owned by China’s Geeley. But they also focus on the long term—most obviously through Norway’s $600 billion sovereign-wealth fund—and they look for ways to temper capitalism’s harsher effects. Denmark, for instance, has a system of “flexicurity” that makes it easier for employers to sack people but provides support and training for the unemployed, and Finland organises venture-capital networks.
The sour part of the smorgasbord
The new Nordic model is not perfect. Public spending as a proportion of GDP in these countries is still higher than this newspaper would like, or indeed than will be sustainable. Their levels of taxation still encourage entrepreneurs to move abroad: London is full of clever young Swedes. Too many people—especially immigrants—live off benefits. The pressures that have forced their governments to cut spending, such as growing global competition, will force more change. The Nordics are bloated compared with Singapore, and they have not focused enough on means-testing benefits.
All the same, ever more countries should look to the Nordics. Western countries will hit the limits of big government, as Sweden did. When Angela Merkel worries that the European Union has 7% of the world’s population but half of its social spending, the Nordics are part of the answer. They also show that EU countries can be genuine economic successes. And as the Asians introduce welfare states they too will look to the Nordics: Norway is a particular focus of the Chinese.
The main lesson to learn from the Nordics is not ideological but practical. The state is popular not because it is big but because it works. A Swede pays tax more willingly than a Californian because he gets decent schools and free health care. The Nordics have pushed far-reaching reforms past unions and business lobbies. The proof is there. You can inject market mechanisms into the welfare state to sharpen its performance. You can put entitlement programmes on sound foundations to avoid beggaring future generations. But you need to be willing to root out corruption and vested interests. And you must be ready to abandon tired orthodoxies of the left and right and forage for good ideas across the political spectrum. The world will be studying the Nordic model for years to come.
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http://www.youngresearch.com/researchandanalysis/economy-researchandanalysis/king-krugman-if-paul-were-king/?awt_l=PWy8k&awt_m=3bpfIfxtU4zlu1V
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http://www.youngresearch.com/researchandanalysis/economy-researchandanalysis/king-krugman-if-paul-were-king/?awt_l=PWy8k&awt_m=3bpfIfxtU4zlu1V
Or, we can study China's great leap forward to see how that plays out in the real world.
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Consider Mises:
"It would be a serious blunder to neglect the fact that inflation [i.e. an increase in the money supply- Tom] also generates forces which tend toward capital consumption. One of its consequences is that it falsifies economic calculation and accounting. It produces the phenomenon of imaginary or apparent profits.... If the rise in the prices of stocks and real estate is considered as a gain, the illusion is no less manifest. What make people believe that inflation results in general prosperity are precisely such illusory gains. They feel lucky and become open-handed in spending and enjoying life. They embellish their homes, they build new mansions and patronize the entertainment business. In spending apparent gains, the fanciful result of false reckoning, they are consuming capital. It does not matter who these spenders are. They may be businessmen or stock jobbers. They may be wage earners.... "
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Consider Mises:
"It would be a serious blunder to neglect the fact that inflation [i.e. an increase in the money supply- Tom] also generates forces which tend toward capital consumption. One of its consequences is that it falsifies economic calculation and accounting. It produces the phenomenon of imaginary or apparent profits.... If the rise in the prices of stocks and real estate is considered as a gain, the illusion is no less manifest. What make people believe that inflation results in general prosperity are precisely such illusory gains. They feel lucky and become open-handed in spending and enjoying life. They embellish their homes, they build new mansions and patronize the entertainment business. In spending apparent gains, the fanciful result of false reckoning, they are consuming capital. It does not matter who these spenders are. They may be businessmen or stock jobbers. They may be wage earners.... "
Funny how the more things change, the more they stay the same.
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Another way of explaining why the theory of "a Living Constitution" is an error.
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Mises: “Friedman Is Not an Economist”
By Joseph Salerno
Monday,
May 13th, 2013
Economist Harry Veryser of the University of Detroit-Mercy and author of It Didn’t Have to Be This Way shared the following recollection:
I remember being in a conference with Ludwig von Mises in the sixties at FEE [the Foundation for Economic Education]. And I asked him about Friedman and economics. And he waved his hand in the typical Austrian way and he said: “Friedman is not an economist. He’s a statistician.”
Now in describing Friedman in these terms, Mises was not name calling but had a very specific meaning in mind.For Mises (pp. 247-48) a “statistician” was someone “who aim at discovering economic laws from the study of economic experience.” But Mises maintained that statistics is not a method useful for research in economic theory because it deals with historical facts. According to Mises:
Statistics is a method for the presentation of historical facts concerning prices and other relevant data of human action. It is not economics and cannot produce economic theorems and theories. The statistics of prices is economic history. The insight that, ceteris paribus, an increase in demand must result in an increase in prices is not derived from experience. Nobody ever was or ever will be in a position to observe a change in one of the market data ceteris paribus. There is no such thing as quantitative economics. All economic quantities we know about are data of economic history.
Indeed in his magnum opus, A Monetary History of the United States, co-authored with Anna Schwartz, Friedman confirmed the accuracy of Mises’s characterization. In their Preface (p. xxii), Friedman and Schwartz stated that their aim in writing the book was “to provide a prologue and a background for a statistical analysis of the secular and cyclical behavior of money in the United States and to exclude any material not relevant to that purpose.” In the final chapter, entitled “A Summing Up,” the authors (Friedman and Schwartz, p. 676) listed three propositions regarding money that they discovered to be “common” to U.S. monetary history and concluded, “These common elements of monetary experience can be expected to characterize our future as they have our past.” It would be difficult to find a better expression of the statistician’s view of the social world.
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The debt to pleasure
A Nobel prizewinner argues for an overhaul of the theory of consumer choice
Apr 27th 2013 |From the print edition
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“SOVEREIGN in tastes, steely-eyed and point-on in perception of risk, and relentless in maximisation of happiness.” This was Daniel McFadden’s memorable summation, in 2006, of the idea of Everyman held by economists. That this description is unlike any real person was Mr McFadden’s point. The Nobel prizewinning economist at the University of California, Berkeley, wryly termed homo economicus “a rare species”. In his latest paper* he outlines a “new science of pleasure”, in which he argues that economics should draw much more heavily on fields such as psychology, neuroscience and anthropology. He wants economists to accept that evidence from other disciplines does not just explain those bits of Behaviour that do not fit the standard models. Rather, what economists consider anomalous is the norm. Homo economicus, not his fallible counterpart, is the oddity.
To take one example, the “people” in economic models have fixed preferences, which are taken as given. Yet a large body of research from cognitive psychology shows that preferences are in fact rather fluid. People value mundane things much more highly when they think of them as somehow “their own”: they insist on a much higher price for a coffee cup they think of as theirs, for instance, than for an identical one that isn’t. This “endowment effect” means that people hold on to shares well past the point where it makes sense to sell them. Cognitive scientists have also found that people dislike losing something much more than they like gaining the same amount. Such “loss aversion” can explain why people often pick insurance policies with lower deductible charges even when they are more expensive. At the moment of an accident a deductible feels like a loss, whereas all those premium payments are part of the status quo.
Another area where orthodox economics finds itself at sea is the role of memory and experience in determining choices. Recollection of a painful or pleasurable experience is dominated by how people felt at the peak and the end of the episode. In a 1996 experiment Donald Redelmeier and Daniel Kahneman, two psychologists, showed that deliberately adding a burst of pain at the end of a colonoscopy that was of lower intensity than the peak made patients think back on the experience more favourably. Unlike homo economicus, real people are strongly influenced by such things as the order in which they see options and what happened right before they made a choice. Incorporating these findings into models of consumer Behaviour should improve their power to predict everything from which loans people choose to which colleges they apply for.
Trust is something economists already incorporate into their models. But trust turns out to be not just a function of history and interactions, as dismal scientists tend to think, but also a product of brain chemistry. Pumping people with oxytocin, the so-called “love hormone”, has been found to make them much more generous in games where they have to decide how much of their money to entrust to another person who has no real incentive to return any of it. Sovereign, indeed.
Much of this may be alien to modern-day economists, but it is in line with the conception that other disciplines have of human decision-making. Psychologists have long known that people’s choices and preferences are influenced by others. Biologists have a much clearer understanding of altruism and kindness, whether to kin or strangers, than economists, who typically emphasise the dogged pursuit of self-interest. This way of thinking would also have been recognisable to their intellectual forefathers. Adam Smith wrote extensively about the central role of altruism and regard for others as motivators of human Behaviour. The idea of loss aversion would have made sense to Jeremy Bentham, the founder of utilitarianism: he spoke of increased pleasure and reduced pain as two distinct sources of happiness.
Mr McFadden believes that economists need to do things differently if they are truly to understand how people make decisions. Manipulating brain activity is one way of delving into where economic choices really come from. Analysing the information people get through social networks would help them understand the role of influence and identity in decision-making.
Such tools have implications for policy. Plenty of poor people in America are wary of programmes like the Earned Income Tax Credit (EITC) because the idea of getting a handout from the government reinforces a sense of helplessness. Dignity is not something mainstream economics has much truck with. But creating a sense of dignity turns out to be a powerful way of affecting decisions. One study by Crystal Hall, Jiaying Zhao and Eldar Shafir, a trio of psychologists, found that getting poor people in a soup kitchen to recall a time when they felt “successful and proud” made them almost twice as likely to accept leaflets that told them how to get an EITC refund than members of another group who were merely asked about the last meal they had eaten.
A nudge and a think
Taking the path Mr McFadden urges might also lead economists to reassess some articles of faith. Economists tend to think that more choice is good. Yet people with many options sometimes fail to make any choice at all: think of workers who prefer their employers to put them by “default” into pension plans at preset contribution rates. Explicitly modelling the process of making a choice might prompt economists to take a more ambiguous view of an abundance of choices. It might also make them more sceptical of “revealed preference”, the idea that a person’s valuation of different options can be deduced from his actions. This is undoubtedly messier than standard economics. So is real life.
* “The New Science of Pleasure”, NBER Working Paper No. 18687, February 2013
http://www.economist.com/news/finance-and-economics/21576645-nobel-prizewinner-argues-overhaul-theory-consumer-choice
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I'm not really sure WTF this guy is talking about, but it seems really learned. Can someone break it down for me?
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Nietzsche’s Marginal Children: On Friedrich Hayek
How did the conservative ideas of Friedrich Hayek and the Austrian school become our economic reality? By turning the market into the realm of great politics and morals.
Corey Robin
In the last half-century of American politics, conservatism has hardened around the defense of economic privilege and rule. Whether it’s the libertarianism of the GOP or the neoliberalism of the Democrats, that defense has enabled an upward redistribution of rights and a downward redistribution of duties. The 1 percent possesses more than wealth and political influence; it wields direct and personal power over men and women. Capital governs labor, telling workers what to say, how to vote and when to pee. It has all the substance of noblesse and none of the style of oblige. That many of its most vocal defenders believe Barack Obama to be their mortal enemy—a socialist, no less—is a testament less to the reality about which they speak than to the resonance of the vocabulary they deploy.
The Nobel Prize–winning economist Friedrich Hayek is the leading theoretician of this movement, formulating the most genuinely political theory of capitalism on the right we’ve ever seen. The theory does not imagine a shift from government to the individual, as is often claimed by conservatives; nor does it imagine a simple shift from the state to the market or from society to the atomized self, as is sometimes claimed by the left. Rather, it recasts our understanding of politics and where it might be found. This may explain why the University of Chicago chose to reissue Hayek’s The Constitution of Liberty two years ago after the fiftieth anniversary of its publication. Like The Road to Serfdom (1944), which a swooning Glenn Beck catapulted to the bestseller list in 2010, The Constitution of Liberty is a text, as its publisher says, of “our present moment.â€
But to understand that text and its influence, it’s necessary to turn away from contemporary America to fin de siècle Vienna. The seedbed of Hayek’s arguments is the half-century between the “marginal revolution,†which changed the field of economics in the late nineteenth century, and the collapse of the Habsburg monarchy in 1918. It is by now a commonplace of European cultural history that a dying Austro-Hungarian Empire gave birth to modernism, psychoanalysis and fascism. Yet from the vortex of Vienna came not only Wittgenstein, Freud and Hitler but also Hayek, who was born and educated in the city, and the Austrian school of economics.Â
Friedrich Nietzsche figures critically in this story, less as an influence than a diagnostician. This will strike some as an improbable claim: Wasn’t Nietzsche contemptuous of capitalists, capitalism and economics? Yes, he was, and for all his reading in political economy, he never wrote a treatise on politics or economics. And despite the long shadow he cast over the Viennese avant-garde, he is hardly ever cited by the economists of the Austrian school.
Yet no one understood better than Nietzsche the social and cultural forces that would shape the Austrians: the demise of an ancient ruling class; the raising of the labor question by trade unions and socialist parties; the inability of an ascendant bourgeoisie to crush or contain democracy in the streets; the need for a new ruling class in an age of mass politics. The relationship between Nietzsche and the free-market right—which has been seeking to put labor back in its box since the nineteenth century, and now, with the help of the neoliberal left, has succeeded—is thus one of elective affinity rather than direct influence, at the level of idiom rather than policy.
“One day,†Nietzsche wrote in Ecce Homo, “my name will be associated with the memory of something tremendous, a crisis without equal on earth, the most profound collision of conscience.†It is one of the ironies of intellectual history that the terms of the collision can best be seen in the rise of a discourse that Nietzsche, in all likelihood, would have despised.
* * *
In 1869, Nietzsche was appointed professor of classical philology at Basel University. Like most junior faculty, he was bedeviled by meager wages and bore major responsibilities, such as teaching fourteen hours a week, Monday through Friday, beginning at 7 am. He also sat on multiple committees and covered for senior colleagues who couldn’t make their classes. He lectured to the public on behalf of the university. He dragged himself to dinner parties. Yet within three years he managed to complete The Birth of Tragedy, a minor masterwork of modern literature, which he dedicated to his close friend and “sublime predecessor†Richard Wagner.Â
One chapter, however, he withheld from publication. In 1872, Nietzsche was invited to spend the Christmas holidays with Wagner and his wife Cosima, but sensing a potential rift with the composer, he begged off and sent a gift instead. He bundled “The Greek State†with four other essays, slapped a title onto a cover page (Five Prefaces to Five Unwritten Books), and mailed the leather-bound text to Cosima as a birthday present. Richard was offended; Cosima, unimpressed. “Prof. Nietzsche’s manuscript does not restore our spirits,†she sniffed in her diary.Â
Though presented as a sop to a fraying friendship, “The Greek State†reflects the larger European crisis of war and revolution that had begun in 1789 and would come to an end only in 1945. More immediately, it bears the stamp of the Franco-Prussian War, which had broken out in 1870, and the Paris Commune, which was declared the following year.Â
Initially ambivalent about the war, Nietzsche quickly became a partisan of the German cause. “It’s about our culture!†he wrote to his mother. “And for that no sacrifice is too great! This damned French tiger.†He signed up to serve as a medical orderly; Cosima tried to persuade him to stay put in Basel, recommending that he send cigarettes to the front instead. But Nietzsche was adamant. In August 1870, he left for Bavaria with his sister Elisabeth, riding the rails and singing songs. He got his training, headed to the battlefield, and in no time contracted dysentery and diphtheria. He lasted a month.Â
The war lasted for six. A half-million soldiers were killed or wounded, as were countless civilians. The preliminary peace treaty, signed in February 1871, favored the Germans and punished the French, particularly the citizens of Paris, who were forced to shoulder the burden of heavy indemnities to the Prussians. Enraged by its impositions—and a quarter-century of simmering discontent and broken promises—workers and radicals in Paris rose up and took over the city in March. Nietzsche was scandalized, his horror at the revolt inversely proportional to his exaltation over the war. Fearing that the Communards had destroyed the Louvre (they hadn’t), he wrote:
The reports of the past few days have been so awful that my state of mind is altogether intolerable. What does it mean to be a scholar in the face of such earthquakes of culture!… It is the worst day of my life.Â
In the quicksilver transmutation of a conventional war between states into a civil war between classes, Nietzsche saw a terrible alchemy of the future: “Over and above the struggle between nations the object of our terror was that international hydra-head, suddenly and so terrifyingly appearing as a sign of quite different struggles to come.â€Â
By May, the Commune had been ruthlessly put down at the cost of tens of thousands of lives—much to the delight of the Parisian aesthete-aristocrat Edmond Goncourt:Â
All is well. There has been neither compromise nor conciliation. The solution has been brutal, imposed by sheer force of arms. The solution has saved everyone from the dangers of cowardly compromise. The solution has restored its self-confidence to the Army, which has learnt in the blood of the Communards that it was still capable of fighting…a bleeding like that, by killing the rebellious part of a population, postpones the next revolution by a whole conscription.Â
Of the man who wrote these words and the literary milieu of which he was a part, Nietzsche would later say: “I know these gentlemen inside out, so well that I have really had enough of them already. One has to be more radical: fundamentally they all lack the main thing—‘la force.’ â€
* * *
The clash of these competing worlds of war and work echoes throughout “The Greek State.†Nietzsche begins by announcing that the modern era is dedicated to the “dignity of work.†Committed to “equal rights for all,†democracy elevates the worker and the slave. Their demands for justice threaten to “swamp all other ideas,†to tear “down the walls of culture.†Modernity has made a monster in the working class: a created creator (shades of Marx and Mary Shelley), it has the temerity to see itself and its labor as a work of art. Even worse, it seeks to be recognized and publicly acknowledged as such.Â
The Greeks, by contrast, saw work as a “disgrace,†because the existence it serves—the finite life that each of us lives—“has no inherent value.†Existence can be redeemed only by art, but art too is premised on work. It is made, and its maker depends on the labor of others; they take care of him and his household, freeing him from the burdens of everyday life. Inevitably, his art bears the taint of their necessity. No matter how beautiful, art cannot escape the pall of its creation. It arouses shame, for in shame “there lurks the unconscious recognition that these conditions†of work “are required for the actual goal†of art to be achieved. For that reason, the Greeks properly kept labor and the laborer hidden from view.Â
Throughout his writing life, Nietzsche was plagued by the vision of workers massing on the public stage—whether in trade unions, socialist parties or communist leagues. Almost immediately upon his arrival in Basel, the First International descended on the city to hold its fourth congress. Nietzsche was petrified. “There is nothing more terrible,†he wrote in The Birth of Tragedy, “than a class of barbaric slaves who have learned to regard their existence as an injustice, and now prepare to avenge, not only themselves, but all generations.†Several years after the International had left Basel, Nietzsche convinced himself that it was slouching toward Bayreuth in order to ruin Wagner’s festival there. And just weeks before he went mad in 1888 and disappeared forever into his own head, he wrote, “The cause of every stupidity today…lies in the existence of a labour question at all. About certain things one does not ask questions.â€
One can hear in the opening passages of “The Greek State†the pounding march not only of European workers on the move but also of black slaves in revolt. Hegel was brooding on Haiti while he worked out the master-slave dialectic in The Phenomenology of Spirit. Though generations of scholars have told us otherwise, perhaps Nietzsche had a similar engagement in mind when he wrote, “Even if it were true that the Greeks were ruined because they kept slaves, the opposite is even more certain, that we will be destroyed because we fail to keep slaves.†What theorist, after all, has ever pressed so urgently—not just in this essay but in later works as well—the claim that “slavery belongs to the essence of a cultureâ€? What theorist ever had to? Before the eighteenth century, bonded labor was an accepted fact. Now it was the subject of a roiling debate, provoking revolutions and emancipations throughout the world. Serfdom had been eliminated in Russia only a decade before—and in some German states, only a generation before Nietzsche’s birth in 1844—while Brazil would soon become the last state in the Americas to abolish slavery. An edifice of the ages had been brought down by a mere century’s vibrations; is it so implausible that Nietzsche, attuned to the vectors and velocity of decay as he was, would pause to record the earthquake and insist on taking the full measure of its effects?Â
If slavery was one condition of great art, Nietzsche continued in “The Greek State,†war and high politics were another. “Political men par excellence,†the Greeks channeled their agonistic urges into bloody conflicts between cities and less bloody conflicts within them: healthy states were built on the repression and release of these impulses. The arena for conflict created by that regimen gave “society time to germinate and turn green everywhere†and allowed “blossoms of genius†periodically to “sprout forth.†Those blossoms were not only artistic but also political. Warfare sorted society into lower and higher ranks, and from that hierarchy rose “the military genius,†whose artistry was the state itself. The real dignity of man, Nietzsche insisted, lay not in his lowly self but in the artistic and political genius his life was meant to serve and on whose behalf it was to be expended.Â
Instead of the Greek state, however, Europe had the bourgeois state; instead of aspiring to a work of art, states let markets do their work. Politics, Nietzsche complained, had become “an instrument of the stock exchange†rather than the terrain of heroism and glory. With the “specifically political impulses†of Europe so weakened—even his beloved Franco-Prussian War had not revived the spirit in the way that he had hoped—Nietzsche could only “detect dangerous signs of atrophy in the political sphere, equally worrying for art and society.†The age of aristocratic culture and high politics was at an end. All that remained was the detritus of the lower orders: the disgrace of the laborer, the paper chase of the bourgeoisie, the barreling threat of socialism. “The Paris commune,†Nietzsche would later write in his notebooks, “was perhaps no more than minor indigestion compared to what is coming.â€
Nietzsche had little, concretely, to offer as a counter-volley to democracy, whether bourgeois or socialist. Despite his appreciation of the political impulse and his studious attention to political events in Germany—from the Schleswig-Holstein crisis of the early 1860s to the imperial push of the late 1880s—he remained leery of programs, movements and platforms. The best he could muster was a vague principle: that society is “the continuing, painful birth of those exalted men of culture in whose service everything else has to consume itself,†and the state a “means of setting [that] process of society in motion and guaranteeing its unobstructed continuation.†It was left to later generations to figure out what that could mean in practice—and where it might lead. Down one path might lay fascism; down another, the free market.
* * *
Around the time—almost to the year—that Nietzsche was launching his revolution of metaphysics and morals, a trio of economists, working separately across three countries, were starting their own. It began with the publication in 1871 of Carl Menger’s Principles of Economics and William Stanley Jevons’s The Theory of Political Economy. Along with Léon Walras’s Elements of Pure Economics, which appeared three years later, these were the European faces—Austrian, English and French-Swiss—of what would come to be called the marginal revolution.
The marginalists focused less on supply and production than on the pulsing demand of consumption. The protagonist was not the landowner or the laborer, working his way through the farm, the factory or the firm; it was the universal man in the market whose signature act was to consume things. That’s how market man increased his utility: by consuming something until he reached the point where consuming one more increment of it gave him so little additional utility that he was better off consuming something else. Of such microscopic calculations at the periphery of our estate was the economy made.
Though the early marginalists helped transform economics from a humanistic branch of the moral sciences into a technical discipline of the social sciences, they were still able to command an audience and an influence all too rare in contemporary economics. Jevons spent his career as an independent scholar and professor in Manchester and London worrying about his lack of readers, but William Gladstone invited him over to discuss his work, and John Stuart Mill praised it on the floor of Parliament. Keynes tells us that “for a period of half a century, practically all elementary students both of Logic and of Political Economy in Great Britain and also in India and the Dominions were brought up on Jevons.â€Â
According to Hayek, the “immediate reception†of Menger’s Principles “can hardly be called encouraging.†Reviewers seemed not to understand it. Two students at the University of Vienna, however, did. One was Friedrich von Wieser, the other Eugen von Böhm-Bawerk, and both became legendary educators and theoreticians. Their students included Hayek; Ludwig von Mises, who attracted a small but devoted following in the United States and elsewhere; and Joseph Schumpeter, dark poet of capitalism’s forces of “creative destruction.†Through Böhm-Bawerk and Wieser, Menger’s text became the groundwork of the Austrian school, whose reach, due in part to the efforts of Mises and Hayek, now extends across the globe.
The contributions of Jevons and Menger were multiple, yet each of them took aim at a central postulate of economics shared by everyone from Adam Smith to the socialist left: the notion that labor is a—if not the—source of value. Though adumbrated in the idiom of prices and exchange, the labor theory of value evinced an almost primitive faith in the metaphysical objectivity of the economic sphere—a faith made all the more surprising by the fact that the objectivity of the rest of the social world (politics, religion and morals) had been subject to increasing scrutiny since the Renaissance. Commodities may have come wrapped in the pretty paper of the market, but inside, many believed, were the brute facts of nature: raw materials from the earth and the physical labor that turned those materials into goods. Because those materials were made useful, hence valuable, only by labor, labor was the source of value. That, and the fact that labor could be measured in some way (usually time), lent the world of work a kind of ontological status—and political authority—that had been increasingly denied to the world of courts and kings, lands and lords, parishes and priests. As the rest of the world melted into air, labor was crystallizing as the one true solid.
By the time the marginalists came on the scene, the most politically threatening version of the labor theory of value was associated with the left. Though Marx would significantly revise and recast it in his mature writings, the simple notion that labor produces value remained associated with his name—and even more so with that of his competitor Ferdinand Lasalle, about whom Nietzsche read a fair amount—as well as with the larger socialist and trade union movements of which he was a part. That association helped set the stage for the marginalists’ critique.
Admittedly, the relationship between marginalism and anti-socialism is complex. On the one hand, there is little evidence to suggest that the first-generation marginalists had heard of, much less read, Marx, at least not at this early stage of their careers. Much more than the threat of socialism underpinned the emergence of marginalist economics, which was as opposed to traditional defenses of the market as it was to the market’s critics. By the twentieth century, moreover, many marginalists were on the left and used their ideas to help construct the institutions of social democracy; even Walras and Alfred Marshall, another early marginalist, were sympathetic to the claims of the left. And on some readings, the mature Marx shares more with the constructivist thrusts of marginalism than he does with the objectivism of the labor theory of value.
On the other hand, Jevons was a tireless polemicist against trade unions, which he identified as “the best example…of the evils and disasters†attending the democratic age. Jevons saw marginalism as a critical antidote to the labor movement and insisted that its teachings be widely transmitted to the working classes. “To avoid such a disaster,†he argued, “we must diffuse knowledge†to the workers—empowered as they were by the vote and the strike—“and the kind of knowledge required is mainly that comprehended in the science of political economy.â€Â
Menger interrupted his abstract reflections on value to make the point that while it may “appear deplorable to a lover of mankind that possession of capital or a piece of land often provides the owner a higher income…than the income received by a laborer,†the “cause of this is not immoral.†It was “simply that the satisfaction of more important human needs depends upon the services of the given amount of capital or piece of land than upon the services of the laborer.†Any attempt to get around that truth, he warned, “would undoubtedly require a complete transformation of our social order.â€Â
Finally, there is no doubt that the marginalists of the Austrian school, who would later prove so influential on the American right, saw their project as primarily anti-Marxist and anti-socialist. “The most momentous consequence of the theory,†declared Wieser in 1891, “is, I take it, that it is false, with the socialists, to impute to labor alone the entire productive return.â€Â
* * *
With its division of intellectual labor, the modern academy often separates economics from ethics and philosophy. Earlier economists and philosophers did not make that separation. Even Nietzsche recognized that economics rested on genuine moral and philosophical premises, many of which he found dubious, and that it had tremendous moral and political effects, all of which he detested. In The Wanderer and His Shadow, Nietzsche criticized “our economists†for having “not yet wearied of scenting a similar unity in the word ‘value’ and of searching after the original root-concept of the word.†In his preliminary outline for the summa he hoped to publish on “the will to power,†he scored the “nihilistic consequences of the ways of thinking in politics and economics.â€Â
For that reason, Nietzsche saw in labor’s appearance more than an economic theory of goods: he saw a terrible diminution of the good. Morals must be “understood as the doctrine of the relations of supremacy,†he wrote in Beyond Good and Evil; every morality “must be forced to bow…before the order of rank.†But like so many before them, including the Christian slave and the English utilitarian, the economist and the socialist promoted an inferior human type—and an inferior set of values—as the driving agent of the world. Nietzsche saw in this elevation not only a transformation of values but also a loss of value and, potentially, the elimination of value altogether. Conservatives from Edmund Burke to Robert Bork have conflated the transformation of values with the end of value. Nietzsche, on occasion, did too: “What does nihilism mean?†he asked himself in 1887. “That the highest values devaluate themselves.†The nihilism consuming Europe was best understood as a democratic “hatred against the order of rank.â€Â
Part of Nietzsche’s worry was philosophical: How was it possible in a godless world, naturalistically conceived, to deem anything of value? But his concern was also cultural and political. Because of democracy, which was “Christianity made natural,†the aristocracy had lost “its naturalnessâ€â€”that is, the traditional vindication of its power. How then might a hierarchy of excellence, aesthetic and political, re-establish itself, defend itself against the mass—particularly a mass of workers—and dominate that mass? As Nietzsche wrote in the late 1880s:
A reverse movement is needed—the production of a synthetic, summarizing, justifying man for whose existence this transformation of mankind into a machine is a precondition, as a base on which he can invent his higher form of being.
   He needs the opposition of the masses, of the “leveled,†a feeling of distance from them. [He] stands on them, he lives off them. This higher form of aristocracy is that of the future.—Morally speaking, this overall machinery, this solidarity of all gears, represents a maximum of exploitation of man; but it presupposes those on whose account this exploitation has meaning.
Nietzsche’s response to that challenge was not to revert or resort to a more objective notion of value: that was neither possible nor desirable. Instead, he embraced one part of the modern understanding of value—its fabricated nature—and turned it against its democratic and Smithian premises. Value was indeed a human creation, Nietzsche acknowledged, and as such could just as easily be conceived as a gift, an honorific bestowed by one man upon another. “Through esteeming alone is there value,†Nietzsche has Zarathustra declare; “to esteem is to create.†Value was not made with coarse and clumsy hands; it was enacted with an appraising gaze, a nod of the head signifying a matchless abundance of taste. It was, in short, aristocratic. Â
While slaves had once created value in the form of Christianity, they had achieved that feat not through their labor but through their censure and praise. They had also done it unwittingly, acting upon a deep and unconscious compulsion: a sense of inferiority, a rage against their powerlessness, and a desire for revenge against their betters. That combination of overt impotence and covert drive made them ill-suited to creating values of excellence. Nietzsche explained in Beyond Good and Evil that the self-conscious exercise and enjoyment of power made the noble type a better candidate for the creation of values in the modern world, for these were values that would have to break with the slave morality that had dominated for millennia. Only insofar as “it knows itself to be that which first accords honor to things†can the noble type truly be “value-creating.â€Â
Labor belonged to nature, which is not capable of generating value. Only the man who arrayed himself against nature—the artist, the general, the statesman—could claim that role. He alone had the necessary refinements, wrought by “that pathos of distance which grows out of ingrained difference between strata,†to appreciate and bestow value: upon men, practices and beliefs. Value was not a product of the prole; it was an imposition of peerless taste. In the words of The Gay Science:Â
Whatever has value in our world now does not have value in itself, according to its nature—nature is always value-less, but has been given value at some time, as a present—and it was we who gave and bestowed it.Â
That was in 1882. Just a decade earlier, Menger had written: “Value is therefore nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs, that is, to our lives and well-being.†Jevons’s position was identical, and like Nietzsche, both Menger and Jevons thought value was instead a high or low estimation put by a man upon the things of life. But lest that desiring self be reduced to a simple creature of tabulated needs, Menger and Jevons took care to distinguish their positions from traditional theories of utility.Â
Jevons, for example, was prepared to follow Jeremy Bentham in his definition of utility as “that property in an object, whereby it tends to produce benefit, advantage, pleasure, good, or happiness.†He thought this “perfectly expresses the meaning of the word Economy.†But he also insisted on a critical rider: “provided that the will or inclination of the person concerned is taken as the sole criterion, for the time, of what is good and desirable.†Our expressed desires and aversions are not measures of our objective or underlying good; there is no such thing. Nor can we be assured that those desires or aversions will bring us pleasure or pain. What we want or don’t want is merely a representation, a snapshot of the motions of our will—that black box of preference and partiality that so fascinated Nietzsche precisely because it seemed so groundless and yet so generative. Every mind is inscrutable to itself: we lack, said Jevons, “the means of measuring directly the feelings of the human heart.†The inner life is inaccessible to our inspections; all we can know are its effects, the will it powers and the actions it propels. “The will is our pendulum,†declared Jevons, a representation of forces that cannot be seen but whose effects are nevertheless felt, “and its oscillations are minutely registered in all the price lists of the markets.â€Â
Menger thought the value of any good was connected to our needs, but he was extraordinarily attuned to the complexity—and contingency—of that relationship. Needs, wrote Menger, “at least as concerns their origin, depend upon our wills or on our habits.†Needs are more than the givens of our biology or psyche; they are the desideratum of our volitions and practices, which are idiosyncratic and arbitrary. Only when our needs finally “come into existenceâ€â€”that is, only when we become aware of them—can we truly say that “there is no further arbitrary element†in the process of value formation.Â
Even then, needs must pass through a series of checkpoints before they can enter the land of value. Awareness of a need, says Menger, entails a comprehensive knowledge of how the need might be fulfilled by a particular good, how that good might contribute to our lives, and how (and whether) command of that good is necessary for the satisfaction of that need. That last bit of knowledge requires us to look at the external world: to ask how much of that good is available to us, to consider how many sacrifices we must bear—how many satisfactions we are willing to forgo—in order to secure it. Only when we have answered these questions are we ready to speak of value, which Menger reminds us is “the importance we attribute to the satisfaction of our needs.†Value is thus “a judgment†that “economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being.†It “does not exist outside the consciousness of men.†Even though previous economists had insisted on the “objectification of the value of goods,†Menger, like Jevons and Nietzsche, concludes that value “is entirely subjective in nature.â€Â
* * *
In their war against socialism, the philosophers of capital faced two challenges. The first was that by the early twentieth century, socialism had cornered the market on morality. As Mises complained in his 1932 preface to the second edition of Socialism, “Any advocate of socialistic measures is looked upon as the friend of the Good, the Noble, and the Moral, as a disinterested pioneer of necessary reforms, in short, as a man who unselfishly serves his own people and all humanity.†Indeed, with the help of kindred notions such as “social justice,†socialism seemed to be the very definition of morality. Nietzsche had long been wise to this insinuation; one source of his discontent with religion was his sense that it had bequeathed to modernity an understanding of what morality entailed (selflessness, universality, equality) such that only socialism and democracy could be said to fulfill it. But where Nietzsche’s response to the equation of socialism and morality was to question the value of morality, at least as it had been customarily understood, economists like Mises and Hayek pursued a different path, one Nietzsche would never have dared to take: they made the market the very expression of morality.
Moralists traditionally viewed the pursuit of money and goods as negative or neutral; the Austrians claimed it embodies our deepest values and commitments. “The provision of material goods,†declared Mises, “serves not only those ends which are usually termed economic, but also many other ends.†All of us have ends or ultimate purposes in life: the cultivation of friendship, the contemplation of beauty, a lover’s companionship. We enter the market for the sake of those ends. Economic action thus “consists firstly in valuation of ends, and then in the valuation of the means leading to these ends. All economic activity depends, therefore, upon the existence of ends. Ends dominate economy and alone give it meaning.†We simply cannot speak, writes Hayek in The Road to Serfdom, of “purely economic ends separate from the other ends of life.â€
This claim, however, could just as easily be enlisted as an argument for socialism. In providing men and women with the means of life—housing, food, healthcare—the socialist state frees them to pursue the ends of life: beauty, knowledge, wisdom. The Austrians went further, insisting that the very decision about what constitutes means and ends was itself a judgment of value. Any economic situation confronts us with the necessity of choice, of having to deploy our limited resources—whether time, money or effort—on behalf of some end. In making that choice, we reveal which of our ends matters most to us: which is higher, which is lower. “Every man who, in the course of economic activity, chooses between the satisfaction of two needs, only one of which can be satisfied, makes judgments of value,†says Mises.Â
For those choices to reveal our ends, our resources must be finite—unlimited time, for example, would obviate the need for choice—and our choice of ends unconstrained by external interference. The best, indeed only, method for guaranteeing such a situation is if money (or its equivalent in material goods) is the currency of choice—and not just of economic choice, but of all of our choices. As Hayek writes in The Road to Serfdom:
So long as we can freely dispose over our income and all our possessions, economic loss will always deprive us only of what we regard as the least important of the desires we were able to satisfy. A “merely†economic loss is thus one whose effect we can still make fall on our less important needs…. Economic changes, in other words, usually affect only the fringe, the “margin,†of our needs. There are many things which are more important than anything which economic gains or losses are likely to affect, which for us stand high above the amenities and even above many of the necessities of life which are affected by the economic ups and downs.Â
Should the government decide which of our needs are “merely economic,†we would be deprived of the opportunity to decide whether these are higher or lower goods, the marginal or mandatory items of our flourishing. So vast is the gulf between each soul, so separate and unequal are we, that it is impossible to assume anything universal about the sources and conditions of human happiness, a point Nietzsche and Jevons would have found congenial. The judgment of what constitutes a means, what an end, must be left to the individual self. Hayek again:
Economic control is not merely control of a sector of human life which can be separated from the rest; it is the control of the means for all our ends. And whoever has sole control of the means must also determine which ends are to be served, which values are to be rated higher and which lower—in short what men should believe and strive for.Â
While the economic is, in one sense readily acknowledged by Hayek, the sphere of our lower needs, it is in another and altogether more important sense the anvil upon which we forge our notion of what is lower and higher in this world, our morality. “Economic values,†he writes, “are less important to us than many things precisely because in economic matters we are free to decide what to us is more, and what less, important.†But we can be free to make those choices only if they are left to us to make—and, paradoxically, if we are forced to make them. If we didn’t have to choose, we’d never have to value anything.Â
* * *
By imposing this drama of choice, the economy becomes a theater of self-disclosure, the stage upon which we discover and reveal our ultimate ends. It is not in the casual chatter of a seminar or the cloistered pews of a church that we determine our values; it is in the duress—the ordeal—of our lived lives, those moments when we are not only free to choose but forced to choose. “Freedom to order our own conduct in the sphere where material circumstances force a choice upon us,†Hayek wrote, “is the air in which alone moral sense grows and in which moral values are daily re-created.â€
While progressives often view this discourse of choice as either dime-store morality or fabricated scarcity, the Austrians saw the economy as the disciplining agent of all ethical action, a moment of—and opportunity for—moral artistry. Freud thought the compressions of the dream world made every man an artist; these other Austrians thought the compulsions of the economy made every man a moralist. It is only when we are navigating its narrow channels—where every decision to expend some quantum of energy requires us to make a calculation about the desirability of its posited end—that we are brought face to face with ourselves and compelled to answer the questions: What do I believe? What do I want in this world? From this life?Â
While there are precedents for this argument in Menger’s theory of value (the fewer opportunities there are for the satisfaction of our needs, Menger says, the more our choices will reveal which needs we value most), its true and full dimensions can best be understood in relation to Nietzsche. As much as Nietzsche railed against the repressive effect of laws and morals on the highest types, he also appreciated how much “on earth of freedom, subtlety, boldness, dance, and masterly sureness†was owed to these constraints. Confronted with a set of social strictures, the diverse and driving energies of the self were forced to draw upon unknown and untapped reserves of ingenuity—either to overcome these obstacles or to adapt to them with the minimum of sacrifice. The results were novel, value-creating.Â
Nietzsche’s point was primarily aesthetic. Contrary to the romantic notion of art being produced by a process of “letting go,†Nietzsche insisted that the artist “strictly and subtly…obeys thousandfold laws.†The language of invention—whether poetry, music or speech itself—is bound by “the metrical compulsion of rhyme and rhythm.†Such laws are capricious in their origin and tyrannical in their effect. That is the point: from that unforgiving soil of power and whimsy rises the most miraculous increase. Not just in the arts—Goethe, say, or Beethoven—but in politics and ethics as well: Napoleon, Caesar, Nietzsche himself (“Genuine philosophers…are commanders and legislators: they say, ‘thus it shall be!’â€).
One school would find expression for these ideas in fascism. Writers like Ernst Jünger and Carl Schmitt imagined political artists of great novelty and originality forcing their way through or past the filtering constraints of everyday life. The leading legal theorist of the Third Reich, Schmitt looked to those extraordinary instances in politics—war, the “decision,†the “exceptionâ€â€”when “the power of real life,†as he put it in Political Theology, “breaks through the crust of a mechanism that has become torpid by repetition.†In that confrontation between mechanism and real life, the man of exception would find or make his moment: by taking an unauthorized decision, ordaining a new regime of law, or founding a political order. In each case, something was “created out of nothingness.â€Â
It was the peculiar—and, in the long run, more significant—genius of the Austrian school to look for these moments and experiences not in the political realm but in the marketplace. Money in a capitalist economy, Hayek came to realize, could best be understood and defended in Nietzschean terms: as “the medium through which a forceâ€â€”the self’s “desire for power to achieve unspecified endsâ€â€”“makes itself felt.â€
* * *
The second challenge confronting the philosophers of capital was more daunting. While Nietzsche’s transvaluation of values gave pride of place to the highest types of humanity—values were a gift, the philosopher their greatest source—the political implications of marginalism were more ambidextrous. If on one reading it was the capitalist who gave value to the worker, on another it was the worker—in his capacity as consumer—who gave value to capital. Social democrats pursued the latter argument with great zeal. The result was the welfare state, with its emphasis on high wages and good benefits—as well as unionization—as the driving agent of mass demand and economic prosperity. More than a macroeconomic policy, social democracy (or liberalism, as it was called in America) reflected an ethos of the citizen-worker-consumer as the creator and center of the economy. Long after economists had retired the labor theory of value, the welfare state remained lit by its afterglow. The political economy of the welfare state may have been marginalist, but its moral economy was workerist.
The midcentury right was in desperate need of a response that, squaring Nietzsche’s circle, would clear a path for aristocratic action in the capitalist marketplace. It needed not simply an alternative economics but an answering vision of society. Schumpeter provided one, Hayek another.Â
Schumpeter’s entrepreneur is one of the more enigmatic characters of modern social theory. He is not inventive, heroic or charismatic. “There is surely no trace of any mystic glamour about him,†Schumpeter writes in Capitalism, Socialism and Democracy. His instincts and impulses are confined to the office and the counting table. Outside those environs, he cannot “say boo to a goose.†Yet it is this nothing, this great inscrutable blank, that will “bend a nation to his willâ€â€”not unlike the father figures of a Mann or Musil novel.Â
What the entrepreneur has—or, better, is—are force and will. As Schumpeter explains in a 1927 essay, the entrepreneur possesses “extraordinary physical and nervous energy.†That energy gives him focus (the maniacal, almost brutal, ability to shut out what is inessential) and stamina. In those late hours when lesser beings have “given way to a state of exhaustion,†he retains his “full force and originality.†By “originality,†Schumpeter means something peculiar: “receptivity to new facts.†It is the entrepreneur’s ability to recognize that sweet spot of novelty and occasion (an untried technology, a new method of production, a different way to market or distribute a product) that enables him to revolutionize the way business gets done. Part opportunist, part fanatic, he is “a leading man,†Schumpeter suggests in Capitalism, Socialism and Democracy, overcoming all resistance in order to create the new modes and orders of everyday life.Â
Schumpeter is careful to distinguish entrepreneurialism from politics as it is conventionally understood: the entrepreneur’s power “does not readily expand…into the leadership of nationsâ€; “he wants to be left alone and to leave politics alone.†Even so, the entrepreneur is best understood as neither an escape from nor an evasion of politics but as its sublimation, the relocation of politics in the economic sphere.Â
Rejecting the static models of other economists—equilibrium is death, he says—Schumpeter depicts the economy as a dramatic confrontation between rising and falling empires (firms). Like Machiavelli in The Prince, whose vision Nietzsche described as “perfection in politics,†Schumpeter identifies two types of agents struggling for position and permanence amid great flux: one is dynastic and lawful, the other upstart and intelligent. Both are engaged in a death dance, with the former in the potentially weaker position unless it can innovate and break with routine.Â
Schumpeter often resorts to political and military metaphors to describe this dance. Production is “a history of revolutions.†Competitors “command†and wield â€pieces of armor.†Competition “strikes†at the “foundations†and “very lives†of firms; entrepreneurs in equilibrium “find themselves in much the same situations as generals would in a society perfectly sure of permanent peace.†In the same way that Schmitt imagines peace as the end of politics, Schumpeter sees equilibrium as the end of economics.Â
Against this backdrop of dramatic, even lethal, contest, the entrepreneur emerges as a legislator of values and new ways of being. The entrepreneur demonstrates a penchant for breaking with “the routine tasks which everybody understands.†He overcomes the multiple resistances of his world—“from simple refusal either to finance or to buy a new thing, to physical attack on the man who tries to produce it.â€Â
To act with confidence beyond the range of familiar beacons and to overcome that resistance requires aptitudes that are present in only a small fraction of the population and that define the entrepreneurial type.
The entrepreneur, in other words, is a founder. As Schumpeter describes him in The Theory of Economic Development:
There is the dream and the will to found a private kingdom, usually, though not necessarily, also a dynasty. The modern world really does not know any such positions, but what may be attained by industrial and commercial success is still the nearest approach to medieval lordship possible to modern man.Â
That may be why his inner life is so reminiscent of the Machiavellian prince, that other virtuoso of novelty. All of his energy and will, the entirety of his force and being, is focused outward, on the enterprise of creating a new order.
And yet even as he sketched the broad outline of this legislator of value, Schumpeter sensed that his days were numbered. Innovation was increasingly the work of departments, committees and specialists. The modern corporation “socializes the bourgeois mind.†In the same way that modern regiments had destroyed the “very personal affair†of medieval battle, so did the corporation eliminate the need for “individual leadership acting by virtue of personal force and personal responsibility for success.†The “romance of earlier commercial adventure†was “rapidly wearing away.†With the entrepreneurial function in terminal decline, Schumpeter’s experiment in economics as great politics seemed to be approaching an end.
* * *
Hayek offered an alternative account of the market as the proving ground of aristocratic action. Schumpeter had already hinted at it in a stray passage in Capitalism, Socialism and Democracy. Taking aim at the notion of a rational chooser who knows what he wants, wants what is best (for him, at any rate) and works efficiently to get it, Schumpeter invoked a half-century of social thought—Le Bon, Pareto and Freud—to emphasize not only “the importance of the extra-rational and irrational element in our behavior,†but also the power of capital to shape the preferences of the consumer.
Consumers do not quite live up to the idea that the economic textbooks used to convey. On the one hand, their wants are nothing like as definite, and their actions upon those wants nothing like as rational and prompt. On the other hand, they are so amenable to the influence of advertising and other methods of persuasion that producers often seem to dictate to them instead of being directed by them.Â
In The Constitution of Liberty, Hayek developed this notion into a full-blown theory of the wealthy and the well-born as an avant-garde of taste, as makers of new horizons of value from which the rest of humanity took its bearings. Instead of the market of consumers dictating the actions of capital, it would be capital that would determine the market of consumption—and beyond that, the deepest beliefs and aspirations of a people.Â
The distinction that Hayek draws between mass and elite has not received much attention from his critics or his defenders, bewildered or beguiled as they are by his repeated invocations of liberty. Yet a careful reading of Hayek’s argument reveals that liberty for him is neither the highest good nor an intrinsic good. It is a contingent and instrumental good (a consequence of our ignorance and the condition of our progress), the purpose of which is to make possible the emergence of a heroic legislator of value.
Civilization and progress, Hayek argues, depend upon each of us deploying knowledge that is available for our use yet inaccessible to our reason. The computer on which I am typing is a repository of centuries of mathematics, science and engineering. I know how to use it, but I don’t understand it. Most of our knowledge is like that: we know the “how†of things—how to turn on the computer, how to call up our word-processing program and type—without knowing the “that†of things: that electricity is the flow of electrons, that circuits operate through binary choices and so on. Others possess the latter kind of knowledge; not us. That combination of our know-how and their knowledge advances the cause of civilization. Because they have thought through how a computer can be optimally designed, we are free to ignore its transistors and microchips; instead, we can order clothes online, keep up with old friends as if they lived next door, and dive into previously inaccessible libraries and archives in order to produce a novel account of the Crimean War.Â
We can never know what serendipity of knowledge and know-how will produce the best results, which union of genius and basic ignorance will yield the greatest advance. For that reason, individuals—all individuals—must be free to pursue their ends, to exploit the wisdom of others for their own purposes. Allowing for the uncertainties of progress is the greatest guarantor of progress. Hayek’s argument for freedom rests less on what we know or want to know than on what we don’t know, less on what we are morally entitled to as individuals than on the beneficial consequences of individual freedom for society as a whole.Â
In fact, Hayek continues, it is not really my freedom that I should be concerned about; nor is it the freedom of my friends and neighbors. It is the freedom of that unknown and untapped figure of invention to whose imagination and ingenuity my friends and I will later owe our greater happiness and flourishing: “What is important is not what freedom I personally would like to exercise but what freedom some person may need in order to do things beneficial to society. This freedom we can assure to the unknown person only by giving it to all.â€
Deep inside Hayek’s understanding of freedom, then, is the notion that the freedom of some is worth more than the freedom of others: “The freedom that will be used by only one man in a million may be more important to society and more beneficial to the majority than any freedom that we all use.†Hayek cites approvingly this statement of a nineteenth-century philosopher: “It may be of extreme importance that some should enjoy liberty…although such liberty may be neither possible nor desirable for the great majority.†That we don’t grant freedom only to that individual is due solely to the happenstance of our ignorance: we cannot know in advance who he might be. “If there were omniscient men, if we could know not only all that affects the attainment of our present wishes but also our future wants and desires, there would be little case for liberty.â€Â
* * *
As this reference to “future wants and desires†suggests, Hayek has much more in mind than producers responding to a pre-existing market of demand; he’s talking about men who create new markets—and not just of wants or desires, but of basic tastes and beliefs. The freedom Hayek cares most about is the freedom of those legislators of value who shape and determine our ends.
The overwhelming majority of men and women, Hayek says, are simply not capable of breaking with settled patterns of thought and practice; given a choice, they would never opt for anything new, never do anything better than what they do now.Â
Action by collective agreement is limited to instances where previous efforts have already created a common view, where opinion about what is desirable has become settled, and where the problem is that of choosing between possibilities already generally recognized, not that of discovering new possibilities.Â
While some might claim that Hayek’s argument here is driven less by a dim view of ordinary men and women than his dyspepsia about politics, he explicitly excludes “the decision of some governing elite†from the acid baths of his skepticism. Nor does he hide his misgivings about the individual abilities of wage laborers who comprise the great majority. The working stiff is a being of limited horizons. Unlike the employer or the “independent,†both of whom are dedicated to “shaping and reshaping a plan of life,†the worker’s orientation is “largely a matter of fitting himself into a given framework.†He lacks responsibility, initiative, curiosity and ambition. Though some of this is by necessity—the workplace does not countenance “actions which cannot be prescribed or which are not conventionalâ€â€”Hayek insists that this is “not only the actual but the preferred position of the majority of the population.†The great majority enjoy submitting to the workplace regime because it “gives them what they mainly want: an assured fixed income available for current expenditure, more or less automatic raises, and provision for old age. They are thus relieved of some of the responsibilities of economic life.†Simply put, these are people for whom taking orders from a superior is not only a welcome relief but a prerequisite of their fulfillment: “To do the bidding of others is for the employed the condition of achieving his purpose.â€Â
It thus should come as no surprise that Hayek believes in an avant-garde of tastemakers, whose power and position give them a vantage from which they can not only see beyond the existing horizon but also catch a glimpse of new ones:Â
Only from an advanced position does the next range of desires and possibilities become visible, so that the selection of new goals and the effort toward their achievement will begin long before the majority can strive for them.
These horizons include everything from “what we regard as good or beautiful,†to the ambitions, goals and ends we pursue in our everyday lives, to “the propagation of new ideas in politics, morals, and religion.†On all of these fronts, it is the avant-garde that leads the way and sets our parameters.
More interesting is how explicit and insistent Hayek is about linking the legislation of new values to the possession of vast amounts of wealth and capital, even—or especially—wealth that has been inherited. Often, says Hayek, it is only the very rich who can afford new products or tastes. Lavishing money on these boutique items, they give producers the opportunity to experiment with better designs and more efficient methods of production. Thanks to their patronage, producers will find cheaper ways of making and delivering these products—cheap enough, that is, for the majority to enjoy them. What was before a luxury of the idle rich—stockings, automobiles, piano lessons, the university—is now an item of mass consumption.
The most important contribution of great wealth, however, is that it frees its possessor from the pursuit of money so that he can pursue nonmaterial goals. Liberated from the workplace and the rat race, the “idle richâ€â€”a phrase Hayek seeks to reclaim as a positive good—can devote themselves to patronizing the arts, subsidizing worthy causes like abolition or penal reform, founding new philanthropies and cultural institutions. Those born to wealth are especially important: not only are they the beneficiaries of the higher culture and nobler values that have been transmitted across the generations—Hayek insists that we will get a better elite if we allow parents to pass their fortunes on to their children; requiring a ruling class to start fresh with every generation is a recipe for stagnation, for having to reinvent the wheel—but they are immune to the petty lure of money. “The grosser pleasures in which the newly rich often indulge have usually no attraction for those who have inherited wealth.†(How Hayek reconciles this position with the agnosticism about value he expresses in The Road to Serfdom remains unclear.)
The men of capital, in other words, are best understood not as economic magnates but as cultural legislators: “However important the independent owner of property may be for the economic order of a free society, his importance is perhaps even greater in the fields of thought and opinion, of tastes and beliefs.†While this seems to be a universal truth for Hayek, it is especially true in societies where wage labor is the rule. The dominance of paid employment has terrible consequences for the imagination, which are most acutely felt by the producers of that imagination: “There is something seriously lacking in a society in which all the intellectual, moral, and artistic leaders belong to the employed classes…. Yet we are moving everywhere toward such a position.â€
When labor becomes the norm, in both senses of the term, culture doesn’t stand a chance.
* * *
In a virtuoso analysis of what he calls “The Intransigent Right,†the British historian Perry Anderson identifies four figures of the twentieth-century conservative canon: Schmitt, Hayek, Michael Oakeshott and Leo Strauss. Strauss and Schmitt come off best (the sharpest, most profound and far-seeing), Oakeshott the worst, and Hayek somewhere in between. This hierarchy of judgment is not completely surprising. Anderson has never taken seriously the political theory produced by a nation of shopkeepers, so the receptivity of the English to Oakeshott and Hayek, who became a British subject in 1938, renders them almost irresistible targets for his critique. Anderson’s cosmopolitan indifference to the indiscreet charms of the Anglo bourgeoisie usually makes him the most sure-footed of guides, but in Hayek’s case it has led him astray. Like many on the left, Anderson is so taken with the bravura and brutality of Strauss’s and Schmitt’s self-styled realism that he can’t grasp the far greater daring and profundity of Hayek’s political theory of shopkeeping—his effort to locate great politics in the economic relations of capitalism.
What distinguishes the theoretical men of the right from their counterparts on the left, Anderson writes, is that their voices were “heard in the chancelleries.†Yet whose voice has been more listened to, across decades and continents, than Hayek’s? Schmitt and Strauss have attracted readers from all points of the political spectrum as writers of dazzling if disturbing genius, but the two projects with which they are most associated—European fascism and American neoconservatism—have never generated the global traction or gathering energy that neoliberalism has now sustained for more than four decades.Â
It would be a mistake to draw too sharp a line between the marginal children of Nietzsche—with political man on one branch of the family tree, economic man on the other. Hayek, at times, could sound the most Schmittian notes. At the height of Augusto Pinochet’s power in Chile, Hayek told a Chilean interviewer that when any “government is in a situation of rupture, and there are no recognized rules, rules have to be created.†The sort of situation he had in mind was not anarchy or civil war but Allende-style social democracy, where the government pursues “the mirage of social justice†through administrative and increasingly discretionary means. Even in The Constitution of Liberty, an extended paean to the notion of a “spontaneous order†that slowly evolves over time, we get a brief glimpse of “the lawgiver†whose “task†it is “to create conditions in which an orderly arrangement can establish and ever renew itself.†(“Of the modern German writings†on the rule of law, Hayek also says, Schmitt’s “are still among the most learned and perceptive.â€) Current events seemed to supply Hayek with an endless parade of candidates. Two years after its publication in 1960, he sent The Constitution of Liberty to Portuguese strongman António Salazar, with a cover note professing his hope that it might assist the dictator “in his endeavour to design a constitution which is proof against the abuses of democracy.†Pinochet’s Constitution of 1980 is named after the 1960 text.Â
Still, it’s difficult to escape the conclusion that though Nietzschean politics may have fought the battles, Nietzschean economics won the war. Is there any better reminder of that victory than the Detlev-Rohwedder-Haus in Berlin? Built to house the Luftwaffe during World War II, it is now the headquarters of the German Ministry of Finance.
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s Krugman right? shocked This is not my field. I don't know enough to agree or disagree. I wonder if anyone on the board or if Scott Grannis would care to comment. An article from a recent Economist edition:
*****The austerity debate
Dismal pugilists
Mudslinging between economists is a distraction from the real issues
Jun 1st 2013 |From the print edition
THE brawl featuring two economists, Carmen Reinhart and Kenneth Rogoff, and a Keynesian militia led by Paul Krugman, a Nobel prize winner, refuses to die down. It makes entertaining academic theatre. Sadly, it also distracts from an emerging consensus on how countries should best cope with debt.
In 2010 Ms Reinhart and Mr Rogoff initiated an influential line of research with a paper that purported to show that growth slowed dramatically when public borrowing rose above 90% of GDP. The work quickly became beloved of austerity-minded politicians in Europe and America. Then in April three economists from the University of Massachusetts, Amherst, said that unorthodox statistical choices and a spreadsheet blunder had led Ms Reinhart and Mr Rogoff to exaggerate the drop-off in growth at high debt levels.
Keynesian academics pounced, declaring the intellectual foundation of austerity destroyed. The most damning salvos came from Mr Krugman in an essay saying the 2010 paper had “more immediate influence on public debate than any previous paper in the history of economics”, yet its conclusion and methodology should have been suspect from the start. Ms Reinhart and Mr Rogoff struck back on May 25th in an open letter to Mr Krugman, decrying his “uncivil behaviour” and his own misstatement (Mr Krugman accused the authors of failing to make public their data; they had. It was their spreadsheet calculations that were not publicly available).
The heat has risen, but the meat of the debate has changed little; if anything, differences may be narrowing. Ms Reinhart and Mr Rogoff now emphasise their less sexy results, that as debt rises growth merely slows, rather than collapses, a point on which many agree. In their letter to Mr Krugman they acknowledge that research is mixed on whether higher debt leads to slow growth or vice versa, long the key criticism of their work. They continue to argue for cautious, proactive debt-reduction. But they say they favour writing down bank debt, slightly higher inflation and “financial repression” (imposing lower real returns on creditors) over immediate austerity.
Those policies are much more to Mr Krugman’s liking. Yet their letter pointedly does not aim to mend fences (it is doubtful Mr Krugman would be interested). And the rhetorical battle obscures important areas of agreement. Austerity that undermines growth does not help; writing down private debt and boosting growth through monetary stimulus and supply-side reform do. That would be a useful message for politicians, but they may struggle to hear it above the din.****
« Last Edit: June 02, 2013, 08:50:57 PM by ccp »
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"Austerity" is when government spending in stagnant economies goes up 6% per year instead of 7%.
CCP/ Crafty, Thanks for 'The Economist' austerity post.
Keynes' work spanned 4 decades and gets interpreted all kinds of ways. The heart of what we call Keynesiansim is the idea that we need government to correct for the failures of the free market, to smooth out the business cycle so to speak. Quite obvious today is that government is preventing the successes of formerly free markets. The issue at hand is whether austerity retards growth. Conversely, would expanding these phony, crony stimuli be the solution to our growth deficit? If Krugman or the other adherents have a valid point to make, I haven't seen it.
Krugman and those following him believe austerity is killing the weaker economies of Europe and will kill us next with our under-spoending (what a joke). But where is the austerity? (See the following article.) The fiscal stimulus in the U.S. botched recovery has been over a trillion a year for at least 4 years. The amount of proven improvement bought at this enormous cost is zilch. And the generational theft it entails is obscene. The monetary stimulus, aka quantitative expansion is also well into the multiple trillions and still continuing. The result of the two enormous artificial forces combined is becoming history's worst recovery. So let's do more of it! (in their view)
The cause of the current malaise is government caused distortions in the markets including taxes, regulations, uncertainty and perverse incentives. These artificial stimuli address none of what is wrong. We have four flat tires and the rear brakes stuck partway on while Krugman and his followers in the White House and at the Fed are trying to pouring more gas into the carburetor. What could go wrong with that? Pretty much everything, but the worst part is that the things that are wrong still aren't being addressed.
The general austerity argument aims first at the failing countries in Europe, the so-called PIIGS countries where austerity allegedly isn't working. But take a closer look at what they are wrongly calling austerity:
http://www.forbes.com/sites/paulroderickgregory/2013/05/26/austerity-to-blame-but-wheres-the-austerity/
'Austerity' To Blame? But Where's The Austerity?
Die-hard Keynesians bemoan that, with a few exceptions, the world’s economies are drowning in the quicksand of austerity. They preach we need more government spending and stimulus, not less. Northern Europe should bail out its less-fortunate neighbors to the South so they can pay their teachers, public employees and continue generous transfers to the poor and unemployed. If not, Europe’s South will remain mired in recession. In America, Keynesians entreat the skinflint Republicans to loosen the purse strings so we can escape sub par growth. They advise Japan to spend itself out of permanent stagnation and welcome recent steps in this direction.
The stimulationists complain that they have been overwhelmed by the defeatist austerity crowd, lead by the un-neighborly Germans and the obstructionist Republicans. If only Germany would shift its economy into high gear while transferring its tax revenues to ailing Southern Europe, and the rascally Republicans drop the sequester cuts, we would be sailing along to a healthy worldwide recovery. We don’t need spending restraint. Instead, we need stimulus, stimulus, and more stimulus to revive economic growth. We’ll deal with the growing deficits later, the stimulation crowd tells us, but we must first get our economies growing again.
The Keynesian stimulus crowd blames austerity for the world’s economic woes without bothering to examine facts. I advise them first to consult my colleague at the German Institute for Economic Research (Georg Erber, I See Austerity Everywhere But in the Statistics), who, unlike them, has actually taken the time to examine the European Union’s statistics as compiled by its statistical agency, Eurostat.
The official Keynesian story is that the PIIGS of Europe (Portugal, Italy, Ireland, Greece and Spain) have been devastated by cutbacks in public spending. Austerity has made things worse rather than better – clear proof that Keynesian stimulus is the answer. Keynesians claim the lack of stimulus (of course paid for by someone else) has spawned costly recessions which threaten to spread. In other words, watch out Germany and Scandinavia: If you don’t pony up, you’ll be next.
Erber finds fault with this Keynesian narrative. The official figures show that PIIGS governments embarked on massive spending sprees between 2000 and 2008. During this period, their combined general government expenditures rose from 775 billion Euros to 1.3 trillion – a 75 percent increase. Ireland had the largest percentage increase (130 percent), and Italy the smallest (40 percent). These spending binges gave public sector workers generous salaries and benefits, paid for bridges to nowhere, and financed a gold-plated transfer state. What the state gave has proven hard to take away as the riots in Southern Europe show.
Then in 2008, the financial crisis hit. No one wanted to lend to the insolvent PIIGS, and, according to the Keynesian narrative, the PIIGS were forced into extreme austerity by their miserly neighbors to the north. Instead of the stimulus they desperately needed, the PIIGS economies were wrecked by austerity.
Not so according to the official European statistics. Between the onset of the crisis in 2008 and 2011, PIIGS government spending increased by six percent from an already high plateau. Eurostat’s projections (which make the unlikely assumption that the PIIGS will honor the fiscal discipline promised their creditors) still show the PIIGS spending more in 2014 than at the end of their spending binge in 2008.
As Erber wryly notes: “Austerity is everywhere but in the statistics.”
The PIIGS remind me of the patient whose doctor orders him to lose weight by eating less. The patient responds by doubling his calorie intake. He later cuts back by ten percent and wonders why he is not losing weight. The PIIGS went on a spending binge from which they do not want to retreat. They then blame their problems on austerity and the lack of charity of others.
There is another message in these figures: the insolvent PIIGS cannot finance their deficits on their own in credit markets. They can keep on spending only with loans from international organizations and the European Central Bank. That PIIGS have continued to spend unabated means that their “miserly” neighbors have continued to bail them out, largely out of public sight.
So much for the scourge of austerity in Southern Europe. The facts show it simply does not exist.
Well, never mind. The Keynesians have new reason to cheer. Japan, under the new government of Shinzo Abe, has embarked on a program of monetary and fiscal stimulus, and, lo and behold, the stagnant Japanese economy actually recorded a whole quarter of decent growth. At last Japan has seen the light. (The latest Economist cover features a superman Abe flying to Japan’s rescue). Stimulus cheerleader, New York Times columnist Paul Krugman (Japan the Model), answers his own question “how is Abenomics working?” with: “The safe answer is that it’s too soon to tell. But the early signs are good…”
Krugman’s memory must be incredibly short if he thinks that Japan has just discovered stimulus. Japan has been in a twenty-year-old funk, despite launching a dizzying variety of Keynesian stimulus programs, some of which bordered on the crazy (such as giving Japanese shopping vouchers so they could relearn how to spend). Over the past twenty years, Japan has tried to spend itself to growth and has nothing to show for it.
We need look only at the growth of Japan’s public debt to prove the failure of Japan’s Keynesian experiments. In 1990, Japan’s public debt was 67 percent of GDP (much like the U.S. today). Today it is 212 percent. All that public spending and Japan still could not grow!
At an interest rate of 5 percent, the Japanese would have to devote ten percent of GDP just to paying interest! And Krugman wants to add to that debt. And believe me, Japan did not accumulate that debt due to austerity. It does not work that way.
Japan is an example of what Europe will look like in twenty years if it takes the Krugman advice — massive and dangerous debt with nothing to show for it. Japan is a perfect real-world experiment with long run, sustained Keynesianism. Europe and the United States, take notice and beware!
Which leads us to the austerity that is supposedly underway in the United States. (Remember that radical sequester that was supposed to ruin the economy?) Our figures tell exactly the same story as the PIIGS – a binge of public spending that has not been reversed. Between 2000 and 2008, both federal and state and local spending increased by almost two thirds. Despite budget cliff hangers, sequestration, and Republican intransience (so claim the Democrats), the federal government today is spending 16 percent more than at the peak of its binge spending in 2008. State and local governments, which cannot borrow as freely as the Feds, are spending a modest 11 percent more.
Instead of “where’s the beef?” we should ask “where’s the austerity?” Perhaps economist Krugman can find it. But first I would advise him and others like him to consult some facts before they pontificate.
PS In the comments section, I got a priceless gem from a big government fan, who relates that government spending has risen at an annual rate of 7 percent since 1965. Hence, austerity is defined as growth of government spending at a rate less than “normal.” The 7 percent rate is instructive because, according to the rule of 72, you get a doubling every ten years. If the federal government continues to grow at its “normal” (non austerity) rate, it will spend $32 trillion in 2043. Maybe then we’ll finally have “enough” government spending to solve all of our problems.
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Well said,
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http://www.pimco.com/EN/Insights/Pages/Wounded-Heart.aspx
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Keynesian Model Blew It Again To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Deputy Chief Economist
Date: 6/17/2013
If there’s one economic conclusion we can make from recent data, it’s that the Keynesian model has failed - again.
Remember that “fiscal cliff clock” on cable TV? Well, the year-end deal included an end to the payroll tax cut and then two months later, on March 1, the dreaded federal spending sequester went into effect. In other words, the Keynesian clock struck midnight, the economy was supposed to slow sharply, and a recession was possible.
The theory was – still is in some quarters – that higher payroll taxes and less federal spending would reduce spendable incomes (especially for government workers and contractors) and hit consumer spending. This drop in spending would set off a multiplier effect that would drag down economic growth.
One widely-followed Keynesian forecasting unit predicted an uptick in the unemployment rate in the second quarter and a decline in nonfarm payroll growth to 100,000 per month. And when March payrolls rose a tepid 88,000, Keynesians blamed it on the fiscal cliff and said “here we go, it’s started.”
But the unemployment rate is lower in Q2 than in Q1 and nonfarm payrolls have risen an average of 155,000 since the sequester went into effect. Payroll growth during the same three months in 2012 was 147,000. Even the tepid March number was revised from 88,000 to 142,000.
The Keynesians, expecting doom and gloom anytime the government cuts spending, have pounced on any signal of soft economic growth. They jumped on the initial report of weakness in retail sales in March and blamed it on the sequester, even though the last three times Easter had been in March, like this year, sales have been unusually weak compared to other indicators (2002, 2005 and 2008).
But we found out this past week that core retail sales – which take out the monthly volatility caused by autos, gas, and building materials – have been up eleven months in a row and didn’t miss a beat after the sequester went into effect. Assuming consumer prices rose 0.1% in May (see our forecast table, below), “real” (inflation-adjusted) retail sales are up about 3% from a year ago. Total consumption, adjusted for inflation, is up 2.1% during the year-ended April 2013 versus the 1.8% growth during the year-ended April 2012
Meanwhile, equity investments, held by US households, are up about $800 billion in value since March 1. Taken at face value, it seems like the effect of the sequester has been positive, not negative.
Keynesians haven’t even been right about the stock market. We’re not going to call anyone out by name, but we’re thinking of a famous Keynesian economist who is widely known for having made a prescient call about 2008-09, whose name starts with an “R” and sounds a lot like Houdini.
It’s true that he called the collapse in 2008-09, but he originally went bearish in 2005, especially after Hurricane Katrina. Reports say that he recently turned bullish. So what if you sold in mid-2005 and waited until now to buy back in? Since mid-2005, the annualized total return on the S&P 500, including reinvested dividends, has been 6.2%. That’s nothing compared to the late 1990s – but, hey, it ain’t shabby either. In other words, completely ignoring the dire Keynesian advice, even when it was right, would have been profitable.
In mid-2005, you could have bought a 10-year Treasury Note that yielded 4%. Less drama for sure, but no clear advantage. Gold, on the other hand, was trading at about $430/oz. back in mid-2005, so that would have been a great buy, but not an option normal Keynesians would have recommended.
The bottom line is that all this focus on government actions through the lens of a Keynesian model has been basically worthless. Investors are better served when they follow free-market economic theories that focus on production, not demand-side models that focus on spending and debt. And this appears true in both the long, and the short, run.
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It isn't whether Keynesians are right or wrong that matters determining economic policy. We know they are wrong. The question in Washington is how does it poll.
That was an excellent Wesbury. Still he predicts good results from bad policies.
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Monday Morning Outlook
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Watching Nominal GDP To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Deputy Chief Economist
Date: 7/1/2013
One of the most important foundations of modern macroeconomics is something called the “equation of exchange.” It dates all the way back to John Stuart Mill but, in the past couple of generations, was popularized by free-market icon Milton Friedman.
It’s really quite simple: M*V = P*Q. And what it means is that the amount of money multiplied by the velocity with which it circulates through the economy determines nominal GDP (real GDP multiplied by the price level). For example, if the money supply increases and velocity stays the same (or rises), then nominal GDP will also increase, meaning more real GDP, higher prices, or some combination of the two.
This is true regardless of a country’s monetary system. It even worked under the old gold reserve system before the Federal Reserve was created in 1913. Back then, the government only created more dollars when someone deposited more gold. So, as long as velocity didn’t change, nominal GDP would grow at the same rate as the amount of gold. For example, if gold quantities rose, say 1%, per year and real GDP rose 3% per year, prices would fall 2% per year. This would have been “good” deflation. But in reality, velocity has tended to rise over time, so harmful deflation rarely occurred.
Frequent readers of our pieces know we often discuss nominal GDP and may wonder why. The simple reason is the “equation of exchange.” Nominal GDP is inextricably linked with monetary policy (and velocity) and knowledge of some parts of the equation let us solve for other parts.
Nominal GDP is up at a nearly 4% annual rate the past two years. As a result, we can say with some certainty that monetary policy must be accommodative. This is confirmed by a near zero federal funds rate and a relatively steep yield curve – meaning a wide spread between long- and short-term interest rates. In addition, the “real” (inflation-adjusted) federal funds rate has been negative for almost four years (average -0.7% for the past decade).
All of this signals monetary policy is loose. As a result, barring some unforeseen drop in velocity, we are forecasting an upward trend in nominal GDP growth over at least the next couple of years. In turn, as nominal GDP accelerates, the current stance of monetary policy will become increasingly inappropriate and the yield curve will steepen further. In other words, tapering and tightening are the right policies.
Some argue that the US is following the path of Japan. Nominal GDP in Japan is the same today as it was in 1991. Literally, zero growth in 22 years. But, the US is not Japan.
Japan’s population is shrinking, with more deaths than births and just slight immigration. This reduces output unless offset by productivity growth. As a result, the same level of short-term rates means Japan’s monetary policy is not as accommodative as in the US (where population is increasing). Comparing the two countries can lead to mistakes in analysis.
In the end, the point to understand is that fears of declining nominal GDP (or deflation) in the US are misplaced. The US is not Japan and the equation of exchange suggests we won’t be.
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The Need for a New Economics
By George Gilder
Why is it that so many Americans seem to believe that government spending, fueled by debt or taxes, can drive economic growth and wealth creation? Why do they believe that low interest rates, enforced by the Federal Reserve, can somehow spur business and investment? Why do they imagine that money and consumer demand impel the economy forward?
The reasons, I believe, are rooted in an economic confusion between knowledge and power. Many economists believe that growth is impelled by the exercise of power, represented by money creation and by government spending and guarantees. By manipulating the so-called “levers of the economic machine,” government power can enlarge demand, inducing businesses to invest and consumers to spend. This process is seen to generate the demand that fuels economic growth.
These images of the economy of power are part of the very creation story of economics in an era of new machines and sources of energy. The first economic models were explicitly based on the dynamics of the steam engine then impelling the industrial revolution. Isaac Newton’s physical “system of the world” became Adam Smith’s “great machine” of the economy, an equilibrium engine transforming coal and steam into economic growth and progress.
Exploring technology investments over recent decades, however, I found myself preoccupied less with sources of power than with webs of knowledge in a field of study called Information Theory. On one level this theory was merely a science of networks and computers. Its implications, however, would change our deepest concepts of the nature of wealth. It would show that wealth is not money or power or demand. It is essentially the accumulation of knowledge.
Information theory effectively began with Kurt Godel’s demonstration in 1930 that all logical systems, including mathematics, are intrinsically incomplete and depend on axioms that they cannot prove. This epochal finding is often obscured by elaborate explanations of the intricate mathematics he used to prove it. But as John Von Neumann in his audience was first to recognize, Godel’s proof put an end to the idea of the universe, or the economy, as a mechanism. Godel’s proof, as he himself understood, implied the existence of autonomous creation.
Godel’s proof led directly to the invention by Alan Turing of a universal generic computer, a so-called Turing machine. By this abstract conception, which became the foundation for all computer science, Turing showed that no mechanistic computer system could be complete and consistent. Turing concluded that all logical systems were intrinsically oracular.
Computers could not be Smithian “great machines” or Newtonian “systems of the world.” They inexorably relied upon human programmers or oracles and could not transcend their creators. As Turing wrote, he could not specify what these oracles would do. All he could say was that “they could not be machines.” In a computer, they are programmers. In an economy, they are entrepreneurs.
In 1948 a rambunctiously creative engineer, Claude Shannon, from Bell Labs and MIT, translated Godel’s and Turing’s findings into a set of technical concepts for gauging the capacity of communications channels to bear information.
Shannon resolved that all information is most essentially surprise. Unless messages are unexpected they do not convey new information. An orderly and predictable mechanism, such as a Newtonian system of the world or Smithian great machine, embodies or generates no new information.
Studying information theory for decades in my exploration of technology, I finally found the resolution to the enigmas that currently afflict most economic thought. A capitalist economy is chiefly an information system, not a mechanistic incentive system. Wealth is the accumulation of knowledge. As Thomas Sowell declared in 1971: All economic transactions are exchanges of differential knowledge, which is dispersed in human minds around the globe. Knowledge is processed information, which is gauged by its news or surprise.
Surprise is also a measure of freedom and criterion of creativity. It is gauged by the freedom of choice of the sender of a message, which Shannon termed “entropy.” The more numerous the possible messages that can be sent, the more uncertainty at the other end about what message was sent and thus the more information there is in the actual message when it is received.
In Knowledge and Power, I sum up information theory as the treatment of human communications or creations as transmissions down a channel, whether a wire or the world, in the presence of the power of noise, with the outcome measured by its “news” or surprise, defined as entropy and consummated as knowledge.
Since these communications or creations can be business plans or experiments, information theory supplies the foundation for an economics driven not by equilibrium and order but by surprises of enterprise that yield knowledge and wealth.
Information theory requires that such a process be experimental and its results be falsifiable. The businesses conducting entrepreneurial experiments must be allowed to fail or go bankrupt. Otherwise there is no yield of knowledge and thus no production of wealth. Wealth does not consist in material capital that can be appropriated by the greedy or the government but in learning processes and knowledge creations that can only thrive in freedom.
After all, the Neanderthal in his cave had all the material resources and physical appetites that we have today. The difference between our own wealth and Stone Age poverty is not an efflorescence of self-interest but the progress of learning, accomplished by entrepreneurs conducting falsifiable experiments of enterprise.
The enabling theory of telecommunications and the internet, information theory offered me a path to a new economics that could place the surprising creations of entrepreneurs and innovators at the very center of the system rather than patching them in from the outside as “exogenous” inputs. It also showed that knowledge is not merely a source of wealth; it is wealth.
Summing up the new economics of information are ten key insights:
1) The economy is not chiefly an incentive system. It is an information system.
2) Information is the opposite of order or equilibrium. Capitalist economies are not equilibrium systems but dynamic domains of entrepreneurial experiment yielding practical and falsifiable knowledge.
3) Material is conserved, as physics declares. Only knowledge accumulates. All economic wealth and progress is based on the expansion of knowledge.
4) Knowledge is centrifugal, dispersed in people’s heads. Economic advance depends on a similar dispersal of the power of capital, overcoming the centripetal forces of government.
5) Creativity, the source of new knowledge, always comes as a surprise to us. If it didn’t, socialism would work. Mimicking physics, economists seek determinism and thus erroneously banish surprise.
6) Interference between the conduit and the contents of a communications system is called noise. Noise makes it impossible to differentiate the signal from the channel and thus reduces the transmission of information and the growth of knowledge.
7) To bear high entropy (surprising) creations takes a low entropy carrier (no surprises) whether the electromagnetic spectrum, guaranteed by the speed of light, or property rights and the rule of law enforced by constitutional government.
8) Money should be a low entropy carrier for creative ventures. A volatile market of gyrating currencies and grasping governments shrinks the horizons of the economy and reduces it to high frequency trading and arbitrage in a hypertrophy of finance.
9) Wall Street wants volatility for rapid trading, with the downsides protected by government. Main Street and Silicon Valley want monetary stability so they can make long term commitments with the upsides protected by law.
10) GDP growth is fraudulent when it is mostly government spending valued retrospectively at cost and thus shielded from the knowledgeable judgments of consumers oriented toward the future. Whether fueled by debt or seized by taxation, government spending in economic “stimulus” packages necessarily substitutes state power for knowledge and thus destroys information and slows economic growth.
11) Analogous to average temperature in thermodynamics, the real interest rate represents the average returns expected across an economy. Analogous to entropy, profit or loss represent the surprising or unexpected outcomes. Manipulated interest rates obfuscate the signals of real entrepreneurial opportunity and drive the economy toward meaningless trading and arbitrage.
12) Knowledge is the aim of enterprise and the source of wealth. It transcends the motivations of its own pursuit. Separate the knowledge from the power to apply it and the economy fails.
The information theory of capitalism answers many questions that afflict established economics. No business guaranteed by the government is capitalist. Guarantees destroy knowledge and wealth by eliminating the precondition of falsifiability. Unless entrepreneurial ideas can fail or businesses go bankrupt, they cannot succeed in creating new knowledge and wealth. Epitomized by heavily subsidized and guaranteed leviathans, such as Goldman Sachs, Archer Daniels Midland, Harvard and Fanny Mae, the crisis of economics today is crony statism.
The message of a knowledge economy is optimistic. As Jude Wanniski wrote, “Growth comes not from dollars in people’s pockets but from ideas in their heads.” Capitalism is a noosphere, a domain of mind. A capitalist economy can be transformed as rapidly as human minds and knowledge can change.
As experience after World War II when US government spending dropped 61 percent in two years, in Chile in the 1970s when the number of state companies dropped from over 500 to under 25, in Israel and New Zealand in the 1980s when their economies were massively privatized almost over-night, and in Eastern Europe and China in the 1990s, and even in Sweden and Canada in recent years, economic conditions can change overnight when power is dispersed and the surprises of human creativity are released.
Perhaps the most powerful demonstration that wealth is essentially knowledge came in the rapid post world war II revival of the German and Japanese economies. Nearly devoid of material resources, these countries had undergone the nearly complete destruction of their physical plant and equipment. As revealed by decades of experience with unsuccessful ministrations of foreign aid, the mere transfer of financial and political power is impotent to create wealth without the knowledge and creativity of entrepreneurs.
Information Theory is a foundation for revitalizing all the arts and sciences, from physics and biology to mathematics and philosophy. All are transformed by a recognition that information is not order but disorder. The universe is not a great machine that is inexorably grinding down all human pretenses of uniqueness and free will. It is a domain of creativity in the image of a creator.
In the same way, capitalism is not a system of equilibrium; it is an engine of disruption and invention. All economic growth and human civilization stem from the surprises of creativity and the growth of knowledge in a domain of constitutional order.
The great mathematician Gregory Chaitin, inventor of algorithmic information theory, explains that to capture the surprising information in any social, economic, or biological science requires a new mathematics of creativity imported from the world of computers. He writes: “Life is plastic, creative! How can we build this out of static, eternal, perfect mathematics? We shall use post-modern math, the mathematics that comes after Godel, 1931, and Turing, 1936, open not closed math, the math of creativity…”
Entropy is a measure of surprise, disorder, randomness, noise, disequilibrium, and complexity. It is a measure of freedom of choice. Its economic fruits are creativity and profit. Its opposites are predictability, order, low complexity, determinism, equilibrium, and tyranny.
Predictability and order are not spontaneous and cannot be left to an invisible hand. It takes a low-entropy carrier (no surprises) to bear high-entropy information (full of surprisal). In capitalism, the predictable carriers are the rule of law, the maintenance of order, the defense of property rights, the reliability and restraint of regulation, the transparency of accounts, the stability of money, the discipline and futurity of family life, and a level of taxation commensurate with a modest and predictable role of government. These low entropy carriers bear all our bounties of surprising wealth and progress.
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I read Gilder's book that expands on these concepts. He builds these ideas in the book but clearly had difficulty making a book length document as repetition occurs again and again in subsequent chapters. But I think he is spot on in his observation (last paragraph below):
"Predictability and order are not spontaneous and cannot be left to an invisible hand. It takes a low-entropy carrier (no surprises) to bear high-entropy information (full of surprisal). In capitalism, the predictable carriers are the rule of law, the maintenance of order, the defense of property rights, the reliability and restraint of regulation, the transparency of accounts, the stability of money, the discipline and futurity of family life, and a level of taxation commensurate with a modest and predictable role of government. These low entropy carriers bear all our bounties of surprising wealth and progress."
Gilder takes his cue from Shannon's work on information theory which I did not fully appreciate until I read Pierce's text summarizing the key concepts. Without this background I would have been a bit adrift in Guilder's presentation which is at times muddled. Consequently Gilder's presentation, while valuable, ends up unconvincing.
I think Gilder's underlying contribution is to reaffirm what probably many of us instinctively believe: Ultimately growth comes from human imagination, initiative, and drive to create new things (surprises), supported adequately to see these new ideas expand out to large scale which can improve the overall economy. For this process to proceed effectively, it must have a solid, stable foundation which can be taken as predictable and for granted so focus can remain on imagination and implementation.
When the foundations shift, the whole system goes unstable ('becomes noisy" in Gilderese) and growth falters. In this context rule of law, finance, banking, money, regulations and such need to be held stable. Fussing with them (via Wall Street manipulation and false innovation and Fed maneuvering) just make the foundations rumble with continuing earthquakes. Innovators and those with initiative (sources of "unexpected and creative noise" in Gilderese) are forced to hang on instead of do what they do best.
Growth then falters.
Nothing the economists will do using their current theory and practice will fix it. In the end the imaginative and persistent innovators will slug through the problems, and drag the economy along, independent or in spite of "stimulus" and "quantitative easing." These manipulations occur only because the economic/finance part of the foundation went unstable when they should have been somehow restricted from doing so. History suggests we don't yet know how, alas. But human beings adapt, and they are adapting to the current situation, and trying to thrive in spite of it. In many areas they are succeeding as David notes. Corporations which are forced to adapt or die adapt most quickly, and guess what, corporate profits are now thriving. But the mental funk continues.
Just caught the news that Bernanke is keeping his foot on the throttle. Markets up. This is the new normal, it seems. People and companies will adapt, but the foundations continue to rumble and roll creating a lot of FUD (fear, uncertainty, and doubt). It is a far from optimum way to run a railroad.
You need a stable soup pot that just sits there and supports the soup as it is being prepared, and imaginative cooks with a huge library of potential ingredients (information) to make the soup appealing. Bounce the soup pot and nothing but slops occur.
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Gilder is right about this. It is interesting to delve deeper into how things work. Unfortunately the way forward to take advantage of this reality is to make these concepts more simple and clear to more people rather than more deep and complicated. Your friend is also right and much easier to follow.
The tragedy today is that the extreme noise in the system is keeping the best and brightest from bothering with making the most valuable innovations that would move us forward.
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Fantastic food for thought. But like his Gilder tech report is so full of concepts I need more time to digest. I have had some initial thoughts. One big concern I have is just letting human entropy take its course. It is totally random and only God knows where this will take us. We need something to balance this. Gilder only trivially speaks of some controls - his piece is long. But he only gives very short drift to this:
"Predictability and order are not spontaneous and cannot be left to an invisible hand. It takes a low-entropy carrier (no surprises) to bear high-entropy information (full of surprises). In capitalism, the predictable carriers are the rule of law, the maintenance of order, the defense of property rights, the reliability and restraint of regulation, the transparency of accounts, the stability of money, the discipline and futurity of family life, and a level of taxation commensurate with a modest and predictable role of government. These low entropy carriers bear all our bounties of surprising wealth and progress."
I also suggest religion in some way also counterbalances the dangers of just letting loose the entropy of capitalism. We need great religious leaders who can update Judeo Christian tenets to apply to the new world.
I would like to take more time to study the post from Gilder. He blends chemistry, math, and information into an applicable theory of capitalism and suggests it is the continuation of human evolution of a species of creationism.
But the crucial question to me is,
what about us as human beings? As socieities? As a civilization? As a species?
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(http://pgpf.org/sites/default/files/chart/F7AC3D0383584021BD31DDBD9514E109.gif)
From savings comes investment. From investment come jobs, growth, opportunity, prosperity.
The net investment rate, a similar graph, is shown with the savings rate in this pdf, http://object.cato.org/sites/cato.org/files/pubs/pdf/pa737_web_1.pdf, I just don't know how to pull the chart out to display here.
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From Mea Culpa,
Crafty: "Like many, I anticipated huge inflation due to the Fed printing scandalous amounts of money. Though this may yet happen due to the inherent contradictions of the path upon which we are embarked, I have come to belief that Scott Grannis has been correct on this point-- that bank reserves are not the same thing as printing money."
My view: Bank reserves are more like potential energy while printed money (in circulation) is more like kinetic energy. With energy, one easily converts into the other. Bank reserves in excess will convert and multiply into printed money in circulation in excess if and when economic velocity begins to accelerate, meaning price increases will come later from the monetary expansions that already occurred.
Regarding who is right, we will see.
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I'm not disagreeing that down the road those reserves may convert into money, but at present I'm thinking Scott's analysis here is better than mine was.
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I'm not disagreeing that down the road those reserves may convert into money, but at present I'm thinking Scott's analysis here is better than mine was.
I don't think the matter is settled yet.
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October 15, 2013
Average Is Over—But the American Dream Lives On
Andrew Lewis
Who dreams of being average? Americans define personal success in different ways, but certainly no one strives for mediocrity. The children of Lake Wobegon, after all, were “all above average.”
Perhaps this explains why some reviewers have understood the glum predictions of Tyler Cowen’s Average Is Over—that shifts in the labor market will cause the middle class to dwindle—as heralds of the death of the American Dream. This understanding misses the real thrust of Cowen’s book.
Everyone has their own notions of what constitutes the American Dream, but when writer and historian James Truslow Adams coined the phrase in the 1930s, he wrote that in America “life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement.” Cowen’s vision of our future actually reinforces this idea.
This claim might seem strange at first glance for a book that delves into the perpetually gloomy subject of economic inequality. But the takeaways from Cowen’s work are, at least marginally, more optimistic than most people would expect. While Cowen foresees an America with more polarizing income inequality, the country won’t be entirely in the grip of the forces we have grown used to. In the past, income inequality was largely driven by differences in social status. In the future, Cowen argues, society will become more meritocratic: ability will be to an even greater extent the primary driver of labor market success. For those Americans who currently lack access to elite education or other resources or privileges of status, the book offers many reasons to be optimistic about the future.
Cowen’s arguments hinge on the belief that income inequality will persist. In this hypothesis he is far from alone, and backed up by current trends. In the past decade income inequality has worsened by almost every measure. Wealth is more concentrated at the top, and more people depend on government transfers. There are few reasons to expect that these trends will curtail. But rather than deny or look for ways to avoid this fate, the book extends this vision with a series of insights about our economic and social future.
Cowen’s Freestyle Future
One of Cowen’s most fascinating projections concerns the proliferation of machine intelligence and its effects on labor market conditions. He sees the mechanization of chess as a small-scale version of how many industries will evolve, following this sequence:
1. Human is the expert; computer adds little to current product.
2. Experts continue programming machine, strengthening its ability.
3. Experts supplement computer with minimal input (correcting obvious miscalculations).
4. Machine becomes expert; human adds little.
5. Computers take place of human (middle-wage jobs); only those who can add value to the computer stay on the job.
Cowen’s analogizing of the progress of chess programs to broader societal trends is worth delving into with a little more detail. For centuries, chess was a game dominated by human art and skill, with Grandmasters as the foremost artists. In 1990, when a team of IBM programmers (and Carnegie Mellon University graduates) set out to create a machine that could beat these human experts, they were largely scoffed at. But in 1996 the resulting program, Deep Blue, won its first game against the reigning world champion Garry Kasparov (but lost the overall match); in 1997, it defeated Kasparov in a traditional six-game match.
Today, Cowen tells us, an average chess-playing program, running on virtually any piece of consumer hardware, is easily capable of outplaying any human. Many people who compete at the highest levels of chess play what is called freestyle chess, where teams include a computer and a human counterpart. Excelling at freestyle does not require profound skill in chess per se, but rather expertise in working with the computer. The best players are the ones who recognize their limitations and are willing to accept the advice of the computer; those who win most are the ones who design or run the best programs. Cowen predicts that this process will be repeated across many different industries and arenas of human endeavor.
If this process holds, it’s not difficult to see why incomes will become increasingly polarized. The top end of the income distribution—which he envisions as the 15 percent, rather than the 1 percent—will be comprised of those who are truly talented or creative in their ability to work with technology. These folks will “win” the most in the new system because of their ability to make computers more productive. The rest of the population will fall into lower paying service jobs.
This idea is sobering, but one major benefit of this future would be the reduction of “opportunity inequality”. These trends will disenfranchise many subpar performers (and their shortcomings, he says, will be increasingly illuminated by an array of public fora for reviews, as well as various automated assessments of value). But they will also reward those who are most deserving—a fact, says Cowen, that “will make it easier to ignore those who are left behind.”
Thus the advance of machine intelligence will cause a surge inincome inequality, but will also level the playing field foropportunity. In a recent interview with NPR Cowen predicted that “for a lot of people upward mobility will be a lot easier.” The internet has already provided a new forum for individuals to exhibit their talents on a nearly global stage. Here Cowen returns to chess, where smaller nations like Armenia and Norway, once underrepresented in the chess world, are producing some of the best young players. Before online chess, an Armenian player would have had to move to Moscow to compete at the highest levels. With this barrier now removed, Armenia is a “perennial competitor” for international chess honors.
We have seen this trend accelerate, too, with the growth in online education and massively open online courseware (MOOCs). There are plenty of individuals who have the desire, aptitude and discipline to learn online, and they will do so when classes are affordable and accessible.
Computerization also makes us better at assessing ability, especially among larger, more geographically dispersed populations. As quality education becomes more readily available, more individuals—for whom attending an elite university is not an option—will have the opportunity to showcase their ability and be rewarded for it. “Machine intelligence is the friend of the educational parvenu,” Cowen says.
And Then What?
The question that logically follows from worsening income inequality is how it will affect America’s social fabric. Plenty of doomsayers predict that it will lead to a revolution—that the left-behinds will conspire against the new high-earners. But if everyone has the same opportunity to succeed, then how will they feel slighted by the system? Cowen calls these theories of the revolutionary consequences of income inequality “some of the least thought-out and least well-supported arguments with wide currency.”
This is largely consistent with his view on the history of income inequality in the United States. He recognizes that the trend is deeply disconcerting to many Americans but also believes it is not the best measure of social inequality. Access to food, modern medicine, and the internet are just a few measures one could cite to show that the average person is better off now than ever before. In a2011 article for The American Interest, Cowen wrote, “By broad historical standards, what I share with Bill Gates is far more significant than what I don’t share with him.” Indeed, the advancements of modern society have allowed more Americans to enjoy higher standards of living than at any other time in our nation’s history.
A report published in 1997 by the Dallas Federal Reserve Bank,Time Well Spent, substantiates this point. While income disparity has grown, the magnitude of the change does not nearly match that of the rising standard of living. The report examines the cost of goods based on the minutes of work needed, on average, to buy them. It finds that in 1919 it took the average American eighty minutes of work in order to buy a dozen eggs. Today it takes him five minutes.
If this is the case—and by the most advanced methodological standards, it is—then income inequality might not be as devastating an issue as many believe. That’s not at all to say that inequality is unimportant, but rather that income inequality is not the best gauge of societal equity. Perhaps opportunity equality should be what we strive for. The book makes a case for this suggestion.
Cowen has another inkling as to why income inequality is not the catalyst of social unrest and outrage that many make it out to be. Envy, he contends, is usually local. “It’s directed at the guy down the street who got a bigger raise. […] Most of us don’t compare ourselves to billionaires.” He doesn’t claim to demonstrate this, of course, but these injections of more personal insights and intuitions add freshness to the book.
Whether or not you agree with its predictions, Average Is Over is worthwhile for any curious reader. Cowen has a rare ability to present fundamental economic questions without all of the complexity and jargon that make many economics books inaccessible to the lay reader. Approachable prose and plainspoken explanations help this cause.
On the whole, the predictions and insights to be found in this book are more exciting than they are dismal. There is virtue to what Cowen says will be a “hyper-meritocracy.” Certainly an important goal of any economic policy should be to ensure that everyone has a fair shot at succeeding in our society. Rewarding individuals for their ability and effort is an idea that rings true with the spirit of James Adams’ vision. The American Dream is alive and well.
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Defending the One Percent
by Greg Mankiw, Chairman and Professor of Economics at Harvard University
Journal of Economic Perspectives, Summer 2013, pages 21-34
http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.27.3.21
I am unable to cut and paste an excerpt from the pdf.
Mankiw's blog: http://gregmankiw.blogspot.com/
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The case here is paradigmatic of many more. Not that I have a solution, but I feel for the workers getting squeezed here.
http://www.nytimes.com/2013/11/15/opinion/egan-under-my-thumb.html?nl=todaysheadlines&emc=edit_th_20131115
By TIMOTHY EGAN
Published: November 14, 2013 53 Comments
SEATTLE — This is how the middle class dies, not with a bang, but a forced squeeze. After a global corporation posts record profits, it asks the state that has long nurtured its growth for the nation’s biggest single tax break, and then tells the people who make its products that their pension plan will be frozen, their benefits slashed, their pay raises meager. Take it or we leave. And everyone caves.
Well, almost everyone. All went according to script as the Boeing Company showed what to expect in a grim future for a diminished class -- the vanishing American factory worker. The threats were issued, the tax giveaways approved, the political leaders warned of the need to buckle to Boeing.
This didn’t happen in a broken town with a broken industrial heart. It took place in one of the most prosperous metropolitan areas on the planet -- Seattle -- home to Starbucks, Costco, Microsoft, Nordstrom and Amazon.com, which is on its way to becoming the world’s largest retailer.
But then came the final item, a vote of the people who actually assemble the planes. By a 2-1 margin on Wednesday, the machinists of Puget Sound told Boeing to stuff it. With this act of economic suicide, the state could lose up to 56,000 jobs on the new 777X plane. Cue your metaphor -- the Alamo, Custer’s Last Stand, Braveheart.
The events of the last few days show the utter bankruptcy of economic policy prescriptions offered by both political parties. You want tax breaks and deregulation -- the Republican mantra? The $8.7 billion granted Boeing this week is the largest single state-tax giveaway in the nation’s history. It wasn’t enough. You want government training for schools and highly skilled workers -- the Democratic alternative? There was plenty of that, to Boeing’s liking, in the package.
What Boeing wants is very simple: to pay the people who make its airplanes as little money as it can get away with. It needs to do this, we’re told, to stay competitive. It has all the leverage, because enough states -- and countries -- are willing to give it everything it asks for. Who wouldn’t want a gleaming factory stuffed with jet assemblers, a payroll guaranteed for a generation?
Boeing is on a roll, its stock at a record high despite the troubled rollout of its 787 Dreamliner, and the pay of its C.E.O. boosted 20 percent to a package totaling $27.5 million last year. It is not impelled, as the auto industry was five years ago, in the midst of bailouts and cutbacks. Boeing could afford to be generous, or at least not onerous. But it’s easier to play state against state, the race to the bottom.
What Boeing’s riveters, line-assemblers and welders want is a thimble of respect. People have been building flying machines in this region since young Bill Boeing rolled seaplanes out of a barn nearly 100 years ago. The machinists didn’t ask for hefty pay raises or new benefits as a condition to keep the much-promoted 777X production in this region. They just wanted to preserve what they had -- jobs that could pay up upward of $80,000 a year, with a guaranteed pension.
Boeing's proposal would have cut workers' compensation but kept assembly of the 777X jet in Washington State.
Dean Rutz/The Seattle Times, via Associated Press
Boeing's proposal would have cut workers' compensation but kept assembly of the 777X jet in Washington State.
“I’m tired of being slapped in the face,” said John Gilman, who has worked at Boeing for nearly 40 years. “Building airplanes -- it takes years of training and skill. The people who run this company used to understand that. But now it’s run by bean counters and lawyers.”
Gilman was among the thousands of factory workers voting on Boeing’s take-it-or-we-leave proposal Wednesday. The anger was palpable. The president of the local machinists union had called the proposal “a piece of crap.” Others referred to it as “the Walmartization of aerospace.” As they voted, vultures circled, among them Gov. Rick Perry of Texas, who tweeted last week that his low-tax, low-wage state was ready to help Boeing.
One of the more tedious laments of our day is the bromide that we don’t make things anymore in the United States. In fact, we make plenty of things, including world-class airplanes. But the question is whether we can still pay the people who make them a decent wage.
Perhaps not. In the wake of the machinists’ rebellion, Boeing is likely to move. “We’re left with no choice but to open the process competitively and pursue all options for the 777X,” said Boeing’s commercial airplanes C.E.O., Ray Conner, after the vote.
So, off to Texas, where one in four people have no health care, or South Carolina, where a compliant work force would never think of putting up a fight? And who can blame Boeing? After all, pensions are a thing of the past, aren’t they? Wages and household income, across the country, have not risen in nearly 15 years.
This is supposed to be the age of the gig economy -- every worker an entrepreneur. But it hasn’t translated to a fix of the greatest economic crisis of our times: how to preserve a declining middle class.
The distilled wisdom on this subject says that education -- elevating minds, skills and critical thinking to match a tomorrow economy -- is the way forward. And everyone in this tomorrow-economy state seems to agree. Except, look at what happened here, a parable for troubled times. The state agreed to subsidize Boeing to the tune of $500 million a year over 16 years. That’s twice what the state gives to the University of Washington, the region’s flagship college, long an elevator to the middle class. Maybe the university should threaten to leave town.
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People who dismiss the importance of the pontiff and his views on other matters such as gay rights, abortion and birth control are suddenly quite exuberant to hear Pope Francis disparage "trickle-down theories". (http://www.vatican.va/holy_father/francesco/apost_exhortations/documents/papa-francesco_esortazione-ap_20131124_evangelii-gaudium_en.pdf) Before I can really comment, I will need to read what is written in its entirety :-( and learn if there is a question about context and meaning coming through the media reports, such as this one:
http://www.washingtonpost.com/business/economy/pope-francis-denounces-trickle-down-economic-theories-in-critique-of-inequality/2013/11/26/e17ffe4e-56b6-11e3-8304-caf30787c0a9_story.html
Pope Francis denounces ‘trickle-down’ economic theories in critique of inequality
Kevin Williamson at National Review wrote:
"... But there is no reason for Pope Francis to take that view [all power relationships as zero-sum: If somebody else gets a little more power, he has a little less]. If ever the Church’s economic thinkers get over their 19th-century model of the relationship between state and market, they might appreciate that spontaneous orders and distributed economic forces could produce some truly radical outcomes in a world in which a billion or more people shared a vision of justice and mercy. The pope’s job in part is to supply that vision; unhappily, the default Catholic position seems to be delegating economic justice to the state, under the mistaken theory that its ministers are somehow less selfish than are the men who build and create and trade for a living rather than expropriate. Strange that a man who labored under the shadow of Perón has not come to that conclusion on his own."
The Pope is quite right (IMHO) to criticize the worship of money and materialism: http://en.wikipedia.org/wiki/Thou_shalt_have_no_other_gods_before_me.
He is out of his realm to think that a lifetime of studying poverty (the lack of wealth creation) leads to very much insight into the creation of wealth, which is the pathway out of poverty.
Most offensive to me is the (media) implication that he supports government programs that emphasize collective taking, not individual giving.
Ed Morrisey of Hot Air took the time to read Evangelii Gaudium and says that this is not a new turn toward socialism or communism. http://hotair.com/archives/2013/12/02/pope-francis-and-the-media-missing-the-forest-for-a-couple-of-trees/
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The Catholic Church has a long history of such corporatist (fascist) thinking.
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The Catholic Church has a long history of such corporatist (fascist) thinking.
This is sad to me. I am only a non-member who sometime attends but a good part of my family is Catholic. I understand that people had failed views of economics centuries ago, but we have quite a bit of new data since then. Economic Freedom and capitalism have lifted billions(?) of people up out of poverty. Big Government, and even charity, has lifted up virtually none.
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My most referenced economics book, I wish I could just post the whole thing. If you are interested in this sort of thing, growing our great country out of plowhorse stagnation, go read it!
http://www.amazon.com/Seven-Fat-Years-How-Again/dp/002901915X
December 3, 2013
Robert Bartley's 'The Seven Fat Years' - One of the Greatest Economics Books Ever Written
By John Tamny http://www.realclearmarkets.com/articles/2013/12/03/robert_bartleys_the_seven_fat_years_-_one_of_the_greatest_economics_books_ever_written_100770.html
Ten years ago in the fall of 2003, I finally read Robert Bartley's The Seven Fat Years. An economic history of the booming ‘80s, along with the slow-growth ‘70s that preceded the alleged ‘Decade of Greed," Bartley's book was a masterpiece. Most already know this, but Bartley was the editorial page editor of the Wall Street Journal, and he sadly died ten years ago today.
I was never lucky enough to know Bartley, but he was always kind enough to return an occasional e-mail, including one about interest rates referenced in his book not long before he passed. Though The Seven Fat Years was published in 1992, it remains one of the most useful books an economically interested reader could ever buy. It explains very entertainingly how extraordinarily easy is economic growth, and to read it once again as I did for this belated review is to also see how very visionary was this revolutionary economic thinker.
What were the seven fat years? As Bartley writes early on, they took place from 1983-1990 when "the United States recovered its pre-1973 growth path." Why did it? That's pretty basic, though hard in practice thanks to the third rate thinkers who generally populate Congress and the White House, not to mention the deluded sorts who populate what is an increasingly fraudulent economics profession.
Bartley thankfully wasn't an economist, and possessing a mind not so polluted by charts, graphs and more than worthless measures of economic activity, he understood intimately that economic growth is as simple as keeping the price of work and investment light (taxes), trade among economic actors around the world free, regulation minimal, and the money used to measure real economic activity stable in value. The Seven Fat Years describes how we forgot basic economics in the malaise-ridden ‘70s, only for Bartley and others to revive Classical economics in the ‘80s; thus the 7-year boom.
The book begins with Bartley's observation that "In the years just before 1982, democratic capitalism was in retreat. Its economic order seemed unhinged, wracked by bewildering inflation, stagnant productivity, and finally a deep recession." He went on to note that "Economic confusions and a sense of futility sapped the morale of the Western people; leaders talked of "malaise" in America and "Europessimism" across the Atlantic."
What's so amazing about Bartley's words, or maybe not, is that they could have been written yesterday. History surely repeats itself, or rhymes, and just as Paul Krugman on the left and Tyler Cowen on the right talk at length about economic growth as something no longer attainable, the popular view among economists then was that "America had become a ‘debtor nation' and was declining as previous empires had." No, economic growth is once again as simple as getting the policy mix right. Bartley and a group of economic visionaries that included, but was not limited to Robert Mundell, Arthur Laffer, Charles Kadlec, Jude Wanniski, and Rep. Jack Kemp, authored a revolution that led to Ronald Reagan's election, and an eventual revival of economic growth thanks to a return to simple economic ideas that removed barriers to production.
These economic concepts were referred to then, and are now, as "supply-side" economics. Unfortunately a media that couldn't understand the concepts limited its flawed analysis of supply side to the Laffer (more on Laffer's brilliant contributions in a little bit) Curve, but it was really much more than that. Unlike demand-side thinkers who falsely presume growth is a function of stimulating consumption, Bartley and other Classical thinkers knew otherwise. They correctly understood that all demand is a function of supply, so in order to stimulate demand it was necessary for policymakers to stimulate the supply side of the economy; as in remove the tax, regulatory, trade and monetary barriers to production. It worked as the booming ‘80s revealed.
To read The Seven Fat Years is to know with certitude how very much Bartley would understand the problems of today. That is so because today's problems are in many ways a repeat of what happened in the 1970s. If there's disagreement with Bartley, and there's very little of that, it has to do with his assertion early on that "It seems that prosperity may bring discontents, real and imagined, that in turn consume the prosperity." My own view is that prosperity doesn't so much bring discontent as much as one of its negative tradeoffs is that it makes us flabby, and too often uncaring in terms of whom we vote into office.
Conversely, slow growth always and everywhere authored by government focuses the electorate. Reagan's election was the result of the failures of LBJ, Nixon, Ford, and Carter, and he revived economic growth through the implementation of the Bartley policy mix that President Clinton largely maintained such that the Reagan/Clinton era was marked by substantial growth. A booming economy essentially blinded voters to the importance of policy such that they elected second rate thinkers of the George W. Bush and Barack Obama variety; both presidents having revived the failed policy ideas of the 1970s; the unstable, cheap money that each sought the most consequential when it came to policy that's always inimical to economic growth.
Bartley would understand today precisely because he'd seen all of this before. Indeed, while it's popular to this day among the political and economic commentariat to blame OPEC for rising oil prices in the ‘70s, Bartley righted the false history about oil in correctly putting quotes around ‘oil shocks.' As he and the rest of the Michael 1 (the lower Manhattan restaurant where he, Laffer, Mundell and other leading Classical thinkers frequently talked policy) crowd knew well, oil wasn't suddenly expensive as much as the dollar in which it was priced was cheap.
Bartley wrote that "The real shock was that the dollar was depreciating against oil, against gold, against foreign currencies and against nearly everything else." About OPEC's non-role in an energy ‘crisis' created by U.S. monetary policy, Bartley observed that "In the confusion of the 1970s, no one noticed that OPEC told us plainly what was going to happen after the closing of the gold window." Put more simply, when the Nixon administration delinked the dollar from gold, the dollar's value plummeted on the way to the 1970s commodity boom.
Bartley would understand our present situation well simply because George W. Bush, like Nixon and Carter in the ‘70s, sought a weak dollar. The markets complied owing to the historical truth that presidential administrations always get the dollar they want. It staggers this writer to this day that so many otherwise smart people ascribe nominally expensive oil to OPEC and foreign demand much as smart people felt this way in the ‘70s. It's particularly unsettling that so many on the right who generally believe in free markets buy into this falsehood. Implicit there is that an oil market dating back to the 1860s still hasn't figured out how to match supply with demand. More to the point, when the right incorrectly tie expensive oil to scarcity they are explicitly suggesting ‘market failure' on the part of the energy industry. It would be funny if it weren't so sad.
The money illusion that gave us high oil prices in the ‘70s, and that has given us similarly nosebleed oil in the 2000s brings with it economy-sapping investment implications. Not only is oil everywhere such that it's prosaic, it's also easy to tax for it being of the earth, or stationary as it were.
Later in the book Bartley noted that in the ‘70s "Nearly everyone had bet on constantly rising oil prices." When money is cheap, investment flows into the commoditized wealth that already exists over the stock and bond income streams representing wealth that doesn't yet exist. When oil and commodities are booming, the real economy is struggling. Bartley went on to write that "when money turned tight, the oil price couldn't go up and the loans [made to oil companies] couldn't be repaid." When we return to quality money, and eventually we will given the desire of Americans for growth, oil and commodity based economies here and around the world will face a rude awakening. History always repeats itself, and Bartley would not be fooled by today's energy ‘boom' in much the same way that he and the rest of the Michael 1 crew weren't fooled back in the ‘70s. As he put it, "At Michael 1 these events were not seen as an oil problem but a monetary problem."
Moving to the monetary policy that created the ‘70s crack-up that Bartley described, and that tells the story of the present too, the Michael 1 crowd very much decried Nixon's ill-conceived decision to rob the dollar of its gold definition. Better yet, they understood the change in investor preference from future concepts to the hard wealth of the present that similarly weighs on our economy today. Much as housing and commodities soared under Bush, in the ‘70s there was similarly according to Bartley a rush into "real assets such as gold or real estate."
In the ‘70s the prevailing economic view of a political class utterly confused by the slow growth that resulted from a weak dollar was that the economy needed more of the same. A weak dollar would boost exports despite devaluation always and everywhere existing as the economy-wrecking policy lever of the poorest countries. The Michael 1 attendees correctly understood that "Money is a veil, and will not change the relative value of a jug of wine and a loaf of bread." To Bartley et al, money's sole purpose was as a measure of value that would facilitate the exchange of bread and wine, thus the importance of stability.
Instead, and pouring gasoline on the fire, the Nixon and Carter years were defined by regular devaluation of the unit of account (the dollar) such that investment dried up, and chaos reigned. Bartley described this era of floating money as a time when "price signals in the real economy would be subject to repeated disturbances that would detract from efficiency and growth." Yes, floating money that was in freefall gave us the growth-deficient ‘70s, but with the resumption of largely stable money in the ‘80s and ‘90s, the economy took off. Since 2000 we've re-entered an era of limp growth; the latter made predictable by a dollar that was both weak and unstable.
Notable about the ‘70s is that just like today, a sagging economy brought out of the woodwork a great deal of monetary mysticism. Milton Friedman's monetarism was rising in popularity then, and while its modern adherents of the Scott Sumner variety in no way measure up to Friedman (about the Nobel Laureate, Bartley wrote that "On most issues - Say's Law, price controls, energy, efficient markets, deficits, Keynes or whatever - he would be entirely at home at Michael 1), it's sad and happy at the same time that economic distress elevates incorrect thinking (Monetarism) as much as it does Classical thinking of the kind that Bartley was so instrumental in reviving.
It's on the subject of Monetarism in The Seven Fat Years that readers will be reminded of Arthur Laffer's certain genius. Monetarism then and now naively presumes that nirvana can be achieved if allegedly ‘wise men' control "the money supply." But as Bartley so helpfully wrote about Laffer's discredit of this failed idea, "Laffer would draw a tiny black box in the corner of a sheet of paper; ‘this is M-1,' currency and checking deposits. Still bigger boxes included money-market funds, then various credit lines. Finally, the whole page was filled with a box called ‘unutilized trade credit' - that is, whatever you can charge on the credit cards in your pocket. Do you really think, he asked, this little black box controls all the others." The Michael 1 crowd understood well that it didn't, but Friedman and other Monetarist thinkers believed it then, much as Sumner and others promote his monetary form of Keynesian mysticism today.
Laffer et al once again didn't bite. As Bartley further explained Laffer's explanation of the quantity theory of money, "The money supply, he insisted, was ‘demand determined.' What the big boxes demanded the little one supplied." Monetarists at present decry the Fed paying interest on reserves (IOR), and while the Fed should not be paying for bank reserves it needlessly created with the imposition of its adolescent QE policies, it does precisely because demand for money is so low. More comically for a truly dangerous theory is the more that money is corrupted by the creation of it clamored for by Monetarists, the lower is the demand for it. Money's sole purpose is as a stable measure of value, but so deluded are Monetarist thinkers by monetary aggregates that they can't see how very much their own policies work against the rising monetary aggregates they desire.
Stable money in terms of value is heavily demanded, and as a result soars in terms of supply, but all of this confuses the Monetarist School. Then as now, monetarists got inflation backwards. Bartley noted that "With big inflation [meaning devaluation - always], for example, consumers would not want to hold currency. They would shift to high-interest deposits not counted in narrow aggregates, or to real assets like real estate or gold, not counted at all. This would mean that demand for money would fall, pull down the statistical aggregate. When the aggregate fell, the Fed would inject more bank reserves, fueling the inflation. Yet if the real economy swung into boom, say because taxes were cut, the demand for money would grow, pushing up the aggregates. Watching the aggregates grow because of higher money demand, the Fed would worry about inflation, choke off bank reserves, curtail the availability of credit, push up interest rates and stop the recovery."
The Reagan policy mix truly took hold in 1983; '83 when the Reagan tax cuts were finally fully implemented, and the economy soared. With a rising economy money demand naturally soared given the tautology that producers are demanding money when they offer up goods and services for sale. As the economy took off Friedman, wedded to a monetary theory that is rooted in confusion about inflation, made the rounds of Wall Street to argue that the recovery was inflationary even though the value of the dollar was on the way up. Rest assured that if and when the U.S. economy emerges from the Bush/Obama disaster, money demand and the aggregates that confused Monetarists will soar again. Modern believers in that which doesn't work like Sumner will first claim that they predicted the boom based on rising aggregates, then they'll claim an inflation problem despite a stronger dollar. Lost on the Monetarist crowd is the simple truth that the stable money values they dismiss are the only path to the rising money in circulation that they're asking for.
Not so the Michael 1 thinkers. Well aware that an economy is a collection of billions of individuals making infinite decisions every millisecond, they weren't so arrogant as to presume to know how many dollars an economy would need. Their solution was a return to quality money defined by gold. As Bartley wrote, the monetary "system needs an ‘anchor,' some method of judging how much money the world needs. If all nations use their monetary policy to fix the currency of nation n, the nth nation can use its monetary policy to anchor the whole system, to gold or some other indicator." Bartley knew well of gold's historical stability, so he called for monetary policy that would stabilize the price of the dollar by virtue of adjusting supply to meet demand; the gold price serving as the market signal that would tell the monetary authority whether there we too many or too few dollars in the system.
The above description brings up another minor disagreement with the author of this most essential of books. Paul Volcker gets a mostly free pass in an economic memoir which refers to him as a ‘saint.' In truth, and Bartley obviously knew this welll, Volcker not only regularly leaked against the Reagan tax cuts, but he also foisted Friedman's monetary policies on the economy in such a way that the Reagan Revolution almost never was. Administrations once again get the dollar they want, and as Reagan was for a strong dollar in the way that Nixon and Carter were not, the markets were going to correct the dollar upward no matter the ‘tight money' policies rooted in quantity theory imposed by Volcker. More to the point, stable money in terms of value has little to do with ‘tight money' as Bartley suggested in the book. More realistically, stable money is heavily demanded as the unit used in trade and investment, so if stable money is the goal, the supply of the credible currency will naturally rise.
Volcker ultimately abandoned Friedman's Monetarism in late '82 such that the Reagan boom would soon begin, but in waiting until then he nearly made Reagan a one-term president. Notably, when he shed Friedman's failed policies that are perhaps unsurprisingly being revived today, Laffer and Kadlec concluded that he was following some sort of dollar price rule; a stable dollar always necessary for economic growth. Volcker surely looms large in any discussion of the ‘80s economic renaissance, but the story should be more about how he almost suffocated it as opposed to being a major factor in the seven fat years that Bartley chronicled.
It's also sadly true that while a dollar price rule loomed large in the recovery, Reagan and the Michael 1 crowd never achieved their goal of returning the dollar to a gold standard. We have the 2000s to thank for this not having happened, and as Bartley noted, resolving monetary policy in a way that rids the economy of unstable money was "the one big unfinished task of the Seven Fat Years." So true, but Rome wasn't built in a day.
About trade and the mythical ‘trade deficits' that still captivate those in the ever fraudulent economics profession, Bartley noted that "In all the pantheon of economic statistics, there is none so meaningless and misleading." He went on to write that we somehow "have trouble remembering that commerce takes place between consenting adults, that the bargain makes both sides richer in one way or the other. Instead, we tend to view trade as some kind of nationalistic competition." This misunderstanding which presumes that trade is war such that one side weakens the other is the driver of all manner of policy stupidity.
But as Bartley so expertly pointed out (thank goodness once again that he wasn't an economist), "In fact, international transactions are always in balance, by definition." Of course they are. We can only trade insofar as we produce something to trade with. We trade products for products, and our ability to demand that which we don't have is a function of our supplying what we do; that or borrowing from the production of others. All trade once again balances.
Back to trade ‘deficits,' Bartley revealed the absurdity of the calculation. As he wrote, "The export of an airliner is called trade. The export of a share of stock is called foreign investment." Why this is important has to do with his later point that "a rapidly growing economy will demand more of the world's supply of real resources and run a trade deficit." We are able to import a great deal in the U.S. precisely because we're able to export not just goods and services, but shares in our leading companies. With the exception of the Great Depression and other periods where bad policy has repelled foreign capital, we've always run a trade ‘deficit' precisely because the U.S. has been correctly seen by investors as the best locale in which to commit capital.
Of course to the economic and political commentariat, the eagerness of global investors to place their money in the U.S. is seen as a negative. Indeed, so debased is economic commentary today (just as it was then) that the investment inflows are decried as a negative signal for making us a ‘debtor nation.' Horrors! All that investment somehow weakens us. What's more horrific is that economics is generally a highly paid profession.
All of which brings us to worries about the budget deficit that reigned supreme then, and that still captivates far too many thinkers today. Bartley wrote that the "deficit is not a meaningless figure, only a grossly overrated one." Unfortunately, it being overrated means that this "great national myth" impacted policy then, just as it does today.
Rising deficits forced a giveback of some of Reagan's tax cuts, and then in modern times any tax cut is viewed in Washington through the prism of its impact on the deficit. Such an accounting abstraction did not cloud the minds of the grand thinkers at Michael 1. Internationalists all who understood per Mundell that "the only closed economy is the global economy," it was apparent to them that "it's not government borrowing that crowds out the private sector, but government spending."
Remember, a dollar is a dollar, and dollar credit is dollar credit. Dollar credit is everywhere (note this, Monetarists) in the world. Whether a government that tautologically lacks resources borrows or taxes the money it spends is economically of little consequence. Either way, limited capital is extracted from the more productive private sector and the investment driving the latter in favor of often wasteful government consumption. In that case, the only statistic that matters is how much government spends on an annual basis because the number is a clear signal of what the private sector is losing. Deficits are just finance, they're a waste of time, and any sentient being should understand that we'd be much better off economically if we had annual deficits of $500 billion per year out of $600 billion in annual spending, over balanced budgets of $3.5 trillion.
The above is important when we consider that much as it does today, Keynesian thinking dominated economic discussion in the ‘70s when Bartley et al led an intellectual revolt. To Keynesians there's no distinction between government and private sector investment. Ever worshipful of demand, they just want the money spent; hence their support of large government budgets.
Bartley obviously saw all of this in a different light. How the money is spent is crucial, and in response to the industrial policy types who felt then and do now that government should direct investment, Bartley wrote "Rank in order the most likely recipient of capital from an industrial planning bureaucracy:
(A) Steve Jobs's garage.
(B) IBM
(C) A company in the district of the most powerful congressman."
Hopefully readers get the point. Government, whether overseen by Republicans or Democrats, is by nature ‘conservative' in the non-ideological sense such that it very much resides in the ‘seen.' If government employees had a clue about what the future of commerce might be they certainly wouldn't be allocating capital from Washington. Instead, they would be making real money investing in the private sector. Government allocation of capital, though said to be stimulative, is logically the opposite. Government spending and investment means that the connected get credit over revolutionary thinkers like Jobs who got started in garages. With the above passage Bartley cleverly exploded the lie that is Keynesian government ‘stimulus.'
About the taxes that governments collect with an eye on redistributing the inflow, Bartley helpfully made plain throughout The Seven Fat Years that high rates of taxation make productive work more expensive. Taxes are a price, or better yet a penalty placed on productive work. To get more work, lower the price. It's that simple.
Looked at in terms of investment, he logically noted that the prospect of a capital gain "is the big jackpot that attracts entrepreneurial vigor." Along those lines he pointed out that "there were no high-tech startup companies founded in 1976, while more than 300 had been founded in 1968." No surprise there. Capital gains taxes were increased in the ‘70s until being reduced in 1978, and then as investors are buying future dollar income streams when they provide capital to entrepreneurs, high taxes on investment combined with dollar devaluation dried up investment altogether.
The economics profession almost to a man and woman elevates consumption above everything else, but there again the non-economist in Bartley revealed the absurdity of the thinking that informs this most worthless of professions. As he put it so well, "If you scraped up $100,000 and used it to buy a Rolls-Royce, you don't get taxed per luxury-driving mile. But if you use it to buy stock, providing the company with investment funds, and then you want to sell it to buy another stock, you only have paper to show for your $100,000, yet you still have to pay a tax." The capital gains tax is anti-company formation, and worse for a political class that worships at the altar of job creation, it's anti-job creation. To put it very simply, there are no companies and no jobs without investment first. We should abolish the capital gains tax.
It was said early on that The Seven Fat Years was quite the book in a visionary sense, and this should be stressed. Bartley wrote it in the early ‘90s when the economy was weak, but throughout had a very optimistic tone about the future. He wrote that "By 1990, a whole subculture was hooking itself together every night, posting messages, information, secrets and insults on tiny bulletin boards of silicon." I was in college at the time, but this in no way described my experience; the point being that a major informer of Bartley's optimism was an Internet future that most then didn't regard, and certainly didn't understand.
About banking, he spent a lot of time on the S&L debacle. He understood that the industry was regulated out of existence through caps on interest rates that could be offered, and then when near extinction, was allowed to swing for the fences; all while overseen by regulators totally and logically unequal to regulating that which they couldn't possibly understand. Bank regulators are the people who couldn't get jobs at banks. Naturally politicians played a role here too (remember the Keating Five?) in protecting errant S&Ls from regulators who were once again unequal to that which they were asked to do.
Where his visionary nature came into play with banking was in his assertion that "the essence of financial safety is diversification. And a financial system that outlaws diversification - breaking finance into a succession of narrow splinters - is a series of disasters waiting to happen." Bartley in a strong sense could see that the regulation of banks was their inevitable undoing; the latter taking place more recently. Bartley would have understood the problems within banks in 2008 very well for having seen what government was doing to them back in the ‘90s.
And to show how history always repeats itself, the response to the S&L crack-up was a great deal more regulation in the form of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) that economist Lawrence White referred to as "an Act of anger." FIRREA was the Dodd-Frank of its day that in Bartley's words "set out to ‘solve' the crisis of unprofitable thrifts by shrinking thrift profits, through higher insurance premiums, more indirect taxes, higher capital requirements, other increased regulation and a reduction in diversification authority."
Bartley seemed to sense that when we shackle any business with rules we reduce its profits, and with reduced profits, drive away the very talent that makes businesses more financially sound to begin with. Bartley correctly understood that the reforms of the early ‘90s were setting the stage for something much worse down the line, and he was proven very correct.
About the ratings agencies that were wrongly fingered for a financial ‘crisis' that was wholly a creation of government error, Bartley understood what too many did not in 2008. So many were quite eager to blame the drones toiling in agency cubicles for their flawed analysis of bonds that ‘tricked' the best investors in the world. What a laugh. As Bartley put it so well, "No one at Michael 1 would believe an individual bond rater could outguess the collective decisions of the market; if he could, he'd be rich and not have to work in such a stodgy place." So true, and his analysis is a reminder that we truly lost a great thinker when Bartley passed in 2003.
As a keen follower of the dollar, Bartley's brilliant book suggests that he would have foreseen our present economic problems early on. He would have known that spiking oil prices were a function of a cheap dollar that was going to author an economy-sapping rush into hard assets like housing least vulnerable to the devaluation. As a keen follower of finance, he would have known that the dollar's descent foretold major problems in a banking sector that was going to and did chase the money illusion into all manner of finance related to housing. And then having witnessed the wrongheaded re-regulation of the banks in the ‘90s, he likely would have written very presciently about how this was all going to work out.
Writing about the ‘70s toward the end of his book, Bartley observed that in that failed decade "the United States led the world to the brink of economic crisis without ever knowing it. It simply didn't understand what it was doing." Other than his tax cuts, President Bush in many ways mimicked the devaluationist, high spending, heavy regulating policies of Nixon and Carter, and a president who surely didn't know what he was doing similarly led the world into crisis once the results of his policies came to fruition.
It says here that Robert Bartley wrote one of the best economic books of all time in 1992. For readers who want to understand why the ‘70s and ‘80s were so different economically, including the seven fat years from 1983-1990, they should read his book. Even better, for those who want to understand what happened in the 2000s on the way to an inevitable crack-up, they should also read Bartley's book. History rhymes, and Bartley told the story of the 2000s in 1992.
John Tamny is editor of RealClearMarkets and Forbes Opinions
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False, static scoring of tax rate cuts (and the ignored damage from tax rate increases) needs to hit the trash bin forever. "Extra growth and changed business behavior will likely recoup 45%-60% of that revenue [From a significant corporate tax rate cut in Britain]. The report says that even that amount is almost certainly understated, since Treasury didn't attempt to model the effects of the lower rate on increased foreign investment or other spillover benefits."
Dec. 5, 2013 WSJ Editorial (Subscribe at https://buy.wsj.com/offers/pages/OfferMulti1a?trackCode=aaqa209l)
While America dawdles over tax reform, new evidence from Britain shows that cutting corporate tax rates is a tax revenue winner.
Chancellor of the Exchequer George Osborne has cut Britain's corporate tax rate to 22% from 28% since taking office in 2010, with a further cut to 20% due in 2015. On paper, these tax cuts were predicted to "cost" Her Majesty's Treasury some £7.8 billion a year when fully phased in. But Mr. Osborne asked his department to figure out how much additional revenue would be generated by the higher investment, wages and productivity made possible by leaving that money in private hands.
The Treasury's answer in a report this week is that extra growth and changed business behavior will likely recoup 45%-60% of that revenue. The report says that even that amount is almost certainly understated, since Treasury didn't attempt to model the effects of the lower rate on increased foreign investment or other "spillover benefits." This sort of economic modeling is never an exact science, but the results are especially notable because the U.K. Treasury gnomes are typically as bound by static-revenue accounting as are the American tax scorers at Congress's Joint Tax Committee.
While the British rate cut is sizable, the U.S. has even more room to climb down the Laffer Curve because the top corporate rate is 35%, plus what the states add—9.x% in benighted Illinois, for example. This means the revenue feedback effects from a rate cut would be even more substantial. (more at link) http://online.wsj.com/news/articles/SB10001424052702303997604579240072829229810?mod=WSJ_Opinion_AboveLEFTTop
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My perspective on minimum wage is not what wages should be but who should set them. Wages should be set by consenting the parties of employer and potential employee for both efficiency and moral reasons, not controlled by the state or the federal government.
Paul Krugman, dishonest and unworthy of quoting, says “there just isn’t any evidence that raising the minimum wage near current levels would reduce employment”.
But there is.
Start here, at the MIT press with a Jan 2013 book, Minimum Wages, By David Neumark and William L. Wascher
https://mitpress.mit.edu/books/minimum-wages
David Neumark is Professor of Economics at the University of California, Irvine, Research Associate at the National Bureau of Economic Research, Senior Fellow at the Public Policy Institute of California, Research Fellow at the Institute for the Study of Labor. William L. Wascher is Senior Associate Director in the Division of Research and Statistics at the Federal Reserve Board.
"Neumark and Wascher demonstrate the overwhelming weight of careful U.S. evidence and other evidence showing the detrimental effects of minimum wages on low-skilled workers."
Synthesizing nearly two decades of their own research and reviewing other research that touches on the same questions...
Neumark and Wascher argue that minimum wages do not achieve the main goals set forth by their supporters. They reduce employment opportunities for less-skilled workers and tend to reduce their earnings; they are not an effective means of reducing poverty; and they appear to have adverse longer-term effects on wages and earnings, in part by reducing the acquisition of human capital.
The evidence still shows that minimum wages pose a tradeoff of higher wages for some against job losses for others, and that policymakers need to bear this tradeoff in mind when making decisions about increasing the minimum wage.
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Of the 19 states with higher-than-federal minimum wages, six are among the top-ten for teen unemployment, while only one is among the bottom ten. The probability this could have happened by chance is under 1%.
http://consultingbyrpm.com/blog/2013/02/i-get-empirical-on-minimum-wage.html
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i was pleased to see George Will pick up on yeserday's minimum wage discussion. He tries so eloquently to not say you have to be a complete idiot to think you can raise the cost of something and get more of it. If we really want to help the downtrodden, why wouldn't we wouldn't we raise the minimum wage to $50? Why wouldn't we "require anyone who gives money to panhandlers to give a minimum of $10"? Won't that bring in more money than smaller donations? Panhandlers don't think so.
"raising the price of low-productivity workers will somewhat reduce demand for them. If you reject that last sentence, name other goods or services for which you think demand is inelastic when their prices increase."
http://www.washingtonpost.com/opinions/george-f-will-raise-the-minimum-wage-its-iffy/2013/12/13/f9a8d81a-6363-11e3-a373-0f9f2d1c2b61_story.html
Raise minimum wage? It’s iffy
By George F. Will, Published: December 13
“It’s not true that life is one damn thing after another — it’s one damn thing over and over.”
— Edna St. Vincent Millay
Liberals’ love of recycling extends to their ideas, one of which illustrates the miniaturization of Barack Obama’s presidency. He fervently favors a minor measure that would have mostly small, mostly injurious effects on a small number of people. Nevertheless, raising the minimum hourly wage for the 23rd time since 1938, from today’s $7.25 to $10.10, is a nifty idea, if:
If government is good at setting prices. Government — subsidizer of Solyndra, operator of the ethanol program, creator of HealthCare.gov — uses minimum-wage laws to set the price for the labor of workers who are apt to add only small value to the economy.
If you think government should prevent two consenting parties — an employer and a worker — from agreeing to an hourly wage that government disapproves.
If you think today’s 7 percent unemployment rate is too low. (It would be 10.9 percent if the workforce participation rate were as high as it was when Obama was first inaugurated; since then, millions of discouraged workers have stopped searching for jobs.) Because less than 3 percent of the workforce earns the minimum wage, increasing that wage will not greatly increase unemployment. Still, raising the price of low-productivity workers will somewhat reduce demand for them.
If you reject that last sentence. If you do, name other goods or services for which you think demand is inelastic when their prices increase.
If you think teenage (16-19) unemployment (20.8 percent), and especially African American teenage unemployment (35.8 percent), is too low. Approximately 24 percent of minimum-wage workers are teenagers.
If you think government policy should encourage automation of the ordering and preparation of food to replace workers in the restaurant industry, which employs 43.8 percent of minimum-wage workers.
If you think it is irrelevant that most minimum-wage earners are not poor. Most minimum-wage workers are not heads of households. More than half are students or other young people, usually part-time workers in families whose average income is $53,000 a year, which is $2,000 more than the average household income.
If you do not care that there are more poor people whose poverty derives from being unemployed than from low wages. True, some of the working poor earn so little they are eligible for welfare. But an increase in the minimum wage will cause some of these people to become unemployed and rely on welfare.
If you do not mind a minimum-wage increase having a regressive cost-benefit distribution. It would jeopardize marginal workers to benefit organized labor, which supports a higher minimum in the hope that this will raise the general wage floor, thereby strengthening unions’ negotiating positions.
If you think it is irrelevant that nearly two-thirds of minimum-wage workers get a raise in their first year.
If you think a higher minimum wage, rather than a strengthened Earned Income Tax Credit, is the most efficient way to give money to the working poor.
If you think tweaking the minimum wage is a serious promotion of equality by an administration during which 95 percent of real income growth has accrued to the top 1 percent.
If you think forcing employers to spend X dollars more than necessary to employ labor for entry-level jobs will stimulate the economy. If you believe this, you must think the workers receiving the extra dollars will put the money to more stimulative uses than their employers would have. If so, why not a minimum wage of $50.50 rather than the $10.10? Because this might discourage hiring? What makes you sure you know the threshold where job destruction begins?
If you think the high school dropout rate is too low. In 1994, Congress decreed that by 2000 the graduation rate would be “at least” 90 percent. In 2010 it was 78.2 percent. Increasing the minimum wage would increase the incentive to leave school early. One scholarly study concluded that, in states where students may leave school before 18, increases in the minimum wage caused teenage school enrollment to decline.
If the milk of human kindness flows by the quart in your veins, so you should also want to raise the minimum street charity: Take moral grandstanding oblivious of consequences to a new level by requiring anyone who gives money to panhandlers to give a minimum of $10. Beggars may not benefit, but you will admire yourself.
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Did incomes go up 3% or 37%? Depends on how you measure - or fail to measure.
From Greg Mankiw's blog, Chariman of the Economics Dept at Harvard
Monday, December 16, 2013
On Measuring Changes in Income
To divert attention from the disastrous rollout of his health reform, President Obama has decided to change the national conversation to discuss increasing inequality. This phenomenon is not new--the trend started about four decades ago--but it is real and important. In case you are a new reader of this blog, you can find my personal views on the matter in this paper.
This national conversation has generated renewed attention to the highly influential Piketty-Saez data. It is worth pointing out, therefore, some limitations of these data, which have been stressed by Cornell economist Richard Burkhauser: The data are on tax units rather than households, they do not include many government transfer payments, they are pre-tax rather than post-tax, they do not adjust for changes in household size, and they do not include nontaxable compensation such as employer-provided health insurance.
Does this matter? Yes! Here are some numbers from the Burkhauser paper:
1. From 1979 to 2007, median real income as measured by pre-tax, pre-transfer cash income of tax units rose by only 3.2 percent. That is a paltry amount for such a long period. You might conclude that middle class incomes have been stagnant. But wait.
2. Households are more important than tax units. Two married people are one tax unit, whereas a couple shacked up are two tax units. We would not want to treat the movement from marriage to shacking up as a drop in income. If we look at households rather than tax units, that meager 3.2 percent rises to a bit more respectable 12.5 percent.
3. Now consider government transfer payments. If we add those in, that 12.5 percent number becomes an even better 15.2 percent.
4. What about taxes? The middle class received some tax cuts during that period. Factoring taxes in, the 15.2 percent figure rises to 20.2 percent.
5. But not all households are the same size, and the size of households has fallen over time. Adjusting for household size increases that 20.2 percent to 29.3 percent.
6. There is still one thing left: employer-provided health insurance, an important fringe benefit that has grown in importance. Adding an estimate of that into income raises the 29.3 percent figure to 36.7 percent.
So, during this period, has the middle class experienced stagnant real income (a mere 3.2 percent increase) or significant gains (a 36.7 percent increase)? It depends on which measure of income you look at. It seems clear to me that the latter measure is more relevant, but the former measure of income often gets more attention than it deserves.
Take this as a cautionary tale. When people talk about changes in income over time, make sure you know what measure of income they are citing.
http://gregmankiw.blogspot.com/2013/12/on-measuring-changes-in-income.html
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« Reply #1459 on: Today at 08:12:13 AM »
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Prospective trials of and not only retrospective collection of after the fact "big Data" will prove the Columbia "know-it-all's" are wrong.
**** The common conclusion from such trials is that the poor’s own decisions matter much more than was once thought. Even the poorest of the poor have tiny amounts of discretionary cash and their decisions about what to spend it on (bednets, for example) make a huge difference to development. This view of the poor is at odds with the one espoused by “Big Push” economists, such as Jeffrey Sachs of Columbia University, who argue that people are stuck in poverty, can do little for themselves and that development should therefore consist of providing the poor with benefits—like irrigation, roads and hospitals—that spring the poverty trap. But it is also at odds with critics of Big Push thinking. J-PAL’s trials show not only that the poor’s decisions are important but that they are sometimes bad****
Another article from the Economist:
Random harvest
Once treated with scorn, randomised control trials are coming of age
Dec 14th 2013 | From the print edition
IT ALL began with a white envelope. Inside, a letter from the provost of the Massachusetts Institute of Technology offered three young economists at MIT $100,000 to spend as they wanted (those were the days). Two of them, Esther Duflo and Abhijit Banerjee, used the money to set up an organisation to run “randomised control trials” (RCTs), an experimental technique a bit like drugs trials, but for economics. To test if, say, boosting teachers’ pay improved educational outcomes, an RCT would take a collection of comparable schools, randomly assign higher wages to some teachers but not others, and see what happens. The organisation, called J-PAL (to give it its full title, the Abdul Latif Jameel Poverty Action Lab), has just celebrated its tenth anniversary. Its methods have transformed development economics.
When J-PAL started in 2003, RCTs were regarded as wacky. Critics said that doing a trial was like putting people in a cage and experimenting on them. They pointed out that you cannot conduct randomised trials for big macroeconomic questions (“What happens if we devalue the currency by 50%?”) because there can be no control group. They conceded RCTs might generate useful nuggets of evidence (raising teachers’ wages in India, for example, did surprisingly little to improve learning). But they argued that evidence from such trials would always remain small-scale, tied to a specific context and not be useful beyond it.
Massachusetts Institute of Technology
Organisation for Economic Cooperation and Development
Ten years on, few of those criticisms have stood up to scrutiny. RCTs have entered the mainstream. J-PAL has conducted 440 of them (it started with five). The World Bank runs RCTs. So do regional bodies like the Inter-American Development Bank. Even governments deploy them: Indonesia used one to test whether identity cards would improve the delivery of subsidised rice to the poor, the largest anti-poverty programme in the country (they did). Techniques for designing and doing trials have improved, with more accurate measurements and more reliable ways of ensuring that samples are random and not merely arbitrary. Trials are bigger. A recent one took place throughout the Indian state of Andhra Pradesh, which has a larger population than Germany. Trials are now investigating questions previously thought off-limits to RCTs, such as labour-market policies or policing. J-PAL did a trial in half the cities in France to determine whether job-training encouraged employment growth overall or just boosted the prospects of trainees at the expense of the untrained. (Answer: before 2007, it helped everyone; afterwards, it redistributed jobs rather than creating them.)
As the number and scope of trials have grown, the accumulation of detail has started to generate broader insights. Take education. J-PAL ran trials on many questions, from the effect of remedial classes in India and Ghana (enormous) to what happens if you double the number of teachers in Kenya (not much). One conclusion kept cropping up: the biggest improvements to educational outcomes occur when you teach children things they are capable of learning. That sounds like a statement of the obvious. But it is quite different from the view of (say) the OECD, a club mainly of rich countries, which runs influential studies on mathematics and literacy among its members. The OECD thinks the quality of teachers matters most. J-PAL’s finding also goes against the grain of what many parents believe: that the focus should be on the quality of the curriculum.
In other areas, RCTs have revealed as much about what is not known as what is known. Microfinance, for example, does not turn the poor into entrepreneurs, as was hoped, but does make them better off: many use the tiny loans to buy television sets. It is not clear why. Poor people also buy too little preventive health care for themselves, even though the benefits are huge. RCTs show that if you charge a pittance for simple products such as bednets treated to combat malaria or water purification tablets, people do not buy them; the products have to be free.
Development economics on trial
The common conclusion from such trials is that the poor’s own decisions matter much more than was once thought. Even the poorest of the poor have tiny amounts of discretionary cash and their decisions about what to spend it on (bednets, for example) make a huge difference to development. This view of the poor is at odds with the one espoused by “Big Push” economists, such as Jeffrey Sachs of Columbia University, who argue that people are stuck in poverty, can do little for themselves and that development should therefore consist of providing the poor with benefits—like irrigation, roads and hospitals—that spring the poverty trap. But it is also at odds with critics of Big Push thinking. J-PAL’s trials show not only that the poor’s decisions are important but that they are sometimes bad (for example, their underinvestment in health). Critics of the Big Push, such as William Easterly of New York University, say the best way to help the poor is to stand back and stop messing up their lives. In contrast, J-PAL’s trials imply that there is a role for outsiders to improve the decision-making of the poor by, say, improving information or incentives.
Over the past ten years, randomised trials have changed hugely. They began as ways to provide hard evidence about what was actually happening. Now they have become techniques for testing ideas that cannot be investigated in any other way. (Are teachers or trained volunteers better at providing simple remedial lessons? Do a trial.) Over the next ten years they will change again. They are likely to get more ambitious still, use “big data”, engage even more with governments and probably measure things that cannot now be tested (RCTs are already measuring cortisol levels as a way of judging how policies affect people’s happiness). Who knows, their proponents might even find a way to apply them to the sweeping assertions of macroeconomists.
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...the poor’s own decisions matter much more than was once thought. Even the poorest of the poor have tiny amounts of discretionary cash and their decisions about what to spend it on (bednets, for example) make a huge difference to development. This view of the poor is at odds with the one espoused by “Big Push” economists, such as Jeffrey Sachs of Columbia University, who argue that people are stuck in poverty, can do little for themselves and that development should therefore consist of providing the poor with benefits—like irrigation, roads and hospitals—that spring the poverty trap. But it is also at odds with critics of Big Push thinking. J-PAL’s trials show not only that the poor’s decisions are important but that they are sometimes bad (for example, their underinvestment in health). Critics of the Big Push, such as William Easterly of New York University, say the best way to help the poor is to stand back and stop messing up their lives. In contrast, J-PAL’s trials imply that there is a role for outsiders to improve the decision-making of the poor by, say, improving information or incentives.
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There is an old axiom that poor people have poor ways. In a wealthy society like America where opportunity abounds, there is truth in that. In a truly poor society, there may be no individual path out. That is where charity and outside help can do the most good IMHO, not in places where we are already rewarding and reinforcing poor choices.
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Posting this to both Economic threads. There are crucial points being made here. Government doesn't produce anything. Indoividuals can't demonstrate generosity without first investing and producing something. The story of Santa includes the existence of an amazing, benevolent, (unregulated) magical investment, factory, production and delivery system. Not exactly a description of government, see Obamacare. Neither our current iteration of liberalism, Obamanomics, nor Pope Francis' guidance for us to move away from non-existent, unfettered capitalism will make generosity possible. "Capitalism is the precondition of generosity." We can have capitalism on the condition that we feed the poor is backwards. "We can feed the poor if we have capitalism. To give away wealth presumes the existence of that wealth".
Government Isn’t Santa
Capitalism is the precondition of generosity.
By Kevin D. Williamson December 24, 2013
http://www.nationalreview.com/article/367018/government-isnt-santa-kevin-d-williamson
There were three wise men, bearing gifts: gold, frankincense, and myrrh. Much has been written about the mystical connotations of those gifts, but it is rarely, if ever, asked: Where did they get them?
Presumably, Balthazar, Melchior, and Caspar were not engaged in gold mining, frankincense farming, or myrrh cultivation. They had other things to do, other stars to follow. For Christians, and for men of goodwill categorically, this is an important question: Feed my sheep, saith the Lord — okay: Feed ’em what? Some of the Apostles were said to have the gift of healing through the laying on of hands; those without such gifts still have an obligation to heal the sick (if the ACLU will allow it), which means building hospitals and clinics, equipping doctors and nurses, etc. With what?
If ye had but faith in the measure of a mustard seed . . . and if the mustard-seed approach does not work, and the mountains we command to be uprooted remain stubbornly in place, then we are back to the old-fashioned problems of human existence: scarcity and production. That is what is so maddening about Pope Francis’s recent apostolic exhortation — which is, as much as my fellow Catholics try to explain it away, a problematic document in many ways. The pope’s argument, fundamentally, is that we can have capitalism on the condition that we feed the poor. This is exactly backward: We can feed the poor if we have capitalism. To give away wealth presumes the existence of that wealth, whether it is an annual tithe or Jesus’ more radical stance of giving away all that one owns. Giving away all that you own does not do the poor an iota of good if you don’t have anything. You can’t spread the wealth without wealth.
Conservatives sometimes protest that the Left presents government as though it were Santa Claus, but Santa Claus, bless him, is a producer. He has a factory up there at the North Pole, full of highly skilled (and possibly undercompensated) labor. He has logistics problems — serious ones. He has production deadlines. The entire point of the Santa Claus myth — at least the animated Christmas-special God Bless America version of that myth — is that those toys aren’t going to make themselves, and they aren’t going to deliver themselves. Government cannot do the work of a captain of industry such as Santa Claus, because government creates nothing. More to the point, government cannot satisfy Jesus’ command that we feed the poor — it produces no food. It has no wealth of its own.
Government isn’t Santa. It’s the Grinch.
Think about it: The redistributionist impulse is driven by envy and bitterness. It is an economic position held, not accidentally, most strongly by people who cringe at the sight of a manger scene — by people who resent and suspect the very word “Christmas.” The redistributors are the people culturally inclined to abolishing Christmas from the public sphere, who will spend the solstice wailing in angst if a public-school choir should so much as hum “Away in a Manger,” never mind singing the verboten words “Little Lord Jesus.” And, in the Grinchiest fashion, they want to take your stuff.
Does anybody really need that many Christmas presents? Is it not the case that, at a certain point, you have enough in your stocking? And who among them has the honesty of Hillary Clinton, who once proclaims that it’s necessary to take things away from us in order to achieve her vision of a better world. If you strap reindeer antlers to your dog while sharing those sentiments, you’re a Seussian villain. Strap donkey ears to yourself while endorsing the same view and you’re the president of these United States.
There is little, if any, virtue in giving gifts to the people we love. Giving gifts to those we love is like giving gifts to ourselves. There is still less virtue in taking what’s under somebody else’s Christmas tree and distributing it to your friends and allies while congratulating yourself on your compassion. To do so is unseemly. Pope Francis is quite right to argue that economic growth alone does not ensure the humane treatment of the poor and the vulnerable — where he is mistaken is that he assumes that there is another side in that argument. Nowhere in the classical liberal tradition, and certainly not in the Anglo-American liberal tradition, has the idea taken root that capitalism is a substitute for generosity. Capitalism is the precondition of generosity. If you want to feed the Lord’s sheep, you must begin by planting the fields.
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The Inequality Bogeyman
By Thomas Sowell - January 28, 2014
http://www.realclearpolitics.com/articles/2014/01/28/the_inequality_bogeyman_121379.html
During a recent lunch in a restaurant, someone complimented my wife on the perfume she was wearing. But I was wholly unaware that she was wearing perfume, even though we had been in a car together for about half an hour, driving to the restaurant.
My sense of smell is very poor. But there is one thing I can smell far better than most people -- gas escaping. During my years of living on the Stanford University campus, and walking back and forth to work at my office, I more than once passed a faculty house and smelled gas escaping. When there was nobody home, I would leave a note, warning them.
When walking past the same house again a few days later, I could see where the utility company had been digging in the yard -- and, after that, there was no more smell of gas escaping. But apparently the people who lived in these homes had not smelled anything.
These little episodes have much wider implications. Most of us are much better at some things than at others, and what we are good at can vary enormously from one person to another. Despite the preoccupation -- if not obsession -- of intellectuals with equality, we are all very unequal in what we do well and what we do badly.
It may not be innate, like a sense of smell, but differences in capabilities are inescapable, and they make a big difference in what and how much we can contribute to each other's economic and other well-being. If we all had the same capabilities and the same limitations, one individual's limitations would be the same as the limitations of the entire human species.
We are lucky that we are so different, so that the capabilities of many other people can cover our limitations.
One of the problems with so many discussions of income and wealth is that the intelligentsia are so obsessed with the money that people receive that they give little or no attention to what causes money to be paid to them, in the first place.
The money itself is not wealth. Otherwise the government could make us all rich just by printing more of it. From the standpoint of a society as a whole, money is just an artificial device to give us incentives to produce real things -- goods and services.
Those goods and services are the real "wealth of nations," as Adam Smith titled his treatise on economics in the 18th century.
Yet when the intelligentsia discuss such things as the historic fortunes of people like John D. Rockefeller, they usually pay little -- if any -- attention to what it was that caused so many millions of people to voluntarily turn their individually modest sums of money over to Rockefeller, adding up to his vast fortune.
What Rockefeller did first to earn their money was find ways to bring down the cost of producing and distributing kerosene to a fraction of what it had been before his innovations. This profoundly changed the lives of millions of working people.
Before Rockefeller came along in the 19th century, the ancient saying, "The night cometh when no man can work" still applied. There were not yet electric lights, and burning kerosene for hours every night was not something that ordinary working people could afford. For many millions of people, there was little to do after dark, except go to bed.
Too many discussions of large fortunes attribute them to "greed" -- as if wanting a lot of money is enough to cause other people to hand it over to you. It is a childish idea, when you stop and think about it -- but who stops and thinks these days?
The transfer of money was a zero-sum process. What increased the wealth of society was Rockefeller's cheap kerosene that added hundreds of hours of light to people's lives annually.
Edison, Ford, the Wright brothers, and innumerable others also created unprecedented expansions of the lives of ordinary people. The individual fortunes represented a fraction of the wealth created.
Even those of us who create goods and services in more mundane ways receive income that may be very important to us, but it is what we create for others, with our widely varying capabilities, that is the real wealth of nations.
Intellectuals' obsession with income statistics -- calling envy "social justice" -- ignores vast differences in productivity that are far more fundamental to everyone's well-being. Killing the goose that lays the golden egg has ruined many economies.
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The Redistribution Recession:How Labor Market Distortions Contracted the Economy
(bringing a couple of posts over here by request)
3rd post regarding economist Casey Mulligan, someone getting it right. Buy his book:
http://www.amazon.com/The-Redistribution-Recession-Distortions-Contracted/dp/0199942218
The Redistribution Recession: How Labor Market Distortions Contracted the Economy Hardcover
by Casey B. Mulligan
Redistribution, or subsidies and regulations intended to help the poor, unemployed, and financially distressed, have changed in many ways since the onset of the recent financial crisis. The unemployed, for instance, can collect benefits longer and can receive bonuses, health subsidies, and tax deductions, and millions more people have became eligible for food stamps.
Economist Casey B. Mulligan argues that while many of these changes were intended to help people endure economic events and boost the economy, they had the unintended consequence of deepening-if not causing-the recession. By dulling incentives for people to maintain their own living standards, redistribution created employment losses according to age, skill, and family composition. Mulligan explains how elevated tax rates and binding minimum-wage laws reduced labor usage, consumption, and investment, and how they increased labor productivity. He points to entire industries that slashed payrolls while experiencing little or no decline in production or revenue, documenting the disconnect between employment and production that occurred during the recession. The book provides an authoritative, comprehensive economic analysis of the marginal tax rates implicit in public and private sector subsidy programs, and uses quantitative measures of incentives to work and their changes over time since 2007 to illustrate production and employment patterns. It reveals the startling amount of work incentives eroded by the labyrinth of new and existing social safety net program rules, and, using prior results from labor economics and public finance, estimates that the labor market contracted two to three times more than it would have if redistribution policies had remained constant.
In The Redistribution Recession, Casey B. Mulligan offers hard evidence to contradict the notion that work incentives suddenly stop mattering during a recession or when interest rates approach zero, and offers groundbreaking interpretations and precise explanations of the interplay between unemployment and financial markets.
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Marginal tax rates for Heads of Households and spouses with median earnings potential including forgone subsidies.
Note that the beginning of 2007 was when unemployment was at its low point (and when Democrats took control of Congress).
(http://si.wsj.net/public/resources/images/ED-AR823_winter_G_20140207170008.jpg)
Tax something more, work in this case, and you will get less of it.
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I am sorry to inform President Obama and his team of pretend economists that inequality and specifically the rich getting richer does not correspond with the poor getting poorer or having fewer opportunities to move up. It simply isn't true.
http://www.economics21.org/commentary/great-gastby-curve-revisited-part-1
"Neither measure of inequality nor the size-of-middle-class measure has a correlation with any of the mobility measures that is statistically different from zero."
http://www.nationalreview.com/agenda/288748/guest-post-scott-winship-offers-his-closing-argument-great-gatsby-curve-wonk-fight-201
http://www.equality-of-opportunity.org/
http://www.u.arizona.edu/~lkenwor/2013thedangeroffrontloadingincomeinequality.pdf
http://www.russellsage.org/sites/all/files/Bloome%20Inequality%20&%20mobility%20April%202013.pdf
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For anyone interested in the inside-baseball debate of Economics, this is interesting stuff, IMO. Links are to pdfs.
Greg Mankiw, Chair of the Harvard Economics Dept, who recently wrote, 'Defending the One Percent': http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.27.3.21
From the article: Optimal redistribution centers on the elasticity of labor supply
Using the force of government to seize such a large share of the fruits of someone else’s labor is unjust
No amount of applied econometrics can bridge this philosophical divide.
Redistibutionist Robert Solow, Nobel winner, MIT, takes issue and Mankiw responds:
http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.28.1.243
Journal of Economic Perspectives, 2013-2104
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According to a recent study of mobility (see Figure 1), the correlation between parent's income rank and children's income rank is about 0.3.
http://obs.rc.fas.harvard.edu/chetty/mobility_trends.pdf
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Ludwig von Mises, "Nation, State, and Economy" (1919):
One of the great ideas of [classical] liberalism is that it lets the consumer interest alone count and disregards the producer interest. No production is worth maintaining if it is not suited to bring about the cheapest and best supply. No producer is recognized as having a right to oppose any change in the conditions of production because it runs counter to his interest as a producer. The highest goal of all economic activity is the achievement of the best and most abundant satisfaction of wants at the smallest cost. . . .
Preferring the producer interest over the consumer interest, which is characteristic of antiliberalism, means nothing other than striving artificially to maintain conditions of production that have been rendered inefficient by continuing progress. Such a system may seem discussible when the special interests of small groups are protected against the great mass of others, since the privileged party then gains more from his privilege as a producer than he loses on the other hand as a consumer; it becomes absurd when it is raised to a general principle, since then every individual loses infinitely more as a consumer than he may be able to gain as a producer. The victory of the producer interest over the consumer interest means turning away from rational economic organization and impeding all economic progress.
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“After theology—economics is the most important science to study because the two things that impact everyone are God and the market.”
- http://thpspeaks.org/post/81769904394/economics-breaking-the-vicious-cycle-through-education
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IN the season of resurrection, it’s fitting that he’s with us once again — bearded, prophetic, moralistic, promising to exalt the humble and cast down the mighty from their thrones.
Yes, that’s right: Karl Marx is back from the dead.
Not on a Soviet-style scale, mercifully, and not with the kind of near-scriptural authority that many Marxists once invested in him. But Marxist ideas are having an intellectual moment, and attention must be paid.
As Timothy Shenk writes in a searching essay for The Nation, there are two pillars to the current Marxist revival. One is the clutch of young intellectuals Shenk dubs the “Millennial Marxists,” whose experience of the financial crisis inspired a new look at Old Karl’s critique of capitalism. The M.M.’s have Occupy Wall Street as a failed-but-interesting political example; they have new-ish journals (Jacobin, The New Inquiry, n + 1) where they can experiment and argue; they are beginning to produce books, two of which Shenk reviews and praises.
What they lack, however, is a synthesis, a story, of the kind that Marx himself offered. This is where the other pillar rises — Thomas Piketty’s “Capital in the Twenty-First Century,” a sweeping interpretation of modern economic trends recently translated from the French, and the one book this year that everyone in my profession will be required to pretend to have diligently read.
Piketty himself is a social democrat who abjures the Marxist label. But as his title suggests, he is out to rehabilitate and recast one of Marx’s key ideas: that so-called “free markets,” by their nature, tend to enrich the owners of capital at the expense of people who own less of it.
This idea seemed to be disproved in the 20th century, by the emergence of a prosperous, non-revolutionary working class. But Piketty argues that those developments were transitory, made possible mostly by the massive destruction of inherited capital during the long era of world war.
Absent another such disruption, he expects a world in which the returns to capital permanently outstrip — as they have recently — the returns to labor, and inequality rises far beyond even today’s levels. Combine this trend with slowing growth, and we face a future like the 19th-century past, in which vast inherited fortunes bestride the landscape while the middle class fractures, weakens, shrinks.
Piketty’s dark vision relies, in part, on economic models I am unqualified to assess. But it also relies on straightforward analysis of recent trends in Western economies, and here a little doubt-raising is in order.
In particular, as the Manhattan Institute’s Scott Winship has pointed out, Piketty’s data seems to understate the income gains enjoyed by most Americans over the last two generations. These gains have not been as impressive as during the post-World War II years, but they do exist: For now, even as the rich have gotten much, much richer, the 99 percent have shared in growing prosperity in real, measurable ways.
Winship’s point raises the possibility that even if Piketty’s broad projections are correct, the future he envisions might be much more stable and sustainable than many on the left tend to assume. Even if the income and wealth distributions look more Victorian, that is, the 99 percent may still be doing well enough to be wary of any political movement that seems too radical, too utopian, too inclined to rock the boat.
This possibility might help explain why the far left remains, for now, politically weak even as it enjoys a miniature intellectual renaissance. And it might hint at a reason that so much populist energy, in both the United States and Europe, has come from the right instead — from movements like the Tea Party, Britain’s UKIP, France’s National Front and others that incorporate some Piketty-esque arguments (attacks on crony capitalism; critiques of globalization) but foreground cultural anxieties instead.
The taproot of agitation in 21st-century politics, this trend suggests, may indeed be a Marxian sense of everything solid melting into air. But what’s felt to be evaporating could turn out to be cultural identity — family and faith, sovereignty and community — much more than economic security.
And somewhere in this pattern, perhaps, lies the beginnings of a more ideologically complicated critique of modern capitalism — one that draws on cultural critics like Daniel Bell and Christopher Lasch rather than just looking to material concerns, and considers the possibility that our system’s greatest problem might not be the fact that it lets the rich claim more money than everyone else. Rather, it might be that both capitalism and the welfare state tend to weaken forms of solidarity that give meaning to life for many people, while offering nothing but money in their place.
Which is to say that while the Marxist revival is interesting enough, to become more relevant it needs to become a little more ... reactionary.
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http://www.nytimes.com/2014/04/21/opinion/krugman-sweden-turns-japanese.html?emc=edit_th_20140421&nl=todaysheadlines&nlid=49641193
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http://www.bloombergview.com/articles/2014-04-20/the-most-important-book-ever-is-all-wrong
Economics
The Most Important Book Ever Is All Wrong
By Clive Crook
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It's hard to think of another book on economics published in the past several decades that's been praised as lavishly as Thomas Piketty's "Capital in the Twenty-First Century." The adulation tells you something, though not mainly about the book's qualities. Its defects, in my view, are greater than its strengths -- but the rapturous reception proves that the book, one way or another, meets a need.
Martin Wolf of the Financial Times calls it "extraordinarily important." Paul Krugman, writing in the New York Review of Books, says it's "truly superb" and "awesome." Branko Milanovic, a noted authority on global income disparities, calls it "one of the watershed books in economic thinking." Even John Cassidy, in a relatively balanced appraisal for the New Yorker, says "Piketty has written a book that nobody interested in a defining issue of our era can afford to ignore."
That issue is inequality, and in confronting it Piketty should certainly be applauded for his ambition. The title invites comparison with Karl Marx's great work, and the author offers nothing less than a general theory of capitalism.
Better still, his theory makes arresting claims -- "that a market economy," as Piketty puts it, "if left to itself, contains powerful forces of convergence [in the distribution of wealth]...; but it also contains powerful forces of divergence, which are potentially threatening to democratic societies and to the values of social justice on which they are based." And he argues that the divergent forces are likely to be more powerful in the 21st century than they were in the 20th.
When it comes to exploring historical data on incomes and wealth, Piketty is second to none in industry and ingenuity. It's how he made his name as a scholar, and the book, as you would expect, is packed with new information. (A companion website puts all the numbers and sources online.) In addition to intellectual ambition and tireless excavation of the historical record, Piketty brings a zeal for accessibility: He writes in non-technical language, with almost no mathematical apparatus to confound the interested non-specialist.
All of which is grand. So what's the problem?
Quite a few things, but this to start with: There's a persistent tension between the limits of the data he presents and the grandiosity of the conclusions he draws. At times this borders on schizophrenia. In introducing each set of data, he's all caution and modesty, as he should be, because measurement problems arise at every stage. Almost in the next paragraph, he states a conclusion that goes beyond what the data would support even if it were unimpeachable.
This tendency is apparent all through the book, but most marked at the end, when he sums up his findings about "the central contradiction of capitalism":
The inequality r>g [the rate of return on capital is greater than the rate of economic growth] implies that wealth accumulated in the past grows more rapidly than output and wages. This inequality expresses a fundamental logical contradiction. The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labor. Once constituted, capital reproduces itself faster than output increases. The past devours the future. The consequences for the long-term dynamics of the wealth distribution are potentially terrifying ...
Every claim in that dramatic summing up is either unsupported or contradicted by Piketty's own data and analysis. (I'm not counting the unintelligible. The past devours the future?)
As he explains elsewhere, r>g isn't enough by itself to trigger the dynamic he describes. If capital grows faster than the economy, inequality will indeed tend to increase because ownership of capital is concentrated -- though much less so than in the past. But capital will outpace the economy only if owners of capital save a sufficiently large part of the income they derive from it. (Suppose they save none of it: Their wealth won't grow at all.)
You might say this misses the point. Wolf offers this clarification: Piketty "argues that the ratio of capital to income will rise without limit so long as the rate of return is significantly higher than the economy’s rate of growth. This, he holds, has normally been the case." That's better: The gap between r and g has to be "significant." The bigger the gap, the more likely it is that saving will build capital faster than output rises -- and Piketty does show that the gap usually has been big.
The trouble is, he also shows that capital-to-output ratios in Britain and France in the 18th and 19th centuries, when r exceeded g by very wide margins, were stable, not rising inexorably. The same was true of the share of national income paid to owners of capital. In Britain, the capitalists' share of income was about the same in 1910 as it had been in 1770, according to Piketty's numbers. In France, it was less in 1900 than it had been in 1820.
What about the 21st century? Perhaps the capitalists' share will rise inexorably in future -- and that's what matters.
Perhaps it will, but Piketty advances reasons to doubt this too. He expects r to be a bit lower and g a bit higher than their respective historical averages. There are many other factors to consider, as he says, but on his own analysis the chances are good that the future gap between return on capital and growth will be smaller than the gap that failed to produce an inexorably rising capital share in the two centuries before 1914.
As I worked through the book, I became preoccupied with another gap: the one between the findings Piketty explains cautiously and statements such as, "The consequences for the long-term dynamics of the wealth distribution are potentially terrifying."
Piketty's terror at rising inequality is an important data point for the reader. It has perhaps influenced his judgment and his tendentious reading of his own evidence. It could also explain why the book has been greeted with such erotic intensity: It meets the need for a work of deep research and scholarly respectability which affirms that inequality, as Cassidy remarked, is "a defining issue of our era."
Maybe. But nobody should think it's the only issue. For Piketty, it is. Aside from its other flaws, "Capital in the 21st Century" invites readers to believe not just that inequality is important but that nothing else matters.
This book wants you to worry about low growth in the coming decades not because that would mean a slower rise in living standards, but because it might cause the ratio of capital to output to rise, which would worsen inequality. In the frame of this book, the two world wars struck blows for social justice because they interrupted the aggrandizement of capital. We can't expect to be so lucky again. The capitalist who squanders his fortune is a better friend to labor than the one who lives modestly and reinvests his surplus. In Piketty's view of the world, where inequality is all that counts, capital accumulation is almost a sin in its own right.
Over the course of history, capital accumulation has yielded growth in living standards that people in earlier centuries could not have imagined, let alone predicted -- and it wasn't just the owners of capital who benefited. Future capital accumulation may or may not increase the capital share of output; it may or may not widen inequality. If it does, that's a bad thing, and governments should act. But even if it does, it won't matter as much as whether and how quickly wages and living standards rise.
That is, or ought to be, the defining issue of our era, and it's one on which "Capital in the 21st Century" has almost nothing to say.
To contact the writer of this article: Clive Crook at ccrook5@bloomberg.net.
To contact the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net.
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Reaction by Greg Mankiw, Chair of Harvard Econ Dept:
The book has three main elements:
A history of inequality and wealth.
A forecast of how things will evolve over the next century
Policy recommendations, such as a global tax on wealth.
Point 1 is a significant contribution. I like this part of the book a lot.
Point 2 is highly conjectural. Economists are really bad at such things. In particular, the leap from r>g to the conclusion of a growing role of inheritance in society seems too large to me. Many capital owners consume much of the return on their capital, so wealth does not grow at rate r. This consumption ranges from fancy cars and luxurious vacations to generous charitable giving. In addition, unless mating is perfectly assortative, or we return to an era of primogeniture, wealth per family shrinks as it is split among children. So, from my perspective, Piketty tries to draw way too much from r>g. (Quick Quiz for econonerds: (a) What does r>g tell you in a standard overlapping generations model? That the economy is dynamically efficient (that is, it has not over-accumulated capital). (b) And what is the magnitude of bequests in that model? (Zero)
Point 3 is as much about Piketty’s personal political philosophy as it is about his economics. As we all know, you can’t get “ought” from “is.” Like President Obama and others on the left, Piketty wants to spread the wealth around. Another philosophical viewpoint is that it is the government’s job to enforce rules such as contracts and property rights and promote opportunity rather than to achieve a particular distribution of economic outcomes. No amount of economic history will tell you that John Rawls (and Thomas Piketty) offers a better political philosophy than Robert Nozick (and Milton Friedman).
The bottom line: You can appreciate his economic history without buying into his forecast. And even if you are convinced by his forecast, you don't have to buy into his normative conclusions.
http://gregmankiw.blogspot.com/2014/04/first-thoughts-on-piketty.html
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Good to see discussion on Piketty. Here's some more-- note also the comments about Warren.
We are going to be clear in our thinking here. What, if anything, is right about Piketty? If he is wrong, we will need to be able to condense our answer into bullet point sound bit size-- witness Warren's use of the toaster. This is effective persuasion technique.
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http://www.salon.com/2014/04/30/thomas_piketty_terrifies_paul_ryan_behind_the_rights_desperate_laughable_need_to_destroy_an_economist/
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Here is Scott Grannis's reply to Piketty:
There hasn't been such a polarizing book that I can remember. Liberals love it because it justifies progressive taxation and government control to "fix" the "problems" of capitalism, almost all of which occur because of prior government interventions. Conservatives hate it because progressive taxation aimed explicitly at taxing away wealth is destructive of the economy. Liberals just don't understand how economies work. Their's is a religion, just as global warming is a religion. David Goldman puts it quite succinctly:
Why Liberals Don’t Care About Consequences
No amount of evidence will convince liberals that they were wrong. Evidence abounds, to be sure: Appeasement invites aggression. Handouts increase dependency. Coddling terror-states like Iran elicits megalomania. Big government stifles the economy. They don’t care. Really.
John Kerry romanced Basher Assad and Vanity Fair published a fawning profile of the Assad family, while the Obama administration secretly courted Iran. As a result we have in Syria the worst humanitarian catastrophe in the Arab world in modern times. Algeria racked up more casualties during the independence war of 1954-1962 and the civil war of 1991-2002, to be sure, but the casualties are coming faster in Syria and the displacement of immiserated civilians is greater. Do you hear liberals wringing their hands and asking, “Where did we go wrong?” They don’t, and they won’t. Ditto the disaster in Libya, which is turning into a Petri dish for terrorists post-Qaddafi. It doesn’t matter. Being in love with yourself means never having to say you’re sorry.
In the one part of the Middle East where nothing bad is happening or likely to happen–namely Israel–liberals are in full-tilt panic, with John Kerry warning that Israel will turn into an apartheid state. It’s not just Kerry, who is a national embarrassment, but the whole liberal world that thinks this way. In reality, Israel’s booming economy is enriching Israeli as well as Palestinian Arabs, to the extent that the kleptocratic Palestinian Authority lets them do business. There is no urgency at all to Israel’s situation–not, at least, where the Palestinians are concerned. Iran is another story.
Why don’t liberals seem to notice the catastrophic consequences of their policies, and why do they imagine imminent horrors where none exist? If you corner a liberal and point to a disaster that followed upon his policy, at very most he will say–with a tear in the eye and a quivering upper lip–”We did the right thing.”
It’s all about having done the right thing according to the dogma of the ersatz liberal religion. Liberalism has nothing whatsoever to do with policy and its real-world consequences. Instead of finding one’s salvation on the path of traditional religions, liberals look for salvation in a set of right opinions–on race, the environment, income distribution, gender, or whatever. Last month I called attention to Joseph Bottum’s new book An Anxious Age, which I reviewed at the American Interest. Jody argues that modern liberalism is the old Mainline Protestantism, and especially the old Social Gospel, turned into a secular cult. I wrote:
Today’s American liberalism, it is often remarked, amounts to a secular religion: it has its own sacred texts and taboos, Crusades and Inquisitions. The political correctness that undergirds it, meanwhile, can be traced back to the past century’s liberal Protestantism. Conservatives, of course, routinely scoff that liberals’ ersatz religion is inferior to the genuine article.
Joseph Bottum, by contrast, examines post-Protestant secular religion with empathy, and contends that it gained force and staying power by recasting the old Mainline Protestantism in the form of catechistic worldly categories: anti-racism, anti-gender discrimination, anti-inequality, and so forth. What sustains the heirs of the now-defunct Protestant consensus, he concludes, is a sense of the sacred, but one that seeks the security of personal salvation through assuming the right stance on social and political issues. Precisely because the new secular religion permeates into the pores of everyday life, it sustains the certitude of salvation and a self-perpetuating spiritual aura. Secularism has succeeded on religious terms. That is an uncommon way of understanding the issue, and a powerful one.
It’s hard to make sense of liberalism without recourse to theology–not the superficial theology of doctrinal comparison, but Jody’s sensitive investigation of how the liberal religion looks from the inside, from the vantage point of its true believers (the “poster children,” as Jody calls them). It’s a rare book that helps us to peer more deeply into everyday phenomena, and Jody’s is one of them. It really must be read.
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Liberals don’t see failed liberal policies as “failed,” any more than people of faith think that unanswered prayers are “failed” prayers. The difference is that people of faith abnegate themselves in prayer to a wholly-other divine person, while liberal poster-children subject the world to the narcissistic demands of their own spiritual needs. Jody isn’t the first to make the point. “Remember the war against Franco/That’s the kind where each of us belongs,” sang Tom Lehrer. “He may have won all the battles/But we had all the good songs.” But he makes it in a theologically-informed way that exposes the phenomenology of liberal self-worship.
The slaughter in Syria is a minor annoyance to the poster children, whereas peace and prosperity in Israel are cataclysmic disasters. That sounds funny, but it isn’t to the liberals: bringing a liberally-conceived peace to the Middle East is one of those Great Opportunities for Redemption, and to miss it is a tragedy of unimaginable proportions. Darwin forbid that Israel might carry on as a pocket superpower in science, business, and the arts, educating and empowering a new Arab middle class, without submitting to the demands of liberal theology. It’s not only John Kerry who stands to lose his last shot at a Nobel Prize. Liberals of all stripes stand to lose the chance, to demonstrate that particularity (for example, Zionism) is inherently wrong and that liberal universality is right.
You can’t argue with liberals. Prove to them their policy has made things worse, and they will say in effect, “Worse for whom? It sure made me feel better!” Tell them that they have foredained their own extinction because their metrosexuality doesn’t leave time for children, and they will gaze heavenward and contemplate martyrdom on behalf of the earth-goddess Gaia. There are too many people polluting the earth anyway.
Dr. Frankenstein didn’t care that he had created a monster. You can’t argue with the man; the only thing to do is to persuade the villagers to march on his castle.
A postscript on neo-conservatives: Irving Kristol liked to say that a neoconservative was a liberal who was mugged by reality. The neocons were liberals who actually cared about the consequences of their actions, and ipso facto stopped being liberals. After the occupation of Iraq and Afghanistan, the failed Bush Freedom Initiative, the abortive Arab Spring, and the Libyan disaster, there appear to be diminishing returns to the marginal mugging.
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"What, if anything, is right about Piketty?"
He did a serious study on income inequality and put the results of his study in Section I of the book. That is worthy of reading and understanding, but he did not get it right. He ignores the progressive taxation effect and ignores the wealth transfer effect to the poor and to the middle class. Taking those into account, income inequality is stagnant. A 'problem' already 'solved'.
"... witness Warren's use of the toaster. This is effective persuasion technique."
Elizabeth Warren: It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street–and the mortgage won’t even carry a disclosure of that fact to the homeowner. Similarly, it’s impossible to change the price on a toaster once it has been purchased. But long after the papers have been signed, it is possible to triple the price of the credit used to finance the purchase of that appliance, even if the customer meets all the credit terms, in full and on time. Why are consumers safe when they purchase tangible consumer products with cash, but when they sign up for routine financial products like mortgages and credit cards they are left at the mercy of their creditors?
The difference between the two markets is regulation. http://www.democracyjournal.org/5/6528.php?page=all
Warren uses deception and a straw argument. Conservatives don't favor a world without consumer protection law and conservatives don't support unregulated mortgage practices. The mortgage meltdown didn't come from lack of regulation; it came out of the botched intervention by government in the mortgage market. Conservatives support regulation rules exactly as Warren implies, that a consumer ought to be able to look at the front page of a mortgage document and know what they will be required to pay. Her toaster story tells us nothing about the differences between conservative and leftist policies. Is the choice of a fully disclosed, adjustable rate mortgage analogous to a frayed cord on a toaster? No. And UL (Underwriters Laboratories) is a private company headquartered in Northbrook, IL. Not all solutions come from government programs and regulations.
If he (Piketty) is wrong, we will need to be able to condense our answer into bullet point sound bit size--
1. Their 'solution' does not address the perceived problem. Witness year 6 of the Obama administration and the way the French socialists had to so quickly back off of their new 75% tax bracket on the rich. Tax increases kill jobs and over-regulation worsens inequality.
2. To a hammer, every problem looks like a nail - the one tool toolbox. To Warren, Piketty, Obama, and all government-centric, 20th century leftists, every problem and challenge we face need the same solution, another tax on the rich. Take from Peter, give to Paul, and Mary, and the others. Poverty, hunger, homelessness, healthcare, climate change, and now income inequality all (surprisingly) need exactly the same thing, a tax on the rich and a wealth transfer to the poor. It was what they wanted to do before they even discovered the problem, just as the hammer knows what it wants to do before it sees the nail. But this problem wasn't a nail, it was your finger you just hit. Capital employs labor. Stomping out wealth also stomps out jobs and stomps out the revenues to pay the people who can't work. Ouch!
3. A logic fallacy as old as the Latin language: Cum Hoc, Ergo Propter Hoc. With this, therefore because of this. The wealth tax idea follows an impressive income inequality study in the book, therefore we should do what he suggests to address it. Piketty proposes to end wealth. What our side sees in the data is that amazing wealth is achievable but there are far too many people who are not participating in the wealth side of the economy.
4. Piketty's main contention: Rates of returns on investments (before taxes) are too high and growth rates are too low. Therefore we should choke off investment returns and make economic growth even worse?!
The opposite is what makes sense. Get more and more people into the investment side of the economy and pursue the economic policies that maximize our growth rate.
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Excellent work Doug.
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http://freebeacon.com/blog/explaining-inequality-over-16-cocktails/
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I wonder which books have the worst balance? Krugman and Wells 'Macroeconomics' covers 27 cases of market failure. None of government failure.
http://johnbtaylorsblog.files.wordpress.com/2014/05/gwartny-fike-table-3.jpg
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A little reflection will show that wherever the right of private property and the right of free contract coexist, each party when contracting is inevitably more or less influenced by the question whether he has much property, or little, or none, for the contract is made to the very end that each may gain something that he needs or desires more urgently than that which he proposes to give in exchange. And since it is self-evident that, unless all things are held in common, some persons must have more property than others, it is from the nature of things impossible to uphold freedom of contract and the right of private property without at the same time recognizing as legitimate those inequalities of fortune that are the necessary result of the exercise of those rights.
- Supreme Court Justice, Mahlon Pitney, 1915, Coppage v. Kansas
http://www.hoover.org/publications/defining-ideas/article/178046
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Respect to Geithner for forthrightly stating his hypothesis.
Let's discuss it:
The Paradox of Financial Crises
Aggressive government intervention will lead to a stronger financial system less dependent on the taxpayer.
By Timothy F. Geithner
May 12, 2014 6:52 p.m. ET
During the terrifying autumn of 2008, when I was serving as president of the Federal Reserve Bank of New York, my team was on a conference call with Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke debating whether the administration should ask Congress for stronger weapons to confront the crisis. Meg McConnell, a colleague, pressed the mute button on the speakerphone and pleaded with me to tell them that if they didn't go to Congress now, "there will be shantytowns and soup lines across the country."
Why did she fear that? We were in the midst of a classic financial panic—similar to the bank runs in the Great Depression. But most people did not yet feel the impact of the run. The losses suffered on Wall Street seemed welcome and deserved, and of no consequence to the vast majority of Americans.
There was little memory of how panics kill economies, but the panic was already killing ours. American households lost 16% of their wealth in 2008 alone, several times as large as the losses at the start of the Great Depression, during which unemployment rose to 25% and total output fell more than 25%.
Financial crises are devastating, but unlike threats to national security, Americans don't give their presidents much in the way of emergency authority to fight them. That reluctance stems from the fear of "moral hazard"—the valid concern that market actors who can expect a bailout in case things go wrong will be encouraged to take too many risks. That same fear typically makes governments, even when they do have the authority, too slow to act.
And so the government had very limited weapons with which to combat the financial crisis of 2008. On "Lehman weekend" (Sept. 13-14), it had no ability, in the absence of a willing buyer, to prevent the investment bank from collapse. And that's why Presidents Bush and Obama had to ask Congress for successive waves of emergency authority.
Ultimately, Congress provided both presidents with the authority to prevent the collapse of the financial system and get the economy growing again. Yet the actions we took were highly controversial, deeply unpopular on the left and the right, and met by vocal skepticism from academics and the public.
That was partly because what one has to do in a panic is the opposite of what seems fair and just. In a financial crisis, the natural instinct is to let creditors suffer losses, let firms fail, and protect taxpayers from any risk of loss. But in a financial panic, a strategy based on those instincts will lead to depression-level unemployment.
Instead, the government and the central bank have to step in and take risks on a scale that the private sector can't and won't. They have to reduce the incentive for investors, lenders and depositors to run and liquidate assets in panic selling. They have to raise the confidence of businesses and individuals that there will not be a systemwide collapse—breaking a vicious cycle in which the fear of a financial-system collapse and a deep recession feed on each other and become self-fulfilling.
Breaking this cycle requires a massive injection of cash into the economy, as directly as possible into the hands of those who will spend it, to offset the loss of private earnings and the collapse in private demand. It also requires doing whatever it takes to keep the financial system from collapse. The banking system is like the power grid; the economy simply can't function if the lights go out and people can't get access to credit.
In a true financial panic, the moral imperative is to ignore moral hazard and first put out the fire. This is counterintuitive. It feels deeply unfair. And it creates some unfortunate collateral beneficiaries in terms of the firms protected from their mistakes. But this is the only way to ultimately protect the innocent victims of the crisis from the calamitous damage of economic depressions.
Because two presidents were willing to put politics aside and deploy a massive and creative rescue, we prevented economic catastrophe and got the economy growing again in about six months. We kept the ATMs working, saved the auto industry, fixed the broken credit channels so that the economy could grow, recapitalized the banking system, and restored much of the damage to America's savings.
The conventional wisdom in early 2009 was that the financial rescue would cost $1-$2 trillion. In fact, the financial system paid for the protection we provided and taxpayers have already earned tens of billions of dollars in profits on these programs.
Herein lies the central paradox: The more aggressive the government is in designing a rescue plan, the easier it is to force more restructuring in the financial sector, and the better the chances of leaving the surviving system stronger and less dependent on the taxpayer.
It is true that we were not able to do all that was important or desirable. The rescue was unorthodox and messy, and the country is still living with the deep scars of the crisis. Long-term unemployment remains alarmingly high. There are very high levels of poverty and appalling inequality, not just in income and wealth, but in the opportunities Americans have for a quality education or economic mobility.
But we did do the essential thing, which was to prevent another Great Depression, with its decade of shantytowns and bread lines. We put out the financial fire, not because we wanted to protect the bankers, but because we wanted to prevent mass unemployment.
We still face many challenges as a country. But we are a stronger country today and in a much stronger position to confront those challenges because America passed its stress test.
Mr. Geithner was secretary of the Treasury from 2009-13 and is the author of "Stress Test: Reflections on Financial Crises" published this week by Crown.
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"Respect to Geithner for forthrightly stating his hypothesis. Let's discuss it: "
I say he is corrupt and dishonest. Let's discuss it anyway.
"Aggressive government intervention will lead to a stronger financial system less dependent on the taxpayer."
Uh, we don't know that. He is so clairvoyant, yet did not see this coming, could not and did not name the causes, doesn't know the solutions, and could care less about constitutional limits that might have restricted his authority to act.
"there will be shantytowns and soup lines across the country [if he had not acted so boldly]"
- Really? No. Most ordinary investors would still own their home, their portfolio at a lower value. Values might have gone further down and then would have come back just like they did. Why wouldn't they? What stoped the crash in 1987?
(http://origin.ih.constantcontact.com/fs064/1102382266122/img/78.gif?a=1102772558174)
"We were in the midst of a classic financial panic"
- Really, what is a "classic" financial panic to someone of Geithner's age, experience or education? "similar to the bank runs in the Great Depression" No, it wasn't similar to the bank runs of the 1930s. There was no bank run. Because of policies he supports, people mostly have no savings in banks.
"The losses suffered on Wall Street seemed welcome and deserved, and of no consequence to the vast majority of Americans." - Because of the politics he supports.
"There was little memory of how panics kill economies, but the panic was already killing ours. American households lost 16% of their wealth in 2008 alone, several times as large as the losses at the start of the Great Depression, during which unemployment rose to 25% and total output fell more than 25%."
- Again, when did panic kill an economy and why did these losses occur? He doesn't know.
"Financial crises are devastating, but unlike threats to national security, Americans don't give their presidents much in the way of emergency authority to fight them."
- He mocks congressional and constitutional limits.
"That reluctance stems from the fear of "moral hazard"—the valid concern that market actors who can expect a bailout in case things go wrong will be encouraged to take too many risks. That same fear typically makes governments, even when they do have the authority, too slow to act."
- He mocks the dangers of establishing moral hazards, while softening with the words: valid concern. It IS a valid concern.
"And so the government had very limited weapons with which to combat the financial crisis of 2008. On "Lehman weekend" (Sept. 13-14), it had no ability, in the absence of a willing buyer, to prevent the investment bank from collapse."
- OMG, not the loss of an investment bank! We have friends there!
"And that's why Presidents Bush and Obama had to ask Congress for successive waves of emergency authority."
- He perhaps never raised a kindergardner. We don't say "had to" for what was really "chose to".
Ultimately, Congress provided both presidents with the authority to prevent the collapse of the financial system and get the economy growing again. Yet the actions we took were highly controversial, deeply unpopular on the left and the right, and met by vocal skepticism from academics and the public.
That was partly because what one has to do in a panic is the opposite of what seems fair and just. In a financial crisis, the natural instinct is to let creditors suffer losses, let firms fail, and protect taxpayers from any risk of loss. But in a financial panic, a strategy based on those instincts will lead to depression-level unemployment.
Instead, the government and the central bank have to step in and take risks on a scale that the private sector can't and won't. They have to reduce the incentive for investors, lenders and depositors to run and liquidate assets in panic selling. They have to raise the confidence of businesses and individuals that there will not be a systemwide collapse—breaking a vicious cycle in which the fear of a financial-system collapse and a deep recession feed on each other and become self-fulfilling.
- What is the heroic and "creative" thing he did if we had to do it all. Where is the evidence that it would all go to zero if investment houses went under. Why were investment houses going under??
Breaking this cycle requires a massive injection of cash into the economy, as directly as possible into the hands of those who will spend it, to offset the loss of private earnings and the collapse in private demand. It also requires doing whatever it takes to keep the financial system from collapse.
- He refers to the cycle as if he recognizes it, it happens all the time and we know the result if we don't flood it with funny money. How about one example from the past that he learned from?
The banking system is like the power grid; the economy simply can't function if the lights go out and people can't get access to credit.
- Looks like the power grid is another subject he knows nothing about. Power gets re-routed when segment or sector fails. I think what he means is an over-loaded, out of date power grid. They should be proud of their political win, shooting down VP Cheney's grid modernization plan a dozen years ago. Sets up the panic.
In a true financial panic, the moral imperative is to ignore moral hazard and first put out the fire. This is counterintuitive. It feels deeply unfair. And it creates some unfortunate collateral beneficiaries in terms of the firms protected from their mistakes. But this is the only way to ultimately protect the innocent victims of the crisis from the calamitous damage of economic depressions.
Because two presidents were willing to put politics aside and deploy a massive and creative rescue, we prevented economic catastrophe and got the economy growing again in about six months. We kept the ATMs working, saved the auto industry, fixed the broken credit channels so that the economy could grow, recapitalized the banking system, and restored much of the damage to America's savings.
"The conventional wisdom in early 2009 was that the financial rescue would cost $1-$2 trillion. In fact, the financial system paid for the protection we provided "
- No, we don't know the full damage that was done.
"and taxpayers have already earned tens of billions of dollars in profits on these programs."
- Did I mention up front that he is dishonest?
Herein lies the central paradox: The more aggressive the government is in designing a rescue plan, the easier it is to force more restructuring in the financial sector, and the better the chances of leaving the surviving system stronger and less dependent on the taxpayer.
- Oh Good Grief! Yes there should be crisis management, but as he brags of his power as the head of the NY Fed, all of the leadup to the crisis including the implosion of the financial sector happened under his watch without him ever uttering that he had a clue. Does Geithner know what went wrong leading us into this crisis? What re-structuring did Geithner propose prior? Nothing. What he supported with his "designing a rescue plan" was everything that caused the crisis needing the rescue.
"It is true that we were not able to do all that was important or desirable. The rescue was unorthodox and messy, and the country is still living with the deep scars of the crisis. Long-term unemployment remains alarmingly high. There are very high levels of poverty and appalling inequality, not just in income and wealth, but in the opportunities Americans have for a quality education or economic mobility."
- Bunk. The crisis eased inequality by destroying wealth. The recovery 'worsened' inequality. Education was UNAFFECTED. Concern for inequality and mobility is the opposite of supporting the policies that only bails out the wealthiest and most poliically connected among us.
"But we did do the essential thing, which was to prevent another Great Depression, with its decade of shantytowns and bread lines. We put out the financial fire, not because we wanted to protect the bankers, but because we wanted to prevent mass unemployment.
"we are a stronger country today and in a much stronger position to confront those challenges because America passed its stress test."
- We don't know that.
In bold, he indicates that he knows with such certainty what we had to do and exactly how bad it would have been if we hadn't. In fact, the reason both sides acted was because we faced total uncertainty about those unknowns. What we do know is that after the fall and recovery we would not be carrying forward this precedent, that there is no real risk taking at the highest and richest levels of this country. With risk taking gone, all that is left is to stomp out the rewards of risk taking.
"You never let a serious crisis go to waste. And what I mean by that it's an opportunity to do things you think you could not do before." - Rahm Emanuel
What they wanted before the crisis was a bigger, stronger, more powerful government. What they wanted during the crisis was a bigger, stronger, more powerful government. What they wanted after the crisis was a bigger, stronger, more powerful government. Are we sure the crisis had anything to do with the actions they took?
ps. I did not fault the bailouts at the time, but find it sickening to see the disease brag about the cure.
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Excellent discussion Doug!
" I did not fault the bailouts at the time"
What about now? This seems to me to be perhaps THE central question-- what DOES one do in such moments?
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" I did not fault the bailouts at the time"
What about now? This seems to me to be perhaps THE central question-- what DOES one do in such moments?
Avoid such moments!
Important questions. I hope others join in.
My thoughts:
a) These crises are government policy failures, not market failures. Why didn't the government correct all that it was doing wrong once it finally knew we were headed into a crisis. Instead, when we saw we were bleeding we kept cutting in our open wounds and ordered more and more band-aids.
b) The Federal Reserve and Federal Govt have no business bailing out private businesses and investments selectively, other than those insured by the federal government.
c) I have no idea why the mortgage business is 90+% federal, or why we make any other federal private sector loan or equity guarantees. Partnering up with some businesses and not others violates my sense of equal protection under the law. Now it is the rule rather than the exception.
d) All that said, elections have consequences and we need to put some trust in our leaders to act in our best interests in an emergency, then face the scrutiny of history in the aftermath. Geithner is partly right in the hypothetical: It is possible for there to be a situation where an injection of money or temporary stoppage of trading or other emergency action could conceivably be in the public's best interest, limit the losses, break the momentum and allow sanity creep back into the markets. Was he right in this instance? I have no idea. Nor does he. Should we now pass enabling legislation to grant greater emergency powers, greater bailout powers that go wider, deeper and make money printing and distribution even easier in a crisis? No. We should address the underlying problems and welcome the role of risk, up and down, in all private investments and transactions.
e) Back to point a, this collapse was avoidable. It was set up by multiple years of free interest. We were already in a crisis-rescue pattern, making things far worse, crying wolf. But pre-2008 was not the crisis, it was the bubble. Why weren't interest rates at market rates then? And then why call it market failure? What a cruel irony.The financial collapse was powered by a poorly thought-out federal government policy of bullying federally backed lenders into extending credit based on criteria other than creditworthiness. It was a recipe for disaster.
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Anytime government distorts markets, it creates a future crisis.
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Agreed, BUT what is to be done when one takes office and faces such a fustercluck?
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The longer you kick the can down the road, the worse the reckoning will be. Better to bite the bullet early on. They didn't save us, they made the price much worse by putting it off.
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Forgive the relentless here:
You take office as the inevitable bubble burst occurs. What do you do?
a) Nothing, let the market work it out. What if mass panic does occur? Do you ride it out, , , , or , , ,?
b) you point out the true cause, but grit your teeth and flood the system with money, but do your best that those at fault personally do not get bailed out,?
c) or , , ,?
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A. No one is too big to fail. We shouldn't be picking winners and losers. Let the creative destruction take place.
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A. No one is too big to fail. We shouldn't be picking winners and losers. Let the creative destruction take place.
It is unfortunate that a person who rose up as high up as Geithner (Peter Principle) and has no idea that creative destruction is a positive term describing the foundation of growth in a dynamic economy. The thinking behind his book and policy is the opposite - that people (and markets) left to themselves will fail and only the smartest and most clever of elite central planners can save us.
Why would investors let prices fall to zero, if real value remains. What stopped the 1987 crash? The market dropped from over 2700 to 1700s, but did not fall further as investors caught their breath and jumped back in. I remember a big, local investor was on Nightline the night of the crash and calmly said that he intended to be making some buys the next morning as it looked like there were some good values out there. Why should it fall to zero?
The DJIA was positive for the 1987 calendar year...and regained its pre-crash peak in less than years. http://en.wikipedia.org/wiki/Black_Monday_(1987)
If something is fundamentally wrong in the market or in the economy, fix what is fundamentally wrong. Not just plug holes.
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May 16, 2014, "Obama to loosen lending standards to boost home ownership."
http://www.aei-ideas.org/2014/05/obama-to-loosen-lending-standards-to-boost-home-ownership-what-could-go-wrong/
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As you guys know, I am very big on having sound bite answers as part of the process of persuasion. I'm thinking the reference to the crash of '87 is a good one. A 1000 drop from 2700 is a 37%! Although this point probably won't be enough by itself, it seems to me a useful one as part of a conversation.
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Piketty fever
Bigger than Marx
A wonky book on inequality becomes a blockbuster
May 3rd 2014 | From the print edition
Timekeeper
Making equations cool again
IT IS the closest thing to a pop-culture sensation heavyweight economics will ever provide. “Capital in the Twenty-First Century”, a vast work on the past and future of inequality by Thomas Piketty, a French economist, has become the best-selling title at Amazon.com. In America the online retailer has run out of the 700-page hardcover, which it sells for $25.
“Capital” has many virtues. It is a clear and thorough analysis of one of the foremost economic concerns of the day. It provides readers with a simple explanation for rising inequality. Wealth generally grows faster than the economy, Mr Piketty argues. What is more, there are few economic forces that counteract its natural tendency to become concentrated, as greater wealth brings greater opportunity to save and invest. In the absence of exceptionally rapid growth or a nasty period of geopolitical instability like that between 1914 and 1945, inequality therefore grows.
The book has attracted much criticism, however. The most common complaints fall into four broad categories. The first concerns Mr Piketty’s tone, beginning with the title. A deliberate allusion to Karl Marx’s magnum opus, it suggests both immodesty and an innate antipathy to markets. Some critics object to Mr Piketty’s use of words like “appropriation” to describe the rising share of income going to the rich. Writing in the Wall Street Journal, Daniel Shuchman, a fund manager, fumed at the book’s “medieval hostility to the notion that financial capital earns a return”.
This is not just a matter of presentation. There is no disguising that Mr Piketty is keener on redistribution than many of his critics. Clive Crook, a columnist at Bloomberg (and former deputy editor of The Economist), asks whether the levels of future inequality the book predicts are really as “terrifying” as Mr Piketty claims.
Others find fault with the book’s economics. The statement “r > g” (meaning that the rate of return on capital is generally higher than the rate of economic growth) is central to the book’s argument that wealth tends to accumulate over time. But some complain that r is too mushily defined, especially by comparison with the calculus-strewn pages of much economics research. Writing in Foreign Affairs, Tyler Cowen of George Mason University reckons Mr Piketty sees capital as a “growing, homogeneous blob”, and so fails to take account of the variation, across time and investments, in the returns to wealth.
Happily, “Capital” is not written in economist-ese. There is relatively little mathematics; Mr Piketty uses 19th-century literature to illustrate many of his points. He freely acknowledges that riskier ventures are more lucrative than safer bets like government bonds. But he is less interested in individual investment choices than in the overall growth in value of an economy’s wealth, including everything from industrial machinery to summer homes and art collections. His data suggest that, with the exceptions mentioned, wealth of this sort does tend to grow faster than the economy as a whole. Since 1700, he reckons, wealth globally has enjoyed a typical pre-tax return of between 4% and 5% a year—considerably faster than average economic growth.
Doubting Thomas
Other critics claim that Mr Piketty ignores bedrock principles of economics. Those dictate that the return on capital should fall as it accumulates. The 100th industrial robot does not provide nearly the same boost to production as the first. Kevin Hassett, of the American Enterprise Institute, a free-market think-tank, reckons the return should fall fast enough as wealth builds that the share of income that goes to the owners of capital should not rise (as Mr Piketty suggests it does).
This disagreement is partly a problem of definitions. Capital in Mr Piketty’s book includes forms of wealth, such as land, that would not figure in economists’ models of production; his rate of return is the pace at which such wealth grows rather than the benefit to firms of investing it. Mr Piketty’s data appear to justify this approach: in the past, at least, the rich have been able to shift resources into higher-yielding forms of wealth when over-investment slashes the return. Mr Piketty also argues that the return on capital can be propped up by technology, which could lead to new ways of substituting machines for people.
A third category of criticism focuses on whether Mr Piketty overstates the extent to which the future is likely to resemble the past. Mr Cowen wonders whether r, however defined, is likely to continue to be higher than the rate of economic growth. Writing in the National Review, Jim Pethokoukis predicts that the same excessive pessimism about economies’ capacity for growth that sank Marx’s prophecies would also undermine Mr Piketty’s.
In a similar vein, some critics question the parallel between today’s wealth (which is mostly the product of soaring labour incomes) and that of the “idle rich” of the 19th century, living off inheritance. The long-run relationship between r and g has little to do with the fortunes accumulated by Bill Gates and Jeff Bezos.
Mr Piketty acknowledges the point, but does not let it distract him from his broader emphasis on the long-run returns to wealth. That is not an absurd decision. Some fortunes, like Warren Buffett’s, seem a confirmation of the contention that r is greater than g. Mr Piketty rightly points out that self-made riches may become tomorrow’s family fortune, given the propensity of wealth to perpetuate itself.
The book’s final section, on how policy should respond to rising inequality, has provoked the most disagreement. Mr Piketty’s proposal for a global tax on wealth is widely written off as politically impossible (which he concedes). Critics like Mr Cowen and Greg Mankiw, an economist at Harvard University, argue that his recommendations are motivated by ideology more than economics.
“Capital” does give unduly short shrift to conservative concerns. Mr Piketty glosses over the question of whether attempts to redistribute wealth will weaken growth. He also assumes, rather blithely, that growing inequality leads to instability. Yet that is not always the case: many democracies have managed such challenges without upheaval. Given the mass of data Mr Piketty has assembled, he might profitably have analysed in what circumstances inequality generates conflict. Then again, the success of his book, and the ever-expanding commentary it has provoked, will doubtless inspire others to do so soon.
From the print edition: Finance and economics
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“Within limits, the system of progressive taxation is defensible and effective. Beyond a certain point, however, it dulls incentives, and may destroy the principal source of funds for new enterprises involving exceptional risks.”
–Harold G. Moulton, founder of the (liberal) Brookings Institution, Controlling Factors in Economic Development, The Brookings Institution, 1949, p. 292.
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Alan Reynolds was debating and refuting Piketty long before political Washington had heard of him. This is from 2 years ago and gives a good prebuttal to the sloppy methodology that Thomas Piketty uses to evaluate his own reckless proposals. Piketty and others use an ETI (elasticity of taxable income) of 0.2 for what Reynolds believes ought to be 1.3 or higher. In other words, if you tax 'taxable income' at 70%, 75% or 83% as proposed, how much LESS taxable income will top earners earn and report? Remember, the highest earners have the greatest ability to move, change or reduce their taxable income.
Sure enough, France added a 75% tax bracket in 2013 as one more burden on its feeble (plowhorse) economy.
"French budget misses target on lower tax revenues" Who knew?
"lower corporate tax revenues and lower income revenues, while revenues from the value-added tax (a regressive tax) were actually up"
http://www.marketwatch.com/story/french-budget-misses-target-on-lower-tax-revenues-2014-01-17
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Reynolds 2012: "If anyone still imagines the proposed "socially optimal" tax rates of 73%-83% on the top 1% would raise revenues and have no effect on economic growth, what about that 100% rate?"
http://online.wsj.com/news/articles/SB10001424052702303916904577376041258476020
Of Course 70% Tax Rates Are Counterproductive
Some scholars argue that top rates can be raised drastically with no loss of revenue. Their arguments are flawed.
By ALAN REYNOLDS
May 7, 2012 7:25 p.m. ET
President Obama and others are demanding that we raise taxes on the "rich," and two recent academic papers that have gotten a lot of attention claim to show that there will be no ill effects if we do.
The first paper, by Peter Diamond of MIT and Emmanuel Saez of the University of California, Berkeley, appeared in the Journal of Economic Perspectives last August. The second, by Mr. Saez, along with Thomas Piketty of the Paris School of Economics and Stefanie Stantcheva of MIT, was published by the National Bureau of Economic Research three months later. Both suggested that federal tax revenues would not decline even if the rate on the top 1% of earners were raised to 73%-83%.
Can the apex of the Laffer Curve—which shows that the revenue-maximizing tax rate is not the highest possible tax rate—really be that high?
The authors arrive at their conclusion through an unusual calculation of the "elasticity" (responsiveness) of taxable income to changes in marginal tax rates. According to a formula devised by Mr. Saez, if the elasticity is 1.0, the revenue-maximizing top tax rate would be 40% including state and Medicare taxes. That means the elasticity of taxable income (ETI) would have to be an unbelievably low 0.2 to 0.25 if the revenue-maximizing top tax rates were 73%-83% for the top 1%. The authors of both papers reach this conclusion with creative, if wholly unpersuasive, statistical arguments.
Most of the older elasticity estimates are for all taxpayers, regardless of income. Thus a recent survey of 30 studies by the Canadian Department of Finance found that "The central ETI estimate in the international empirical literature is about 0.40."
But the ETI for all taxpayers is going to be lower than for higher-income earners, simply because people with modest incomes and modest taxes are not willing or able to vary their income much in response to small tax changes. So the real question is the ETI of the top 1%.
Harvard's Raj Chetty observed in 2009 that "The empirical literature on the taxable income elasticity has generally found that elasticities are large (0.5 to 1.5) for individuals in the top percentile of the income distribution." In that same year, Treasury Department economist Bradley Heim estimated that the ETI is 1.2 for incomes above $500,000 (the top 1% today starts around $350,000).
A 2010 study by Anthony Atkinson (Oxford) and Andrew Leigh (Australian National University) about changes in tax rates on the top 1% in five Anglo-Saxon countries came up with an ETI of 1.2 to 1.6. In a 2000 book edited by University of Michigan economist Joel Slemrod ("Does Atlas Shrug?"), Robert A. Moffitt (Johns Hopkins) and Mark Wilhelm (Indiana) estimated an elasticity of 1.76 to 1.99 for gross income. And at the bottom of the range, Mr. Saez in 2004 estimated an elasticity of 0.62 for gross income for the top 1%.
A midpoint between the estimates would be an elasticity for gross income of 1.3 for the top 1%, and presumably an even higher elasticity for taxable income (since taxpayers can claim larger deductions if tax rates go up.)
But let's stick with an ETI of 1.3 for the top 1%. This implies that the revenue-maximizing top marginal rate would be 33.9% for all taxes, and below 27% for the federal income tax.
To avoid reaching that conclusion, Messrs. Diamond and Saez's 2011 paper ignores all studies of elasticity among the top 1%, and instead chooses a midpoint of 0.25 between one uniquely low estimate of 0.12 for gross income among all taxpayers (from a 2004 study by Mr. Saez and Jonathan Gruber of MIT) and the 0.40 ETI norm from 30 other studies.
That made-up estimate of 0.25 is the sole basis for the claim by Messrs. Diamond and Saez in their 2011 paper that tax rates could reach 73% without losing revenue.
The Saez-Piketty-Stantcheva paper does not confound a lowball estimate for all taxpayers with a midpoint estimate for the top 1%. On the contrary, the authors say that "the long-run total elasticity of top incomes with respect to the net-of-tax rate is large."
Nevertheless, to cut this "large" elasticity down, the authors begin by combining the U.S. with 17 other affluent economies, telling us that elasticity estimates for top incomes are lower for Europe and Japan. The resulting mélange—an 18-country "overall elasticity of around 0.5"—has zero relevance to U.S. tax policy.
Still, it is twice as large as the ETI of Messrs. Diamond and Saez, so the three authors appear compelled to further pare their 0.5 estimate down to 0.2 in order to predict a "socially optimal" top tax rate of 83%. Using "admittedly only suggestive" evidence, they assert that only 0.2 of their 0.5 ETI can be attributed to real supply-side responses to changes in tax rates.
The other three-fifths of ETI can just be ignored, according to Messrs. Saez and Piketty, and Ms. Stantcheva, because it is the result of, among other factors, easily-plugged tax loopholes resulting from lower rates on corporations and capital gains.
Plugging these so-called loopholes, they say, requires "aligning the tax rates on realized capital gains with those on ordinary income" and enacting "neutrality in the effective tax rates across organizational forms." In plain English: Tax rates on U.S. corporate profits, dividends and capital gains must also be 83%.
This raises another question: At that level, would there be any profits, capital gains or top incomes left to tax?
"The optimal top tax," the three authors also say, "actually goes to 100% if the real supply-side elasticity is very small." If anyone still imagines the proposed "socially optimal" tax rates of 73%-83% on the top 1% would raise revenues and have no effect on economic growth, what about that 100% rate?
Mr. Reynolds is a senior fellow with the Cato Institute and the author of "Income and Wealth" (Greenwood Press, 2006).
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Alan Reynolds is a very good economist. He has my respect.
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http://www.businessinsider.com/the-ft-accusation-against-piketty-2014-5
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The point made herein about the Reagan tax cuts appearing to concentrate wealth by causing more money to allow itself to be exposed to taxes is one I have made a number of times on this forum-- probably in the Taxes thread.
http://www.youngresearch.com/authors/jeremyjones/feldstein-dismantles-pikettys-socialist-tome/?awt_l=PWy8k&awt_m=3ckEt.ZCyfzlu1V&utm_source=rss&utm_medium=rss&utm_campaign=feldstein-dismantles-pikettys-socialist-tome
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The point made herein about the Reagan tax cuts appearing to concentrate wealth by causing more money to allow itself to be exposed to taxes is one I have made a number of times on this forum-- probably in the Taxes thread.
http://www.youngresearch.com/authors/jeremyjones/feldstein-dismantles-pikettys-socialist-tome/?awt_l=PWy8k&awt_m=3ckEt.ZCyfzlu1V&utm_source=rss&utm_medium=rss&utm_campaign=feldstein-dismantles-pikettys-socialist-tome
Thank you to Crafty and GM for continuing coverage on the flaws of Piketty. It turns out his data is wrong and deceptive, his analysis of the false data is flawed, and his prescription for a 'solution' is pure nonsense. Yet he became a far-left sensation before his book was read. (shocking)
If the rate of return on investments is greater than the growth rate in the economy and that is perceived to be a problem on a par with climate change(!), why not pursue policies that accelerate the growth rate instead of pursuing policies that destroy job-supporting investment?
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Explaining what caused 2008 is a matter of great importance; the currently dominant meme is both wrong and hostile to a belief in the free market.
Here is Wesbury's analysis:
http://www.ftportfolios.com/Commentary/EconomicResearch/2014/5/28/the-myth-of-2008
If correct, it could be very helpful to our cause. Is it?
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In response, my very savvy friend Rick writes:
Nothing was changed. FASB simply clarified the rule a second time. Read the excerpt below.
http://money.cnn.com/2009/04/02/news/fair.value.fortune/
The new FASB rules could help boost banks' earnings by making it clear that institutions can account for mortgage-backed securities and other assets based on their internal estimates of cash flow and other factors, rather than relying on sales prices in largely inactive markets. But observers such as Larsen note that the latest guidelines only confirm what careful readers of the FASB's fair value rules have known all along, that fire sales aren't meant to be the main determinant of value.
Thus, if the banks have been following the rules as intended all along, there could be little effect on the earnings. (emphasis added)
The FASB, which sets the guidelines under the aegis of the Securities and Exchange Commission, on Thursday also tweaked the rules for how banks may account for securities such as bonds that aren't expected to be repaid in full, but whose market value has been depressed as markets have grown less liquid.
Under the new rules, these so-called "other-than-temporary" impairments will be divided into two buckets, one that reflects the expected credit losses tied to a security and another that accounts for other declines in value, which may be tied to market uncertainty.
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The Little Miracle Spurring Inequality
Extreme leaps in innovation, like the invention of the microprocessor, bring with them staggering fortunes.
By JOHN STEELE GORDON WSJ
Updated June 2, 2014 7:35 p.m. ET
Judging by the Forbes 400 list, the richest people in America have been getting richer very quickly. In 1982, the first year of the list, there were only 13 billionaires on it. A net worth of $75 million was enough to earn a spot. The 2013 list has nothing but billionaires, with $1.3 billion as the cutoff. Sixty-one American billionaires aren't rich enough to make the list.
Many regard this as a serious problem, seeing the development of a plutocracy dominating the American economy through the sheer power of its wealth. The French economist Thomas Piketty, in his new book "Capital in the 21st Century," calls for an 80% tax on incomes over $250,000 and a 2% annual tax on net worth in order to prevent an excessive concentration of wealth.
That is a monumentally bad idea.
The great growth of fortunes in recent decades is not a sinister development. Instead it is simply the inevitable result of an extraordinary technological innovation, the microprocessor, which Intel brought to market in 1971. Seven of the 10 largest fortunes in America today were built on this technology, as have been countless smaller ones. These new fortunes unavoidably result in wealth being more concentrated at the top.
But no one is poorer because Bill Gates, Larry Ellison, et al., are so much richer. These new fortunes came into existence only because the public wanted the products and services—and lower prices—that the microprocessor made possible. Anyone who has found his way home thanks to a GPS device or has contacted a child thanks to a cellphone appreciates the awesome power of the microprocessor. All of our lives have been enhanced and enriched by the technology.
This sort of social transformation has happened many times before. Whenever a new technology comes along that greatly reduces the cost of a fundamental input to the economy, or makes possible what had previously been impossible, there has always been a flowering of great new fortunes—often far larger than those that came before. The technology opens up many new economic niches, and entrepreneurs rush to take advantage of the new opportunities.
The full-rigged ship that Europeans developed in the 15th century, for instance, was capable of reaching the far corners of the globe. Soon gold and silver were pouring into Europe from the New World, and a brisk trade with India and the East Indies sprang up. The Dutch exploited the new trade so successfully that the historian Simon Schama entitled his 1987 book on this period of Dutch history "The Embarrassment of Riches."
Or consider work-doing energy. Before James Watt's rotary steam engine, patented in 1781, only human and animal muscles, water mills and windmills could supply power. But with Watt's engine it was suddenly possible to input vast amounts of very-low-cost energy into the economy. Combined with the factory system of production, the steam engine sparked the Industrial Revolution, causing growth—and thus wealth as well as job creation—to sharply accelerate.
By the 1820s so many new fortunes were piling up that the English social critic John Sterling was writing, "Wealth! Wealth! Wealth! Praise to the God of the 19th century! The Golden Idol! The mighty Mammon!" In 1826 the young Benjamin Disraeli coined the word millionaire to denote the holders of these new industrial fortunes.
Transportation is another fundamental input. But before the railroad, moving goods overland was extremely, and often prohibitively, expensive. The railroad made it cheap. Such fortunes as those of the railroad-owning Vanderbilts, Goulds and Harrimans became legendary for their size.
The railroad also made possible many great fortunes that had nothing, directly, to do with railroads at all. The railroads made national markets possible and thus huge economies of scale—to the benefit of everyone at every income level. Many merchandising fortunes, such as F.W. Woolworth's five-and-dime, could not have happened without the cheap and quick transportation of goods.
Many of the new fortunes in America's Gilded Age in the late 19th century were based on petroleum, by then inexpensive and abundant thanks to Edwin Drake's drilling technique. Steel, suddenly made cheap thanks to the Bessemer converter, could now have a thousand new uses. Oil and steel, taken together, made the automobile possible. That produced still more great fortunes, not only in car manufacturing, but also in rubber, glass, highway construction and such ancillary industries.
Today the microprocessor, the most fundamental new technology since the steam engine, is transforming the world before our astonished eyes and inevitably creating huge new fortunes in the process.
To see how fundamental the microprocessor—a dirt-cheap computer on a chip—is, do a thought experiment. Imagine it's 1970 and someone pushes a button causing every computer in the world to stop working. The average man on the street won't have noticed anything amiss until his bank statement failed to come in at the end of the month. Push that button today and civilization collapses in seconds. Cars don't run, phones don't work, the lights go out, planes can't land or take off. That is all because the microprocessor is now found in nearly everything more complex than a pencil.
The number of new economic niches created by cheap computing power is nearly limitless. Opportunities in software and hardware over the past 30 years have produced many billionaires—but they're not all in Silicon Valley. The Walton family collectively is worth, according to Forbes, $144.7 billion, thanks to the world's largest retail business. But Wal-Mart couldn't exist without the precise inventory controls that the microprocessor makes possible.
The "income disparity" between the Waltons and the patrons of their stores is as pronounced as critics complain, but then again the lives of countless millions of Wal-Mart shoppers have been materially enriched by the stores' staggering array of affordable goods.
Just as the railroad, the most important secondary technology of the steam engine, produced many new fortunes, the Internet is producing enormous numbers of them, from the likes of Amazon, Facebook and Twitter. When Twitter went public last November, it created about 1,600 newly minted millionaires.
Any attempt to tax away new fortunes in the name of preventing inequality is certain to have adverse effects on further technology creation and niche exploitation by entrepreneurs—and harm job creation as a result. The reason is one of the laws of economics: Potential reward must equal the risk or the risk won't be taken.
And the risks in any new technology are very real in the highly competitive game that is capitalism. In 1903, 57 automobile companies opened for business in this country, hoping to exploit the new technology. Only the Ford Motor Co. survived the Darwinian struggle to succeed. As Henry Ford's fortune grew to dazzling levels, some might have decried it, but they also should have rejoiced as he made the automobile affordable for everyman.
Mr. Gordon is the author of "An Empire of Wealth: The Epic History of American Economic Power" (HarperCollins, 2004).
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New Report Predicts Strong Bullish Move
by Mitch Zacks, Senior Portfolio Manager
For some time I have been calling for a market correction. This is nothing to fear. Corrections entail sell-offs of 10% or more in the S&P 500 over a couple of months, and are necessary to prevent asset bubbles.
In previous commentaries, I have expressed my concern that the market cap of the publicly traded companies in the U.S. relative to GDP is too high given historical levels of the ratio. I am still bothered that the majority of corporate earnings growth has materialized from cost savings due to margin expansion, and that this may not be sustainable without organic corporate revenue growth.
Additionally, the majority of gains in the S&P 500 over the past year materialized from P/E expansion rather than earnings growth and the P/E multiple of the market can only go so high.
At the same time, I have been indicating that bull markets rarely end at average P/E levels and the level of speculative fervor you find near the tail end of a bull market simply is not yet present.
(Continued below)
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There remains a wall-of-worry for the market to climb based on the low growth economic recovery. Additionally, interest rates are incredibly low which is pumping up market valuations, and the European central bank is becoming more accommodative with its monetary policy.
The Bull Case for This Market
None other than Larry Summers, the former Secretary of the Treasury, advanced the Bull Case for the stock market to defy those calling for a correction. He predicts it will continue to head substantially higher. Summers' bull-market case is fascinating.
His thesis is that the economy has structurally changed. This change is basically that capital and labor are no longer complementary.
In the past, to produce goods you needed people, and people needed machines to produce goods. If you were running an automobile factory in the 1950's, you needed assembly line workers plus the machines or capital that were used by the people.
What Larry Summers is proposing is that, starting in the late 90's, capital began to be not a complement but a substitute for labor. Essentially, the automobile factory no longer needs the same ratio of people to machines. Effectively, the people making the cars can be replaced with technology.
An Accelerating Trend
More and more, technology is serving as a substitute for labor. Think of all the travel agents that were replaced by the Internet. What about the book store clerks whose jobs were destroyed by Amazon, or the newspaper delivery boys being put out of business by iPhones?
The argument goes that because technology is substituting for labor, an increase in labor productivity will not cause an increase in wages. In the past, greater capital meant higher productivity which leads to more jobs and higher wages. What Larry Summers is saying is that increased demand for technology is actually lowering demand for labor.
Where Is the Money Going?
This is causing the aggregate share of labor income to decline and the share of capital to rise. From a common sense perspective, if capital is a substitute for labor the economic pie is going to go more and more to those that own the capital and less to those that own the labor. This is the explanation for the growing amount of income inequality in the world. People are being replaced by technology and the capitalists are taking greater and greater gains from economic growth.
The result is that the jobs in most demand are ( 1 ) very low-wage jobs like barbers that are not easily replaced by technology, or ( 2 ) very high-wage positions that require extensive analytical abilities that are also hard to replace with machines. Retail clerks, assembly line workers, travel agents, and even low-level legal workers are all being replaced by technology. Meanwhile, high-level corporate managers who direct complex operations are seeing their wages increase.
Big Advantage for the Stock Market
This disruption is extremely positive for publicly traded corporations. We would expect to see higher profit margins in aggregate as a result of low wage growth and this is exactly what we are witnessing.
Twenty years ago, the largest publicly traded companies in the U.S. employed far more people. Google, Microsoft, and Facebook simply do not need the same number of workers as US Steel and General Motors required. In fact, the size of corporations in terms of employees has been declining over time. Even manufacturing and energy companies are employing fewer people and more and more technology.
If this shift from capital being a complement to labor to becoming a replacement for labor is truly here, the effect will be twofold:
First and foremost, interest rates will remain much lower for a longer time than anyone is currently anticipating. With capital replacing labor, wages remain under pressure. As I have said many times, there has never been a period of price inflation that has not been accompanied by a period of wage inflation.
Second, and most important to investors, the stock market should go much higher than what people, including me are anticipating. If technological advances are causing capital to get a greater percentage of the economic pie than it used to, the best course of action is to own the capital. In other words, invest in the stock market.
Then when you combine the structural shift in the economy with the way globalization is increasing the labor supply, and factor in the decline of labor unions, we are looking at a prolonged period of stagnant wage growth.
Our current outlook for the market might actually be somewhat conservative if the trend of wages not increasing continues to persist. Click here for free Zacks' June Outlook.
What Do I Think of This?
Well, an old saw of wisdom is that when people start saying that "This time it is different," they are usually mistaken. The theory that capital and technology are becoming substitutes for labor is a well thought out, if not brilliant argument. It explains why interest rates are globally low, profit margins are high, wages are stagnant, inflation is benign, inequality is rising, and yet the market keeps heading higher and the P/E multiple keeps expanding. The theory explains the data, but brilliant theories usually do.
However, I tend to feel that the more things change the more they stay the same especially with regard to the equity market. This time around nothing is different.
Wages will eventually go up, inflation will return, interest rates will rise and the market will appreciate not at an accelerated rate but at its historical rate of 6% above the risk-free interest rates.
Summers' argument is very powerful, but it is simply a brilliant way of saying "This time things are different."
So What Should You Do?
A market correction, unfortunately, is not out of the cards. Corrections will materialize and the best course of action, as always, will be to continue to hold equities even when interest rates begin to rise.
If you want the Zacks point of view on what is going to happen with the market moving forward, you are welcome to download our June Market Outlook.
This intelligence has been reserved for our private clients but today I am opening it up to you for free. Now you can see our latest, detailed predictions on GDP growth, inflation's next trend, where the market's headed through 2014 and 2015, and more.
Click to download Zacks' June Market Outlook Free
-Mitch Zacks
About Mitch Zacks
Mitch is a Senior Portfolio Manager at Zacks Investment Management. He wrote a weekly column for the Chicago Sun-Times and has published two books on quantitative investment strategies. He has a B.A. in Economics from Yale University and an M.B.A. in Analytic Finance from the University of Chicago.
Mitch also is a Portfolio Manager for the Zacks Small Cap Core Fund ( ZSCCX ).
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As usual, Larry Summers is talking like an economically illiterate person. "... capital and labor are no longer complementary ..."??
Ignorant people have been talking like this for a very long time -- every time that some capital investment has displaced labor. It's certainly true that digital technology has ramped up these effects, but it is still the same issue.
Meanwhile, almost all of this gibberish is just plain wrong. Money is not capital. A society's stock of capital is the physical and intellectual "goods" that enable the production of consumer goods. Nobody wants capital goods for their own sake; all production is for the purpose of producing more consumer goods, less expensively. Capital has value only to the extent that some entrepreneur thinks it has value. And an entrepreneur won't buy or produce capital goods unless he believes those goods can be employed to produce something that consumers (or entrepreneurs closer to the consumer) will buy for more than his costs.
Now it's true that capital goods allow the production of consumer goods with less labor than before, but capital and labor will always be complementary. At a minimum there must be an entrepreneur who visualizes how the available (or newly created) capital goods can be combined to produce valued consumer goods -- and it is pretty ridiculous to think that we are going to have successful firms with only one person working to apply the capital goods to the problem at hand. Those firms that do hold employment to very low numbers are invariably "outsourcing" a lot of work -- and people are always a necessary ingredient.
But you are correct when you say
"It could be argued that without the deficit spending - and redistribution of 'borrowed' funds to consumers over the past several years - many of today's great businesses would be broke."
Yes indeed, many government activities have distorted the market economy in ways that have caused entrepreneurs to launch capital goods projects that would not currently be profitable on unfettered markets. The Austrian School economists call this "malinvestment." Bad investments can be caused by central bank policies and various other government actions. Tesla, for example, could never produce a profit if it were not for the various "green" energy subsidies -- and without zero interest rate policies. In general, it's safe to say that much of the extreme applications of labor saving technology has been driven by cheap money and regulations in minimum wage, medical insurance, and others that make labor too expensive.
As for all of this being an argument in favor of higher nominal stock prices ... I don't see it. Capital goods have value only to the extent that they increase the production of valuable consumer goods and services. But as the stock of consumer goods rises, nominal prices for units of goods will normally fall -- unless there is monetary inflation. Furthermore, this environment of rampant technological advances produces more and more firms. How can all of their stock prices be rising? The total value of capital cannot exceed the value of consumer goods production, and that value is dictated by the prices consumers can and do pay for the consumer goods.
The author of the posted article, Zacks, says that
"I have expressed my concern that the market cap of the publicly traded companies in the U.S. relative to GDP is too high given historical levels of the ratio."
To this I would say "no kidding!" Below is a chart produced by that pariah John Hussman.
In this chart Hussman correlates Market cap/GDP to subsequent ten year nominal S&P 500 returns -- and includes the actual ten year returns (in red) for comparison. You might notice that the projected return for previous market highs turned out to be a bit optimistic. When people talk about current valuations being less extreme than they were in 2000, you have to consider that the ten year result from 2000 was a negative S&P 500 return. Is that the Wall Street goal once again?
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Yes the Larry Summers view certainly is misguided, if accurately quoted and portrayed. And the response posted is right on the money and worth reading more than once.
If not Summers, it could be said about almost any leftist politician, they think the laws and forces of economics and human spirit don't apply to their failed ideas.
I have said often, capital employs labor. And a greater investment in capital makes labor more productive resulting in higher pay. The responder says money is not capital and is right, but when money becomes capital, it employs labor.
Without capital, no one gets employed. Poor people don't employ anyone. Poor economies with anti-business, anti-employment, anti-economic freedom rules and customs employ no one at a good wage. Wealthy people who have had it with business and investment and keep their money on the sidelines employ almost no one compared with the when they were risking their capital and building their businesses.
Capital is a substitute for Labor? What bunk!
Let's take a simple example. Our business digs ditches or moves earth for building foundations. Our capital is in shovels and we employ a few laborers. Over time, our business or at least the industry if invested with capital now owns giant diesel powered powered products from Cummins and Caterpillar and we now can dig with one person in one machine what used to take a thousand people to do. By Summers math, or Obama, etc. that productivity gain just put 999 workers out of work. Same as the Obama argument that the ATM (which hit the market in the 1970s) is costing us jobs. That argument is wrong in so many ways. Innovation improves and grows jobs. If yo9u can't see that intuitively, you can easily see it empirically.
We could analyze the math and see that jobs grew at the machinery companies and supply chains etc. and trace and calculate all of that. The biggest advancement though is that much larger jobs are now possible. A guy holding a shovel is displaced, but if he also responds to the changes in a dynamic world, he moves quickly from that to bettering himself. When we remove all incentives, responsibilities and consequences, likely he doesn't.
More simple is to understand that the dynamic economy that fosters innovation will grow and prosper and an economy burdened with rules slowing and stopping change does not. Economic success includes monetary prosperity but also is tied to things like health, education, environment and longevity.
Economies that innovate, prosper. Nothing unleashes human innovation like a private, freedom based risk capital system. Look around the world. Look through human history. Compare the Heritage Freedom indices with the results the leading countries are attaining. Yet we keep hearing every argument in politics that pulls in the opposite direction. Capital is no longer tied to jobs, good grief!
If leftist lived by the rules they impose on the private sector, they would be forced to disclose the harm they inflict with their policies and get sued for the damages.
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A long, thoughtful takedown and deconstruction of Piketty's twisted book aagainst capital, by Jonah Goldberg in Commentary Magazine, June 2014:
http://www.commentarymagazine.com/article/mr-pikettys-big-book-of-marxiness/
With the quick slide in sales of Hillary's travel notes, maybe we can get back to real issues! Excerpted here, read it all at the link.
One: Piketty’s Charge
...It remains to be seen what history will make of Thomas Piketty’s Capital in the Twenty-First Century, which was released in America in April. But it was so perfectly timed that it joined the ranks of those lightning-in-a-bottle books even before its publication. Piketty purports to offer a “general theory of capitalism,” in the words of the economist Tyler Cowen. His theory is that capitalism inherently leads to ever-widening income inequality that can be addressed only through heavy taxes on accumulated wealth. In December 2013, President Obama prepared the intellectual battlefield for Piketty by declaring that income inequality was now “the defining challenge of our time.” As the enormous and dense tome finally settled in at the top of the charts, Hillary Clinton previewed a presidential campaign stump speech of sorts, which largely focused on Piketty’s core theme: inequality. Even the pope got in on the act. Adding a religious dimension to Piketty’s theories on Twitter, he declared in late April that “inequality is the root of social evil” and called for “the legitimate redistribution of economic benefits by the State.”
...
According to Boris Kachka of New York magazine, “One hundred and eighty years after Alexis de Tocqueville came back to France with the news that he’d found true égalité in America, his countryman has arrived on our shores to deliver the opposite news.”
Taken literally, the comparison between the two writers is ridiculous.
...Capital in the Twenty-First Century is the artillery shell his supporters have long been waiting for to begin the war against “economic inequality.”
Two: Piketty’s Claim
Piketty’s overarching argument is that Karl Marx was essentially correct when he identified what might be called the original sin of capitalism: the problem of “infinite accumulation.” This is the idea that the rich get richer and the poor get poorer. According to Piketty, it’s what happened when capitalism was left to its own devices at the end of the 19th century, and it’s what is about to happen in the United States and Europe in the 21st. There was, he says, a brief flattening-out of inequality in the middle of the 20th century, thanks to the devastation of two world wars, which destroyed enormous amounts of wealth and fueled huge spikes in taxation. But otherwise the story has remained the same.
Piketty asks:
Do the dynamics of private capital accumulation inevitably lead to the concentration of wealth in ever fewer hands, as Karl Marx believed in the nineteenth century? Or do the balancing forces of growth, competition, and technological progress lead in later stages of development to reduced inequality and greater harmony among the classes…?
Given this either/or, Piketty essentially sides with Marx. I say “essentially” because there is much bickering about whether it is fair or right to call Piketty a Marxist. Paul Krugman, for instance, finds the idea ridiculous, despite the fact that the very title of the book is an homage to Marx’s Das Kapital and that Piketty says Marx asked the right questions even if some of his answers had “limitations.” Piketty himself rejects the Marxist label, presents his arguments in neoclassical terms, and describes himself as a social democrat.
Others have called Piketty’s approach “soft Marxism.” But with apologies to Stephen Colbert, I’d call it “Marxiness.” Piketty attempts to avoid Marx’s scientistic messianism by proffering caveats like “one should be wary of economic determinism.” Yes, one should. But Piketty has a grating habit of offering seemingly deflating qualifiers and “to be sures” only to proceed—à la an unreconstructed Marxist—to argue as if science and objective truth are unquestionably on his side.
He concludes that the problem with capitalism is that “there is no natural, spontaneous process to prevent destabilizing, inegalitarian forces from prevailing permanently.” Rather, capitalism is structurally (or objectively, as the old Marxists might say) inegalitarian. It is a rigged casino where the winners not only keep winning but don’t deserve their chips in the first place.
His proof comes in the form of r > g, already the most famous mathematical formula since E=MC2. R is the rate of return on capital (investments, interest on savings, rent from land). G is the growth rate of the broader economy. The problem, according to Piketty, is that the rate of return on capital is greater than the growth of the broader economy. He postulates that if capital grows faster than national income, specifically income earned through wages, over time the capitalists will come to own everything unless something stops that from happening.
Piketty dismisses the claim that the free market self-corrects. He essentially rejects the belief that the law of diminishing returns applies to capital. Most economists hold that if there’s too much capital chasing too few opportunities for investment, the return on capital will inevitably drop. Such corrections, in his view, are fleeting shifts in the current of an ever-rising tide of inequality. And even when they occur, they don’t amount to much:
Never mind that such adjustments might be unpleasant or complicated; they might also take decades, during which landlords and oil well owners might accumulate claims on the rest of the population so extensive that they could easily own everything that can be owned, including rural real estate and bicycles, once and for all. As always, the worst is never certain to arrive. It is much too soon to warn readers that by 2050 they may be paying rent to the emir of Qatar.
Piketty asserts that the return on capital (the r in r > g) holds steady at about 5 percent over time. This means that once you’re rich, you keep getting richer thanks to the miracle of compound interest. Inherited wealth, or old money, expands forever—or, as Piketty puts it in a memorable line, “the past devours the future.”
Piketty’s occasional concessions to uncertainty about his most dire predictions illustrate one reason he shouldn’t be considered an orthodox Marxist. He has no grand Hegelian theory of the ineluctable progression of History with a capital H. But who needs dialectical materialism when you have algebra?
Indeed, his primary claim to originality comes from a statistical tendency he discerns through masses of data, according to which the free market yields a society in which the rich not only get richer but get richer faster than everyone else and ultimately leave the poor behind. This is, he says, the “central contradiction of capitalism.” He goes on:
Once constituted, capital reproduces itself faster than output increases. The past devours the future. The consequences for the long-term dynamics of the wealth distribution are potentially terrifying, especially when one adds that the divergence in wealth distribution is occurring on a global scale.
According to Piketty, we are not only returning to levels of income inequality not seen since the 19th century. We are also looking at a potentially eternal future where the overclass rules at the expense of the ever-growing underclasses. It’s economic Morlocks versus Eloi all the way down.
Matters would appear to be hopeless. But not to worry. Piketty has hope. What gives him hope, and what excites so many of his fans, is that this central contradiction of capitalism can be overpowered by the state.
His key proposal is what he calls a “global wealth tax” of 5 to 10 percent off the top for billionaires, 2 percent for people worth 5 million euros or more, and 1 percent for millionaires below that. He also advocates a top marginal tax rate of 80 percent. And that ain’t the half of it—literally. It’s more like less than a quarter of it. “If one follows Piketty in assuming a normal return on capital of 4 percent for the 21st century,” Stefan Homburg of the University of Leibnitz has written, “a 10 percent tax on wealth is equivalent to a 250 percent tax on the resulting capital income. Combined with the 80 percent income tax, taxpayers would face effective tax rates of up to 330 percent.”
How and by whom this money would be collected is kept rather vague, in part because even Piketty concedes that this proposal is “utopian.” More interesting, he is not especially concerned about what to do with these revenues. Leveling the gap between the rich and the rest of us is a much larger priority for him than lifting up the poor. “Confiscatory tax rates on incomes deemed to be indecent” are worthwhile in their own right, he says. Such rates, which reached 90 percent in the United States at one point, were an “impressive U.S. innovation of the interwar years.” He says this even though he concedes that a high marginal tax rate on extremely high incomes actually “brings in almost nothing” (because the rich would simply stop taking proceeds in taxable form). He does concede in a wonderful understatement at the end of the book that “before we can learn to efficiently organize public financing equivalent to two-thirds to three-quarters of national income”—what his desired tax rates would amount to—“it would be good to improve the organization and operation of the existing public sector.” There’s a useful insight.
His comfort with punitive taxation is reminiscent of Barack Obama’s response in 2008 when asked if he would support a higher tax on capital gains even if he knew it would bring in less revenue. Obama answered that he would still favor raising such taxes for “purposes of fairness.” In short, some people don’t deserve the money they have, and the government should take it from them.
...
Three: Piketty’s Data
The general consensus even from very critical economists—and there are many—is that Piketty and his colleagues (chiefly his frequent writing partner, Berkeley economist Emmanuel Saez) have masterfully collected an amazing amount of data that describe some very interesting trends over the past 300 years. They have made massive databases with information culled from tax returns, estate records, and virtually every other source they could find. They plausibly argue that such records are more valuable and accurate than conventional surveys because the sample size of responses from the wealthiest individuals are simply too small to give a clear picture of inequality. Capital in the Twenty-First Century is largely a repackaging of that work. But for Piketty and his fans, it amounts to nothing less than the spread of the Big Data revolution to economic history. Maybe so. But his analysis of those data is far more controversial.
One reason for the controversy is that Piketty oversimplifies the concept of capital. He depicts it “as a growing, homogeneous blob which, at least under peaceful conditions, ends up overshadowing other economic variables,” in the words of economist Tyler Cowen. But different kinds of capital have different rates of return. Right now Treasury bills yield barely better than a 1 percent return, while equities historically have a return of about 7 percent. As Cowen notes in an essay for Foreign Affairs, this alone reveals a certain blind spot in Piketty’s analysis: the hugely significant role of risk-taking in a free-market economy.
The most common and strongest complaint is that Piketty’s arrangement of the data paints a false picture of rising inequality in the United States. Harvard’s Martin Feldstein noted in the Wall Street Journal that Piketty fails to take into account important—albeit arcane—changes in the tax code that have caused business income to be counted on personal tax returns. “This transformation occurred gradually over many years as taxpayers changed their behavior and their accounting practices to reflect the new rules,” Feldstein writes. As an example, “the business income of Subchapter S corporations alone rose from $500 billion in 1986 to $1.8 trillion by 1992.” This leads Feldstein to conclude that Piketty “creates the false impression of a sharp rise in the incomes of high-income taxpayers even though there was only a change in the legal form of that income.”
Feldstein and Scott Winship, of the Manhattan Institute, identify another methodological problem. By focusing on tax returns (instead of household surveys and the like), Piketty fails to take into account the already sizable redistributive elements of our tax code. One in three Americans receives some means-tested government aid today. And that percentage will only grow as people live longer in retirement than ever before. In other words, social security, housing assistance, food aid, etc. don’t show up in Piketty’s portrait of inequality. Winship also notes that his method lumps together many young workers who might live at home and spouses who work only part time. Perhaps more significant, in Piketty’s data, capital gains are registered as a one-time windfall. In other words, if you buy shares in a mutual fund and you hold onto that asset for 25 years, the gains you realize when you sell are counted as income in a single year. But in fact, they’ve been earned over a quarter century. And by “excluding non-taxable capital gains,” Winship wrote in National Review,“most wealth accruing to the middle and working class, which comes in the form of home sales or 401(k) and IRA investments, is invisible in Piketty’s data.”
Then there is Piketty’s use, or abuse, of r > g. “Pretty much every economics textbook will tell you that r > g,” writes American Enterprise Institute economist Andrew Biggs. “But none of the textbook models take from this that the capital stock will rise endlessly relative to the economy. Most of them hold that it stays pretty constant, and the historical evidence supports that view.”
Indeed, as Homburg notes, historical evidence shows that the divide between wealth and income doesn’t eternally widen simply because r is greater than g. The evidence for this can be found in Piketty’s own book, which shows that for the last two centuries, the wealth-to-income ratio in the United States and Canada has remained fairly stable. This North American exception is important because, unlike Europe and Japan, we were not subjected to the physical devastation of the world wars (a topic I will return to later).
Homburg, the American Enterprise Institute’s Kevin Hassett, and a team at the Sciences Po in Paris, moreover, argue that the recent widening of the wealth-to-income gap in the United States that Piketty reports is largely a function of a housing boom in the past 30 years. This fact complicates the story. The housing boom has benefited rich people, to be sure, but it has also been fueled by a massive expansion of home ownership among not only the wealthy but also the middle and lower classes (though not in proportion to gains by the wealthy). “The largest single component of capital in the United States is owner-occupied housing,” notes the liberal economist Lawrence Summers in his review of the book for Democracy. “Its return comes in the form of the services enjoyed by the owners—what economists call ‘imputed rent’—which are all consumed rather than reinvested since they do not take a financial form.”
Also, housing booms cannot go on forever. If you exclude housing from other forms of wealth or capital (Piketty explicitly uses the terms interchangeably), these economists argue, the return on capital is less robust. “In the U.S.,” the Sciences Po economists write, “the net capital income ratio of housing capital was the same in 1770 as it was in 2010 and there is neither a long run trend nor a recent increase of this ratio.” They add: “This type of situation, where a small share of the population owns most of the housing capital, appears to be far from the current situation of developed countries, where the homeownership rate varies between 40 percent and 70 percent. The diffusion of homeownership is likely to slow or even reverse the rise of inequality regardless of trends in housing prices.” Ultimately, the Sciences Po economists found that their conclusions about inequality in recent years “are exactly opposite to those found by Thomas Piketty.”
Other critics raise a different objection. According to Saez, the largest portion of rising wealth has been in the growth of pension savings, which is a very good thing by most accounts. This is important for two reasons. First, pensions, while disproportionately held by the wealthy, are nonetheless very widely held (by teachers, policemen, autoworkers, et al.). Second, as Forbes’s Tim Worstall notes, pension wealth is generally not inheritable. Indeed, by design, it is intended to be spent.
But in order for Piketty’s invincible confidence that “the past will devour the future” to hold, wealthy people can’t spend down their money, because then it would circulate through the broader economy, raise the fortunes of others, and reduce their own net wealth. But one needs only to look outside the window to see that they do. The wealthy spend their money on cars, houses, boats, and, of course, their own children. Doing so depletes their own wealth holdings and increases the incomes of the less wealthy who provide these goods. They also spend it on museum wings, hospitals, charities of all kinds (even this magazine, a 501(c)3 to which you should be donating if you’re not already), and even progressive reform efforts of the kind Piketty surely endorses. Whatever the motive, they spend down their capital stock relentlessly—a major reason, in the United States and Canada especially, the wealth-to-income ratio has stayed relatively constant. As Feldstein notes, Piketty’s assumption about the rich might be true if every individual rich person lived forever.
...one must conclude that what its supporters have hailed as an irrefutable mathematical prophecy might have to be downgraded by everyone else into the well-informed hunch from a left-leaning French economist—a significant drop in confidence level, as the statisticians might say.
And this is hugely inconvenient for those holding aloft Capital in the Twenty-First Century as though it were the Statistical Abstract of the United States—because that would mean all of Piketty’s policy proposals and dire predictions for the future are based on a guess about the future, a guess he has falsely portrayed as an immutable law.
Four: Piketty’s Faith
Appeals to scientific fact are powerful only if the science holds up. The problem is that Piketty’s whole case sits on what could be called a one-legged stool: Remove that leg and there’s nothing left to hold it up but faith. Marxism suffered from a similar weakness. So long as its “scientific” claims remained uncontested and unexamined, Marxism had a huge advantage. Once it became clear that the science in “scientific socialism” was nothing more than clever branding, all that was left was faith.
The radical philosopher Georges Sorel (1847–1922) recognized that Marx’s Das Kapital was next to useless as a work of scientific analysis. That’s why he preferred to look at it as an “apocalyptic text… as a product of the spirit, as an image created for the purpose of molding consciousness.” And for generations of revolutionaries, intellectuals, artists, and activists, it served that purpose well. Marxism lent to its acolytes a certainty they could call “scientific”—an indispensable label amidst a scientific revolution—but, as Sorel understood, that was a kind of psychological marketing, a Platonic “vital lie” or what Sorel called a useful “myth.” Indeed, Lenin’s most significant contribution to Marxism lay in using Sorel’s concept of the myth to galvanize a successful revolutionary political movement.
Marx tapped into the language and concepts of Darwinian evolution and the Industrial Revolution to give his idea of dialectical materialism a plausibility it didn’t deserve. Similarly, Croly drew from the turn-of-the-century vogue for (heavily German-influenced) social science and the cult of the expert (in Croly’s day “social engineer” wasn’t a pejorative term, but an exciting career). In much the same way, Piketty’s argument taps into the current cultural and intellectual fad for “big data.” The idea that all the answers to all our problems can be solved with enough data is deeply seductive and wildly popular among journalists and intellectuals. (Just consider the popularity of the Freakonomics franchise or the cult-like popularity of the self-taught statistician Nate Silver.) Indeed, Piketty himself insists that what sets his work apart from that of Marx, Ricardo, Keynes, and others is that he has the data to settle questions previous generations of economists could only guess at. Data is the Way and the Light to the eternal verities long entombed in cant ideology and darkness. (This reminds me of the philosopher Eric Voegelin’s quip that, under Marxism, “Christ the Redeemer is replaced by the steam engine as the promise of the realm to come.”)
For the lay reader of Capital, this might seem ironic, given Piketty’s own criticisms of the economics profession. He mocks his colleagues’ “childish passion for mathematics and for purely theoretical and often highly ideological speculation” and “their absurd claim to greater scientific legitimacy, despite the fact that they know almost nothing about anything.” He decries the “scientistic illusion” that emerges from statistical lightshows. “The new methods often lead to a neglect of history and of the fact that historical experience remains our principle source of knowledge,” he writes. It is true that the economists he’s talking about don’t deal with real-world data but with abstract mathematical models masquerading as economic theory. Nonetheless, he would be well advised to consider that towering trees of data can blind you to the more complex nature of the forest.
With almost the sole exception of left-wing Salon columnist Thomas Frank, virtually none of his reviewers—positive and critical alike—have commented on the fact that Piketty has a remarkably thumbless grasp of historical context. “Piketty’s command of American political history is, quite simply, abysmal,” Frank correctly declares. ...
...Piketty sees the super rich as an undifferentiated agglomeration—a single static class bent on protecting its own collective self-interests. But the rich are not a static class, any more than capital can be reduced to a homogenous blob. Fewer than 1 in 10 of the 400 wealthiest Americans on the Forbes list in 1982 were still there in 2012. (Lawrence Summers notes that if Piketty was right about the stable return on capital, they should have all stayed on the list.) Of the 20 biggest fortunes on the Forbes list in 2013, 17 (85 percent) were self-made. Of the three remaining entries, only one—the Mars candy family—goes back three generations. The Koch brothers inherited the business their father created, but they also greatly expanded it through their own entrepreneurial zeal. The Waltons of Walmart fame inherited the family business from Sam Walton, a self-made billionaire from quite humble origins.
Nor are the poor and the middle class static. As a statistical artifice, there will always be a bottom 1 percent, just as there will always be a top 1 percent. But that doesn’t mean that if you are born in the bottom 1 percent, you will stay there. Some of Piketty’s fans seem confused about this, appearing to believe that economic inequality is synonymous with low economic mobility. There may indeed be a link between inequality and low economic mobility. After all, rich people by definition have advantages poor people do not. But there is no iron law that says any individual person must stay in his narrow economic bracket for life; the Morlocks can become Eloi. Indeed, there remains an enormous amount of churn in our economy; 61 percent of households will find themselves in the top quintile of income for at least two years, according to data compiled by economists Mark Rank and Thomas Hirschl. Just under 40 percent will reach the top 10 percent, and 5 percent will be one-percenters, at least for a while.
Piketty himself offers an extensive analysis of the Forbes list of the wealthiest people in the world in an attempt to prove that today’s richest people are much richer than they were in 1987 and that the “largest fortunes grew much more rapidly than average wealth.” He says the data show that wealth grew by an inflation-adjusted 7 percent, even higher than the normal 4-to-5 percent return implicit in r > g. In what seems a generous nod, Piketty even concedes that if you jigger the timespan—starting from, say, 1990 instead of 1987—the rate of return might drop a bit. But one problem remains: Piketty leaves out that the people on the list are almost all different people.3 The economist Stan Veuger, writing for U.S. News & World Report, looked at the same list and found that the top 10 individuals collectively earned about 0.5 percent on their capital during the period Piketty says “the rich” got richer. And, Vueger notes: “If it weren’t for Walmart, the wealthiest people in the world would actually have lost about half of their wealth in the last 25 years.”
Five: Piketty’s Warning
Piketty’s insistence that “historical experience remains our principal source of knowledge” and that economists need to get out of their abstract cocoons becomes all the more tone-deaf when we get to the question he barely addresses at all: Why should we care? So there’s income inequality. So what? For his part, Martin Wolf of the Financial Times raved about Capital, but conceded that the work has “clear weaknesses. The most important is that it does not deal with why soaring inequality…matters. Essentially, Piketty simply assumes that it does.”
The Economist’s Ryan Avent objected to Wolf’s criticism noting that Piketty finds income inequality “unsustainable” because it will either lead to a few (or even a single person) owning everything or to bloody revolution. Piketty does suggest as much—but he makes nothing resembling a sustained philosophical, historical, or ethical case to support his views. Rather, he breezily and unpersuasively assumes and asserts such conclusions as if they are the sorts of things everybody knows. ...
Six: Piketty’s Threat
Piketty is convinced that income inequality “inevitably instigates…violent political conflict.” Is that actually true? And if it is, is such violence justified? Skepticism is warranted on both counts, as history suggests.
For example, the French Revolution was about inequality, but not first and foremost economic inequality. Inherited titles, the power of the Church, the unjust rule of what Edmund Burke called “arbitrary power,” and other tangible examples of legal or formal inequality played enormous and mutually reinforcing roles. The American Revolution, likewise, was about political inequality, as were later fights in this country over abolition and civil rights. Economic inequality was a symptom, not the disease—at least according to countless revolutionaries, abolitionists, and civil-rights leaders.
The postwar history of the West actually makes a hash of Piketty’s sweeping presumption. He argues that the years 1950 to 1970 were a “golden age” of economic equality. If so, why did the greatest period of social unrest in Europe and the United States in the 20th century come at the height of this golden age in the 1960s? That unrest spilled over into the 1970s, but the domestic terrorists who roiled Germany and Italy and the crime wave that devastated the United States had an extremely tangential relationship to income inequality at best. Then, pollsters tell us, in the 1980s—when the West took a wrong turn, according to Piketty, thanks to the policies of Margaret Thatcher and Ronald Reagan—social contentment started to rise and continued to rise, with the usual dips, all the way into the 1990s. One small example: In 1979, 84 percent of Americans told Gallup they were dissatisfied with the direction of the country. In 1986, 69 percent were satisfied.
So, just looking at the historical record, the notion that greater income equality by itself yields social peace seems insane.
Seven: Piketty’s Capitalism
“The consequences for the long-term dynamics of the wealth distribution are potentially terrifying,” Piketty writes. For instance, Piketty fears that whenever the return on capital really starts to outstrip national growth, “capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.” That is open to debate, to put it mildly. Bill Gates, Sam Walton, Larry Ellison, Mark Zuckerberg, Sergey Brin, Fred Smith, and others became billionaires because they created goods and services of real value to consumers; there was nothing “arbitrary” about it. In fact, most of them didn’t achieve their wealth, strictly speaking, from “capital” in the Pikettyesque sense at all. They mostly earned it from technological innovation. Piketty seems to believe, without marshaling much if any evidence, that such accretions of wealth undermine meritocratic values—when in fact, in a very real sense, the wealth creation over the past 30 years collectively constitutes the most extreme example of meritocratic advancement the world has ever seen.
Do the masses resent their wealth? It doesn’t appear so, or if they do, it is not a major concern. As inequality has risen over the last 30 years, the share of the public who think that that the “rich are getting richer and the poor are getting poorer” has stayed fairly constant (80 percent told Harris pollsters they agree with that statement in 2013 compared with 82 percent in 1990). The number dipped a bit in the 1990s when inequality was increasing but wages were rising. But, in May, when Gallup asked voters what they saw as “the most important problem facing this country today,” a mere 3 percent volunteered the gap between rich and poor (which gives you a sense of how out of touch with the concerns of Americans some of Piketty’s biggest fans are and why, for instance, they wildly overestimated the significance of Occupy Wall Street at the time, and even in retrospect). Polls consistently find that Americans are much more concerned about creating jobs and making the economy grow than fighting income inequality or redistributing wealth. A poll in January conducted by McLaughlin & Associates (for the YG Network) found that Americans by a margin of 2:1 (64 percent to 33 percent) prefer expanding economic growth to narrowing the gap between rich and poor. In 1990, Gallup asked Americans whether the country benefits from having a class of rich people. Sixty-two percent said yes. In 2012, 63 percent said yes.
It seems that most Americans simply want a fair shake. They don’t really begrudge the success of others, and to the extent they do, they don’t want to do much about it. It’s hard to see how any of this amounts to an inequality-driven powder keg of social unrest waiting to explode.
A third claim—one can’t call them arguments because they don’t rise to that level—is that the super rich will rig democracy to their advantage. This, too, has a faint Marxist echo, featuring as it does the assumption that capitalist overlords form a homogenous political class bent on exploitation. One must only read the newspaper to know that this is nonsense on stilts. At this very moment, George Soros, Tom Steyer, and other liberal billionaires are in a hammer-and-tongs political battle with Sheldon Adelson, Charles and David Koch, and other conservative or libertarian billionaires. And the evidence that either side has the power to buy elections is discredited almost every November. This is not to say that our democracy couldn’t be healthier or that wealthy special interests do not cause real problems, but America is hardly being run today by characters out of a Thomas Nast cartoon. It’s being run, instead, by the son of a teenage single mother from Hawaii, the son of a barkeep from Ohio who became speaker of the House, and a miner’s son from Nevada who grew up in a shack with no running water before becoming majority leader of the Senate—none of them born into wealth, to put it mildly.
Eight: Piketty’s Choice
Piketty is shockingly unconcerned with the fact (which he acknowledges) that one of the driving forces of U.S. income inequality is rising global equality. The world’s poor are getting much richer, in large part because they are doing a lot of the sometimes backbreaking and manual labor that poor and middle-class people in rich countries once did. This clearly creates significant political and economic challenges for wealthy countries eager to maintain high domestic-living standards, but from the vantage point of someone who believes in universal economic rights, that is a small price to pay, no?
Thanks to capitalism, we have seen the single largest alleviation of poverty in human history. In 1981, 52 percent of humanity lived in “extreme poverty.” They could not provide for themselves and for their families such basic needs as housing and food. According to a recent study by Yale and the Brookings Institution, by the end of 2011, that number had fallen to 15 percent. They credit globalization, capitalism, and better economic governance (i.e., the abandonment of Marxism and similar ideologies). Even for economic nationalists, how is that not a staggering triumph for the ethical superiority of capitalism?
That is also the story of the West in the 19th and 20th centuries. Piketty might be right that whenever capitalism runs amok, the rich get richer faster than the poor get richer. Even so, the poor still get richer. The economic historian Deirdre McCloskey beautifully chronicles how for nearly all of history (and prehistory), the average human lived on the equivalent of $3 per day. What she calls the “great fact” of human advancement is that, thanks to the rise of democratic capitalism, that small figure no longer holds wherever democratic capitalism has been permitted to work its magic.
Even more troubling, Piketty places enormous emphasis on the role of the world wars as a great leveler of inequality and the primary driver of the postwar “golden age.” But ask yourself a question: If you were a remotely sane human in 1900 and you were given the choice of
(a) getting richer, though at a slower rate than the very wealthiest, so that in 1950 there was a lot of economic inequality but you and your kids were still much better off; or
(b) facing two horrendous and cataclysmic global wars in which whole societies were razed and a hundred million people died violently and you (along with the rich) were made poorer for it, and would die at a younger age,
What would you have chosen? It appears Piketty finds Option B awfully tempting. And that is madness.
Nine: Piketty’s Justice
In little more than a few throwaway sentences, Piketty asserts that confiscatory taxes on wealth are morally required as a matter of social justice. That an economist who has ensconced himself in the Parisian velvet of the social-democratic left for nearly all of his adult life believes such things is hardly surprising, particularly given his confidence that extreme wealth is essentially the arbitrary product of an “ideological construct.”
But this does not absolve him of the responsibility of making a case.
Piketty begins Capital in the Twenty-First Century with a quotation from the Declaration of the Rights of Man, the operating document of the French Revolution: “Social distinctions can be based only on common utility.” He concedes elsewhere in the book that the “social distinctions” to which it refers had to do with the hereditary “orders of privileges of the Ancien Regime” and not with economic inequality. Even so, he insists, we must breathe new life into the concept of “common utility”:
One can interpret the phrase more broadly, however. One reasonable interpretation is that social inequalities are acceptable only if they are in the interest of all and in particular of the most disadvantaged social groups. Hence basic rights and material advantages must be extended insofar as possible to everyone, as long as it is in the interest of those who have the fewest rights and opportunities to do so.
The notion that wealth—or, to put it another way, private property—is an arbitrary social distinction that can be erased for the betterment of the have-nots is incredibly radical. One might even call it Marxist (or at least “Marxy”). Given that, an argument on its behalf should be extended and defended. But aside from a perfunctory reference to the philosopher John Rawls’s “difference principle,” which says that justice should be weighted toward the least advantaged people in society, he does not do so. He is more than comfortable letting it sit as largely self-evident.
Where he breaks with Marxism is the means by which he would reward the have-nots: not the seizure of all property but the mere soaking of the rich in order to seize the returns on the means of production. Piketty’s obsession with tax hikes as a cure-all is almost a perfect mirror of how liberals see the supply-side obsessions with tax cuts. It is this idée fixe that allows him to summarily dismiss other proposals that might get us to his preferred destination without confiscating the ill-gotten gains of the well-to-do. For instance, Tyler Cowen and National Review’s Kevin D. Williamson point out that if Piketty’s assumptions about the long-term returns on capital are correct, then we would be crazy not to transform social security into a system of privately held investment accounts. Boldly expanding the Earned Income Tax Credit—which would necessarily increase the tax burden of the wealthy—might also do more to solve the problem, assuming it is a problem. An aggressive tax on consumption instead of income would, according to many economists, boost growth and have the added benefit of taxing the Gilded Age lifestyles of billionaires instead of merely taxing billionaires for the alleged crime of existing. But none of these has the satisfying bang of that 80 percent marginal tax rate—or, even more thrilling, the 10 percent “global tax” on billionaires’ filthy lucre.
And then, of course, there are the countless reforms that lie outside the realm of tax tables. The data are clear that marriage delivers roughly as much bang for the buck as going to college. Raising children in a stable two-parent home is a better guarantor of lifetime economic success than crude interventions by the state. But while Piketty is happy to opine at great length about the Gilded Age matrimonial lifestyles of the rich and famous, drawing deeply on Jane Austen and other sources to paint a vivid picture, he is uninterested in the same issues down the socioeconomic ladder.
Ten: Piketty’s Class
Why does Piketty reject the more romantic path of the classic Marxist? You know—“Let the ruling classes tremble at a Communistic revolution. The proletarians have nothing to lose but their chains. They have a world to win”—that kind of thing?
One answer to this question explains not only Piketty’s thinking but the response to his work as well: Piketty is a member of the ruling class. Piketty’s way puts Piketty and his friends in charge of everything. A one-time adviser to the Socialist politician Ségolène Royal, a star academic and a columnist for Libération, Piketty is a quintessential member of what the economist Joseph Schumpeter identified as the “new class.” Schumpeter’s prediction of capitalism’s demise hinged on his brilliant insight that capitalism breeds anti-capitalist intellectuals. Educators, bureaucrats, lawyers, technocrats, journalists, and artists, often the children of successful capitalists, always raised in the material affluence of capitalism, would organize to form a class whose collective interest lay in seizing economic decisions from the free market. As Deirdre McCloskey writes: “Schumpeter believed that capitalism was raising up its own grave diggers—not in the proletariat, as Marx had expected, but in the sons of daughters of the bourgeoisie itself. Lenin’s father, after all, was a high-ranking educational official, and Lenin himself a lawyer. It wasn’t the children of auto workers who pulled up the paving stones on the Left Bank in 1968.” No, it was actually people like Piketty’s own parents.
There is a reason the most passionate foes of income inequality tend to be very affluent but not super rich, intellectuals like Paul Krugman and other journalists eager to set the threshold for confiscatory tax rates just beyond their own income levels. But this sort of class war—the chattering classes versus the upper classes—is only part of the equation. Power plays a huge part as well. A full-throated endorsement of classic leftist radicalism would set a torch to Piketty’s own tower of privilege. The State, guided by experts, informed by data, must be empowered to decide how the Rawlsian difference principle is applied to society. Piketty’s assurance that inequality “inevitably” leads to violence amounts to an implied threat: “Let us distribute resources as we think best, or the masses will bring the fire next time.” Once again the vanguard of the proletariat takes the most surprising form: bureaucrats (the true “rentiers” of the 21st century!). A revealing sub-argument running throughout Capital is that we need to tax rich people in ever more, new, and creative ways just so we can get better data about rich people! To borrow a phrase from James Scott, author of Seeing Like a State, Piketty is obsessed with making society more “legible.” The first step in empowering technocrats is giving them the information they need to do their job.
This is what places the Piketty phenomenon squarely in the tradition of Croly and, yes, Marx himself. Piketty’s argument, with its scientific veneer and authoritative streams of numbers, is a warrant to empower those who think they are smarter than the market—and who feel superior to those most richly rewarded by it.
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Inequality Is Not Inevitable
By JOSEPH E. STIGLITZ (didn't he win a Nobel at one point? Not sure , , ,)
June 27, 2014 6:16 pm
The Great Divide
AN insidious trend has developed over this past third of a century. A country that experienced shared growth after World War II began to tear apart, so much so that when the Great Recession hit in late 2007, one could no longer ignore the fissures that had come to define the American economic landscape. How did this “shining city on a hill” become the advanced country with the greatest level of inequality?
One stream of the extraordinary discussion set in motion by Thomas Piketty’s timely, important book, “Capital in the Twenty-First Century,” has settled on the idea that violent extremes of wealth and income are inherent to capitalism. In this scheme, we should view the decades after World War II — a period of rapidly falling inequality — as an aberration.
This is actually a superficial reading of Mr. Piketty’s work, which provides an institutional context for understanding the deepening of inequality over time. Unfortunately, that part of his analysis received somewhat less attention than the more fatalistic-seeming aspects.
Over the past year and a half, The Great Divide, a series in The New York Times for which I have served as moderator, has also presented a wide range of examples that undermine the notion that there are any truly fundamental laws of capitalism. The dynamics of the imperial capitalism of the 19th century needn’t apply in the democracies of the 21st. We don’t need to have this much inequality in America.
Our current brand of capitalism is an ersatz capitalism. For proof of this go back to our response to the Great Recession, where we socialized losses, even as we privatized gains. Perfect competition should drive profits to zero, at least theoretically, but we have monopolies and oligopolies making persistently high profits. C.E.O.s enjoy incomes that are on average 295 times that of the typical worker, a much higher ratio than in the past, without any evidence of a proportionate increase in productivity.
If it is not the inexorable laws of economics that have led to America’s great divide, what is it? The straightforward answer: our policies and our politics. People get tired of hearing about Scandinavian success stories, but the fact of the matter is that Sweden, Finland and Norway have all succeeded in having about as much or faster growth in per capita incomes than the United States and with far greater equality.
So why has America chosen these inequality-enhancing policies? Part of the answer is that as World War II faded into memory, so too did the solidarity it had engendered. As America triumphed in the Cold War, there didn’t seem to be a viable competitor to our economic model. Without this international competition, we no longer had to show that our system could deliver for most of our citizens.
Ideology and interests combined nefariously. Some drew the wrong lesson from the collapse of the Soviet system. The pendulum swung from much too much government there to much too little here. Corporate interests argued for getting rid of regulations, even when those regulations had done so much to protect and improve our environment, our safety, our health and the economy itself.
But this ideology was hypocritical. The bankers, among the strongest advocates of laissez-faire economics, were only too willing to accept hundreds of billions of dollars from the government in the bailouts that have been a recurring feature of the global economy since the beginning of the Thatcher-Reagan era of “free” markets and deregulation.
The American political system is overrun by money. Economic inequality translates into political inequality, and political inequality yields increasing economic inequality. In fact, as he recognizes, Mr. Piketty’s argument rests on the ability of wealth-holders to keep their after-tax rate of return high relative to economic growth. How do they do this? By designing the rules of the game to ensure this outcome; that is, through politics.
So corporate welfare increases as we curtail welfare for the poor. Congress maintains subsidies for rich farmers as we cut back on nutritional support for the needy. Drug companies have been given hundreds of billions of dollars as we limit Medicaid benefits. The banks that brought on the global financial crisis got billions while a pittance went to the homeowners and victims of the same banks’ predatory lending practices. This last decision was particularly foolish. There were alternatives to throwing money at the banks and hoping it would circulate through increased lending. We could have helped underwater homeowners and the victims of predatory behavior directly. This would not only have helped the economy, it would have put us on the path to robust recovery.
OUR divisions are deep. Economic and geographic segregation have immunized those at the top from the problems of those down below. Like the kings of yore, they have come to perceive their privileged positions essentially as a natural right. How else to explain the recent comments of the venture capitalist Tom Perkins, who suggested that criticism of the 1 percent was akin to Nazi fascism, or those coming from the private equity titan Stephen A. Schwarzman, who compared asking financiers to pay taxes at the same rate as those who work for a living to Hitler’s invasion of Poland.
Our economy, our democracy and our society have paid for these gross inequities. The true test of an economy is not how much wealth its princes can accumulate in tax havens, but how well off the typical citizen is — even more so in America where our self-image is rooted in our claim to be the great middle-class society. But median incomes are lower than they were a quarter-century ago. Growth has gone to the very, very top, whose share has almost quadrupled since 1980. Money that was meant to have trickled down has instead evaporated in the balmy climate of the Cayman Islands.
With almost a quarter of American children younger than 5 living in poverty, and with America doing so little for its poor, the deprivations of one generation are being visited upon the next. Of course, no country has ever come close to providing complete equality of opportunity. But why is America one of the advanced countries where the life prospects of the young are most sharply determined by the income and education of their parents?
Among the most poignant stories in The Great Divide were those that portrayed the frustrations of the young, who yearn to enter our shrinking middle class. Soaring tuitions and declining incomes have resulted in larger debt burdens. Those with only a high school diploma have seen their incomes decline by 13 percent over the past 35 years.
Where justice is concerned, there is also a yawning divide. In the eyes of the rest of the world and a significant part of its own population, mass incarceration has come to define America — a country, it bears repeating, with about 5 percent of the world’s population but around a fourth of the world’s prisoners.
Justice has become a commodity, affordable to only a few. While Wall Street executives used their high-retainer lawyers to ensure that their ranks were not held accountable for the misdeeds that the crisis in 2008 so graphically revealed, the banks abused our legal system to foreclose on mortgages and evict people, some of whom did not even owe money.
More than a half-century ago, America led the way in advocating for the Universal Declaration of Human Rights, adopted by the United Nations in 1948. Today, access to health care is among the most universally accepted rights, at least in the advanced countries. America, despite the implementation of the Affordable Care Act, is the exception. It has become a country with great divides in access to health care, life expectancy and health status.
In the relief that many felt when the Supreme Court did not overturn the Affordable Care Act, the implications of the decision for Medicaid were not fully appreciated. Obamacare’s objective — to ensure that all Americans have access to health care — has been stymied: 24 states have not implemented the expanded Medicaid program, which was the means by which Obamacare was supposed to deliver on its promise to some of the poorest.
We need not just a new war on poverty but a war to protect the middle class. Solutions to these problems do not have to be newfangled. Far from it. Making markets act like markets would be a good place to start. We must end the rent-seeking society we have gravitated toward, in which the wealthy obtain profits by manipulating the system.
The problem of inequality is not so much a matter of technical economics. It’s really a problem of practical politics. Ensuring that those at the top pay their fair share of taxes — ending the special privileges of speculators, corporations and the rich — is both pragmatic and fair. We are not embracing a politics of envy if we reverse a politics of greed. Inequality is not just about the top marginal tax rate but also about our children’s access to food and the right to justice for all. If we spent more on education, health and infrastructure, we would strengthen our economy, now and in the future. Just because you’ve heard it before doesn’t mean we shouldn’t try it again.
We have located the underlying source of the problem: political inequities and policies that have commodified and corrupted our democracy. It is only engaged citizens who can fight to restore a fairer America, and they can do so only if they understand the depths and dimensions of the challenge. It is not too late to restore our position in the world and recapture our sense of who we are as a nation. Widening and deepening inequality is not driven by immutable economic laws, but by laws we have written ourselves.
This is the last article in The Great Divide.
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Many of us here predicted massive inflation by now , , ,
http://www.nytimes.com/2014/07/07/opinion/paul-krugman-conservative-delusions-about-inflation.html?emc=edit_th_20140707&nl=todaysheadlines&nlid=49641193
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Many of us here predicted massive inflation by now , , ,
http://www.nytimes.com/2014/07/07/opinion/paul-krugman-conservative-delusions-about-inflation.html?emc=edit_th_20140707&nl=todaysheadlines&nlid=49641193
http://www.kitco.com/ind/Brecht/2014-07-03-Gas-Prices-Near-6-Year-Highs-No-Inflation-Who-Says.html
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Many of us here predicted massive inflation by now , , ,
http://www.nytimes.com/2014/07/07/opinion/paul-krugman-conservative-delusions-about-inflation.html?emc=edit_th_20140707&nl=todaysheadlines&nlid=49641193
http://www.kitco.com/ind/Brecht/2014-07-03-Gas-Prices-Near-6-Year-Highs-No-Inflation-Who-Says.html
(Broken record here but...) There is a difference between inflation and price level increases even though we conflate the terms. Mr. Krugman, Nobel award winner, no one ever said M = P, they said MV = PQ. Price increases are a consequence of excessive money supply increases, but not a big threat when the economy is running nowhere near peak velocity. The question is, how big will be the price level increases AFTER normal velocity returns?
Crafty wrote: "Many of us here predicted massive inflation by now , , ," (emphasis added)
Krugman writes as if the final score is in, but the damages are not all known by now and posted. We have seen but the tip of the iceberg of the consequences of these wrongheaded policies.
Surprising (not really) that any professional who was off on economic growth by -200% last quarter (Wesbury, Krugman, etc.) would be smug about how right or wrong amateurs are at (straw argument) forecasting.
Average GDP growth the last 7 years was 0.4T/yr. http://www.statista.com/statistics/263591/gross-domestic-product-gdp-of-the-united-states/
QE has been averaging 3/4 Trillion per year (in press reports), so the money supply is growing at nearly twice the rate of real output, by my count. To say that will have no consequence seems insincere, to put it nicely. Krugman is setting up is to blame the aftermath of these policies on Obama's successor, while still blaming Obama's predecessor for his current failures. The technical term for that level of analysis is ... partisan hack.
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Scott Grannis has been cautioning us on our take of things and he is no partisan hack.
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Scott Grannis has been cautioning us on our take of things and he is no partisan hack.
Agree, Scott Grannis gives honest analysis. It was Krugman's choice to go from respected academic to partisan hack and it is a long accumulated, well earned characterization of his columns, even if poorly documented by me in that short post.
I doubt if Grannis believes the combination of fiscal and monetary excesses caused no damage just because large price increases do not show up yet, nor does he use the sluggish Obama economy to slam the conservative viewpoint.
For one thing, Scott Grannis acknowledges that the Fed's strategy has destroyed the incentive to save in this country. What are the long term consequences of that? Nothing?
http://scottgrannis.blogspot.com/2014/06/the-bond-markets-pessimism-is-vindicated.html
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"We are very likely still in a recovery, but the problem—as illustrated in the chart above—is that the economy is more than 10% below where it could or should be if long-term growth trends are extrapolated. This is without doubt and by far the weakest recovery in history. I think the reasons for this weak growth are a huge increase in regulatory burdens (e.g., Obamacare), a significant increase in top marginal tax rates, a hugely burdensome, complicated, and distorting tax code, and the developed world's highest corporate tax rates." - Scott Grannis June 25, 2014
It means we have given up over $11 TRILLION in economic activity over this period of wrongheaded economic policies. That is the difference between young people getting a good start and not getting a good start. That is not very different from my view.
Accompanying chart:
http://4.bp.blogspot.com/-vmSGbRCiJ4Y/U6tD2fG1fII/AAAAAAAAQ-I/7gXooXOhqoQ/s1600/Real+GDP+vs+trend+50.jpg
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http://www.mybudget360.com/young-unemployment-rate-millennials-economic-trends-jobs-income/
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http://thefederalist.com/2014/07/08/food-prices-are-soaring-and-washington-doesnt-care/
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I mentioned Grannis in this moment in the context of our being wrong here about inflation. No argument from me on the rest of it. Terrible recovery, terrible consequences, debt out of control etc etc etc
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http://davidstockmanscontracorner.com/whats-lurking-beneath-the-glossy-veneer-of-the-jobs-report/
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http://www.nytimes.com/2014/07/08/upshot/welcome-to-the-everything-boom-or-maybe-the-everything-bubble.html?emc=edit_th_20140708&nl=todaysheadlines&nlid=49641193&_r=0
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Second post
Alan Reynolds is a very good supply side economist.
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Why Piketty's Wealth Data Are Worthless
Private retirement plans rose to $12.4 trillion in 2012 from $875 billion in 1984. None of it is reported on tax returns.
By Alan Reynolds
July 9, 2014 6:39 p.m. ET
No book on economics in recent times has received such a glowing initial reception as Thomas Piketty's "Capital in the Twenty-First Century." He remains a hero on the left, but the honeymoon may be drawing to a sour close as evidence mounts that his numbers don't add up.
Mr. Piketty's headline claim is that capitalism must result in wealth becoming increasingly concentrated in fewer hands to a "potentially terrifying" degree, on the grounds that the rate of return to capital exceeds the rate of economic growth. Is there any empirical evidence to back up this sweeping assertion? The data in his book—purporting to show a growing inequality of wealth in France, the U.K., Sweden and particularly the United States—have been challenged. And that's where the story gets interesting.
In late May, Financial Times economics editor Chris Giles published anessay that found numerous errors in Mr. Piketty's data. Mr. Piketty's online "Response to FT" was mostly about Europe, where the errors Mr. Giles caught seem minor. But what about the U.S.?
Mr. Piketty makes a startling statement: The data in his book should now be disregarded in favor of a March 2014 Power Point presentation, available online, by Mr. Piketty's protégé, Gabriel Zucman (at the London School of Economics) and his frequent co-author Emmanuel Saez (of the University of California, Berkeley). The Zucman-Saez estimates, Mr. Piketty says, are "much more systematic" and "more reliable" than the estimates in his book and therefore "should be used as reference series for wealth inequality in the United States. . . (rather than the series reported in my book)."
Zucman-Saez concludes that there was a "large increase in the top 0.1% wealth share" since the 1986 Tax Reform, but "no increase below the top 0.1%." In other words, all of the increase in the wealth share of the top 1% is attributed to the top one-tenth of 1%—those with estimated wealth above $20 million. This is quite different from the graph in Mr. Piketty's book, which showed the wealth share of the top 1% (which begins at about $8 million, according to the Federal Reserve's Survey of Consumer Finances) in the U.S. falling from 31.4% in 1960 to 28.2% in 1970, then rising to about 33% since 1990.
In any event, the Zucman-Saez data are so misleading as to be worthless. They attempt to estimate top U.S. wealth shares on the basis of that portion of capital income reported on individual income tax returns—interest, dividends, rent and capital gains.
This won't work because federal tax laws in 1981, 1986, 1997 and 2003 momentously changed (1) the rules about which sorts of capital income have to be reported, (2) the tax incentives to report business income on individual rather than corporate tax forms, and (3) the tax incentives for high-income taxpayers to respond to lower tax rates on capital gains and dividends by realizing more capital gains and holding more dividend-paying stocks. Let's consider each of these issues:
• Tax reporting. Tax laws were changed from 1981 to 1997 to require that more capital income of high-income taxpayers be reported on individual returns, while excluding most capital income of middle-income savers and homeowners. This skews any purported increase in the inequality of wealth.
For example, interest income from tax-exempt municipal bonds was unreported before 1987—so the subsequent reporting of income created an illusory increase in top incomes and wealth. Since 1997, by contrast, most capital gains on home sales have disappeared from the tax returns of middle-income couples, thanks to a $500,000 tax exemption. And since the mid-1980s, most capital income and capital gains of middle-income savers began to vanish from tax returns by migrating into IRAs, 401(k)s and other retirement and college savings plans.
Balances in private retirement plans rose to $12.4 trillion in 2012 from $875 billion in 1984. Much of that hidden savings will gradually begin to show up on tax returns as baby boomers draw them down to live on, but they will then be reported as ordinary income, not capital income.
Tax law changes, in summary, have increased capital income reported at the top and shifted business income from corporate to individual tax returns, while sheltering most capital income of middle-income savers and homeowners. Using reported capital income to estimate changing wealth patterns is hopeless.
• Switching from corporate to individual tax returns. When individual tax rates dropped from 70% in 1980 to 28% in 1988, this provoked a massive shift: from retaining private business income inside C-corporations to letting earnings pass through to the owners' individual tax returns via partnerships, LLCs and Subchapter S corporations. From 1980 to 2007, reports the Congressional Budget Office, "the share of receipts generated by pass-through entities more than doubled over the period—from 14 percent to 38 percent." Moving capital income from one tax form to another did not mean the wealth of the top 1% increased. It simply moved.
• Tax rates and capital gains. There were huge, sustained increases in reported capital gains among the top 1% after the capital-gains tax was reduced to 20% from 28% in 1997, and when it was further reduced to 15% in 2003. Although more frequent asset sales showed up as an increase in capital income, realized gains are no more valuable than unrealized gains so realization of gains tells us almost nothing about wealth. Similarly, a portfolio shift from municipal bonds, coins or cash into dividend-paying stocks after the tax on dividends fell to 15% in 2003 might look like more capital income when it was merely swapping an untaxed asset for a taxable one.
In his book, Mr. Piketty constructed estimates of top wealth shares, decade by decade, melding and massaging different kinds of data (estate tax records, the Federal Reserve's Survey of Consumer Finances). These estimates are suspect in their own right; but as we now learn from Mr. Piketty's response to Mr. Giles, we can ignore them.
Yet Mr. Piketty's preferred alternative, the Zucman-Saez slide show, is also irreparably flawed as a guide to wealth concentration. Mr. Piketty's premonition of soaring U.S. wealth shares for the top 1% finds no credible support in his book or elsewhere.
Mr. Reynolds, a senior fellow with the Cato Institute, is author of a 2012 Cato Institute paper, "The Misuse of Top 1 Percent Income Shares as a Measure of Inequality."
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How to Spark Another 'Great Moderation'
A new House bill would encourage the Fed to abide by monetary policy rules.
John B. Taylor
July 15, 2014 8:07 p.m. ET
WSJ
Sound money and free markets go hand in hand. In 1776, Adam Smith wrote of the importance of rules for "a well-regulated paper-money" in "The Wealth of Nations." In 1962, Milton Friedman made the chapter "Control of Money," with its rationale for monetary rules, a centerpiece of "Capitalism and Freedom." In the 1980s, British Prime Minister Margaret Thatcher and President Ronald Reagan made sound money principles a key part of their market-based reform platforms.
The reason is clear: Economic crises and slow economic growth, as in the Great Depression of the 1930s and the Great Inflation of the 1970s, could be traced to deviations from sound rules-based monetary policy. That common- sense finding still holds.
When monetary policy became more rules-based during the 1980s, 1990s and until recently, the economy improved and we got what economists call the Great Moderation of strong economic growth with declining unemployment and inflation during those same years. When policy became more ad hoc, interventionist and discretionary during the past decade, the economy deteriorated and we got a financial crisis, a Great Recession, and a not-so-great recovery.
So as Americans begin to diagnose the poor economic performance of recent years and look for remedies that rely more on markets, they are again looking to monetary reform. A welcome example is the Federal Reserve Accountability and Transparency Act, just introduced in the House.
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Federal Reserve Chair Janet Yellen in her Senate testimony on Tuesday. Getty Images
Its first main section "Requirements for Policy Rules for the Fed" would require that the Federal Reserve submit to Congress and the American people a rule or strategy for how the Fed's policy instrument, such as the federal-funds rate, would change in a systematic way in response to changes in inflation, real GDP or other inputs. The bill was the subject of a hearing on Capitol Hill last week, and Fed Chair Janet Yellen was asked about its requirements Tuesday during her testimony to the Senate Banking Committee. It ought to be the main subject when she testifies Wednesday before the House Financial Services Committee.
According to the legislation, the Fed, not Congress, would choose the rule and how to describe it. But if the Fed deviated from its rule, then the chair of the Fed would have to "testify before the appropriate congressional committees as to why the [rule] is not in compliance." The rule would have to be consistent with the setting of the actual federal-funds rate at the time of the submission. The legislation also creates a transparent process for accountability: The U.S. comptroller general would be responsible for determining whether or not the "Directive Policy Rule" was in compliance with the law and report its finding to Congress.
The legislation provides flexibility. It does not require that the Fed hold any instrument of policy fixed, but rather that it make adjustments in a systematic and predictable way. It allows the Fed to serve as lender of last resort or take appropriate actions to provide liquidity in a crisis. Moreover, the legislation even allows for the Fed to change its rule or deviate from it if the Fed policy makers decide that is necessary. As stated in the act: "Nothing in this Act shall be construed to require that the plans with respect to the systematic quantitative adjustment of the Policy Instrument Target be implemented if the Federal Open Market Committee determines that such plans cannot or should not be achieved due to changing market conditions." But "Upon determining that plans . . . cannot or should not be achieved, the Federal Open Market Committee shall submit an explanation for that determination and an updated version of the Directive Policy Rule."
In the interests of clarity, the legislation also specifies a "Reference Policy Rule," to which the Fed must compare its policy rule. The reference policy rule, to quote from the legislation, "means a calculation of the nominal Federal funds rate as equal to the sum of the following: (A) The rate of inflation over the previous four quarters. (B) One-half of the percentage deviation of the real GDP from an estimate of potential GDP. (C) One-half of the difference between the rate of inflation over the previous four quarters and two [percent]. (D) Two [percent]."
In monetary and financial circles this rule is known as the Taylor Rule, due to a proposal I made in 1992, and researchers routinely compare any policy rule they are considering to this rule. It is thus a straightforward task for the Fed. Many at the Fed already make such comparisons, including Fed Chair Janet Yellen.
Some will object to the legislation, including some at the Fed. But there is nothing partisan about rules-based monetary policy, and there is a clear precedent for congressional oversight. The Federal Reserve Act previously required that the Fed report the ranges for the future growth of the money supply, but these requirements were removed from the law in 2000. The proposed legislation fills that void.
Some will say that the legislation would destroy central-bank independence. But since the Fed chooses its own rule, its independence is maintained. The purpose of the act is to prevent the damaging departures from rules-based policy, which central-bank independence obviously has not prevented.
Based on writings, speeches and publicly released transcripts of meetings, we know that many at the Fed favor a more rules-based policy. Constructive comments from the Fed would undoubtedly improve the legislation, but if it were passed into law as is, economic performance would improve greatly.
The Federal Reserve Accountability and Transparency Act limits discretion and excessive intervention by our independent central bank, as its name implies, in a transparent and accountable way. It thereby meets Milton Friedman's goal of "legislating rules for the conduct of monetary policy that will have the effect of enabling the public to exercise control over monetary policy through its political authorities, while at the same time . . . prevent[ing] monetary policy from being subject to the day-by-day whim of political authorities."
Mr. Taylor, a professor of economics at Stanford University and a senior fellow at the Hoover Institution, served as Treasury undersecretary for international affairs from 2001 to 2005.
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Greg Mankiw is head of the Harvard Economics Dept.
His blog: http://gregmankiw.blogspot.com/
This article:
http://www.nytimes.com/2014/06/22/upshot/how-inherited-wealth-helps-the-economy.html?smid=pl-share&_r=0
How Inherited Wealth Helps the Economy
JUNE 21, 2014
By N. GREGORY MANKIW
Is inherited wealth making a comeback?
Yes, says Thomas Piketty, author of the best seller “Capital in the Twenty-First Century.” Inherited wealth has always been with us, of course, but Mr. Piketty believes that its importance is increasing. He sees a future that combines slow economic growth with high returns to capital. He reasons that if capital owners save much of their income, their wealth will accumulate and be passed on to their heirs. He concludes that individuals’ living standards will be determined less by their skill and effort and more by bequests they receive.
To be sure, one can poke holes in Mr. Piketty’s story. Since the book came out, numerous economists have been doing exactly that in book reviews, blog posts and academic analyses.
Moreover, given economists’ abysmal track record in forecasting, especially over long time horizons, any such prognostication should be taken with a shaker or two of salt. The Piketty scenario is best viewed not as a solid prediction but as a provocative speculation.
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An undated photograph shows John D. Rockefeller, wearing a bow tie, and family members. Credit Rockefeller Archive Center
But it raises the question: So what? What’s wrong with inherited wealth?
First, let’s consider why parents leave bequests to their children. I believe that this decision is based on three principles:
INTERGENERATIONAL ALTRUISM This starts with the prosaic premise that parents care about their children. Economists simplify this phenomenon with the concept of “utility,” a measure of lifetime satisfaction or happiness. Intergenerational altruism within the family is modeled by assuming that the utility of Generation One depends on the utility of Generation Two.
And it doesn’t stop there, because future generations will also care about their children. Generation Two’s utility depends on Generation Three’s utility, which depends on Generation Four’s utility, and so on. As a result, each person’s utility depends not only on what happens during his own lifetime but also on the circumstances he expects for his infinite stream of descendants, most of whom he will never meet.
CONSUMPTION SMOOTHING People get utility from consuming goods and services, but they also exhibit “diminishing marginal utility”: The more you are already consuming, the less benefit you get from the next increase in consumption. Your utility increases if you move from a one- to a two-bathroom home. It rises less if you move from a four- to a five-bathroom home.
Because of diminishing marginal utility, people typically prefer a smooth path of consumption to one that jumps around. Consuming $50,000 of goods and services in each of two years is generally better than consuming $80,000 one year and $20,000 the next. People smooth consumption by saving in good times and drawing down assets when conditions are lean.
REGRESSION TOWARD THE MEAN This is the tendency of many variables to return to normal levels over time. Consider height. If you are much, much taller than average, your children will most likely be taller than average as well, but they will also most likely be shorter than you are.
The same is true for income. According to a recent study, if your income is at the 98th percentile of the income distribution — that is, you earn more than 98 percent of the population — the best guess is that your children, when they are adults, will be in the 65th percentile. They will enjoy higher income than average, but much closer to that of the typical earner. (This regression to the mean over generations, of course, has nothing to say about a nation’s overall income inequality, which is an entirely separate issue.)
This phenomenon is clearest for the most extreme cases. In their own times, John D. Rockefeller and Steve Jobs each created one of the world’s most valuable companies and made a ton of money along the way. They must have known it was unlikely that their children would accomplish the same feat.
Together, these ideas explain why top earners often leave sizable bequests to their families. Because of intergenerational altruism, they make their consumption and saving decisions based not only on their own needs but also on those of their descendants. Because of regression toward the mean, they expect their descendants to be less financially successful than they are. Hence, to smooth consumption across generations, they need to save some of their income so future generations can consume out of inherited wealth.
This logic also explains why many people aren’t inclined to reduce their current spending so they will have money saved for bequests. For those in the bottom half of the income distribution, regression toward the mean is good news: Their descendants will very likely rank higher than they do. Even those near the middle can expect their children and grandchildren to earn higher incomes as technological progress pushes productivity and incomes higher. Only for those with top incomes does the combination of intergenerational altruism, consumption smoothing and regression toward the mean lead to a significant role for inherited wealth.
From a policy perspective, we need to consider not only the direct effects on the family but also the indirect effects on the broader economy. Rising income inequality over the past several decades has meant meager growth in living standards for those near the bottom of the economic ladder, and one might worry that inherited wealth makes things worse. Yet standard economic analysis suggests otherwise.
When a family saves for future generations, it provides resources to finance capital investments, like the start-up of new businesses and the expansion of old ones. Greater capital, in turn, affects the earnings of both existing capital and workers.
Because capital is subject to diminishing returns, an increase in its supply causes each unit of capital to earn less. And because increased capital raises labor productivity, workers enjoy higher wages. In other words, by saving rather than spending, those who leave an estate to their heirs induce an unintended redistribution of income from other owners of capital toward workers.
The bottom line is that inherited wealth is not an economic threat. Those who have earned extraordinary incomes naturally want to share their good fortune with their descendants. Those of us not lucky enough to be born into one of these families benefit as well, as their accumulation of capital raises our productivity, wages and living standards.
N. Gregory Mankiw is a professor of economics at Harvard.
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Interesting questions presented here:
http://online.wsj.com/articles/alternative-index-shows-japan-price-fall-1410298206
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Forbes
9/22/2013
Mein Gott! What Germany Inc. Can Teach America About Economics
Eamonn Fingleton
As German voters go to the polls today, it is interesting to consider their rather self-confident world view – and how sharply it contrasts with the increasing self-doubts that have gripped the American people in recent years.
The German economy’s vigorous good health is most obvious in jobs. The German unemployment rate has remained consistently one of the developed world’s lowest and, at last count, on an American accounting basis, stood at a mere 5.5 percent. This was the second lowest of ten advanced nations surveyed by the U.S. Bureau of Labor Statistics and compares with 7.6 percent for the United States. Only Japan, with a rate of 3.4 percent, did better.
Perhaps even more impressive is Germany’s international competitiveness. As of 2012, Germany ran a balance of payments surplus of $208 billion – the second highest in the world after China’s $214 billion. On a per-capita basis, Germany’s surplus was more than 16 times China’s.
Another telling statistic is Germany’s net foreign assets. At $1,437 billion recently, they rank among the world’s largest. By comparison America’s foreign assets have long since been exceeded by its liabilities, and its net foreign liabilities at last count were a shocking $4,277 billion.
As for per-capita incomes, Germans have seen growth of 49.2 percent as measured in current dollars in the most recent ten years – easily trumping growth of just 27.7 percent in the United States.
The most interesting thing about all this is that Germany does not believe in American-style free markets, and never has. The German labor market, for instance, is extensively regulated to discourage layoffs and in downturns German corporations are generally obligated to carry more labor than they can fully use. Even so such huge German employers as Daimler have remained profitable in the last few years.
Another sharp deviation from American ideas of good economics is in anti-trust regulation. Although cartels are officially illegal in Germany, they are generally tolerated if not actively encouraged, with the result that it is almost impossible for new entrants to penetrate many areas of German industry.
Meanwhile German regulators have contrived to ensure extraordinary concentration of power in the financial system, which is now dominated by two duopolies – Deutsche Bank and Commerzbank in banking and Allianz and Munich Re in reinsurance. These corporations directly or indirectly control large swathes of industry and commerce. Adding to the concentration of power is that the reinsurance companies own large stakes in the banks. (Disclosure: I am a stockholder in Munich Re.)
Given its flouting of so much of the canon of “good economics,” why has Germany been so successful? The short answer is that free markets are greatly exaggerated as a source of economic success (they come up short in safeguarding a nation’s endowment of advanced production technology, for instance).
A longer answer would point out that Germany’s economic structuring closely parallels that of the miracle economies of East Asia and can be presumed to be designed to achieve the same objectives. Indeed for those who know their economic history, it is East Asia that has copied German economic ideas, not the other way around. The story goes all the way back to the 1870s and 1880s when Bismarck set Germany on the road to economic superpowerdom with a strongly mercantilist approach to trade. One of Germany’s first imitators was Meiji Japan.
This is a big subject and cannot be adequately addressed in a short note. A basic problem is that in commenting on economies that deviate from Anglo-American textbook norms, the Anglophone press is highly unreliable. Commentators seek to make reality conform to theory either by “pruning” their accounts of contradictory facts or, worse, by utterly misrepresenting undeniable facts. A classic example of the genre was a recent article by Adam Posen in the
Financial Times in which he seemed to suggest that Germany has been underperforming in income growth in recent years. For an ideologue like Posen, who runs the Peterson Institute for International Economics, the idea that German incomes could have outperformed American ones in recent years may seem impossible – but that is no reason to misstate fundamental facts.
For now the key point is that Americans should simply take note that their mainstream economic commentators — the same ones whose theories paved the way for the Wall Street crash — are even less reliable on economies like Germany and Japan than they are on the United States.
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German people have a strong, cultural, work ethic. Given that, wouldn't it be better to compare German workers in Germany with German-American workers in the US if you're comparing economic systems? The US states with the highest proportions of German American workers have lower unemployment rates than Germany: http://names.mongabay.com/ancestry/st-German.html Only Japan beats German low unemployment according to the article. Japanese-Americans also have a lower unemployment rate in the US than Japanese workers in japan, and their economy is notoriously stagnant. http://articles.economictimes.indiatimes.com/2014-09-07/news/53653023_1_unemployment-rate-labour-force-participation-rate-ethnic-groups
The author points to America under Obama and the housing crash under Bush, while mortgages were 90% federal, as free markets running wild. What?
Speaking of stagnation, look at the German growth. The average GDP growth rate in Germany from 1991 to 2014 was 0.30%. And we should copy them??!!
Germany is the 21st most prosperous nation in the world according to the CIA Fact Book (per capita income measured with purchasing power parity). Germany is ahead of Greece, Portugal, etc. but behind the US, Norway, Sweden, Iceland, Ireland, Canada, Switzerland, Netherlands, Australia, Austria, and many more. http://en.wikipedia.org/wiki/The_World_Factbook How did the article jump from one positive measurement to concluding that a German, crony government in bed with large industries system is better than economic freedom? That doesn't make sense.
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Thank you to Kevin Williamson at National Review for trying to make the points that I have been trying to make about income inequality. This is a misleading measure resurrected to play off of resentment and envy to make healthy, growing economies look bad. That was fine for liberals during the good years of the Bush administration, but everything the Dems have done since has made it worse. People like Krugman put forth screwy ideas and then free market advocates are put on perpetual defense. Why are we on defense when their policies make income, wealth, growth, jobs, AND inequality worse?
http://www.nationalreview.com/article/389125/gelded-age-kevin-d-williamson
SEPTEMBER 30, 2014
The Gelded Age
The inequality bed-wetters are misleading you.
By Kevin D. Williamson
The inequality police are worried that we are living in a new Gilded Age. We should be so lucky: Between 1880 and 1890, the number of employed Americans increased by more than 13 percent, and wages increased by almost 50 percent. I am going to go out on a limb and predict that the Barack Obama years will not match that record; the number of employed Americans is lower today than it was when he took office, and household income is down. Grover Cleveland is looking like a genius in comparison.
The inequality-based critique of the American economy is a fundamentally dishonest one, for a half a dozen or so reasons at least. Claims that the (wicked, wicked) “1 percent” saw their incomes go up by such and such an amount over the past decade or two ignore the fact that different people compose the 1 percent every year, and that 75 percent of the super-rich households in 1995 were in a lower income group by 2005. “The 3 million highest-paying jobs in America paid a lot more in 2005 than did the 3 million highest-paying jobs in 1995” is a very different and considerably less dramatic claim than “The top 1 percent of earners in 1995 saw their household incomes go up radically by 2005.” But the former claim is true and the latter is not.
Paul Krugman, who persists in Dickensian poverty, barely making ends meet between six-figure sinecures, is a particularly energetic scourge of the rich, and he is worried about conspicuous consumption: “For many of the rich, flaunting is what it’s all about. Living in a 30,000 square foot house isn’t much nicer than living in a 5,000 square foot house; there are, I believe, people who can really appreciate a $350 bottle of wine, but most of the people buying such things wouldn’t notice if you substituted a $20 bottle, or maybe even a Trader Joe’s special.” In an earlier piece on the same theme, he urged higher taxes as a way to help the rich toward virtue: “While chiding the rich for their vulgarity may not be as offensive as lecturing the poor on their moral failings, it’s just as futile. Human nature being what it is, it’s silly to expect humility from a highly privileged elite. So if you think our society needs more humility, you should support policies that would reduce the elite’s privileges.” That is, seize their money before they order the 1982 Margaux.
I live in the same city as Donald Trump, so the existence of rich people with toxic taste is not exactly a Muppet News Flash for me. But poor people are not poor because rich people are rich, nor vice versa. Very poor people are generally poor because they do not have jobs, and taking away Thurston Howell III’s second yacht is not going to secure work for them. Nobody has ever been able to satisfactorily answer the question for me: How would making Donald Trump less rich make anybody else better off?
There is, obviously, one direct answer to that question, which is that making Trump less rich by seizing his property and giving it to somebody else would make the recipients better off, and that is true. But the Left does not generally make that straightforward argument for seizing property. Rather, they treat “inequality” as though it were an active roaming malice on the economic landscape, and argue that incomes are stagnant at the lower end of the range because too great a “share of national income” — and there’s a whole Burkina Faso’s worth of illiteracy in that phrase — went to earners at the top. It simply is not the case that if Lloyd Blankfein makes a hundred grand less next year, then there’s $100,000 sitting on shelf somewhere waiting to become part of some unemployed guy in Toledo’s “share of the national income.” Income isn’t a bag of jellybeans that gets passed around.
Further, if your assumption here is that this is about redistribution, then you should want the billionaires’ incomes to go up, not down: The more money they make, the more taxes they pay, and the more money you have to give to the people you want to give money to, e.g., overpaid, lazy, porn-addicted bureaucrats. Maybe you think that the tax rates on the rich are too low, especially given that the very rich tend to have income taxed at the capital-gains rate rather than at the much higher income-tax rate. Strange that when Democrats had uncontested power in Washington — White House, House, and Senate — they did not even make a halfway serious effort to change that. It’s almost as if Chuck Schumer has a bunch of Wall Street guys among his constituents. The tepidness of our national economic-policy leadership suggests very strongly that we are living in a Gelded Age, not a gilded one. We do need radical economic reform, not of the sort that Elizabeth Warren desires but of the kind that will allow the modestly off to thrive through mechanisms other than the largesse of politicians looting others on their behalf.
You can make the straightforward case for property seizure, though Democrats generally are not all that comfortable doing so around election time, or you can ritually chant the 1,001 names of the ancient demon Inequality. Or you can make it a matter of public morals and good taste: David Brooks received jeers for writing that the rich should adhere to a “code of seemliness,” but there’s something to be said for a less ducal executive style. How far you want to take that, though, is a matter of very wide discretion. Old millionaire Main Line families used to look sideways at anybody who drove anything flashier than a Buick — Lincolns and Cadillacs were not for Protestants, and BMWs weren’t even on the mental map. Michelle Obama wears a lot of Comme des Garçons for a class warrior, and the makers of the world’s most expensive cigars say Bill Clinton is a fan. We can do this all day.
What Paul Krugman et al. should do rather than fret about the rich and their conspicuous consumption is take the advice of a superior economist, the one who suggested that we should “focus on the stagnation of real wages and the disappearance of jobs offering middle-class incomes, as well as the constant insecurity that comes with not having reliable jobs or assets.” That’s not advice for a rich-are-too-rich problem, it’s advice for a poor-are-too-poor problem. And those are not the same problem.
That those words were Professor Krugman’s own makes it all the more puzzling that he fails to follow where they lead. The late 19th century saw substantial improvements in the standard of living for average working people in the United States. The early 21st century, not so much. This Gilded Age has a lot of catching up to do before it is anything near as successful as the last one.
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Minimum wage laws seems like a good and popular idea only because of economic ignorance and logical laziness, IMHO. Maybe a picture replace a thousand words of why it hurts the people it intends and pretends to help:
(https://danieljmitchell.files.wordpress.com/2011/07/minwage.jpg?w=462&h=350)
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Too many intellectuals are too impressed with the fact that they know more than other people. Even if an intellectual knows more than anybody else, that is not the same as saying that he knows more than everybody else put together — which is what would be needed to justify substituting his judgment for that expressed by millions of others through the market...
http://jewishworldreview.com/cols/sowell102814.php3#CUTfI7rIZKDtAPwD.99
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http://www.washingtonpost.com/opinions/the-laffer-curve-at-40-still-looks-good/2014/12/26/4cded164-853d-11e4-a702-fa31ff4ae98e_story.html
(http://i603.photobucket.com/albums/tt114/dougmacg/laffer-web1228_zps01012c71.jpg)
when you tax something you get less of it, and when you tax something less, you get more of it
The Laffer Curve turns 40: the legacy of a controversial idea
(Washington Post photo illustration/Based on an iStock image)
By Stephen Moore December 26
Stephen Moore is chief economist at the Heritage Foundation and a co-author with Arthur Laffer of “An Inquiry Into the Nature and Causes of the Wealth of States.”
It was 40 years ago this month that two of President Gerald Ford’s top White House advisers, Dick Cheney and Don Rumsfeld, gathered for a steak dinner at the Two Continents restaurant in Washington with Wall Street Journal editorial writer Jude Wanniski and Arthur Laffer, former chief economist at the Office of Management and Budget. The United States was in the grip of a gut-wrenching recession, and Laffer lectured to his dinner companions that the federal government’s 70 percent marginal tax rates were an economic toll booth slowing growth to a crawl.
To punctuate his point, he grabbed a pen and a cloth cocktail napkin and drew a chart showing that when tax rates get too high, they penalize work and investment and can actually lead to revenue losses for the government. Four years later, that napkin became immortalized as “the Laffer Curve” in an article Wanniski wrote for the Public Interest magazine. (Wanniski would later grouse only half-jokingly that he should have called it the Wanniski Curve.)
This was the first real post-World War II intellectual challenge to the reigning orthodoxy of Keynesian economics, which preached that when the economy is growing too slowly, the government should stimulate demand for products with surges in spending. The Laffer model countered that the primary problem is rarely demand — after all, poor nations have plenty of demand — but rather the impediments, in the form of heavy taxes and regulatory burdens, to producing goods and services.
In the four decades since, the Laffer Curve and its supply-side message have taken something of a beating. They’ve been ridiculed as “trickle down” and “voodoo economics” (a phrase coined in 1980 by George H.W. Bush), and disparaged in mainstream economics texts as theories of “charlatans and cranks.” Last year, even Pope Francis criticized supply-side theories, writing that they have “never been confirmed by the facts” and rely on “a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.” And this year, French economist Thomas Piketty penned a best-selling back-to-the-future book arguing for a return to the good old days of 70 percent tax rates on the rich.
But I’d argue — and not just because Laffer has been a longtime friend and mentor — that his theory has actually held up pretty well these past 40 years. Perhaps its critics should be called Laffer Curve deniers.
Solid supporting evidence came during the Reagan years. President Ronald Reagan adopted the Laffer Curve message, telling Americans that when 70 to 80 cents of an extra dollar earned goes to the government, it’s understandable that people wonder: Why keep working? He recalled that as an actor in Hollywood, he would stop making movies in a given year once he hit Uncle Sam’s confiscatory tax rates.
When Reagan left the White House in 1989, the highest tax rate had been slashed from 70 percent in 1981 to 28 percent. (Even liberal senators such as Ted Kennedy and Howard Metzenbaum voted for those low rates.) And contrary to the claims of voodoo, the government’s budget numbers show that tax receipts expanded from $517 billion in 1980 to $909 billion in 1988 — close to a 75 percent change (25 percent after inflation). Economist Larry Lindsey has documented from IRS data that tax collections from the rich surged much faster than that.
Reagan’s tax policy, and the slaying of double-digit inflation rates, helped launch one of the longest and strongest periods of prosperity in American history. Between 1982 and 2000, the Dow Jones industrial average would surge to 11,000 from less than 800; the nation’s net worth would quadruple, to $44 trillion from $11 trillion; and the United States would produce nearly 40 million new jobs.
Critics such as economist Paul Krugman object that rapid growth during the Reagan years was driven more by conventional Keynesian deficit spending than by reductions in tax rates. Except that 30 years later, President Obama would run deficits as a share of GDP twice as large as Reagan’s through traditional Keynesian spending programs, and the economy grew under Obama’s recovery only half as fast.
Supply-side economics was never just about slashing tax rates. As Laffer told me in a recent interview: “We also emphasized sound money, free trade and deregulation. It was a package of reforms to clear away the obstacles to increased economic output.”
I asked Laffer about the economy’s surge, while income tax rates rose, during the Clinton presidency — which critics cite as repudiation of supply-side theories. Laffer noted that tax rates on work and investment fell in the ’90s. “Under Clinton we had the biggest reduction in government spending in 30 years, one of the steepest reductions in the capital gains tax, a big cut in the tax on traded goods thanks to NAFTA, and welfare reforms which dramatically increased incentives to work. Of course the economy soared.”
As to the concern that supply-side tax-cutting has exacerbated income inequality: The real story of the 1980s and ’90s was one of upward economic mobility. After-tax incomes of middle-class families rose by roughly 30 percent (when taking into account government benefits and correctly adjusting for inflation) from 1982 to 2005. The middle class didn’t shrink, it grew richer — though the past decade has seen a big reversal.
Perhaps the most powerful vindication of the Laffer Curve comes from the many nations around the world that have successfully integrated supply-side economics into their fiscal policies. World Bank statistics reveal that almost every nation — from China to Ireland to Chile — has much lower tax rates today than in the 1970s. The average income tax rate among industrialized nations has fallen from 68 percent to less than 45 percent. The average corporate tax rate has fallen from nearly 50 percent to closer to 25 percent today. Political leaders learned from Reagan that in a globally competitive world, jobs, capital and wealth tend to migrate from high- to low-tax locations.
This vital link between low taxes and jobs has played out within the United States as well. It helps explain why, from 2002 to 2012, Texas — with no income tax — gained 1 million people in domestic migration, while almost 1.5 million more Americans left California, with its 12 percent top tax rate, than moved there.
It’s worth noting that there has been some shift in emphasis among advocates of supply-side economics. The original Laffer Curve illustrated that two tax rates lead to zero revenue: a rate of zero and a rate of 100 percent — because no one will work if all earnings are taken away. Yes, in some cases tax rates can get so high that cutting them will raise more revenue, not less. That was clearly true when capital-gains tax rates were slashed in the 1980s and 1990s, and when in 2004 the federal government enacted a repatriation tax cut on foreign earnings held captive overseas. Revenue rose in all of these instances. But today, even the most ardent disciples of the Laffer Curve don’t argue that cutting tax rates will increase revenue — except in extreme cases when rates are at the very highest range of the curve.
We do argue, and history is our guide, that lower tax rates are a private-sector stimulus that in many circumstances will rev up growth and lead to more jobs. It’s a happy byproduct that this growth will help generate higher revenue than the government’s “static” estimates always undercount.
Alas, the Laffer Curve effect is now working against the United States on corporate taxation. Our highest-in-the-world corporate tax rate of nearly 40 percent is chasing iconic U.S. companies such as Burger King and dozens of others out of the country for lower-tax climates where rates are half as high.
Even liberals unwittingly acknowledge the Laffer Curve truth when they support higher tobacco taxes to stop smoking or a new carbon tax to reduce global warming. If higher carbon taxes reduce CO2 emissions, why is it so hard to understand that higher taxes on work or investment lead to less of these?
When I asked Laffer if, 40 years later, there is any point of consensus in economics on the Laffer Curve, he replied: “I think today everyone agrees with the premise that when you tax something you get less of it, and when you tax something less, you get more of it
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Monday Morning Outlook
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Chicken Little Economics To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 12/29/2014
It’s now been more than six years since the failure of Lehman Brothers – when the sky fell in and economic panic seized the land. Since then, Chicken Little Economics has inflicted fear and loathing on many investors.
Much of that fear has been caused by a misunderstanding of what actually happened. Conventional Wisdom has a bumper sticker mentality about the crisis – “Greedy Financiers Push World to Brink,” “Thank God the Government Saved Us” and “It Could Happen Again –Remember 1937.”
But this has it exactly backward. It was government mistakes that caused the crisis. It was government over-reaction that caused the recovery to be slower than it should have been. Most importantly, it was free market capitalism that saved us, not government.
While our readers understand our point of view, there are many who dismiss it because we were late in understanding how bad the crisis would become in 2008. We believed that government would figure out the role of mark-to-market accounting in making the crisis worse and we wrongly assumed this rule would be changed before things got worse.
But the Treasury and Federal Reserve refused to deal with the accounting problem, and instead invented Quantitative Easing (which started in September 2008) and the $700 billion TARP program, which passed Congress October 8, 2008.
What many don’t realize is that after TARP was passed, and after QE started, the stock market fell an additional 40%. In other words, there is absolutely no evidence that TARP or QE saved the economy.
Others say that it was “Stress Tests” that turned the market around. But the results of the first large bank stress tests were not released until May 7, 2009, which could not have caused the market to bottom on March 9, 2009, nearly two months earlier.
The only thing that happened on that exact day was that Congressman Barney Frank’s Financial Services Committee announced it was holding a hearing with FASB to force a change in mark-to-market accounting rules.
This is no coincidence. Forcing FASB to change overly strict accounting rules officially ended the crisis. No longer did illiquid markets and a really dumb accounting rule force banks to take losses that were not real.
Since then, the economy has consistently grown and the S&P 500, without dividends reinvested, has climbed by more than 210%.
Conventional wisdom just can’t deal with this. And politics has made things massively worse. Republicans who supported TARP still argue that it worked even though they supposedly believe in free markets. They also argue that as long as President Obama is in office, the economy cannot possibly grow. As a result, they join with the Fed in believing that QE has boosted stocks and the economy.
Democrats have treated the Financial Crisis of 2008 exactly as they did the Great Depression – as a reason to spend more, regulate more and redistribute more. The Democratic ideology is that government is always needed to keep markets in check and make things “fair.” This argument works best after a crisis. So, the political argument from the left is that the economy is growing because of government action as well.
In other words, investors have few friends that believe in free markets. “Arm chair economists” are everywhere, arguing that it’s simple to manage an economy. Just dial up some QE, redistribution and infrastructure spending, stress test the banks, too, and all will be well.
But these simple-minded remedies have run into an anecdotal and intellectual brick wall. The Fed has tapered its QE and is no longer buying bonds, yet GDP grew 5% last quarter and stock prices are at all-time highs. In Japan, massive new QE is not lifting economic activity or inflation. In Europe, with no QE, interest rates are lower than in the US. In addition, so many “end of the world” forecasters have been wrong that they are making “chicken little” look like an optimist.
Investors need to understand that the same things that boosted growth 150 years ago and 25 years ago are still the same things that boost growth today. What are those things? The answer: Entrepreneurship, innovation and creativity.
In spite of government mistakes, the U.S. entrepreneur has refused to be held back. Profits are at an all-time high and so are stocks. Chicken Little will be wrong again in 2015.
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On his main point, he is in agreement with us:
"the same things that boosted growth 150 years ago and 25 years ago are still the same things that boost growth today. What are those things? The answer: Entrepreneurship, innovation and creativity."
On his data, he seems to be cherrypicking:
"GDP grew 5% last quarter and stock prices are at all-time highs"
(Growth was negative in a different quarter of the same year!)
"Profits are at an all-time high and so are stocks"
(Profits, that is, in the narrow world of entrenched company equities that he deals with.)
"the U.S. entrepreneur has refused to be held back."
(That is pure BS. Real startups are at historically low levels. So is the workforce participation rate, historically low and trending downward into unsustainable territory - unmentioned in his rosy scenario, equity pumping diatribe.)
On his hedge:
"In spite of government mistakes..."
(Wesbury fully dismisses the costs of these.) Other economists such as labor economist Casey Mulligan at University of Chicago measure these and conclude differently, that "if you like your weak economy, you can keep your weak economy". http://2017project.org/authors/casey-mulligan/
On his main prediction:
"Chicken Little will be wrong again in 2015", meaning big gains across all the main markets for yet another year, maybe forever up ... that remains to be seen!
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A good responsive answer.
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Piketty Corrects the Inequality Crowd
The economist’s book caused a sensation last year, but now he says the redistributionists drew the wrong conclusions.
By
Robert Rosenkranz
March 8, 2015 7:40 p.m. ET
319 COMMENTS
‘Capital in the 21st Century,” a dense economic tome written by French economist Thomas Piketty, became a publishing sensation last spring when Harvard University Press released its English translation. The book quickly climbed to the top of best-seller lists, and more than 1.5 million copies are now in circulation in several languages.
The book’s central proposition, that inequality in capitalist societies will inevitably grow, can be summed up with a simple equation: r>g. That is, the return on capital (r) outpaces the growth rate of the economy (g) over time, leading inexorably to the dominance of inherited wealth. Progressives such as Princeton economist Paul Krugman seized on Mr. Piketty’s thesis to justify policies they have long wanted—namely, very high taxes on the wealthy.
Now in an extraordinary about-face, Mr. Piketty has backtracked, undermining the policy prescriptions many have based on his conclusions. In “About Capital in the 21st Century,” slated for May publication in the American Economic Review but already available online, Mr. Piketty writes that far too much has been read into his thesis.
Though his formula helps explain extreme and persistent wealth inequality before World War I, Mr. Piketty maintains, it doesn’t say much about the past 100 years. “I do not view r>g as the only or even the primary tool for considering changes in income and wealth in the 20th century,” he writes, “or for forecasting the path of inequality in the 21st century.”
ENLARGE
Illustration: David G Klein
Instead, Mr. Piketty argues in his new paper that political shocks, institutional changes and economic development played a major role in inequality in the past and will likely do so in the future.
When he narrows his focus to what he calls “labor income inequality”—the difference in compensation between front-line workers and CEOs—Mr. Piketty consigns his famous formula to irrelevance. “In addition, I certainly do not believe that r>g is a useful tool for the discussion of rising inequality of labor income: other mechanisms and policies are much more relevant here, e.g. supply and demand of skills and education.” He correctly distinguishes between income and wealth, and he takes a long historic perspective: “Wealth inequality is currently much less extreme than a century ago.”
All of this takes the wind out of enraptured progressives’ interpretation of Mr. Piketty’s book, which embraced the r>g formulation as relevant to debates playing out in Congress. Writing in the New York Review of Books last May, for example, Mr. Krugman lauded the book as a “magnificent, sweeping meditation on inequality.” He wrote that Mr. Piketty has proven that “we haven’t just gone back to nineteenth-century levels of income inequality, we’re also on a path back to ‘patrimonial capitalism,’ in which the commanding heights of the economy are controlled not by talented individuals but by family dynasties.”
The r>g formulation always struck me as unconvincing. First, Mr. Piketty’s definition of r as including “profits, dividends, interest, rents, and other income from capital” conflates returns on real business activity (profits) with returns on financial assets (dividends and interest).
Second, it ignores the basic rule of economics that when supply of capital increases faster than demand, the yield on capital falls. For instance, since the great recession, the money supply has grown far more rapidly than the real economy, driving down interest rates. Returns on government bonds, the least risky asset, are now close to zero before inflation and negative 1% to 2% after inflation. In today’s low-return environment, with the headwinds of income and estate taxes, it becomes a Herculean task to build and transmit intergenerational wealth.
Many mainstream economists had reservations about Mr. Piketty’s views even before he began walking them back. Consider the working paper issued by the National Bureau of Economic Research in December. Daron Acemoglu and James A. Robinson, professors at the Massachusetts Institute of Technology and Harvard, respectively, find Mr. Piketty’s theory too simplistic. “We argue that general economic laws are unhelpful as a guide to understand the past or predict the future,” the paper’s abstract reads, “because they ignore the central role of political and economic institutions, as well as the endogenous evolution of technology, in shaping the distribution of resources in society.”
The Initiative on Global Markets at the University of Chicago asked economists in October whether they agreed or disagreed with the following statement: “The most powerful force pushing towards greater wealth inequality in the U.S. since the 1970s is the gap between the after-tax return on capital and the economic growth rate.” Of 36 economists who responded, only one agreed.
Other critics have questioned the trove of statistical data Mr. Piketty assembled to chart trends in income and wealth in the U.S., U.K., France and Sweden over the past century. Are such diverse data comparable, and have the adjustments that Mr. Piketty introduced to make them comparable distorted the final picture?
After an extensive review, Chris Giles, the economics editor of the Financial Times, concluded in May last year that “Two of Capital in the 21st Century’s central findings—that wealth inequality has begun to rise over the past 30 years and that the U.S. obviously has a more unequal distribution of wealth than Europe—no longer seem to hold.”
Mr. Piketty is willing to stand up and say that the material in his book does not support all the uses to which it has been put, that “Capital in the 21st Century” is primarily a work of history. That is certainly admirable. Now it is time for those who cry that we are heading into a new gilded age to follow his lead.
Mr. Rosenkranz is a financier and economist who promotes civil discourse as founder of the Intelligence Squared U.S. debates.
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The latest left's spin. Wages have not risen because Wall Street Hedge funds have forced corporate managers take money from investment, research and modernization to buy back shares. This seems absurd on the face of it. A recent article claims all the jobs this economy has produced has essentially gone to foreign born workers. Why should employers pay more if they don't have to? If companies were not investing, doing research and modernizing then how do these same economists explain the explosion in technology, the bull run of the last 5 to 6 years? They are saying it is because unions are bust and they are buying back shares? Folks this seems like leftist spin.
There was also a rumor online that some law makers are contemplating taxing share buy backs. Me thinks there is some connection with this odd opinion and a new leftist policy push for more taxation. Also not a peep in the WSJ article about the role of millions of people abroad flooding the employee pools. :
******Why salaries don’t rise
The Washington PostWashington Post - Washington Post
The Washington Post
Harold Meyerson2 days ago
In this Jan. 20, 2015, file photo, Doug Bullock, an Albany County legislator, speaks during the People's State of the State outside the state Capitol in Albany, N.Y. President Barack Obama’s top economists say that even as the U.S. has managed to kick-start a lasting and growing recovery, modest wage gains are far from making up for decades of paycheck stagnation for middle-class workers. © AP Photo/Mike Groll, File In this Jan. 20, 2015, file photo, Doug Bullock, an Albany County legislator, speaks during the People's State of the State outside the state Capitol in Albany, N.Y. President Barack Obama’s top economists say that even as the U.S. has…
Job creation is up. Unemployment is down. Wages are stagnant. And economists — well, some economists — are confused.
Tighter labor markets are supposed to give workers more bargaining power. To be sure, there are still millions of Americans who left the workforce during the recession and have yet to return; employers’ knowledge of their absence is probably holding wages down. But at the rate that new jobs are now popping up, we should, by all conventional metrics, be seeing at least some increase in Americans’ take-home pay.
And yet, we’re not. Last week, the Labor Department reported that 295,000 jobs were created in February, and official unemployment fell to its lowest rate since early 2008. Wages, however, increased by an anemic 0.1 percent. Over the previous 12 months, they increased just 2 percent. Factoring in inflation, they’ve barely increased at all. Which defies virtually every economic tenet we learned during the 20th century.
But the economy of the 21st century doesn’t work like its predecessor did. The rise of globalization and work-replacing technology has eliminated millions of middle-class jobs. Many believe that this places more of a premium than ever before on education, on increasing the level of workers’ skills. That premium is real, but it doesn’t even begin to explain our epidemic of stagnant wages. As Elise Gould of the Economic Policy Institute has shown, real wages fell for virtually every American in 2014, save only the poorest, and presumably least credentialed, workers. Wages for people at the 10th income percentile actually increased by 1.3 percent, chiefly due to minimum-wage increases enacted by cities and states. But wages for workers at the 95th percentile — presumably, those with some of the best educations – fell by 1 percent. For workers at the 90th percentile, they fell by 0.7 percent, and at the 80th, by 1 percent. So education isn’t the great explainer after all.
For a more plausible explanation, we must, as the great leaker Mark Felt once told two Post reporters, follow the money. When we do, we find that the funds corporations earmarked for their own investment, research, technology and raises during the 20th century have been redirected to shareholders in the 21st. Over the past decade, more than 90 percent of Fortune 500 corporations’ net earnings have been funneled to investors. The great shareholder shift has affected more than employees’ incomes. As Luke A. Stewart and Robert D. Atkinson noted in a 2013 report for the Information Technology and Innovation Foundation, business investment in equipment, software and buildings increased by just 0.5 percent per year between 2000 and 2011 — “less than a fifth that of the 1980s and less than one-tenth that of the 1990s.”
The power of major shareholders to appropriate corporate revenue has grown as the power of workers to win raise increases has dwindled — even though the actual commitment of shareholders to any one corporation has diminished. (In 1960, the average length of time an investor held a stock was eight years; today, it’s four months, and when computerized high-frequency trading is factored in, it’s 22 seconds.) The decimation of private-sector unions has flatly eliminated the ability of large numbers of U.S. workers to bargain collectively for better pay or working conditions. But the ability of financiers to threaten the jobs of corporate managers unless they fork over more cash to shareholders has greatly increased.
Facing one such challenge from an “activist investor” backed by four hedge funds, General Motors on Monday announced that it would buy back $5 billion of its shares, thereby raising the value of the remaining shares and enriching those investors as a reward for their hard work instilling fear in GM’s managers. As for GM’s assembly-line workers, their contract is up for renegotiation this year, and their union hopes to eliminate or at least diminish the two-tier pay system instituted during the auto bailout, under which every worker hired since 2009 can make no more than two-thirds of what veteran workers make, no matter how long those newer hires work at GM. But with the overall rate of unionization so low, GM’s workers don’t have the leverage that one “activist investor” has, though they make the cars while the investor makes threats.
At the root of our great pay stagnation is the appropriation by major investors of the funds that used to go to businesses’ research, modernization, expansion and workers. Full employment will certainly boost workers’ wages, but unless the power shift from workers to investors is reversed, the stagnant middle class
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This liberal article goes halfway to the truth of causation, IMHO.
http://www.slate.com/blogs/moneybox/2015/03/16/our_kids_culture_helped_kill_the_two_parent_family_and_liberals_shouldn.html
"Yes, Culture Helped Kill the Two-Parent Family. And Liberals Shouldn’t Be Afraid to Admit It."
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They suggest more liberal policies as the solution.
Causation is a little more simple than this deep article suggests. Government took over the role of the husband and father. And would like to take over the role of the mother too!
The solution, in law of holes - when you realize you are in one, is generally to stop digging.
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This liberal article goes halfway to the truth of causation, IMHO.
http://www.slate.com/blogs/moneybox/2015/03/16/our_kids_culture_helped_kill_the_two_parent_family_and_liberals_shouldn.html
"Yes, Culture Helped Kill the Two-Parent Family. And Liberals Shouldn’t Be Afraid to Admit It."
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They suggest more liberal policies as the solution.
Causation is a little more simple than this deep article suggests. Government took over the role of the husband and father. And would like to take over the role of the mother too!
The solution, in law of holes - when you realize you are in one, is generally to stop digging.
Insufficient opportunity for power and graft with a traditional family.
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Some dangerous thinking here , , ,how do we respond?
By
Carol Tavris
May 15, 2015 4:20 p.m. ET
8 COMMENTS
As a social psychologist, I have long been amused by economists and their curiously delusional notion of the “rational man.” Rational? Where do these folks live? Even 50 years ago, experimental studies were demonstrating that people stay with clearly wrong decisions rather than change them, throw good money after bad, justify failed predictions rather than admit they were wrong, and resist, distort or actively reject information that disputes their beliefs. In recent years, a new field has emerged—“behavioral economics”—to propose an alternative to the rational man of traditional economics. A spate of popular books and empirical studies have been published exploring human irrationality—in decision making, beliefs and actions. Researchers in this field are making up for lost time, or perhaps realizing that they are social psychologists after all.
As the offspring of traditional economics and experimental social psychology, behavioral economics shows remarkable hybrid vigor, and Richard Thaler, one of the new field’s founders, acknowledges its debt to psychological science throughout his highly enjoyable intellectual autobiography, “Misbehaving.” Indeed, his opening aphorism is Vilfredo Pareto’s 1906 claim that “the foundation of political economy and, in general, of every social science, is evidently psychology. A day may come when we shall be able to deduce the laws of social science from the principles of psychology.” That day is here, as Mr. Thaler explains.
Misbehaving
By Richard H. Thaler
Norton, 415 pages, $27.95
For all of his creative career spanning 40 years, Mr. Thaler, who is a professor of behavioral science and economics at the University of Chicago Graduate School of Business, has been studying “the myriad ways in which people depart from the fictional creatures that populate economic models.” As human beings who arrogantly and often wrongly consider ourselves “sapiens,” we simply don’t match the model of human behavior favored by economists, one that “replaces homo sapiens” (whom Mr. Thaler calls Humans) with “a fictional creature called homo economicus” (whom he calls Econ). “Econs do not have passions; they are cold-blooded optimizers,” he says. “Compared to this fictional world of Econs, Humans do a lot of misbehaving”—thus the book’s title.
The problem, Mr. Thaler argues, is that although economists “hold a virtual monopoly” on giving policy advice, the very premises on which that advice rests are deeply flawed. That is why “economic models make a lot of bad predictions”: some small and trivial, some monumental and devastating. “It is time to stop making excuses,” he admonishes his colleagues. Mr. Thaler calls for an “enriched approach to doing economic research, one that acknowledges the existence and relevance of Humans.” By injecting economics with “good psychology and other social sciences” and by including real people in economic theory, economists will improve predictions of human behavior, make better financial and marketing decisions, and create a field that is “more interesting and more fun than regular economics.” In that way, Mr. Thaler believes, economists will finally produce an “un-dismal science.”
That enriched (and fun) approach is on display in “Misbehaving.” Mr. Thaler’s goal in this conversational, informative book is to “tell the tale of how it all happened, and to explain some of the things we learned along the way.” He tells us that he began having “deviant thoughts” about economic theory as a graduate student in the 1970s—an unsettling experience for a not-yet-professor, comparable to having deviant thoughts about Freudian theory when it dominated clinical psychology.
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The book’s organization is both chronological, describing Mr. Thaler’s discoveries over time and productive collaborations with scholars from other fields, and topical, devoting long sections to findings from four areas of particular interest to him. These are “mental accounting” (with chapters on bargains and sales, sunk costs, budgets and gambling), self-control (the difference between people who plan and people who impulsively act), finance (including the irrationality of people’s behavior in the stock market), and fairness games (why people often prefer fairness to self-interest). In a two-person game in which one person must allocate, say, $50, most recipients would prefer to walk away with nothing than accept an offer they consider “unfair” (such as $5).
Dense with fascinating examples, each of Mr. Thaler’s topical areas tells, in a way, the same story: Traditional economics predicted X; evidence failed to confirm X and indeed often contradicted X; establishment explained away the evidence as an anomaly or miscalculation. For example, by the 1980s, investment guru Benjamin Graham’s classic, decades-old work on “value investing”—“in which the goal is to find securities that are priced below their intrinsic, long-run value”—had become passé. Mr. Thaler explains that Graham’s evidence of the benefits of buying cheap stocks rather than expensive, fashionable “darlings” had become inconsistent with the Efficient Market Hypothesis, which said that value investing simply could not work—not that anyone had bothered to refute Graham’s claim empirically.
Therefore, when the accounting professor Sanjoy Basu published a “thoroughly competent study of value investing that fully supported Graham’s strategy,” in the late 1970s, Mr. Thaler writes, he “had to offer abject apologies for the results” in order to get it accepted for publication; indeed, Mr. Basu “stopped just short of saying ‘I am sorry.’ ” When another economist found that the assumption of market efficiency was not supported by his data, he concluded that there must have been a “pricing model mis-specification.” When Mr. Thaler and Werner De Bondt, his psychology-and-economics graduate student, did their own research, using psychological principles to predict market anomalies that occur because of what they called the market’s “generalized overreaction,” the researched showed why the Efficient Market Hypothesis was wrong. Their paper, ultimately published in 1985, got in through the back door thanks to their having an ally on a major journal—without an apologetic conclusion. “Werner was too principled” to write one, says Mr. Thaler, “and I was too stubborn.”
Time after time Mr. Thaler cheerfully reports how many of his most famous papers in behavioral economics, often written with scholars across enemy lines (that is, noneconomists), were “pure heresy” that “got people’s blood boiling.” One article directly attacked the “core principle underlying the Chicago School’s libertarian beliefs,” namely consumer sovereignty: “the notion that people make good choices, and certainly better choices than anyone else could make for them.” By empirically demonstrating that consumers often do precisely the opposite, because rationality and self-control are bounded by human perceptual distortions, their paper undercut this principle. This was “treacherous, inflammatory territory,” he writes. In 1998, Christine Jolls, then an assistant law professor at Harvard, Cass Sunstein, a law professor at the University of Chicago, and Mr. Thaler published their groundbreaking paper, “A Behavioral Approach to Law and Economics,” which infuriated members of both professions in one blow.
Mr. Sunstein and Mr. Thaler then collaborated on another scandalous claim, that human beings are susceptible to cues in the environment that affect their behavior—a fact that governments and businesses can use to promote healthy behavior and wiser choices. Needless to say, many economists and others were outraged by the implication that the authors were promoting “paternalism” and intervention by government bureaucrats. Not at all, says Mr. Thaler. They were simply noting that “the knee-jerk claim that it is impossible to help anyone make a better decision is clearly undercut by the research.” No matter how often they added that bureaucrats are Humans, with their own biases, their critics wouldn’t listen, even when Mr. Sunstein kept repeating that they were not pro-paternalism but rather “anti-anti-paternalism.” Mr. Thaler preferred the term “libertarian paternalism,” but that didn’t catch on either. Eventually they found the right word to capture the gist of their argument, using it for the title of their book “Nudge.”
Accordingly, the final chapters of “Misbehaving” take on the key issue of nudging: “Could we use behavioral economics to make the world a better place? And could we do so without confirming the deeply held suspicions of our biggest critics: that we were closet socialists, if not communists, who wanted to replace markets with bureaucrats?” Yes, he argues, and yes. Because people make predictable errors, we can create policies and rules that lower the error rate, whether it has to do with reducing driving accidents, getting men who use public urinals to aim better or enticing people to save for retirement—and do it in a way that makes people themselves happier with the results.
Reading this book made me think of (one version of) the classic story of Jascha Heifetz’s American debut at Carnegie Hall in 1917, when he was 16 years old. At intermission, the violinist Mischa Elman turned to his friend, the pianist Leopold Godowsky, wiped his brow and said, “It’s awfully hot in here!” Godowsky replied, “Not for pianists.” Mr. Thaler’s research doesn’t raise my temperature, but that’s because I am not a traditional economist. Pianists will enjoy this book, but violinists need it.
It is long past time to replace Econs with Humans, both in theory and in the practice of prediction. Mr. Thaler believes that, soon enough, all economists will be “behavioral,” and his field will vanish. But the Econ-oriented theorists who have been major players in (mis)predicting the stock market and consumer behavior will—I predict—continue to resist its message. Psychologists, and Mr. Thaler, know why.
—Ms. Tavris is co-author, with Elliot Aronson, of “Mistakes Were Made (But Not by Me),” forthcoming in a revised edition in the fall of 2015.
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Roger Brown
Roger Brown 23 minutes ago
"even when Mr. Sunstein kept repeating that they were not pro-paternalism but rather “anti-anti-paternalism.”
Means that They, Sunstein, Thaler, were "paternalistic".
That is, behavioral economics can improve economic choices.
A stretch.
I agree completely that over-reaction and attachment to sunk costs are irrational behaviors that are noneconomic and make many predicitions wrong. More rational actors might use such to make money, however, and then sentient beings on the wrong side of markets should use feedback to improve their rational thinking. Is it not fun to write books that claim everyone is wrong but me?
Irrationality of markets provides ammunition for the statists among us, unfortunately, and since it is not a universal principal (there are people who make perfectly good decisions for themselves and families after all), then what occurs in practice is that a central agent makes "good choices" that turn out to be good for some at the expense of others, a la the ACA.
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Free markets have a much better track record then command and control economies. Yet totalitarians like Sunstein keep going back to the Marxist well, hoping a new rebranding on rthe same failures will finally work this time.
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Haven't read this yet , , ,
http://fee.org/freeman/detail/paul-krugman-three-wrongs-dont-make-a-right
This seems intriguing , , ,
http://www.businessinsider.com/paul-krugman-shifts-chart-to-show-non-existant-correlation-2015-5
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http://www.cato.org/publications/commentary/book-review-forgotten-depression-1921-crash-cured-itself
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https://americanprinciplesproject.org/wp-content/uploads/Gilder.pdf
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https://americanprinciplesproject.org/wp-content/uploads/Gilder.pdf
Okay, I read this. Did anyone else read it? Let's discuss.
I am a big fan of Gilder. That said, I'm not fully following his logic here. Will come back to this to post some quotes. This is a long scholarly piece. At the end, out of the blue, he is saying that the world will turn to a de facto gold standard. I think he is also implying that we could save ourselves a lot of heartache and economic damage if we would do that now rather than later.
An easier solution would be to simplify the mission of the Fed and appoint a Federal Reserve board that would competently pursue that mission, namely maintainng a US dollar as stable, as strong and as predictable as gold. Same goes for all other countries and currencies if they want to succeed and prosper.
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I believe in buying gold and silver. Even more, I believe in guns, ammo and canned food.
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I believe in buying gold and silver. Even more, I believe in guns, ammo and canned food.
Then if our currency was tied to gold, would you buy and hold money instead? Nothing's perfect in the bunker; canned goods are damaged by freezing and guns can damage with moisture.
(Frustrating that I can't cut and paste from the pdf, but...) Gilder says in effect, with QE and other tampering, money moved from being the neutral medium of exchange to being the message itself. Only if the channel (money) is changeless can the message in the channel [clearly] communicate changes. In 2003, Milton Freidman acknowledged failure of his money supply target theory.
8 canons of Gilder's information theory, slightly shortened and paraphrased:
1. The economy is not an incentive system, but an information system. (An odd distinction.)
2. Creativity comes as a surprise. Planned economies don't produce it.
3. The capitalist economy is not an equilibrium system (static, as taught) but dynamic domains of entrepreneurial activity.
4. Money should be / needs to be - a stable and reliable standard of measure.
5. Interference (The Fed, QE, etc.) is noise and makes it impossible to distinguish between content and channel.
6. Gyrating currencies are deadly to the commitment of long term enterprise.
7. Profits and losses are unexpected outcomes. The real interest rate represents average return.
8. Velocity is not a constant, therefore the effective supply of money is not controlled by the central bank but by free decisions made by individuals.
Bonus point, time is the scarce resource.
As Crafty said, serious read. 103 pages, 87 sources cited. All this should be in the monetary thread also.
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People will recognize gold and silver as having value when the current dollar is being used to kindle fires.
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Glad to see the discussion here but while I am in Germany on a small computer I will not have time to respond, but I hope you guys will continue to do so.
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https://www.facebook.com/prageru/videos/941293992580124/
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Can anyone else see anything that could go wrong with this?
The Key Role of Conservatives in Taxing Carbon
SEPTEMBER 4, 2015
Economic View
By N. GREGORY MANKIW
This summer, a friend sent me a remarkable headline from The Seattle Times: “ ‘Green’ Alliance Opposes Petition to Tax Carbon.”
My initial thought was that this doesn’t make sense. It is like reading “Democrats Rally to Cut the Minimum Wage” or “Republicans Unite to Hike Income Taxes.”
But the political debate in Washington State is a case study about why smart environmental policy is so hard to enact.
First, some background.
Scientists have been telling us for years that the earth is warming and that one of the culprits is human emissions of greenhouse gases like carbon dioxide. Some believe that global warming has contributed to the current severe drought in California.
Sure, there are skeptics about the climate science behind these claims. But science is always a matter of probabilities, not certainties. Even a reasonable skeptic should be willing to embrace modest steps to curb carbon emissions.
Policy wonks like me have long argued that the best way to curb carbon emissions is to put a price on carbon. The cap-and-trade system President Obama advocates is one way to do that. A more direct and less bureaucratic way is to tax carbon. When polled, economists overwhelmingly support the idea.
One reason is that putting a price on carbon alters incentives in many ways. It encourages utilities to switch to cleaner forms of generating electricity, like wind and solar instead of coal. It encourages people to buy more fuel-efficient cars, form car pools with their neighbors, use more public transportation, live closer to work and turn down their thermostats. A regulatory system that tried to achieve all this would be heavy-handed and less effective.
Motivated by this thinking, Washington Carbon, an advocacy group in the state, is now trying to put a carbon tax on the 2016 ballot. Initiative Measure 732 would institute a tax on fossil fuels of $25 a metric ton of carbon dioxide (which translates to about 25 cents a gallon of gasoline).
Most of the revenue from the measure would be used to reduce the state sales tax by one percentage point. A smaller amount would be used to reduce taxes on manufacturing companies and to fund a tax rebate of up to $1,500 for low-income working families. The overall plan is progressive and revenue-neutral. If passed, the initiative would yield a tax shift, not a tax increase.
That is why some environmentalists are opposed. Rather than rebating the money the carbon tax would raise, they want to spend it on environmental and other government programs.
To be sure, a person can favor both a more environmentally friendly tax policy and greater government spending. But there is no good reason to marry these policies. If the goal is to build a political consensus to tackle climate change, there is good reason not to.
The size of government is an issue that divides the political right and the political left, and it will most likely always do so. The same need not be true of climate change.
Bob Inglis, the former Republican congressman from South Carolina, heads the Energy and Enterprise Initiative at George Mason University A recent winner of the John F. Kennedy Profile in Courage Award, which is given to public officials, he has been pushing for climate change solutions that are consistent with free enterprise and limited government.
Environmentalists in the United States would do well to look north at the successes achieved in a Canadian province. In 2008, British Columbia introduced a revenue-neutral carbon tax similar to that being proposed for Washington.
The results of the policy have been what advocates promised. The use of fossil fuels in British Columbia has fallen compared with the rest of Canada. But economic growth has not suffered.
What is most noteworthy, however, is that the policy was championed by a right-of-center government that did not previously have close ties to the environmental movement.
It was a Nixon-goes-to-China moment: Gordon Campbell, British Columbia’s premier, had more credibility by acting against type. Because of the government’s conservative credentials and its commitment to make the policy revenue-neutral, it brought along the crucial support of the business community.
Could such a situation happen in the United States? Right now, it is hard to imagine, as many of the Republicans vying for the presidential nomination pander to the deniers of climate change. But the experience of British Columbia suggests that this attitude could change.
This brings me back to my friend, Yoram Bauman, who sent me that headline. He is an environmental economist and stand-up comedian (yes, an unusual combo). He is also one of the leaders of the effort in Washington State to pass a carbon tax. He has been working tirelessly to build support.
Based on his experiences, he has a message for environmental activists: “I am increasingly convinced that the path to climate action is through the Republican Party. Yes, there are challenges on the right — skepticism about climate science and about tax reform — but those are surmountable with time and effort. The same cannot be said of the challenges on the left: an unyielding desire to tie everything to bigger government, and a willingness to use race and class as political weapons in order to pursue that desire.”
Yoram Bauman is a funny guy, but this time he is not joking.
N. Gregory Mankiw is the Robert M. Beren Professor of Economics at Harvard University.
© 2015 The New York Times Company


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Ego Alert!
I have been making exactly this point here on the forum for years now.
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Ego Alert!
I have been making exactly this point here on the forum for years now.
Climate action?
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No, about taxing pollution and reducing taxes on good things in equal or greater measure.
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Ego Alert!
I have been making exactly this point here on the forum for years now.
Yes. I was going to give you 'credit' in the intro.
"taxing pollution and reducing taxes on good things in equal or greater measure"
Yes and that is what the supposedly conservative author* has in mind too. *former chief economist for Pres. Bush and head of the Harvard Economics dept.
That said, I have a couple of questions...
1) Per GM's follow up, what is the 'external cost' of adding carbon, not pollution, to the atmosphere when the current concentration is .000400, (400 parts per million)? The hard answer after rounding is nothing, right?
2) Per my criticism of the national sales tax, what is the safeguard that after creating this new tax (that will clean up nothing) that the new tax will not be used a) to change behaviors according to bureaucratic preferences and b) to raise the total burden of taxation? The answer is that of course it will be used for arbitrary social engineering and of course it will be used to increase the total tax burden.
Theoretical arguments for new sources of government revenues need to be held up to political realities.
Social security was passed because it was it was a 1% tax on up to 3000 of income, a $30 tax. It was capped to not exceed 3% up to the same maximum making it never more than a $90/year tax, not indexed for inflation or wage levels. http://www.justfacts.com/socialsecurity.asp
Great idea, but FDR's law has nothing to do with the system we have now.
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http://www.cato.org/blog/singapore-power-economic-freedom
I wonder what the stats would look like for Venezuela?
What is strange, is that Marxism is scientific. Or so I have been told.
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The praise this week for Andy Grove, who died on Monday at age 79, has been wrapped up in praise for Silicon Valley, where he was a towering figure in the semiconductor revolution and the longtime leader of Intel, the world’s biggest supplier of microprocessors.
Lost in the lore is Mr. Grove’s critique of Silicon Valley in an essay he wrote in 2010 in Bloomberg Businessweek. According to Mr. Grove, Silicon Valley was squandering its competitive edge in innovation by failing to propel strong job growth in the United States.
Mr. Grove acknowledged that it was cheaper and thus more profitable for companies to hire workers and build factories in Asia than in the United States. But in his view, those lower Asian costs masked the high price of offshoring as measured by lost jobs and lost expertise. Silicon Valley misjudged the severity of those losses, he wrote, because of a “misplaced faith in the power of start-ups to create U.S. jobs.”
Mr. Grove contrasted the start-up phase of a business, when uses for new technologies are identified, with the scale-up phase, when technology goes from prototype to mass production. Both are important. But only scale-up is an engine for job growth — and scale-up, in general, no longer occurs in the United States. “Without scaling,” he wrote, “we don’t just lose jobs — we lose our hold on new technologies” and “ultimately damage our capacity to innovate.”
And yet, an all-out commitment to American-based manufacturing has not been on the business agenda of Silicon Valley or the political agenda of the United States. That omission, according to Mr. Grove, is a result of another “unquestioned truism”: “that the free market is the best of all economic systems — the freer the better.” To Mr. Grove, that belief was flawed.
The triumph of free-market principles over planned economies in the 20th century, he said, did not make those principles infallible or immutable. There was room for improvement, he argued, for what he called “job-centric” economics and politics. In a job-centric system, job creation would be the nation’s No. 1 objective, with the government setting priorities and arraying the forces necessary to achieve the goal, and with businesses operating not only in their immediate profit interest but also in the interests of “employees, and employees yet to be hired.”
When Mr. Grove wrote his critique, he was concerned about the corrosive social and economic effects of high unemployment, then 9.7 percent nationally. Unemployment has dropped considerably since then, but problems persist. Insecure, low-paying, part-time and dead-end jobs are prevalent. On the campaign trail, large groups of Americans are motivated and manipulated on the basis of real and perceived social and economic inequities.
Conditions have worsened in other ways. In 2010, one of the arguments against Mr. Grove’s critique was that exporting jobs did not matter as long as much of the corporate profits stayed in the United States. But just as American companies have bolstered their profits by exporting jobs, many now do so by shifting profits overseas through tax-avoidance maneuvers.
The result is a high-profit, low-prosperity nation. “All of us in business,” Mr. Grove wrote, “have a responsibility to maintain the industrial base on which we depend and the society whose adaptability — and stability — we may have taken for granted.” Silicon Valley and much of corporate America have yet to live up to that principle.
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http://scottgrannis.blogspot.com/2016/03/chinas-gift-to-us-cheap-goods.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+blogspot%2FtMBeq+%28Calafia+Beach+Pundit%29
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This is important today. 9 out of 10 economists or news agencies getting this wrong doesn't make wrong right. it wasn't caused by a failure of private businesses. It was caused by a failure of the federal government.
https://www.youtube.com/watch?v=ObiIp8TKaLs
Who is the Milton Friedman today? Besides being brilliant, he explained economic things in a way that everyone can understand and he openly debated anyone.
The above takes about 7 minutes of your life for you to not be wrong about something that caused a decade or more of misery. The wrong lessons learned from the Great Depression are central to the problems we face today.
Here is another, Friedman on wealth inequality and inheritance taxes, 4 minutes. MUST SEE.
https://www.youtube.com/watch?v=ObiIp8TKaLs
Ted Cruz needs to watch this and speak this clearly and persuasively on economics.
Glenn Beck has been doing a series of Milton Friedman on radio. These are two clips are heard there and found on youtube.
http://www.glennbeck.com/2016/04/04/milton-friedman-part-i-economics-101/
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http://www.freerepublic.com/focus/f-news/2190282/posts
Pass it on.
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http://www.freerepublic.com/focus/f-news/2190282/posts
Pass it on.
https://mises.org/sites/default/files/Road%20to%20Serfdom%20in%20Cartoons.pdf
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Larry Elder puts to words what we all know but some want to deny.
http://townhall.com/columnists/larryelder/2016/06/02/on-inequality-n2172075
Is there a more brain-dead concept than to empower the government to fight "income inequality"? What sane, normal, rational human being thinks that human talent, drive, interests and opportunity can -- or should -- result in equal outcomes?
Despite my love of athletics, I knew in third grade that my friend, Keith, could run much faster than I could. For two years I played Little League ball, and I got better at it. But no matter how hard I tried or how many hours I spent, I could not hit, run or throw as well as my friend Benji.
Later in life, I started playing tennis, and I became quite passionate about it. But most of the people I played against had started playing years earlier, and most had taken lessons for years. I got better, but given my competitors' head start, the gap remained.
Financial planners advise clients to start early and stick to some sort of game plan. Is there any wonder that those who do so will have more net worth than those who started later, or who lacked the discipline to follow and stick to a plan? How is government supposed to address these "unequal" outcomes?
Most entrepreneurs experience failure before hitting on an idea, concept or business that makes money. Even then, it takes 20 to 30 years of long hours and sacrifice, along with occasional self-doubt and a dollop of luck, to become a multimillionaire.
I recently saw a movie starring Cate Blanchett. She is a very good actress, but she is also strikingly beautiful. Is there any doubt that her good looks, over which she had no control, are a factor in her success? Is it unfair that an equally talented actress, but with plain looks, will likely have an "unequal" career compared with that of Blanchett?
Speaking of acting, most who venture into that field do not become successful, if success is defined as making a living as an actor. These overwhelming odds still do not deter the many young people who flock to Hollywood every year to "make it."
Had a would-be actor dedicated that same drive and personality to some other profession, success would have been more likely, if less enjoyable. Should the government intervene and take from the successful non-actor and give to those who unsuccessfully pursued a long-shot acting career? An ex-actor told me of her recent lunch with a friend she had met when they both left college and pursued acting. While the ex-actor moved on to a different, successful career, her friend stuck to acting, through thick and thin. The actor informed her friend that she recently turned down a commercial. Why? What struggling actor turns down this kind of work? Turns out, through some sort of "assistance" program, said the friend, the state of California is "assisting with her mortgage." She has no obligation to repay the money, and she will continue to receive the assistance as long as her income is not above a certain level. How does this strengthen the economy? The ex-actor, through her taxes, subsidizes the lifestyle of the actor, who admits turning down work lest she be denied the benefits.
But this is exactly the world sought by Bernie Sanders -- a government that taxes the productive and gives to the less productive in order to reduce "income inequality."
In the real world, two individuals, living next door to each other, make different choices about education, careers, spouses, where to live, and if and how to invest. Even if they make exactly the same income, one might live below his or her means, prudently saving money, while the other might choose to regularly buy new cars and fancy clothes and go on expensive vacations. Is there any question that the first person will end up with a higher net worth than the latter? Is their "inequality" something that government should address?
Although Beyoncé is a good singer, is there any question that there are others with superior voices? But Beyoncé is also blessed with "unequally" good looks, charisma and perhaps better management -- maybe better than the other two ladies in her musical trio, Destiny's Child, whom she once sang with. Three singers, in the same group, have had "unequal" outcomes.
Communism, collectivism and socialism rest on the same premise -- that government possesses the kindness, aptitude, judgment and ability to take from some and give to others to achieve "equality." Karl Marx wrote, "From each according to his ability, to each according to his needs." And that's the problem. The statement implicitly acknowledges that some have more aptitude, drive, energy and ability than others. To take from some and give to others reduces the initiative of both the giver and the givee.
This is the fundamental flaw with income redistribution, the very foundation of communism, socialism and collectivism. One would think that Bernie Sanders would have figured this out by now. But wisdom among 74-years-olds, like outcome, is not distributed equally.
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http://www.wsj.com/articles/a-guaranteed-income-for-every-american-1464969586
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Lets see. Wikipedia states 27% of population is under 21. That means 73% are over 21 or 225 million if we assume there are 300 million in the US. Giving everyone of those $10,000 comes out to 2.25 trillion dollars.
Did I miss something? Did the article above explain who is going to pay for this?
Of course the answer is the "rich". It always is. Doesn't add up.
His point about less jobs if AI really fulfills it's promise is worth thinking about though.
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"First, my big caveat: A UBI will do the good things I claim only if it replaces all other transfer payments and the bureaucracies that oversee them. If the guaranteed income is an add-on to the existing system, it will be as destructive as its critics fear."
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"First, my big caveat: A UBI will do the good things I claim only if it replaces all other transfer payments and the bureaucracies that oversee them. If the guaranteed income is an add-on to the existing system, it will be as destructive as its critics fear."
Also, he begins: "Replacing the welfare state with ..."
I oppose a new gigantic program because it WON'T replace all other programs. The politics of this isn't that simple. For example, the left doesn't actually want to solve the problem and the right isn't going to embrace a new $2 trillion program either. Still I like the thought process. We need to find ways to help those in need and reform our basic safety net WITHOUT all the disincentives to produce that we currently put on both the payers and the recipients.
It is a sign of how bad our current system is to know that paying everyone, need it or not, 13k/year is better.
People on the edge of working more and not working for money often face real, marginal tax rates greater than 100%. The Unaffordable Healthcare Act puts all our previous disincentive to work problems on steroids.
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Sorry to muddle the waters with a second subject at the same time:
Not sure I agree with Scott 100% here , , ,
http://scottgrannis.blogspot.com/2016/06/recommended-reading-ikenson-on-trade.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+blogspot%2FtMBeq+%28Calafia+Beach+Pundit%29
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Not sure I agree with Scott 100% here , , ,
http://scottgrannis.blogspot.com/2016/06/recommended-reading-ikenson-on-trade.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+blogspot%2FtMBeq+%28Calafia+Beach+Pundit%29
"nearly all economists agree that free trade, by expanding the size of the market to enable greater specialization and economies of scale, generates more wealth than any system that restricts cross-border exchange."
- I would like to hear your view on this.
"Consider Apple. By availing itself of lowskilled, low-wage labor in China to produce small plastic components and to assemble its products, Apple may have deprived U.S. workers of the opportunity to perform that low-end function in the supply chain..."
- this is a great, current example. I was going to cut it there and say, we could require US workers to build it and then the number built would be zero as the phones would need to be so expensive. Same point, but they answered it better than I could:
"...But at the same time, that decision enabled iPods and then iPhones and then iPads to be priced within the budgets of a large swath of consumers. Had all of the components been produced and all of the assembly performed in the United States — as President Obama once requested of Steve Jobs — the higher prices would have prevented those devices from becoming quite so ubiquitous, and the incentives for the emergence of spin-off industries, such as apps, accessories, Uber, and AirBnb, would have been muted or absent."
What is the alternative to free trade that works better? Government managed trade? Government targeted trade? We will get tougher on their products and services entering and they won't get tougher on ours? Government will stay benevolent and not be corrupted by cronyism as it picks winners and losers? I don't think so on all counts.
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Smoot Hawley data (Smoot Hawley was not the only factor, but telling IMO):
Smoot Hawley raised tariffs on 20,000 items by 6.3% to 19.8%.
Imports fell 66%, exports fell 61%
GDP fell over 25%.
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I'm leaving tomorrow for the three day DBMA Camp in Central PA with Top Dog and Lonely Dog and a proper answer of this would require more time and mental effort that I have today.
Part of the answer has to do with what happens when a hostile fascist state e.g. China, targets certain sectors (e.g. rare earth minerals) for geo-political military considerations. Russian control over Euro natural gas would be another example.
Part of the answer has to do with the predatory pricing of fascist states. Yes in the long run this is unsound, but in the long run we are all dead.
There's more, but as I say, no time today.
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Have a great trip and camp. We aren't very far apart on this.
"Part of the answer has to do with what happens when a hostile fascist state e.g. China, targets certain sectors (e.g. rare earth minerals) for geo-political military considerations. Russian control over Euro natural gas would be another example."
"Part of the answer has to do with the predatory pricing of fascist states. Yes in the long run this is unsound, but in the long run we are all dead."
On the first part from my point of view, national security is always a valid reason to interrupt free trade. Freeze assets, cancel purchases, block trade, all are legitimate if national security is the valid reason. But that is the exception and it doesn't mean, from my point of view, that 'managed' trade in general is an acceptable alternative, economically or in terms of liberty, to free trade.
Each of those examples, China rare earth elements and Russia natural gas warfare, are great topics to dive into later when time permits. How do we address those?
On the second part, dealing with fascist states, I guess the same applies. How do we best address that? If we are going to violate our own principles in our trade policies, then our express purpose in a range of policies should be to bring about the end of that fascism and those policies, not to move us in the permanent direction of government managed trade.
I don't buy the premise that China can gain on us by devaluing and under-pricing. Anti-trust violations, copyright theft etc are obvious exceptions to that and should be aggressively dealt with .
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One more economics post for today - the previous one is on the Monetary thread.
Walter Heller was my Econ professor at U of MN. He was chief economic adviser to Presidents Kennedy and Johnson, author of the Kennedy tax cuts, the war on poverty and part of the Marshall Plan. A Keynesian. Milton Friedman hopefully needs no introduction. A Monetarist. They each make their case and respond to each other:
https://fraser.stlouisfed.org/docs/meltzer/monetary_fiscal_friedman_1969.pdf 80 pages plus glossary etc.
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"When politicians use bailouts to protect borrowers or lenders from their folly, they just encourage more folly."
- Alan Reynolds on the sub prime mtg market one year before it crashed. Like nearly all economists, he missed predicting the crash, but was grasping the cause. http://townhall.com/columnists/alanreynolds/2007/03/22/subprime_economics
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The measure most heavily used to gauge the health of the economy in terms of jobs and joblessness has become useless in an era where the workforce participation rate has been plunging.
Hold the workforce participation rate constant and the unemployment rate tells a different story:
(http://i603.photobucket.com/albums/tt114/dougmacg/ISS3c080816-1024x651_zpsfiwscxrc.jpg)
It is time to devise a better measure.
http://www.investors.com/politics/editorials/its-time-to-dump-the-unemployment-rate/
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https://fee.org/articles/how-roman-central-planners-destroyed-their-economy/
Bad luck!
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https://fee.org/articles/how-roman-central-planners-destroyed-their-economy/
Bad luck!
Central planning has been a failure for many years, really all of history.
This post is a keeper. Hard to fully document the failure of central planning without knowing the end of the Roman empire and of the Soviet planners, two very different experiments.
Also note the writing of Ibn Khaldun from the 1300s, The Muqqadimah, noting how government expanding and incentives to produce diminishing ends in collapse. Excerpt in translation:
"In the early stages of the state, taxes are light in their incidence, but fetch in a large revenue...As time passes and kings succeed each other, they lose their tribal habits in favor of more civilized ones. Their needs and exigencies grow...owing to the luxury in which they have been brought up. Hence they impose fresh taxes on their subjects...[and] sharply raise the rate of old taxes to increase their yield...But the effects on business of this rise in taxation make themselves felt. For business men are soon discouraged by the comparison of their profits with the burden of their taxes...Consequently production falls off, and with it the yield of taxation."
http://dogbrothers.com/phpBB2/index.php?topic=1023.msg16968#msg16968
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Wait, I have been told that Marxism is scientific! By people with credentials!
https://fee.org/articles/how-roman-central-planners-destroyed-their-economy/
Bad luck!
Central planning has been a failure for many years, really all of history.
This post is a keeper. Hard to fully document the failure of central planning without knowing the end of the Roman empire and of the Soviet planners, two very different experiments.
Also note the writing of Ibn Khaldun from the 1300s, The Muqqadimah, noting how government expanding and incentives to produce diminishing ends in collapse. Excerpt in translation:
"In the early stages of the state, taxes are light in their incidence, but fetch in a large revenue...As time passes and kings succeed each other, they lose their tribal habits in favor of more civilized ones. Their needs and exigencies grow...owing to the luxury in which they have been brought up. Hence they impose fresh taxes on their subjects...[and] sharply raise the rate of old taxes to increase their yield...But the effects on business of this rise in taxation make themselves felt. For business men are soon discouraged by the comparison of their profits with the burden of their taxes...Consequently production falls off, and with it the yield of taxation."
http://dogbrothers.com/phpBB2/index.php?topic=1023.msg16968#msg16968
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When our host and moderator says this needs to be posted on both the science and political threads on economics, I believe that makes it REQUIRED READING. )
Good to see more experts weigh in on this. Piketty debunked (again). Inequality is the ladder there for everyone to climb. It isn't a bad thing that people in different careers, at different points in their careers, with different effort levels and different talents get different pay. It's how our most scarce resource, our time, gets allocated best. But it gets measured wrong and then hyped for political and economic folly. I suppose this debate has been going on since Adam and Eve but it restarted in the Bush years as a way of saying a good and growing economy was bad. Mis-measure the differences and then sound the alarm. The point of the deception was to foster dissatisfaction with economic growth and gain support for greater redistribution.
John F Kennedy said a rising tide lifts all boats. He didn't say all boats have to be the same size and travel at the same speed, now matter how small or slow or how vulnerable they would have to be to the next wave.
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http://www.the-american-interest.com/2017/01/03/the-inequality-hype/
The Inequality Hype
NEIL GILBERT
The great devil of progressives turns out to be mainly a figment of accounting. Better data gives us a more heartening picture of American well-being.
For most of the 20th century, poverty represented the root of all evil to Americans—sprouting criminality, violence, hunger, disease, stunted achievement, and premature death. With the tremendous growth of both the economy and the welfare state over the past sixty years, the political campaign against poverty has almost vanished from the public square. Today, many see economic inequality as the root cause of most, if not all, of our social ills. President Obama described it as the defining challenge of our time—one that threatens “the very essence of who we are as a people.”
It should go without saying that poverty and inequality are not the same. However, it’s worth repeating, because over time a conflation of the two has taken root in common perceptions. The evils once associated with poverty have been transferred lock, stock, and barrel to inequality, whether justifiably or not.
Although political efforts to reduce income (and wealth) inequality do not carry the moral force of religious edicts (leaving aside those for whom Das Kapital has assumed biblical status), they have an intuitive moral appeal not dramatically different from appeals to reduce true poverty—again, since both are seen as causing the same cluster of social evils. Long before any exposure to ideas of social justice one typically hears young children yelling “that’s unfair!” when a pie is divided unequally among them; the quickest to complain are invariably those handed the smallest slices.
And why shouldn’t they? All else equal, there seems to be little ethical justification for one child to get a bigger slice of the pie. As adults we usually make peace with reality by recognizing that it is rarely if ever the case that all else is equal. Karl Marx got around this problem by arguing that the secret expression of value, namely that all kinds of human labor are equal and equivalent, because in so far as they are human, labor in general cannot be deciphered until the notion of human equality has acquired the fixity of a popular prejudice.
For Marx, in other words, all human labor has the same value because we are all equal in what he deems people’s most important characteristic—their humanity. This tautological formulation skirts the issue of how, or even whether, to adjust for merit (and of course it famously leaves out every other factor of production in an economy, but never mind about that for now).
Since classical antiquity the balance between merit and equality has animated philosophical debate about what constitutes a just distribution of material goods. Aristotle believed that a fair and just distribution could not ignore merit, which, once taken into consideration, made a fair distribution essentially an unequal one. He qualified the idea that “equal” is just by differentiating between numerical and proportional equality. The former dictates that everyone gets exactly the same basket of goods, while latter prescribes that the amount of goods received by different people be relative to the amount of effort each contributed to their production. With this deft distinction, Gregory Vlastos observes, “the meritarian view of justice paid reluctant homage to the equalitarian view by using the vocabulary of equality to assert the justice of inequality.”1
Still, the case for reducing inequality made in the political arena appeals to the intuitive sense that fair means equal. All that is being asked is that millionaires and billionaires pay their fair share. This leaves aside the meritarian question of whether they legitimately deserve to possess such vast wealth in the first place. For the most part, proposals to advance equality by taxing tycoons evoke little public opposition. Whether or not targeting this group is really just, many argue that the millionaires can easily afford it. Others question how lawfully the super-rich came by their wealth in the first place, and still others, law aside, assert that all wealth distribution systems are based ultimately on coercion, made necessary by the original sin of private property. The merely progressive as opposed to radical case for income redistribution gains added support from the prevailing assumption that economic inequality is inherently bad because it causes stress, low self-esteem, and a whole raft of dubiously medicalized effects. This assumption reflects the growing tendency to conflate the equality of material outcomes with the incontestable fair-mindedness of equal opportunity.
Champions of increasing economic equality have an emotionally compelling argument that ensures the moral high ground for those making the case. It is not an argument that any sensible politician (or aspiring academician, as opposed to a professional gadfly like the Princeton philosophy professor Harry Frankfurt) wants to enter on the other side.2 Thus in contemporary Western political discourse equality is so thoroughly vested as an abstract good that questions are rarely raised about exactly how much economic inequality is unacceptable, how much is fair, or even how much really exists. The next time someone lectures you about the need to increase equality, you might try asking: How much should we have? As much as Sweden, is one likely response. But inequality has been on the rise in Sweden as in most other industrialized countries, so is the acceptable level that of Swedish equality in 1995 or 2016? Now there’s a conversation stopper for you.
Income inequality is at once a palpable and amorphous condition. That some people have more money than others is a tangible reality. But most people have no idea about the actual distribution of income and their position in the population. An analysis of several surveys of ordinary citizens in nearly forty countries reveals widespread misperceptions about the degree of inequality, how it is changing and where they fit in their country’s income distribution. For example, in the countries surveyed an average of 7 percent of respondents owned a car and a second home, yet on average 57 percent of this group thought they belonged in the bottom half of the income distribution. Among low-income respondents receiving public assistance, a majority placed themselves above the bottom 20 percent of their income distribution. These findings raise serious doubts about the extent to which the median voter knows how much she might lose or gain from redistribution. More important, it means that discontent with economic trends has a lot less to do with perceptions of material inequality than it does with a whole host of other factors that are, as it happens, a lot harder to quantify and therefore much less well appreciated by elites.
Metrics of Inequality and Material Well-Being
In contrast to the normative moral appeals and vague calibrations of fairness in political discourse, the quantitative metrics of social science lend a certain precision to estimates of income inequality. However, these empirical estimates and especially what they signify rest on loose soil that offers fertile diggings for economists and philosophers less interested in facts than in changing facts. To really grasp the essential meaning of economic inequality requires examining how income is measured in relation to demographic changes, geographic differences, and shifting fortunes over the life course. But if that interferes with the propagation of a certain ideological position, then these requirements go unrequited. Let’s look more closely at the facts before we deign to tamper with them.
Income inequality in the United States is generally perceived to have increased over the past thirty years. However, the degree and implications of this trend remain in dispute. The disagreement reflects, in part, differences in the way economists measure inequality, which are rarely aired outside of technical publications. Even when the different measures are reported, what they signify is difficult to discern beyond whether the numbers are going up or down.
The most common measures of inequality include the Gini index and a comparison of income quintiles. They vary in convenience and transparency. The Gini index provides an expedient summary ranging from 0 to 1; zero denotes perfect equality of income and 1 represents a distribution in which one member possesses all the society’s income. Among the advanced industrialized countries Gini coefficients range from .250 to .500. By summarizing the dispersion of income in one number, Gini coefficients are useful for comparative purposes. They clearly show whether economic inequality is increasing or decreasing over time and is higher or lower among countries.
However, the numerical precision veils the existential reality of inequality, particularly in a country as large as the United States. That is, the numbers convey an empirical impression that those with an annual income of $100,000 have a higher standard of living than those with an income of $85,000. If this were not the case, why be concerned about income inequality in the first place?
But in fact it is often not the case. The U.S. Bureau of Economic Analysis documents strikingly large differences in the cost of living throughout the country.3 Thus, for example, when regional price differences are factored in, a $100,000 income in New York State is worth less than an $85,000 income in Montana. Some might argue that it is worth the difference to live in New York. Having come from New York City, like many of my friends I once believed that civilization ended on the east bank of the Hudson. Yet people have different preferences for cultural amenities and natural beauty—and different levels of tolerance for traffic, noise, smog, and cramped apartments. Montanans typically refer to their state as “the last best place,” which may explain the influx of wealthy people over the past few decades. Cost-of-living differences are even more extreme among metropolitan areas. The San Francisco Bay area is almost 40 percent more expensive than Rome, Georgia, a charming locale nestled in the foothills of the Appalachians. Since the cost of living is usually higher in states and metropolitan areas where the average household income is above the U.S. median, the Gini coefficient tends to exaggerate differences in the levels of material comfort and well-being implied by economic inequality.
Moreover, despite the suitability of Gini coefficients for comparing levels of income inequality over time and among countries, the findings expressed by these comparisons can obscure their implications for economic well-being. For example, the .378 Gini coefficient for the United States represents a much higher degree of income inequality than the .257 computed for the Slovak Republic. As for economic well-being, a look at how much money is actually available reveals that the Slovak Republic’s median disposable household income amounts to 29 percent of that of the United States.4 Its middle-class would be on welfare here.
Finally, the Gini coefficient lends numerical precision to the assumption that increasing economic equality is a social improvement. Yet during a recession economic equality as measured by the Gini index may well increase in a country where everyone is getting poorer. Earnings fall for people in both the upper and lower income brackets, but the decline is steeper for those at the higher end who have more to lose in the first place. By the same token, a country could experience rising inequality according to its Gini index when everyone is becoming better off. The rich are getting richer as the poor are also getting richer, just not as much. Rising inequality, however, can also signal that the rich are getting absolutely more and the poor are getting absolutely less. But the Gini coefficient metric by itself is powerless to tell you which is which.
So, are the rich getting richer and the poor getting poorer? A 2012 Pew Research Center survey found 76 percent of the public answered “yes,” which was about the same as the 74 percent who held this view in 1987.5 In contrast to the Gini coefficient, which cannot answer the question, the analysis of income quintiles entails a direct examination of how money is distributed among the different groups, revealing the extent to which their incomes are rising or falling. Calculating the financial resources of five groups that range from the top to the bottom 20 percent of the income distribution, this approach illuminates the economic well-being of families and how they fare over time. But here, too, the results vary according to the alternative definitions of income.
Thomas Piketty and Emmanuel Saez’s well-known study of income inequality in the United States, for example, was based on the market income of tax filers.6 According to this definition, from 1979 to 2007 there was a 33 percent decline in the mean income of those in the bottom quintile in contrast to a 33 percent increase among those in the top 20 percent of tax units. Thus, left entirely to its own devices, the market allocation of income generated a pattern of increasing inequality wherein the rich got noticeably richer and the poor got poorer—a bleak testimony, supposedly, to the distributional problem of capitalism.
However as Richard Burkhauser pointed out in his presidential address to the Association for Public Policy Analysis and Management, the market income of a tax unit is a poor indicator of how much money families actually have to live on.7 A more inclusive measure of the income that remains in households after subtracting what they must pay in taxes and adding the money they receive through government transfers transmits a different image of the American experience. Applying these criteria, instead of a decline we see a 32 percent increase in the mean income of the poorest fifth between 1979 and 2007. (Table 1) Overall, this broader measure still reveals a rise in inequality during that period as the mean income of those in the top bracket climbs by 54 percent.8 But it, too, is incomplete.
(http://www.the-american-interest.com/wp-content/uploads/2017/01/Table1-768x414.jpg)
Source: * Philip Armour, Richard V. Burkhauser, and Jeff Larrimore, “Deconstructing Income and Income Inequality Measures: A Crosswalk from Market Income to Comprehensive Income” American Economic Review (May, 2013). ** Congressional Budget Office, “The Distribution of Household Income and Federal Taxes, 2010” (Government Printing Office, 2013).
Along with taxes and transfers, the most authoritative and extensive measure of income also incorporates capital gains. Along with Burkhauser and his colleagues, the nonpartisan Congressional Budget Office (CBO) agrees that a comprehensive definition involves the sum of market income adjusted for taxes, household size, cash and in-kind transfers, and capital gains.9 However, the consensus unravels over the issue of exactly how to value capital gains. The basic choice is whether to focus on the total taxable gains realized in the year capital assets are sold or the annual change in value of capital assets whether or not they are sold. This is not just a matter of bookkeeping. The choice to include either realized or accrued capital gains in the calculation of annual income has a considerable impact on the rates of inequality.
The CBO favors the use of realized capital gains that are reported on tax returns. After factoring in the impact of taxes, capital gains, and government transfers the CBO data reveal a sharp decline in inequality compared to when it is measured solely by market income. According to these figures, between 1979 and 2010 the household income in the bottom quintile increased by 49 percent, the income in the middle three quintiles increased on average by 40 percent, and those in the highest bracket increased by 71 percent.10 While incomes increased across the board, the largest gains registered on the two ends of the income distribution. These findings temper progressive arguments that focus on the increasing inequality of market incomes to demonstrate the need for greater social welfare spending.
The income measures cited above all indicate a rising level of inequality that varies only in the rate at which it seems to have increased over the past three decades. In contrast, a different picture emerges if accrued capital gains, which include housing, are substituted for realized taxable gains. This approach yields a reversal of income trends between 1989 and 2007, which shows a decline in inequality as the household income in the bottom quintile climbed at a rate considerably higher than the increase experienced in the top quintile, which was hit much harder by the housing market crash in 2007. Needless to say, the choice between these methods of valuing capital gains is highly contested.
Every pertinent measure of income quintiles, especially the widely acknowledged comprehensive assessment by the CBO, dispels the notion that within the United States over the past three decades the rich have been getting richer as the poor have gotten poorer. The CBO measure reveals that from the highest to the lowest quintile, the mean household income of every group was lifted, even amid a rising tide of inequality. Among the bottom fifth the mean income increased by 49 percent. That’s not peanuts, particularly when we recognize what else is happening.
Another Dimension: Looking Within the Groups
Although the analyses of change since 1979 illustrate the extent to which household incomes climbed while the gap between the bottom and top fifths widened, it’s a one-dimensional picture that discounts what was happening within these economic bands. This image conveys a static impression that the same households within each quintile were experiencing these changes over time. In truth, a lot more was going on among the households within these five divisions, the particulars of which lend depth to the one-dimensional story of increasing economic inequality.
To grasp the full implication of rising inequality in household income, it is important to recognize that during the period in question young workers were continually entering the labor force as the older generation retired and died. A 25 year old who began working in 1979 while living on his own with an income in the bottom 20 percent would very likely reach a higher bracket by the time he was 53 years old in 2007. So not only did entry-level income rise between 1979 and 2007, but over the course of time many of those who started out at the bottom climbed toward the top. In just the period from 1996 to 2005, for example, the U.S. Treasury Department estimates that about half of the taxpayers starting in the bottom 20 percent moved into a higher income bracket.11 Of course, we do not know how many members of this upwardly mobile group were young scions spending their first year out of Princeton as shipping clerks in their fathers’ factory, serving Teach for America in a poor rural area or lolling lazily on the Left Bank—a reminder that numbers can impose a surface on patterns that shields us from the underlying reality.
There is even more to this story. As time passed, the 25 year old got married and had two children. Thus, what started in 1979 as a single-person household in the bottom fifth of the income distribution had morphed into a middle-income household with four people by 2007. This change illustrates an important characteristic of the income quintiles. Although they represent five groups with an equal number of households, the average number of persons per household within these groups varies as do other characteristics such as family structure and employment. The top fifth of households contain 82 percent more people than the bottom fifth. The proportion of married couples in each group ranges from 17 percent in the lowest income quintile to 78 percent in the highest. At the same time, single men and women living alone account for 56 percent of the households in the bottom fifth, but only 7 percent among the top group. And no one was employed in more than 60 percent of the households in the bottom quintile; while 75 percent of the households in the top quintile had two or more earners.
Taking account of the household characteristics within each quintile reveals that to some extent the increasing level of income inequality since 1979 coincides with the changing demographics of family life, particularly the smaller number of persons per household, the decreasing rate at which couples form and maintain stable marriages, and the increasing number of two-earner households. On that score, W. Bradford Wilcox and Robert I. Lerman estimate that 32 percent of the growth in family income inequality since 1979 is linked to the retreat from marriage and the decline of stable family life.12 The point, again, is that economic data are not self-interpreting, and that without a relevant sociological filter they can be made to mean almost anything except what they actually mean.
Concentrating on advances within just the top quintile offers a different perspective, which sharpens our understanding of what is behind the rising level of economic inequality in recent years. Two prominent findings based on the CBO’s all-inclusive measure of income tell the story: From 1979 to 2010 the after-tax income of the top 1 percent increased by 201 percent (compared to the 49 percent increase for households in the bottom quintile and the 65 percent increase for those in the 81st to 99th quintile).13 Research focused on the pre-tax market income of the top 1 percent generates an even higher level of inequality than the CBO findings.
Thus, a disproportionate degree of the increasing level of inequality was due to significant financial gains made by those at the apex of the income pyramid. As for the rest, a careful analysis matching data from the U.S. Census Bureau and Internal Revenue Service demonstrates that after 1993 there was no palpable increase of inequality among the bottom 99 percent of the population. Since the pre-tax incomes of the top 1 percent started at $388,905 in 2011, many of these families would not be considered the super-rich. It’s around the top one-tenth of 1 percent, where pre-tax incomes start at $1,717,675, that we begin to cross the line between relatively well-off and truly affluent.
As soon as the conversation on inequality begins to concentrate on the wealthiest households, the question increasingly comes to mind: What do these people do to deserve such immense rewards? A 2013 study commissioned by the New York Times discloses a median executive pay of $13.9 million among the CEOs of 100 major firms, described by one journalist as a “new class of aristocrat.”14 Although not terribly harsh, this description connotes a privileged class renowned more for its leisure pursuits than its productive labor. But it does suggest how easily personalizing the numbers can transform a dispassionate report on the top 1 percent into bitter accounts of debauchery and corporate corruption. The likes of Bernie Madoff, Tyco’s Dennis Kozlowski, and Ken Lay of Enron supply no shortage of infamy on which to justify a denial of merit. But then there are the brilliant hard-working multi-millionaires who created Apple, Google, and Microsoft, not to mention our favorite movie stars and athletes. Even here some might question why grown men should receive immense sums of money to stand around a few afternoons a week waiting for a chance to hit a ball with a big stick. Major League baseball players were paid on average $3.39 million in 2013. In contrast, for the same activity most minor league players earned between $2,500 and $7,000 for a five-month season—talk about inequality!
Like it or not, in a capitalist system the criterion for reward is ultimately associated with what the market will bear. Of course, many people doubt just how well this standard works in practice. They wonder, for example, how difficult it might be to replace a CEO earning $20 million a year with an equally qualified executive who would accept half that salary. Also, market demand is no guarantee of social value or cultural enlightenment. A writer’s worth varies by the number of readers willing to plunk down the price of a book, regardless of how crass or meaningless the content. Alas, Fifty Shades of Gray has earned millions, while my publishers will be fortunate to clear the all-too-modest advance awarded for Never Enough: Capitalism and the Progressive Spirit. What the market will bear is certainly an imperfect calibration, but most people still think it preferable to having the standard set by bureaucratic quotas or political bargains, though both are often in play, as well.
How Has the Middle Class Really Fared?
Politicians on both sides of the aisle contend that the middle class is being crushed by inequality and diminishing income. But with household incomes increasing amid rising inequality, what do the facts tell us about the real material state of the middle class? There are several ways to answer this question, depending on how the middle class is defined and the benchmarks against which its progress and well-being are measured. The historical absence of an aristocracy has bred a fluid sense of social class and a democratic ethos that instills a degree of reluctance in Americans to identify as “upper class.” Thus, the middle class is a well-regarded, if ill-defined, status to which most Americans subscribe. It is typically associated with one’s income, education, and occupation. Numerous polls capture the propensity of Americans to identify themselves as somewhere along the spectrum of lower-middle to upper-middle class.
When policymakers and the media talk about the middle class, however, it is usually defined by economic divisions. Estimates vary regarding the range of income that delineates the middle class, as well as the interpretation of how the economic fortunes of this group have changed over time. Thus, reviewing the same Census Bureau data the New York Times decries, “Middle Class Shrinks Further as More Fall Out Instead of Climbing Up,” while ten days later the Pew Research Center announces, “America’s ‘Middle’ Holds Its Ground After the Great Recession.”15 Both of these captions are correct and neither highlights the larger story in the data, which only underscores how those who write the headlines may parse the numbers to express the points they wish to publicize. The economic definitions of the middle class in these reports differ: $35,000-$100,000 in the New York Times and $40,667-$122,000 in the Pew study. But the findings are very similar. Both show a substantial contraction of about 10 percent in the size of the middle class, which started shrinking around 1970. Though it sounds ominous, this decline is not necessarily a distressing trend. It depends on where those who were squeezed out of the middle class ended up. If they all moved into the upper income brackets, everyone’s better off.
So where did they go? The answer hinges on the years in question. The New York Times headline focused on the period from 2000 to 2013, the decade of the Great Recession during which the middle class declined by around 2 percent, the upper-income group also declined by about 3 percent, and the lower-income group increased. The Pew caption referred to the period from 2010 to 2013, just after the Great Recession. Over this interval the size of the middle class remained stable, and there was even a small uptick in the upper-income group and a slight decline in the lower-income group.
Despite the fluctuation of a few percentage points during the Great Recession, the larger story in the New York Times report is that between 1967 and 2013 both the lower-income and the middle-income groups contracted while the size of the upper-income group expanded by 15 percent. From this perspective the shrinking of the middle class (and of those in the lower-income bracket) is directly connected to a significant advance in economic well-being as the combined size of the middle- and upper-income groups grew by 5 percent.
Thus, while the New York Times headline evoked a disheartening picture of middle-class decline, the data easily yield a more promising interpretation of the middle-class experience since 1970. The Pew findings offer a somewhat different conclusion, in part because the middle-class definition was pegged at a higher level of income. Although the middle-income group fell by 10 percent, about 6 percent of those who left had climbed into the upper-income category. What a way to go.
Of course, there are other benchmarks against which to evaluate the economic progress and status of the U.S. middle class. Certainly, those concerned about inequality would judge that the middle class has not fared very well in comparison to the income gains realized by the country’s top 1 percent. True; but consider everyone else on the planet. The U.S. middle class boasts among the highest disposable household incomes in the world. The average U.S. family has 38 percent more disposable household income than a family in Italy, 25 percent more than a family in France, and 20 percent more than a household in Germany, when adjusted for differences in purchasing power. (Of course, that doesn’t take fully into account the more efficient provision of many services in Western Europe via the public route: think health care, for example. Which only confirms the point that numbers alone cannot really tell us very much.)
Although some academics invest considerable intellectual energy in debating how to quantify inequality and the significance of change in measures such as the Gini coefficient, most members of the middle class have no idea whether this index is going up or down unless they read about it in the news. And even then the average middle-class citizen is more interested in how much money remains for her family to live on after the give and take of government taxes and transfers than whether or not the Gini index rose or fell by three-tenths of a point.
Could We Ask for More?
Several issues have so far been raised about the divergent approaches to the measurement of inequality, the disparate characteristics of those in different income brackets, the absence of cost-of-living adjustments, the plight of the middle class, the soaring 1 percent, and the sobering revelation of international comparisons. On the whole these issues enable us not so much to dismiss concerns about rising economic inequality as to calm public apprehensions about its rate, degree, and implications. The disparities related to the changing distribution of income in the United States look a lot more acute before taxes and benefits are taken into account, for example—are you listening, Dr. Piketty? As such it can be said that the capitalist market generates and the welfare state mitigates inequality.
Recounted in its most auspicious light, the story of this interaction over the past three decades reveals that while inequality increased, so did household incomes at every level. Measured by disposable household income the U.S. standard of living is among the highest of all the advanced industrial democracies, not to mention the rest of the world. Indeed, reflecting on the rest of the world, Tyler Cowen urges us to preface all discussions of inequality with a reminder that although economic inequality has been increasing in advanced industrialized nations, over the past two decades global inequality has been falling.16 And given global economic patterns, this is not a coincidence but a relationship.
Of course, in an ideal world everyone would have been even better off if the top 1 percent had taken home less than 13 percent of all the income and the bottom 20 percent had gained more—even while the economy grew at the same overall rate. Not to promote the best as an enemy of the good, there is nevertheless a convincing case to be made for social reforms that would to some degree shift the distribution of income away from the top. Progressives and conservatives generally agree on the need to rein in government transfers received by wealthy citizens, particularly the special benefits derived from the favorable tax treatment afforded to homeowners. These benefits, known as “tax expenditures,” allow home owners to deduct the interest paid on mortgages and to net up to $500,000 of capital gains tax-free on the sale of their homes.
The amounts are not trivial. The CBO estimates that the tax expenditures for mortgage-interest deductions amount to $70 billion, almost 73 percent of which goes to households in the top 20 percent of the income distribution, while those in bottom 20 percent receive no benefit. Although there would be some downside for the home-building industry, limiting tax subsidies to wealthy homeowners could lower the level of inequality without seriously adverse consequences for the rate of homeownership.
Yet even if these adjustments were made, much income inequality would still remain, which takes us back to the question: Could we ask for still more? Obviously, there are many ways for government to appropriate additional money from those in the upper-income brackets and deliver more to those on the bottom. Raising income taxes, lifting the ceiling on taxable income for Social Security, increasing the Earned Income Tax Credit and eliminating its marriage penalties, boosting the minimum wage, means-testing Social Security benefits, and taxing the fringe benefits of employment are among the evident alternatives. Then there are the less well-recognized but hardly trivial proposals to tax some classes of advertising and to eliminate the corporate income tax altogether in the context of comprehensive tax reform. Progressives and conservatives argue about whether any and all such measures would kill jobs or boost the economy, discourage work or stimulate activity, generate class conflict or enhance social solidarity, and advance social justice or deny the just deserts of individual merit. A vast literature on these issues has generated mixed findings about the implications of various measures.
Considering the uncertainty surrounding these issues, the degree of support for additional measures to spread the nation’s wealth is heavily influenced by one’s answer to the question: How serious is the problem of rising economic inequality amid abundance? The answer rests on competing ideas about the current state of material well-being in the United States, the integrity of free-market capitalism and, above all, the putative consequences of inequality.
Progressives tend to think that inequality is the story and that, as already noted, nearly everything wrong in U.S. society stems from it. But this argument ultimately depends on presumed maladies arising from inequality that more than stretch scientific criteria for medical causality. The evils ascribed to inequality expand roughly at the same rate as the DSM manual, and that is a suspicious thing.
As long as household incomes are increasing at every level (as measured by the CBO), conservatives are less concerned about rising economic inequality than progressives. They accept inequality as the tribute that equality of opportunity grants to merit, productivity, and luck in the free market, recognizing that this transaction is sometimes distorted by discrimination, exploitation, corruption, and outright larceny, which need to be checked by government. With the average family’s disposable household income in the United States among the highest in the world, inequality is perceived less as a source of social friction between the “haves and the have-nots” than as an imbalance between those who have a lot and others who have even more. This, on balance and seen in an historical perspective, ought to be a cause for celebration, not an occasion for mass self-flagellation.
1Vlastos, “Justice and Equality,” in Social Justice, edited by Richard Brandt (Prentice-Hall, 1962), p. 32.
2Frankfurt, On Inequality (Princeton University Press, 2015).
3“Real Personal Income for States and Metropolitan Areas, 2008-2012,” U.S. Bureau of Economic Analysis, April 24, 2014.
4Michael Forster et al., Society at a Glance 2011, (OECD 2011).
5“Partisan Polarization Surges in Bush, Obama Years: Trends in American Values: 1987-2012,” Pew Research Center, June 4, 2012.
6Piketty & Saez, “Income Inequality in the United States,” Quarterly Journal of Economics (February 2003).
7Burkhauser, “Presidential Address Evaluating the Questions that Alternative Policy Success Measures Answer,” Journal of Policy Analysis and Management (Spring 2011).
8Philip Armour, Richard V. Burkhauser, and Jeff Larrimore, “Deconstructing Income and Income Inequality Measures: A Crosswalk from Market Income to Comprehensive Income,” American Economic Review (May 2013). The government transfers included here involve both cash and in-kind benefits, specifically food stamps, housing subsidies, and school lunches, but not the value of employer- and government-provided health insurance. For an analysis of the income growth when cash transfers and health insurance are included, but not in-kind benefits, see Richard Burkhauser, Jeff Larrimore, and Kosali Simon, “A ‘Second Opinion’ on the Economic Health of the American Middle Class,” National Tax Journal (March 2012), pp. 7-32.
9Congressional Budget Office, The Distribution of Household Income and Federal Taxes, 2008 and 2009 (Government Printing Office, 2012). The major components of income included here differ from those recommended by the Canberra Group mainly in regard to capital gains, which the Canberra guidelines exclude from the measure of household income in favor of their treatment as changes in net worth.
10Congressional Budget Office, The Distribution of Household Income and Federal Taxes, 2010 (Government Printing Office, 2013).
11U.S. Treasury Department, Income Mobility in the U.S. from 1996 to 2005 (Government Printing Office, 2007). A similar rate of mobility was reported for those in the bottom quintile from 1986 to 1996. Unlike the CBO measure, these findings are based on pre-tax market income plus cash but not tax-exempt or in-kind transfers. Also, the unit of analysis is not adjusted for household size.
12Wilcox & Lerman, “For richer, for poorer: How Family Structures Economic Success in America,” AEI, October 28, 2014.
13The Distribution of Household Income and Federal Taxes, 2010. In 2010 the top 1 percent netted almost 13 percent of all the after tax income (15 percent before taxes).
14Peter Eavis, “Invasion of the Supersalaries,” New York Times, April 13, 2014.
15Dionne Searcey & Robert Gebeloffjan, “Middle Class Shrinks Further as More Fall Out Instead of Climbing Up,” New York Times, January 25, 2015. Rakesh Kochhar & Richard Fry, “America’s ‘Middle’ Holds Its Ground After the Great Recession,” Pew Research Center, February 4, 2015.
16Cowen, “Income Inequality Is Not Rising Globally. It’s Falling,” New York Times, July 19, 2014.
Neil Gilbert is Chernin Professor of Social Welfare at the University of California, Berkeley. This essay is adapted from his latest book, Never Enough: Capitalism and the Progressive Spirit (Oxford University Press, forthcoming3
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Thanks for posting that Doug. I agree, it is a worthy read for all of us.
Not wanting to step on it but posting here nonetheless:
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Monday Morning Outlook
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Big Government Causes Slow Growth To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 1/9/2017
In 1930, Pluto was declared the ninth planet. In 2007, it was demoted to "dwarf planet" status by astronomers after considering new evidence. There are now only eight planets.
Also in the 1930s, the ideas of John Maynard Keynes came of age. In spite of a massive amount of evidence that these ideas don't work, unlike astronomers, economists won't demote Keynes's theories to the dustbin of history.
This isn't that surprising. Whether Pluto is a planet, or not, doesn't impact politicians, or their constituents. If it did, Pluto might still be categorized as a planet.
Keynes thought a free market economy should be managed: in fact, needed to be managed. His ideas flourished in the 1930s when the US was in the Great Depression. Keynes believed that a lack of consumer demand was the culprit to economic problems and government should spend to boost jobs and economic activity.
To this day, in the name of Keynes, economists and politicians support stimulus spending, unemployment benefits, minimum wages, and the redistribution of income.
Not only do politicians and bureaucrats get to increase the size of their budgets and take credit for benefiting constituents, but they get to do it in the name of helping the overall economy. They do it in the name of Keynesian economic theory.
But there is no evidence it has worked. Keynes's theories, as mentioned earlier, have been around for over 80 years. Countries all over the world have tried them. Government budgets have increased dramatically.
This spending encompasses food stamps, welfare, unemployment benefits, Social Security, Medicare, Medicaid, ethanol, solar, wind, and electric vehicle subsidies. State and local governments have boosted the minimum wage and created special subsidies and income support for citizens. Other countries have single-payer healthcare systems and even bigger budgets relative to GDP than the United States.
But there is no economic nirvana anywhere. After 80 years of growth in government, and little economic growth to show for it, doesn't anyone think we ought to stop and question the underlying assumptions that support these Keynesian policies?
Since the current expansion started, U.S. real GDP has expanded at just a 2.1% annualized rate. At the same time government spending, tax rates and regulation have increased. These government burdens reduce entrepreneurial activity, jobs, income growth and push companies out of the U.S.
But many ignore this correlation between bigger government and slower growth. Instead of blaming government there are endless non-government excuses for slow growth. Some blame demographics and some blame weak investment by companies. Other explanations include income inequality, foreign trade, the residual effects of the financial crisis, or government debt levels (which result from low tax receipts.)
All of these explanations shift the blame to the private sector for slow growth and support Keynesian, big-government policy. Unfortunately, government is funded by taxing incomes and profits of business activity or borrowing the wealth generated by that activity. It's true that government can help create a positive environment for business, by, for example, enforcing the rule of law and contracts. But the U.S. long ago surpassed the pro-growth level of spending.
The point is government doesn't create wealth. The private sector does. No matter what Keynesian theories say, it's a truth politicians and bureaucrats don't find very appealing.
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Thanks Crafty. What I mean by required reading, income inequality is the heart of the 'progressive' economic view, like opposing the law of gravity. If you aren't ready to answer and challenge them on it, you have lost the argument.
A short snippet from a long piece, "is the acceptable level [of income inequality] that of Swedish equality in 1995 or 2016? Now there’s a conversation stopper for you."
From a liberal point of view, what they're doing in Sweden isn't working either.
People who are invested in the economy are always more likely to benefit from its upturns than people that aren't. Therefore we should oppose significant economic growth?
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Nice piece by BW. The last election will be good for our Wesbury discussions. Watching his optimism under Obama was painful, even if he was right that big equities did well in that slow growth environment and no big crash came during that time. Now we can all realistically discuss good policy choices instead of guessing how resilient our economy will be to bad policies.
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How Efficiency Is Wiping Out the Middle Class
Another View
By DAVID SIEGEL JAN. 25, 2017
Self-driving truck technology for travel on interstate highways, based on artificial intelligence, is already technically feasible. Today, about five million drivers are employed in the industry. A 20 percent reduction in this work force over the next 15 years would equate to a million lost jobs. Credit Tony Avelar/Associated Press
I am concerned that my childhood dreams may turn into a nightmare.
Stanley Kubrick’s “2001: A Space Odyssey,” which I first saw in 1968 at seven years of age, sparked my fascination with computers and artificial intelligence, and I have since focused my academic studies and career pursuits within this area.
Fast-forward to today. I still believe that A.I. and automation can keep bringing good to the world. Its effects on middle-skill workers, in America’s industrial Midwest and elsewhere, however, worry me.
It has been suggested that the significant job loss and career destruction illuminated by the 2016 presidential election are a result of bad trade deals and corporate greed. I disagree. It’s much more likely a result of computers, including significant advances in A.I., which have allowed us to optimize our economy as never before. Already, they have permitted the global economy to function as if it were in your backyard. In the next decade, they will take over a vast array of routine work, in new industries, affecting even more workers.
The economic dislocations that computers and artificial intelligence have unleashed have been vastly underestimated. And we are just in the early days.
Think about commercial trucking in America. A.I.-based self-driving truck technology for travel on interstate highways is already technically feasible. Today, about five million drivers are employed in this industry. Even a 20 percent reduction in this work force over the next 15 years equates to a million lost jobs.
One of capitalism’s bedrock promises — one that dates back to Adam Smith — is that competition in the free market benefits society at large. Somewhere along the line, intoxication with efficiency caused us to lose sight of that principle at the expense of workers. Getting back to that promise will require policy changes and a renewal of forgotten values.
The raw, widespread anger we saw during the recent election — and the unexpected swing of several industrial states from reliably blue to red — reflects in large part the intense despair that many middle-skill workers feel as they see their families’ economic prospects fade and social conditions deteriorate.
Trade and immigration have become boogeymen, while technological advances and the huge efficiency gains they bring truly underpin the “hollowing out” of the middle class behind the scenes. Industrial automation has been displacing workers for decades — particularly those doing repetitive, lower-skill work.
Exponential gains in computing power, along with innovations in software, analytical techniques and the rise of Big Data, mean that many white-collar occupations are due for disruption by machines too. According to a 2013 study by two Oxford University professors, almost half of all jobs in the United States are susceptible to “computerization” over the coming decade or two.
With so many at risk of being pushed aside by Smith’s invisible hand, no one should be surprised if people decide to push back. Unless we change course now, we can expect many more Everytowns to become Allentowns.
While the phenomenon I describe is understood by academics and technocrats and, more important, keenly felt by millions of Americans, no one seems to know how to fix this. As Harvard’s Clayton Christensen and Derek van Bever argue in “The Capitalist’s Dilemma,” orthodox finance dictates that investment by corporations to create jobs tends to be the third-best option behind substitutive innovation (which tends not to create new jobs) and efficiency innovation (which almost always results in job losses). As we have seen, companies today increasingly prefer not to employ humans, if possible.
What’s the answer? Most of the commonly proposed fixes are unlikely to resolve the issue. For example, an increasing focus on education, while necessary (the number of American college graduates falls short of labor demand by about 300,000 annually), is not sufficient; what good is a college degree if there are no opportunities to use it? The same could be asked of worker retraining programs.
Some promote the promise of the so-called gig or sharing economy — flexibility! convenience! — but I don’t buy it. Working as an Uber driver might help make ends meet in the short term, but the experience actually causes skills to atrophy over time. When I speak of jobs being lost or saved, what I really mean is careers: the kind of work that provides skill development, meaningful wage growth prospects and a reasonable likelihood that one’s work won’t be automated away. The types of careers, in other words, that have traditionally formed the foundation of healthy communities.
Some argue that history teaches us not to worry: The Industrial Revolution was disruptive, but it created jobs eventually, didn’t it? Sure. Will the Information Revolution do the same? Nobody knows. Creative destruction has become a hallowed concept in the American boardroom, but let’s be honest: Not all destruction is creative in the Schumpeterian sense. As we are seeing, it might just create a wasteland where middle-class communities once thrived.
Mr. Christensen and Mr. van Bever suggest rebooting the capitalist system through a series of policy incentives aimed at making investment capital more “patient,” evolving the curriculums at business schools, realigning corporate strategy and resource allocation and freeing managers to focus on long-term value creation.
These ideas are worthy of support. I would go further and recommend aligning corporate tax policy with the goal of creating and fostering careers by skewing tax rates to favor businesses that create opportunities meeting the criteria described above (skill development, wage growth and resistance to automation).
Given the nature of the problem we face, companies able to create careers through innovation should reap significantly greater policy rewards than companies focused primarily on driving down costs — and eliminating careers.
And business leaders must wake up to the scope and difficulty of the challenges we face. It’s going to require a shift in values. The hollowing out of the middle-skill work force is a classic tragedy of the commons, and few in leadership positions today feel a personal responsibility to help address it. Unfortunately, the true costs associated with the upheaval have thus far been borne not by those in the C-suite, but predominantly by the hard-pressed American worker.
A narrow emphasis on efficiency puts our entire system at risk. Moving forward, creating careers (rather than dead-end jobs) must be an equally valid goal. We cannot and should not try to stop the march of technological progress. But we have to redefine what progress really means.
David Siegel is co-founder and co-chairman of Two Sigma Investments.
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I like this article, it goes part way to explaining what capitalism is and why it works.
'capitalism...is individual freedom expressed in an economic system'
http://www.americanthinker.com/blog/2017/03/the_science_behind_capitalism.html#ixzz4bPjQNiaa
March 14, 2017
The science behind capitalism
By John Conlin
The economic system called capitalism has been described in many ways, but at its core, it is quite simply free people freely interacting with other free people. Capitalism has transformed the world by producing more wealth than any other economic system in the history of civilization.
But how does it produce such wealth? Some have said freedom is the magic potion – that left to their own devices, free people will outperform any other economic system.
That is true, but the ultimate reason is deeper and firmly based in science and fact. In the past few decades, a great deal of research has been done on what is called swarm intelligence. Swarm intelligence attempts to explain and understand the collective behavior of group animals. Think of honeybees, schools of fish, herds of bison, flocks of birds, etc.
The intelligence of the swarm is a significant multiplier. Rather than relying solely on individual intelligence, these groups create a collective intelligence that is orders of magnitudes beyond that of any individual member.
They do so without any leader, with no management of any sort, with no one "seeing the big picture." In fact, having no one in charge is a key ingredient to swarm intelligence. This incredible increase in intelligence is driven by countless interactions among individual members, with each following simple rules of thumb and reacting to their local environment and those members around them. That's it.
Perhaps counterintuitively, if an individual member did attempt to become a leader, the group intelligence would drop precipitously. And although it may be difficult to grasp, this self-organizing behavior has no cause and effect. It simply is.
Think of the intelligence of one of the members of these swarms versus the intelligence of the group. We are talking about not adding a few group I.Q. points, but rather increases in intelligence by orders of magnitude.
My hypothesis is this same process is the scientific basis for the success of capitalism, and in fact the success of the human race. This swarm intelligence has always been at work, but with our highly developed communication skills and the ability to record and store knowledge our collective swarm intelligence is truly astounding. Just like the honeybee, our swarm is orders of magnitude more intelligent than even the brightest among us.
And thus capitalism, which is just individual freedom as expressed in an economic system, is absolutely certain to "work." It is a scientific fact just as certain as gravity. And just like the swarm, it does so with no leader, no management, and no one seeing the big picture – no cause and effect. It just is.
And just like the swarm, when we attempt to place leaders in this process, the collective intelligence plummets. This explains why governments and their activities are always going to be far stupider than free individuals going about their daily lives. This isn't a political statement, but a factual one.
Again, we aren't talking about knocking off a couple group I.Q. points, but rather magnitudinal increases in stupidity. This stupidity multiplier isn't restricted to governments; it applies to all organizations, the larger the worse. Anyone who has worked in government, the military, or other large organizations has seen it every day.
Some economists have noted that during the Soviet Union's existence, the central planners had to daily determine the prices of literally hundreds of thousands of things, and thus the system was terribly inefficient, as they had no way to accurately determine this. My hypothesis is that even if they could have accurately determined each and every one of those prices, they still would have failed. The stupidity multiplier of their command-and-control economy ensured this.
The science on this is clear. If we want to maximize our collective well-being and wealth, if we want to maximize our freedom, if we want to maximize our collective odds for survival, we must allow human swarm intelligence to do its magic. And governments are not the solution, but are rather the destroyer.
John Conlin is an expert in organizational design and change. He also holds a B.S. in Earth sciences and an MBA and is the founder and president of E.I.C. Enterprises, www.eicenterprises.org, a 501(c)(3) non-profit dedicated to spreading the truth here and around the world, primarily through K-12 education.
The economic system called capitalism has been described in many ways, but at its core, it is quite simply free people freely interacting with other free people. Capitalism has transformed the world by producing more wealth than any other economic system in the history of civilization.
But how does it produce such wealth? Some have said freedom is the magic potion – that left to their own devices, free people will outperform any other economic system.
That is true, but the ultimate reason is deeper and firmly based in science and fact. In the past few decades, a great deal of research has been done on what is called swarm intelligence. Swarm intelligence attempts to explain and understand the collective behavior of group animals. Think of honeybees, schools of fish, herds of bison, flocks of birds, etc.
The intelligence of the swarm is a significant multiplier. Rather than relying solely on individual intelligence, these groups create a collective intelligence that is orders of magnitudes beyond that of any individual member.
They do so without any leader, with no management of any sort, with no one "seeing the big picture." In fact, having no one in charge is a key ingredient to swarm intelligence. This incredible increase in intelligence is driven by countless interactions among individual members, with each following simple rules of thumb and reacting to their local environment and those members around them. That's it.
Perhaps counterintuitively, if an individual member did attempt to become a leader, the group intelligence would drop precipitously. And although it may be difficult to grasp, this self-organizing behavior has no cause and effect. It simply is.
Think of the intelligence of one of the members of these swarms versus the intelligence of the group. We are talking about not adding a few group I.Q. points, but rather increases in intelligence by orders of magnitude.
My hypothesis is this same process is the scientific basis for the success of capitalism, and in fact the success of the human race. This swarm intelligence has always been at work, but with our highly developed communication skills and the ability to record and store knowledge our collective swarm intelligence is truly astounding. Just like the honeybee, our swarm is orders of magnitude more intelligent than even the brightest among us.
And thus capitalism, which is just individual freedom as expressed in an economic system, is absolutely certain to "work." It is a scientific fact just as certain as gravity. And just like the swarm, it does so with no leader, no management, and no one seeing the big picture – no cause and effect. It just is.
And just like the swarm, when we attempt to place leaders in this process, the collective intelligence plummets. This explains why governments and their activities are always going to be far stupider than free individuals going about their daily lives. This isn't a political statement, but a factual one.
Again, we aren't talking about knocking off a couple group I.Q. points, but rather magnitudinal increases in stupidity. This stupidity multiplier isn't restricted to governments; it applies to all organizations, the larger the worse. Anyone who has worked in government, the military, or other large organizations has seen it every day.
Some economists have noted that during the Soviet Union's existence, the central planners had to daily determine the prices of literally hundreds of thousands of things, and thus the system was terribly inefficient, as they had no way to accurately determine this. My hypothesis is that even if they could have accurately determined each and every one of those prices, they still would have failed. The stupidity multiplier of their command-and-control economy ensured this.
The science on this is clear. If we want to maximize our collective well-being and wealth, if we want to maximize our freedom, if we want to maximize our collective odds for survival, we must allow human swarm intelligence to do its magic. And governments are not the solution, but are rather the destroyer.
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http://thefederalistpapers.org/us/leftists-attack-melania-trump-immediately-backfires?utm_source=FBLC&utm_medium=FB&utm_campaign=LC
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https://openknowledge.worldbank.org/bitstream/handle/10986/25078/9781464809583.pdf
"...success in reducing inequality and boosting shared prosperity in a given period does not necessarily translate into similar success on other economic, social, or political fronts, nor into sustainable reductions in inequality over time."
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https://www.youtube.com/watch?v=gAjKyEGDlXA
Bono: 'Capitalism Takes More People Out of Poverty Than Aid'
U2 frontman Bono, who is also an investor, philanthropist, and Christian told students at Georgetown University that real economic growth, not government aid, is what lifts people and countries out of poverty long-term, emphasizing that "entrepreneurial capitalism" is the key to prosperity.
“Some of Africa is rising, and some of Africa is stuck," said Bono while speaking at Georgetown's McDonough School of Business to about 700 students. "The question is whether the rising bit will pull the rest of Africa up, or whether the other Africa will weigh the continent down. Which will it be? The stakes here aren’t just about them."
"Imagine for a second this last global recession [in 2007-2009] but without the economic growth of China and India, without the hundreds of millions of newly minted middle class folks who now buy American and European goods – imagine that," said Bono. "Think about the last 5 years."
Then, holding his forehead with his right hand, Bono, who has an estimated wealth of $600 million, said, "Rock star preaches capitalism—wow. Sometimes I hear myself and I just cannot believe it."
"But commerce is real," he said. "That’s what you’re about here. It’s real. Aid is just a stop-gap. Commerce, entrepreneurial capitalism takes more people out of poverty than aid -- of course, we know that.”
Bono made those remarks on Nov. 12, 2012
http://www.cnsnews.com/blog/michael-w-chapman/bono-capitalism-takes-more-people-out-poverty-aid
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If you care about the poor, you want free markets!
https://www.youtube.com/watch?v=gAjKyEGDlXA
Bono: 'Capitalism Takes More People Out of Poverty Than Aid'
U2 frontman Bono, who is also an investor, philanthropist, and Christian told students at Georgetown University that real economic growth, not government aid, is what lifts people and countries out of poverty long-term, emphasizing that "entrepreneurial capitalism" is the key to prosperity.
“Some of Africa is rising, and some of Africa is stuck," said Bono while speaking at Georgetown's McDonough School of Business to about 700 students. "The question is whether the rising bit will pull the rest of Africa up, or whether the other Africa will weigh the continent down. Which will it be? The stakes here aren’t just about them."
"Imagine for a second this last global recession [in 2007-2009] but without the economic growth of China and India, without the hundreds of millions of newly minted middle class folks who now buy American and European goods – imagine that," said Bono. "Think about the last 5 years."
Then, holding his forehead with his right hand, Bono, who has an estimated wealth of $600 million, said, "Rock star preaches capitalism—wow. Sometimes I hear myself and I just cannot believe it."
"But commerce is real," he said. "That’s what you’re about here. It’s real. Aid is just a stop-gap. Commerce, entrepreneurial capitalism takes more people out of poverty than aid -- of course, we know that.”
Bono made those remarks on Nov. 12, 2012
http://www.cnsnews.com/blog/michael-w-chapman/bono-capitalism-takes-more-people-out-poverty-aid
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https://www.nature.com/articles/s41562-017-0082
There is immense concern about economic inequality, both among the scholarly community and in the general public. . . . However, when people are asked about the ideal distribution of wealth in their country, they actually prefer unequal societies. . . . Despite appearances to the contrary, there is no evidence that people are bothered by economic inequality itself. Rather, they are bothered by something that is often confounded with inequality: economic unfairness. Drawing upon laboratory studies, cross-cultural research, and experiments with babies and young children, we argue that humans naturally favour fair distributions, not equal ones, and that when fairness and equality clash, people prefer fair inequality over unfair equality. Both psychological research and decisions by policymakers would benefit from more clearly distinguishing inequality from unfairness.
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Doug: The public, social policy question is, how can we improve each person's life in real terms, not relative to someone else. Media, politicians and 'experts' use a lot of data in this regard to lie and to deceive. Even this article does not acknowledge that pacetti's study is badly flawed.
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A one dollar increase in the minimum wage leads to a 14 percent increase in the likelihood of exit [for a median level restaurant]!
Who knew?
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https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2951110
We study the impact of the minimum wage on firm exit in the restaurant industry, exploiting recent changes in the minimum wage at the city level. The evidence suggests that higher minimum wages increase overall exit rates for restaurants.
Exit rate? Exit means death of employer company, at least in the location of the minimum wage increase.
However, lower quality restaurants, which are already closer to the margin of exit, are disproportionately impacted by increases to the minimum wage. Our point estimates suggest that a one dollar increase in the minimum wage leads to a 14 percent increase in the likelihood of exit for a 3.5-star restaurant (which is the median rating)...
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Judge every Democrat proposal to help or expand the "Middle Class" with this in mind...
"The government decides to try to increase the middle class by subsidizing things that middle class people have: If middle-class people go to college and own homes, then surely if more people go to college and own homes, we’ll have more middle-class people. But homeownership and college aren’t causes of middle-class status, they’re markers for possessing the kinds of traits — self-discipline, the ability to defer gratification, etc. — that let you enter, and stay, in the middle class. Subsidizing the markers doesn’t produce the traits; if anything, it undermines them."
https://www.usatoday.com/story/opinion/2017/05/01/trump-test-democrats-tax-patriotism-glenn-reynolds/101159082/?siteID=je6NUbpObpQ-sSZk.GAzZjnKA3Zm_U0Yyg
https://philoofalexandria.wordpress.com/2010/09/25/reynolds-law/
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"Everybody gets a trophy", writ large.
Judge every Democrat proposal to help or expand the "Middle Class" with this in mind...
"The government decides to try to increase the middle class by subsidizing things that middle class people have: If middle-class people go to college and own homes, then surely if more people go to college and own homes, we’ll have more middle-class people. But homeownership and college aren’t causes of middle-class status, they’re markers for possessing the kinds of traits — self-discipline, the ability to defer gratification, etc. — that let you enter, and stay, in the middle class. Subsidizing the markers doesn’t produce the traits; if anything, it undermines them."
https://www.usatoday.com/story/opinion/2017/05/01/trump-test-democrats-tax-patriotism-glenn-reynolds/101159082/?siteID=je6NUbpObpQ-sSZk.GAzZjnKA3Zm_U0Yyg
https://philoofalexandria.wordpress.com/2010/09/25/reynolds-law/
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"Please feel free to post that in the Tax thread here and the Economics thread on the SC&H forum too."
http://www.heritage.org/node/18247/print-display
The tax rate cuts of the 1920s were followed by a 61% increase revenues over 7 years.
The Kennedy tax rate cuts brought a 62% increase in revenues over 7 years.
The Reagan tax rate cuts yielded a 54% increase over 6 years (100% over 10 years).
Then when Bush or Trump propose tax rate cuts, the media demands to know how they will deal with the static revenue loss - a demonstrably false premise question.
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Opponents argue that revenues increase anyway, but the point is that if revenues surge after rates are lowered, the increase in income is that much more - which is a good thing!
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"High social transfers not tied to work incentives emerged as the most likely explanation for the low participation rate. The phase-in of ... minimum wage ... may have also helped to drive down participation rates." - BROOKINGS INSTITUTION (regarding fiscal collapse in Puerto Rico)
http://caseymulligan.blogspot.com/2017/01/who-wrote-this.html?m=1
https://www.brookings.edu/book/restoring-growth-in-puerto-rico/ (Page 29)
Pay for not working hurts work participation. Who knew?
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"High social transfers not tied to work incentives emerged as the most likely explanation for the low participation rate"
What are "high social transfers" - is this politically correct speak for free government sponsored benefits ?
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"High social transfers not tied to work incentives emerged as the most likely explanation for the low participation rate"
What are "high social transfers" - is this politically correct speak for free government sponsored benefits ?
Right. The redistribution economy run amok. Government directed theft from producers to non-producers both reduces the incentive to produce and increases the receive. Every additional dollar transferred doubles this incentive/disincentive problem. Each time one more person switches from contributing to receiving, we are two steps closer to an economy that will not support those in real need. In the case of the US, we are already $19 trillion in debt, short of being able to pay our bills.
In the US, 27% of the people have full time, private sector jobs. (I rounded up, using 2014 numbers.)
http://www.cnsnews.com/commentary/terence-p-jeffrey/86m-full-time-private-sector-workers-sustain-148m-benefit-takers
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Written from a political perspective but quite telling about how things work economically.
http://www.realclearmarkets.com/articles/2017/06/12/the_democrats_new_economic_agenda_will_solidify_their_minority_status_102738.html
The Democrats' New Economic Agenda Will Solidify Their Minority Status
By John Tamny
June 12, 2017
The Democrats' New Economic Agenda Will Solidify Their Minority Status
In a column from December of 2015, the Wall Street Journal’s Mary O’Grady unveiled a rather inconvenient fact that poverty warriors on the American left and right would perhaps prefer remain hidden: from 1980 to 2000, when the U.S. economy boomed, the number of Mexican arrivals into the U.S. grew from 2.2 million in 1980 to 9.4 million in 2000. The previous number is a clear market signal that the U.S. is where poverty has always been cured, as opposed to a condition that requires specific U.S. policy fixes.
O’Grady’s statistics came to mind while reading a recent New York Times column by Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities. He writes that a “highly progressive agenda [from Democratic scholars and politicians] has been coming together in recent months, one with the potential to unite both the Hillary and Bernie wings of the party, to go beyond both Clintonomics and Obamanomics.” The problem is that the agenda that's got Bernstein so giddy has nothing to do with the very economic growth that is always the source of rising economic opportunity for the poor, middle and rich.
Up front, Bernstein expresses excitement about a $190 billion (annually) program that he describes as a “universal child allowance.” The allowance would amount to annual federal checks sent to low-income families of $3,000/child. It all sounds so compassionate on its face to those who think it kind for Congress to spend the money of others, but given a second look even the progressive and hysterical might understand that economic opportunity never springs from a forcible shift of money from one pocket to another. If it were, theft would be both legal and encouraged.
The very economic growth in the U.S. that has long proven a magnet for the world’s poorest springs not from wealth redistribution, but instead from precious capital being matched with entrepreneurs eager to transform ideas into reality. Just as the U.S. economy wouldn’t advance if Americans with odd-numbered addresses stealthily 'lifted' $3,000 each from those with even-numbered addresses, neither will it grow if the federal government is the one taking from some, only to give to others. Economic progress always and everywhere springs from investment, yet Bernstein is arguing with a straight face that the U.S.’s poorest will be better off if the feds extract $190 billion of precious capital from the investment pool. As readers can probably imagine, he doesn’t stop there.
Interesting is that Bernstein’s next naïve suggestion involves “direct job creation policies, meaning either jobs created by the government or publicly subsidized private employment.” Ok, but all jobs are a function of private wealth creation as Bernstein unwittingly acknowledges given his call for resource extraction from the private sector in order to create them. This begs the obvious question why economic opportunity would be enhanced if the entrepreneurial and business sectors had less in the way of funds to innovate with. But that’s exactly what Bernstein is seeking through his $190 billion “universal child allowance,” not to mention his call for more “jobs created by the government.” Stating what’s obvious even to Bernstein, government can’t create any work absent private sector wealth, so why not leave precious resources in the hands of the true wealth creators? Precisely because they’re wealth focused, funds kept in their control will be invested in ways that foster much greater opportunity than can politicians consuming wealth created by others.
Still, Bernstein plainly can’t see just how contradictory his proposals are; proposals that explicitly acknowledge where all opportunity emerges from. Instead, he calls for more government programs. Specifically, he’s proposing a $1 trillion expansion of the “earned-income tax credit” meant to pay Americans to go to work. As he suggests, the $1 trillion of funds extracted from the productive parts of the economy would lead to family of four tax credits of $6,000 in place of the “current benefit of about $2,000.” Ok, but what goes unexplained here is why we need to pay those residing in the U.S. to work in the first place.
What gives life to the above question is the previously mentioned influx of Mexican strivers into the U.S. during the U.S. boom of the 80s and 90s. What the latter indicated rather clearly is that economic growth itself is the greatest enemy poverty has ever known. It also indicated that work is available to those who seek it, and even better, the work available is quite a bit more remunerative than one could find anywhere else in the world. Rest assured that the U.S. hasn’t historically experienced beautiful floods of immigration because opportunity stateside was limited. People come here because the U.S. is once again the country in which the impoverished can gradually erase their poverty thanks to abundant work opportunities. If Mexicans who frequently don’t speak English can improve their economic situations in the U.S., why on earth would the political class pay natives who do speak the language to pursue the very work that is the envy of much of the rest of the world? Put rather simply, those who require payment above and beyond their wage to get up and go in the morning have problems that have nothing to do with a lack of work, and everything to do with a lack of initiative. Importantly, handouts from Washington logically won’t fix what is a problem of limp ambition. At best, they'll exacerbate what Bernstein claims to want to fix.
Most comical is Bernstein’s assertion that the tax credits will allegedly mitigate “the damage done to low- and moderate-wage earners by the forces of inequality that have steered growth away from them” in modern times. What could he possibly mean? The U.S. has long been very unequal economically, yet the world's poorest have consistently risked their lives to get here precisely because wealth gaps most correlate with opportunity. Translated, investment abundantly flows to societies where individuals are free to pursue what most elevates their talents (yes, pursuit of what makes them unequal), and with investment comes work options for a growing number. Doubters need only travel to Seattle and Silicon Valley, where the world's five most valuable companies are headquartered, to see up close why the latter is true.
Similarly glossed over by this rather confused economist is that rising inequality is the surest sign of a shrinking lifestyle inequality between the rich and poor. We work in order to get, and thanks to rich entrepreneurs more and more Americans have instant access at incessantly falling prices to the computers, mobile phones, televisions, clothing and food that were once solely the preserve of the rich. Just once it would be nice if Bernstein and the other class warriors he runs with would explain how individual achievement that leads to wealth harms those who aren’t rich. What he would find were he to replace emotion with rationality is that in capitalist societies, people generally get rich by virtue of producing abundance for everyone. In short, we need more inequality, not less, if the goal is to improve the living standards of those who presently earn less.
Remarkably, Bernstein describes the ideas presented as “bold” and “progressive,” but in truth, they’re the same lame-brained policies of redistribution that the left have been promoting for decades. And as they’re anti-capital formation by Bernstein’s very own admission, they’re also inimical to the very prosperity that has long made the U.S. the country where poverty is cured. To be clear, if this is the best the Democrats have, they’ll long remain in the minority.
John Tamny is editor of RealClearMarkets, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He's the author of Who Needs the Fed? (Encounter Books, 2016), along with Popular Economics(Regnery, 2015)
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With the collapsing cost of oil and information we need a new way of measuring productivity.
https://www.the-american-interest.com/2017/05/17/the-new-oil-reality/
It’s possible that the productivity increases are appearing as lower prices rather than as higher incomes. If the price of oil falls from $100 per barrel to $50 per barrel due to increasingly cheap and efficient methods of production, then everybody in the industry is more productive in terms of barrels of oil per hour of work, but since the oil price has gone down, that productivity increase won’t be captured by statistical methods that calculate productivity in terms of money.
...
The African villager with a solar powered smartphone has more access to more information than Louis XIV in the halls of Versailles.
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http://www.latimes.com/business/la-fi-seattle-minimum-wage-20170626-story.html
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http://www.latimes.com/business/la-fi-seattle-minimum-wage-20170626-story.html
https://townhall.com/tipsheet/christinerousselle/2016/11/30/mcdonalds-to-install-ordering-kiosks-instead-of-paying-people-15hour-n2252849
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http://www.latimes.com/business/la-fi-seattle-minimum-wage-20170626-story.html
https://townhall.com/tipsheet/christinerousselle/2016/11/30/mcdonalds-to-install-ordering-kiosks-instead-of-paying-people-15hour-n2252849
The costs to low-wage workers in Seattle outweighed the benefits by a ratio of three to one, according to the study, conducted by a group of economists at the University of Washington who were commissioned by the city. The study, published as a working paper Monday by the National Bureau of Economic Research
https://www.washingtonpost.com/news/wonk/wp/2017/06/26/new-study-casts-doubt-on-whether-a-15-minimum-wage-really-helps-workers/?utm_term=.9290384225c1
And once again, "unexpectedly".
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Coming soon! Government repeals Law of Gravity!
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https://www.facebook.com/Robots4MinimumWage/
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Catching up on my Alan Reynolds readings this am.
https://www.cato.org/blog/compare-medical-college-inflation-services-not-goods
JULY 24, 2017
Compare Medical and College Inflation with Services, not Goods
By ALAN REYNOLDS
A Wall Street Journal report, “Colleges Pull Back Tuition’s Long Rise,” includes a graph showing the cumulative increases in consumer price indexes (CPI) since 1990 for College Tuition, Medical Care, and All Consumer Prices.
Adding up nearly three decades of increases looks dramatic, but doesn’t show when various prices changes accelerated or slowed. More important, prices for college tuition and medical care are dominated by skilled human services, so they should be properly compared with service prices in general rather than with all items.
All Consumer Prices (shown as an erratic black line in the graph) includes falling quality-adjusted prices for such tech products as computers and televisions, for example, and cyclically-volatile prices of internationally traded commodities such as oil, steel, and grain.
Service prices largely reflect wages and benefits for skilled labor, which (unlike commodity prices) almost never fall. If service prices did not increase faster than the CPI in general, then real compensation in service sectors could never rise.
See graph: https://object.cato.org/sites/cato.org/files/wp-content/uploads/compare_medical_care_with_services_not_goods.png
Medical care prices compared to other services & CPI
This graph omits college tuition because that CPI item is particularly problematic due to averaging large differences in quality and “financial aid” (selective discounts from sticker prices). The Bureau of Labor Statistics explains some of the difficulties:
“The inclusion of financial aid has added to the complexity of pricing college tuition. Many selected students may have full scholarships (such as athletic), and therefore their tuition and fixed fees are fully covered by scholarships. Since these students pay no tuition and fees, they are not eligible for pricing. In addition, there are other students who pay a very small fee to the college since the majority of their tuition and fixed fees are covered by scholarships. When these situations are priced by BLS Field Staff, normal increases in tuition/fees and minor declines in scholarship awards can provide extremely large changes for entry in the CPI index. For some of these same quotes, minor tuition declines or minor scholarship award increases can actually result in negative prices, which make the quotes ineligible for use in the CPI.”
The graph compares two decades of year-to-year price increases for Medical Care and Services in general. The CPI for medical services alone (not shown in the graph) has actually increased somewhat less than the CPI for all Medical Care, which suggests prices of drugs and medical devices increased faster than physician and hospital fees. There have been major improvements in the quality of drugs and medical devices, however, and economists doubt the CPI adequately adjusts for quality improvement. As a BEA report notes, “If there are unobserved attributes that change over time (e.g. perceived efficacy or experience with the drug), these indexes will count any price increases associated with these changes as increases in price, not quality.”
Have Medical Care prices risen faster than Services prices in general? Yes, but the difference in annualized price increases was typically smaller than one percentage point except in 2002 and 2010, when recession’s aftermath depressed other services prices more than (heavily-subsidized) medical care prices.
Recessions’ impact on commodity prices pushed the year-to-year overall CPI below zero at times, which underscores the inaptness of comparing prices of medical or educational services to any price index such as the CPI which is heavily weighted by goods.
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" It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. "
- by Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776
http://geolib.com/smith.adam/won1-02.html
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Taking a bit of the Venezuelan story over here including GM's video for illustration.
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Coercive 'Paternalism' vs freedom with inequality
On the right, what went wrong in Venezuela is a stupid question, too obvious for words. Socialism led to economic collapse. On the left, it is the missing question, seldom or never asked.
Hugo Chavez was the hero of the American Left. Some were explicit; others just argued we should implement all the same policies here.
"These days, the American dream is more apt to be realized in South America, in places such as Ecuador, Venezuela and Argentina, where incomes are actually more equal today than they are in the land of Horatio Alger. Who's the banana republic now?" - Bernie Sanders, August 5, 2011 https://www.sanders.senate.gov/newsroom/must-read/close-the-gaps-disparities-that-threaten-america
A year ago I asked my closest, then-leftist confidant the question:
If socialism is so great, how do you explain what is happening in Venezuela?
For background, I even included the following information:
The story of Chile’s success starts in the mid-1970s, when Chile’s military government abandoned socialism and started to implement economic reforms. In 2013, Chile was the world’s 10th freest economy.
Venezuela declined from being the world’s 10th freest economy in 1975 to being the world’s least free economy in 2013 (other than North Korea).
http://dogbrothers.com/phpBB2/index.php?topic=1307.msg98285#msg98285
She answered with the best explanation possible: Maybe they (the socialists) went too far.
I agree and would add at least two exclamation points, They went too far!!
https://www.youtube.com/watch?v=IaCSdtG4MmI
Coercive Paternalism versus Income Inequality
No one on the right wants zero public sector or no safety net, but we want to limit the powers of government and enlarge the liberties of the individual. In a freer, market-based economy, income inequality is a fact - a feature, not a bug. Some people make more money than others. Some work harder, smarter, longer hours or more than one job chasing a dream. Some keep making more and more over the working lifetime as they get smarter, more experienced and have more invested. Others hang out on discussion boards... The fruit of our labor is one reason why labor gets done, goods produced and services provided. The fruit of our investment, too. Without fruit of your labor, goods don't get produced and services don't get provided. It's not rocket science but we keep steering away from what is known to work best.
Coercive Paternalism is the ideal of The Left. http://www.nybooks.com/articles/2013/03/07/its-your-own-good/ I kid you not! You don't want or need free choice when 'smart-planners' can do that for you and do it better. http://dogbrothers.com/phpBB2/index.php?topic=1518.msg71031#msg71031
You don't get to equality without coercion. And then you don't get there anyway. Big powerful government is a feature not a bug in real world socialism.
In Venezuela, they pursued the policies and dreams of the American Left. We should thank them and pay them for their experiment. They took from the rich and they gave to the people, well actually the government, on behalf of the people (the government). But private sector capitalism requires private sector capital and they chased it away. Ironically, Public sector investment also requires a vibrant private sector to support it - and they chased it away. It's a fact, not a cliche, that eventually you run out of other people's money [Margaret Thatcher].
Among the endless ironies of the left is that as you pursue equality and grow poorer, inequality worsens anyway. Compare Chavez' daughter with median income or see President Obama's record in the US.
http://dailycaller.com/2015/08/10/iron-fisted-socialism-benefited-hugo-chavezs-daughter-to-the-tune-of-billions-reports-say/
http://publications.credit-suisse.com/tasks/render/file/index.cfm?fileid=AD783798-ED07-E8C2-4405996B5B02A32E
https://www.counterpunch.org/2016/02/26/during-obamas-presidency-wealth-inequality-has-increased-and-poverty-levels-are-higher/
Who knew?
https://www.youtube.com/watch?v=l5KUadzyV9A
"How important is income equality to you?"
"Really important!"
Good luck with that.
https://www.youtube.com/watch?v=bDm2-1NZBLw
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http://www.ftportfolios.com/Commentary/EconomicResearch/2017/9/1/hurricane-harvey-and-broken-windows
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I took another look at this because people on the left or looking for balance are still quoting and recommending it.
For anyone interested, please listen to this interview debunking Piketty up, down and sideways. His little technical flaws make his thesis false. His dates and basic facts are wrong such as when tax rates were raised in the US during the great depression. Among his flaws he completely ignores depreciation, meaning that all capital ever put into use is still of full value and in use.
http://tomwoods.com/thomas-piketty-refuted/
All his errors are coincidentally in the direction of supporting his flawed thesis, not in random directions.
As with all leftists, they measure income and wealth of the lower earners without counting their income or wealth. Housing capital is not capital or wealth, for example. WIth the rich, they tell how much higher their income and wealth is without accounting for the actions we are already taking (taxation) to limit and discount their income and wealth.
Among those debunking Piketty is Piketty:
http://ww2.cfo.com/the-economy/2015/03/economist-piketty-backtracks-inequality-theory/
His work that ignores capital flight is not as popular in Europe, already plagued by capital flight.
Wages depend on productivity of labor which is dependent on labor. To fight against capital is to fight against wages. Who knew.
One who believes his own proposed tax on wealth is not doable is ... Piketty.
https://www.youtube.com/watch?v=QIGM9ga1sWc
http://dailysignal.com/2015/02/18/economic-research-refutes-piketty/
http://www.salon.com/2015/01/02/joseph_stiglitz_thomas_piketty_gets_income_inequality_wrong_partner/
http://www.realclearmarkets.com/articles/2014/04/22/the_systematic_errors_in_thomas_pikettys_new_book_101016.html
https://www.youtube.com/watch?v=QIGM9ga1sWc
https://www.amazon.com/Pikettys-Capital-Theory-Destructive-Program-ebook/dp/B00M0D69S2
https://economics21.org/html/problems-piketty-1307.html
I don't look for economists to predict the future. I will happily settle for economists who can analyze the past and the present correctly.
Search this thread or "Piketty" in topic search for more on this.
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https://www.amazon.com/My-Life-Work-Henry-Ford/dp/1497432251
https://www.youtube.com/watch?v=fAtyxuaRnHM
The right to the fruits of our labor
Excerpts from Henry Ford’s ‘My Life and Work,’ 1922
When you get a whole country — as did ours — thinking that Washington is a sort of heaven and behind its clouds dwell omniscience and omnipotence, you are educating that country into a dependent state of mind, which augurs ill for the future. Our help does not come from Washington, but from ourselves; our help may, however, go to Washington as a sort of central distribution point, where all our efforts are coordinated for the general good. We may help the Government; the Government cannot help us. The slogan of “less government in business and more business in government” is a very good one, not mainly on account of business or government, but on account of the people. Business is not the reason why the United States was founded. The Declaration of Independence is not a business charter, nor is the Constitution of the United States a commercial schedule.
The United States — its land, people, government and business — are but methods by which the life of the people is made worthwhile. The Government is a servant and never should be anything but a servant. The moment the people become adjuncts to government, then the law of retribution begins to work, for such a relation is unnatural, immoral and inhuman. … The welfare of the country is squarely up to us as individuals. That is where it should be, and that is where it is safest. Governments can promise something for nothing, but they cannot deliver. …
The economic fundamental is labor. Labor is the human element which makes the fruitful seasons of the earth useful to men. It is men’s labor that makes the harvest what it is. That is the economic fundamental: Every one of us is working with material which we did not and could not create, but which was presented to us by Nature.
The moral fundamental is man’s right in his labor. This is variously stated. It is sometimes called “the right of property.” It is sometimes masked in the command, “Thou shalt not steal.” It is the other man’s right in his property that makes stealing a crime. When a man has earned his bread, he has a right to that bread. If another steals it, he does more than steal bread; he invades a sacred human right. If we cannot produce, we cannot have — but some say if we produce it is only for the capitalists. Capitalists who become such because they provide better means of production are the foundation of society. …
The only strong group of union men in the country is the group that draws salaries from the unions. Some of them are very rich. Some of them are interested in influencing the affairs of our large institutions of finance. Others are so extreme in their so-called socialism that they border on Bolshevism and anarchism — their union salaries liberating them from the necessity of work so that they can devote their energies to subversive propaganda. All of them enjoy a certain prestige and power, which, in the natural course of competition, they could not otherwise have won.
If the official personnel of the labor unions were as strong, as honest, as decent, and as plainly wise as the bulk of the men who make up the membership, the whole movement would have taken on a different complexion these last few years. But this official personnel, in the main — there are notable exceptions — has not devoted itself to an alliance with the naturally strong qualities of the workingman; it has rather devoted itself to playing upon his weaknesses, principally upon the weaknesses of that newly arrived portion of the population which does not yet know what Americanism is, and which never will know if left to the tutelage of their local union leaders.
The workingmen, except those few who have been inoculated with the fallacious doctrine of “the class war” and who have accepted the philosophy that progress consists in fomenting discord in industry, have the plain sense which enables them to recognize that conditions change. The union leaders have never seen that. They wish conditions to remain as they are, conditions of injustice, provocation, strikes, bad feeling and crippled national life. Else where would be the need for union officers? Every strike is a new argument for them; they point to it and say, “You see! You still need us.” …
The workingman himself must be on guard against some very dangerous notions — dangerous to himself and to the welfare of the country. It is sometimes said that the less a worker does, the more jobs he creates for other men. This fallacy assumes that idleness is creative. Idleness never created a job. It creates only burdens. The industrious man never runs his fellow worker out of a job; indeed, it is the industrious man who is the partner of the industrious manager — who creates more and more business and therefore more and more jobs.
It is a great pity that the idea should ever have gone abroad among sensible men that by “soldiering” on the job, they help someone else. A moment’s thought will show the weakness of such an idea. The healthy business, the business that is always making more and more opportunities for men to earn an honorable and ample living, is the business in which every man does a day’s work of which he is proud. And the country that stands most securely is the country in which men work honestly and do not play tricks with the means of production. We cannot play fast and loose with economic laws, because if we do, they handle us in very hard ways.
The fact that a piece of work is now being done by nine men which used to be done by 10 men does not mean that the 10th man is unemployed. He is merely not employed on that work, and the public is not carrying the burden of his support by paying more than it ought on that work — for after all, it is the public that pays!
https://books.google.com/books?id=8elRmsxDBWsC&pg=PA7&lpg=PA7&dq=clouds+dwell+omniscience+and+omnipotence&source=bl&ots=LyEftCsOah&sig=2PsozpcwrE8HYJeHC0lOwQrW9b8&hl=en&sa=X&ved=0ahUKEwiHh5Lc66LWAhUE5oMKHcmuAM8Q6AEIOTAE#v=onepage&q=clouds%20dwell%20omniscience%20and%20omnipotence&f=false
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Obamster has no problem cashing on the fruits of HIS labor doe he?
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https://www.facebook.com/Robots4MinimumWage/
https://techxplore.com/news/2017-09-burger-robots.html
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https://www.facebook.com/Robots4MinimumWage/
Why robots support a higher minimum wage
https://www.americanexperiment.org/2017/08/why-robots-support-a-higher-minimum-wage/
People Versus Machines: The Impact of Minimum Wages on Automatable Jobs
http://www.nber.org/papers/w23667.pdf
Raising the minimum wage by $1 equates to a decline in ‘automatable’ jobs of 0.43%. Certain industries were affected far more than others. In manufacturing, a rise of $1 in minimum wage drove employment in automatable jobs down a full percentage point.
If you raise the price of something, people will switch to substitutes.
A lot of economic turmoil comes from disruptive innovation and the globalization of markets. Minimum wage legislation speeds up exactly what they wish to stop.
Leftists stuck on stupid. Denying science.
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https://www.nytimes.com/2017/10/09/business/nobel-economics-richard-thaler.html?emc=edit_na_20171009&nl=breaking-news&nlid=49641193&ref=cta
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https://www.forbes.com/sites/louiswoodhill/2014/03/19/the-war-on-poverty-wasnt-a-failure-it-was-a-catastrophe/#6620686a6f49
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"War on Poverty was a Catastrophe"
The LEFT can fix this easily by confiscating more from those who produce . They curse the rich but at the same time they would have zero power without them.
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https://www.forbes.com/sites/jeffreydorfman/2017/12/22/why-growth-matters/#1b84ddcb7141
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https://seekingalpha.com/article/4134231-amazon-multi-trillion-dollar-monopoly-hidden-plain-sight?ifp=0
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CD,
cannot read article without logging in
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Summary
Amazon is both a direct retailer and a near indispensable platform for competing resellers.
In that latter capacity, it sets the rules and it can tilt the game in its favor and extract most of the value and valuable data and information.
That information allows it to start competing businesses by picking off its merchants' best-selling products.
It's difficult to see how this can be stopped bar action by competition authorities.
The year 2017 was certainly the year of big tech rising. FANG stocks, like Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB) Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Netflix (NASDAQ:NFLX), have risen sheer inexorably:
And there seems to be good reasons for most if not all the rise of the shares of these companies. Facebook and Google have basically cornered the online ad market and they are now responsible for nearly all of its growth. From Business Insider (our emphasis):
The 10 leading ad-selling companies accounted for 73% of total revenues in Q4 2016, according to the report. So who are these 10 companies that grab the largest share of these revenues? The report didn't say. But analysts for the Pivotal Research Group, cited by Reuters, reported the only two names that really matter: Facebook and Google. In terms of the industry growth, so in terms of the 22% or $12.9 billion year-over-year increase in total internet advertising revenue, Facebook and Google together grabbed 99% of the growth! They're sitting at the sweet spot. Everyone else is fighting for crumbs.
And of course this sets up a virtuous cycle as their platforms become more useful for advertisers and less intrusive for users and it allows them to gather even more data about its users, the input for even better targeted ads, etc.
This data then serves other purposes as well. It's a giant treasure trove for AI applications that can kick these virtuous cycles into overdrive.
The position of Amazon seems only slightly less untouchable. Its leading position in cloud computing brings in the dough, and its ever expanding online (and increasingly offline) retail business doesn't actually have to make a profit.
This allows the company to keep investing in cementing its advantage (like robot technology for automated warehouses, etc.) and riding economies of scope as it expands its reach.
And of course, Amazon has also accumulated a wealth of data about its users which will enable it to put through machine learning and work into AI applications, turning it into gold.
The positions of the other three companies mentioned seem less unassailable to us. While Apple has a booming service business, most of its revenue depends on its sales of its iPhone, which is an already mature market.
One or two relatively less successful new models could quite dent the financials here. Mind you, this is not what we're predicting (we are in fact long in Apple for the SHU portfolio), but it could happen.
Microsoft increasingly depends on its booming cloud business for growth, but it's still distant second behind Amazon here. Netflix also faces considerable competition from Amazon (and others) and could stumble on a variety of issues (lack of a hit series, content cost, mispricing subscriptions, not to mention misbehaving stars).
Again, we don't predict this happening; we merely point out that their position is less unassailable than those of Facebook, Google or Amazon. These three are the top three real big tech commandeering companies, and even in theory it's simply difficult to imagine what could unseat their positions.
Amazon
Amazon is such a juggernaut that it flattens whole retail sectors, malls, and the retail landscape and in doing so it is amassing ever more power. The way it treats its warehouse employees has also come under scrutiny.
Amazon is already generating 30% of all (online + offline) retail sales growth in the US and (from the Atlantic):
Last year, Amazon sold six times as much online as Wal-Mart, Target, Best Buy, Nordstrom, Home Depot, Macy’s, Kohl’s, and Costco did combined
Source: ILSR
Losses
Amazon has incurred losses on many ventures, but this only serves as a way to flatten the competition and establish a dominant position and hook customers in. It sells at prices and gives perks (free shipping, etc.) which few if any competitors can match.
Equally, Amazon's access to cheap finance allows it to undercut the competition and amass resources with which to expand its advantage and platform.
For instance, it has allowed it to amass a distribution network and fulfillment centers which have been automated by its purchase of Kiva Systems.
And while normal companies suffer when they acquire another company at a steep premium, Amazon's stock actually went up when it acquired Whole Foods earlier in the year; on the day actually by roughly the same amount as the acquisition cost ($13.4B), making it essentially free. Perhaps investors know something that competition watchdogs have yet to wake up to this. From ILSR (PDF):
Between October 2014 and October 2016, Amazon’s market capitalization - the total value of its outstanding stock - rose from about $140 billion to about $380 billion. In the eyes of investors, Amazon is now worth nearly twice what Wal-Mart is worth, even though the latter generated $80 billion in profit over the last 5 years, while Amazon cleared only a little more than $1 billion.2
It's only gotten worse since. Apparently, investors see something that competition authorities seem to be blind to. Chamath Palihapitiya, a Silicon Valley venture capitalist, argued that ILSR:
“We believe there is a multi-trillion-dollar monopoly hiding in plain sight.”
Indeed, as Amazon is becoming the first place for shoppers to look for stuff, it is becoming the indispensable gateway for suppliers to sell. And by selling through Amazon, they become captive to its terms and conditions, and the multiple ways in which Amazon can tilt the game in its favor. It is like Wal-Mart (NYSE:WMT) owning all shopping malls.
Indispensable Gateway
Market share figures really do not capture the market power the company has amassed. Its market power is simply hidden in plain sight - hidden because Amazon actually produces very meager margins and profits (apart from its cloud business). Here is an extensive report from the ILSR:
Today, half of all U.S. households are subscribed to the membership program Amazon Prime, half of all online shopping searches start directly on Amazon, and Amazon captures nearly one in every two dollars that Americans spend online.
Since competition policy, especially that in the US, focuses on companies raising prices for consumers as a sign of monopolistic behavior, this is a pretty efficient decoy. The company actually does the opposite.
But it is not the actual slice of the market that is the most worrying part of Amazon's market power, even if this is growing pretty fast. It's its control over an increasing part of the infrastructure of sales. From the ILSR (our emphasis):
Amazon increasingly controls the underlying infrastructure of the economy. Its Marketplace for third-party sellers has become the dominant platform for digital commerce. Its Amazon Web Services division provides the cloud computing backbone for much of the country, powering everyone from Netflix to the CIA. Its distribution network includes warehouses and delivery stations in nearly every major U.S. city, and it’s rapidly moving into shipping and package delivery for both itself and others. By controlling this critical infrastructure, Amazon both competes with other companies and sets the terms by which these same rivals can reach the market.
That is, companies that want to reach the market increasingly have to rely on Amazon. Basically everything Amazon does is targeted at becoming the indispensable gateway for online sales (and increasingly offline sales as well), creating the famous flywheel that Jeff Bezos likes to invoke as its business model.
Third-party sellers broaden Amazon's sales, make the platform more valuable for shoppers, and allow it to gain knowledge of new segments and amass invaluable data in order for it to extract much of the value from these third-party sellers, or even enter these segments itself and eliminate them.
Half of worldwide Amazon sales are generated by third-party sellers, but buyers wouldn't know it, as they are almost completely anonymous on Amazon's platform. And apart from invaluable data and amassing buyers fortifying its platform, Amazon also gets a cut (15% to 50% in some cases) with zero effort.
Take for instance LeTravelStore.com. It did very well online until more and more people skipped online search and went straight to Amazon. For the owners, it became clear that if you want to sell online, you have to go through Amazon.
But that wasn't a success either, as Amazon restricted its interaction and building relationships with customers, and the company closed. It's not alone. From ILSR:
They can either continue to be independent, hanging their shingles out on search engine byways less and less traveled by shoppers, or they can set up shop as third-party sellers on Amazon’s site, forfeiting much of their knowledge, revenue, and autonomy to their most powerful competitor.
Or take Nike (NYSE:NKE), or Hachette, From Fast Company:
Last week, Amazon offered to police the many counterfeiters that sell fake Nike shoes on its site as a bargaining chip to get Nike to agree, for the first time, to offer a full line of its products to Amazon. Similarly, when the publisher Hachette resisted Amazon's demands in negotiations over book pricing, it found the buy-buttons removed from all of its titles, putting thousands of books off-limits to both buyers and sellers.
Birkenstock, another shoe brand, fell into the same problem as Nike. And as strict as Amazon is with policies in its Marketplace, it is lax with others, like those involving counterfeited items. This is just another way for Amazon to gain leverage.
Keep in mind that Nike and Hachette aren't exactly small companies, but Amazon can waltz right over them nevertheless. As a side note, Speaker of the House Paul Ryan was one of its victims, as he has just had a book published by Hachette. Amazon restored his book to normal status (instead of delaying shipping and modifying search and recommendation algorithms), but not those of others.
In the book business, Amazon is extracting ever more value in annual negotiations about fees from publishers (the so-called "Gazelle project"). Those that don't play ball risk payback that will severely affect its sales.
Publishing house Melville House experienced the removal of buy buttons from all its titles on Amazon when the latter was shaking it down for another hike in fees.
Data
Amazon amasses a treasure trove of data from its own sales and those on Marketplace. From the ILSR:
The company uses its data on what we browse and buy to shape what we see and adjust prices accordingly, and its control over suppliers and power as a producer itself means that it’s increasingly steering our choices, deciding what products make it to market and what products we’re exposed to... Already there is evidence that Amazon is using its huge trove of data about our browsing and buying habits to selectively raise prices, and it’s also started blocking access to certain products and delaying shipping for customers who decline to join its Prime program.
The mechanisms involved aren't really all that different from those that provide Facebook and Amazon with their increasing return in the online ad market.
Instead of ever better targeted ads, the company can provide customers with ever better targeted products and services. In itself, this isn't bad, but the company has a lot of leeway to skew the process, just like Russian trolls can misuse Facebook or Twitter to skew political processes.
And there is another side to this. In skewing, Amazon can also tilt the production of goods and services itself and/or demand a premium for premium access, or even any access at all.
Amazon products
Another thing that Amazon increasingly does with all the data it has amassed both from its own sales and that of third-party sellers selling on its platform. From The Atlantic:
Some merchants have accused Amazon of secretly using Marketplace as a laboratory: After collecting data on which products do best, it introduces low-price competitors available through its flagship service.
Since half of all online shopping searches start directly on Amazon, it can heavily skew these searches in favor of its own (or preferred party) solutions. After all Amazon increasingly produces stuff itself, like books, audio books (Audible), TV shows, video games (via its platform Twitch), it has its own streaming music solution, groceries, etc. From ILSR:
Earlier this year, the company unveiled 7 of its own fashion lines, offering more than 1,800 items of apparel. It’s added hundreds of new products to its AmazonBasics brand, which now furnishes a wide range of household items, from computer cables to swivel chairs. On Amazon.com, many of these products rank as top sellers in their categories and show up first in search results. Amazon publishes books too, and it’s not uncommon for as many as half of the titles on its Kindle bestseller list to be its own.
And the Marketplace also serves as a great lab to figure out where to expand. From ILSR:
It also appropriates their product knowledge. Upstream Commerce recently tracked 857 apparel items first offered for sale by Marketplace sellers and found that, within 12 weeks, Amazon began selling 25 percent of their top-selling items. Another study by researchers at Harvard Business School also looked at patterns in Amazon’s entry into new product areas and found, “The likelihood of Amazon’s entry is positively correlated with the popularity and customer ratings of third-party sellers’ products.”
Other elements
The acquisition of Whole Foods gives Amazon another leg up in its competition with other retailers:
Another series of distribution centers often located in the best neighborhoods.
The ability to merge online and offline data to create an even bigger data advantage (readers might want to read up on the possibilities here, for instance, through our treatment of the same topic describing Alibaba's (NYSE:BABA) O2O strategy).
See for instance how its ever denser network of fulfillment centers gives it a leg up in distribution. From Business Insider:
New and improved Amazon shipping options made it easy to get last-minute holiday gifts in time for the holiday. Customers use of Amazon's one-day, same-day, and two-hour delivery doubled this holiday, according to the company. This dovetails with Amazon's commitment to being the most convenient option to gain market share, at the expense of margin.
Another brilliant idea to rope in consumers was Amazon Prime, which provides a series of perks like streaming media (competing with the likes of Netflix). But perhaps its most important feature is free shipping. The benefits of this accumulate with use so it greatly reduces people's motivation to shop anywhere else (ILSR):
Less than 1 percent of Prime members visit competing sites while shopping on Amazon, and Prime members spend almost three times as much with the company as non-Prime customers do
Then there is its digital assistant, Alexa, which is a full frontal attack on brand power. Do you want batteries? Alexa doesn't give you the option of choosing between brands. And Alexa's reach is rapidly increasing. From Business Insider:
The Alexa app, which is required to set up Amazon's Echo devices and other products with the Alexa digital assistant built in, was the top app for Android and iPhone on Christmas day. Since app store rankings reflect what people are downloading almost in real-time, it's a strong indication that Echo products were some of the most popular gifts this Christmas.
From ILSR:
Amazon presents a vastly more dangerous threat to competition than Wal-Mart, because its ambition is not only to be the biggest player in the market. Its intention is to own the market itself by providing the underlying infrastructure—the online shopping platform, the shipping system, the cloud computing backbone— that competing firms depend on to transact business. In effect, Amazon is turning an open, public marketplace into a privately controlled one.
Already there is evidence that Amazon is using its huge trove of data about our browsing and buying habits to selectively raise prices, and it’s also started blocking access to certain products and delaying shipping for customers who decline to join Prime.
In summary, how Amazon squeezes the competition
Half of shoppers already begin their search on Amazon; Amazon has the ability to produce at a loss aided by cheap finance; and its fast and cheap shipping are becoming the norm. All of this gives independent sellers little choice but to join Marketplace.
Once they join, they have to accept the terms and conditions (like no interaction with customers outside Amazon's platform and little in the way of marketing or branding). Fulfillment terms are another point of leverage for Amazon.
Amazon's platform is strengthened by more third-party Marketplace sellers, and here Amazon gains knowledge of new verticals and transaction data which it can then use against these third-party sellers.
It can tilt the playing field (fulfillment, search and recommendation algorithms, or even removing the sell button or the seller altogether) in order to extract better conditions.
It can also use the seller data to see what sells best and to produce similar items (again tilting the field in its favor).
Amazon Prime is another powerful instrument to get even more people to its platform and stick with it, as the transport cost reductions are cumulative for instance.
Alexa can further reduce brand power of suppliers and make the shopping experience seamless and sticky.
This is by no means a complete picture, but you get the idea of the flywheel which Bezos likes to talk about. A bleak conclusion from Fast Company:
Amazon treated the book industry the same way companies like Wal-Mart once treated the territories into which they expanded: Use a war chest of capital to undercut prices, put competitors out of business, become the sole employer in the community, turn employees into part-time shift workers, lobby for deregulation, and effectively extract all the value from a given region before closing up shop and moving to the next one.
Conclusion
Amazon is both a retail competitor and a near indispensable platform for other retailers to sell on. But in that second capacity, Amazon has numerous ways to extract value and valuable data and information from these third-party sellers, and it has multiple ways at its disposal to tilt the playing field in its advantage. After all, it's Amazon's playing field. Amazon sets the rules, and Amazon controls the information and the customer interface.
The flywheel is all but unstoppable; Amazon is indeed a multi-trillion-dollar monopoly hidden in plain sight. Investors seem to realize this, but few others do - certainly not competition authorities, who happen to be the only ones who can do something about it. They, like consumers, are loving it.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AMZN over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
About this article:Expand
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It was utter nonsense for our economically illiterate mainstream media to poll CEOs of existing large businesses and ask them how they will distribute the windfall of a static tax rate cut as they pay out a smaller portion in taxes of a fixed pie. If they are benevolent, the story goes, they will give all of it to workers, and if they are mean and selfish they will pocket it for themselves and their shareholders. As Woody Boyd might say, that isn't how it works in the real world. Companies don't pay more for inputs like labor because they want to. They pay what they need to pay in competition with other bidders for scarce resources.
Lower business tax rates and other improvements like immediate expensing of capital equipment purchases means that, all other things equal, more capital will be invested in this economy. Now we hear that Samsung, LG, Toyota and Mazda are building plants or expanding in the US. (Maybe Apple will come to the US someday too!)
These companies and their expansions add jobs, but how, when the unemployment rate is at essentially at ground zero.?
Newly relocated companies with really good jobs to offer have to hire people away from other companies, not invent people out of thin air. The existing companies that stand to lose good employees have to drive those wages up. How can they do that? Capital investment is investment is synonymous with productivity improvement. They will have to invest more, grow, innovate and be more efficient and effective in their field.
When they do lose key employees to competition, they have to promote people up and hire people in. This affects supply and demand up and down the labor economic ladder. The people out of the workforce coming in might not land jobs as plant managers or robotics engineers but their world of incentives, disincentives and job offers will be affected by incoming investment and hiring.
We live in an amazingly integrated and interconnected economy, not a trickle down one that flows in only one direction.
Hiring and retaining good people is the hardest job of every vibrant and dynamic organization. Let the bidding begin!
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I look occasionally for writings from some of the better economists and noticed there are so few columns lately from Alan Reynolds, who I usaually find to be brilliant and prescient. I should give him a break; he is 75 years old. Anyway I was surprised to notice that he posts quite frequently on twitter:
https://twitter.com/alanreynoldsecn?lang=en
A lot of good material there if anyone has time or inclination to follow.
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Excellent find!
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Posting this in two places. Valuable info IMHO.
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Not just the printing of money but by their interference in markets, take a look:
(http://www.mauldineconomics.com/images/uploads/newsletters/180303-02.jpg)
Notice in the chart below that it is the high-inflation items that are most influenced by government – things like health care and government-subsidized education. (If you think education is not influenced by the government, you are not paying attention.) The items that are not growing in price? Those are more purely market-driven.
http://www.mauldineconomics.com/frontlinethoughts/inflation-and-honest-data
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http://www.aei.org/publication/the-first-lesson-that-larry-kudlow-should-deliver-to-trump-trade-deficits-are-made-in-the-usa/?mkt_tok=eyJpIjoiTldSa1ptWXdZVFkzTjJWaSIsInQiOiJmRlpBVTVaRG8rZlBUT3FEUW51Z25pa1Z6RDZoNDRiNFFaeENCVU9QUittMXNMZzBUMmtVS0RoNUNyYTduOTQ5UVk5WHVsYmI4K1dKXC9oNGdNcGlxSlA0c0VpcE0wNHVpMnV0RDM0XC9SMWc0enk4Vm91V3Q4V1k3K1Q5TTlJRndiIn0%3D
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Jobs that are difficult to automate from an engineering perspective may be exactly the jobs pushed to extinction by automation because they cannot compete.
http://caseymulligan.blogspot.com/2018/02/your-job-cannot-be-automated-then-you.html
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Doug's theory, we aren't equal. We aren't even equal with ourselves doing different tasks at different times in our careers. Greg Mankiw: Roger Federer has a greater economic advantage playing tennis than mowing lawns even if he is good at both.
Socialism takes away the incentive to do what you do best. In fact, it takes away all incentives, is a denial of science, math and history.
Only by coercion can we pretend we are equal and so coercion and tyranny are necessary to implement socialism.
But even then, argued below, a benevolent Venezuela or North Korea would still be starving poor.
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https://fee.org/articles/you-cant-argue-against-socialisms-100-percent-record-of-failure/
You Can't Argue against Socialism's 100 Percent Record of Failure
After more than two dozen failed attempts, Socialism has proven itself to be a disastrous philosophy.
by Kristian Niemietz April 16, 2018
Socialism is extremely in vogue. Opinion pieces which tell us to stop obsessing over socialism’s past failures, and start to get excited about its future potential, have almost become a genre in its own right.
For example, Bhaskhar Sunkara, the founder of Jacobin magazine, recently wrote a New York Times article, in which he claimed that the next attempt to build a socialist society will be completely different:
This time, people get to vote. Well, debate and deliberate and then vote—and have faith that people can organize together to chart new destinations for humanity. Stripped down to its essence, and returned to its roots, socialism is an ideology of radical democracy. […] t seeks to empower civil society to allow participation in the decisions that affect our lives.
Nathan Robinson, the editor of Current Affairs, wrote in that magazine that socialism has not “failed." It has just never been done properly:
It’s incredibly easy to be both in favor of socialism and against the crimes committed by 20th-century communist regimes."
When anyone points me to the Soviet Union or Castro’s Cuba and says “Well, there’s your socialism,” my answer […] [is] that these regimes bear absolutely no relationship to the principle for which I am fighting. […] The history of the Soviet Union doesn’t really tell us much about “communism” […]
I can draw distinctions between the positive and negative aspects of a political program. I like the bit about allowing workers to reap greater benefits from their labor. I don’t like the bit about putting dissidents in front of firing squads.”
Closer to home, Owen Jones wrote that Cuba’s current version of socialism was not “real” socialism—but that it could yet become the real thing:
“Socialism without democracy […] isn’t socialism. […] Socialism means socializing wealth and power. […]
Cuba could democratize and grant political freedoms currently denied as well as defending […] the gains of the revolution. […] The only future for socialism […] is through democracy. That […] means organizing a movement rooted in people’s communities and workplaces. It means arguing for a system that extends democracy to the workplace and the economy.
And Washington Post columnist Elizabeth Bruenig wrote an article with the self-explanatory title It’s time to give socialism a try:
Not to be confused for a totalitarian nostalgist, I would support a kind of socialism that would be democratic and aimed primarily at decommodifying labor, reducing the vast inequality brought about by capitalism, and breaking capital’s stranglehold over politics and culture.
Despite differences in style and emphasis, articles in this genre share a number of common flaws.
Socialists insist that previous examples of socialism were not “really” socialist, but none of them can tell us what exactly they would do differently.
Flawed Arguments
First, as much as the authors insist that previous examples of socialism were not “really” socialist, none of them can tell us what exactly they would do differently. Rather than providing at least a rough outline of how “their” version of socialism would work in practice, the authors escape into abstraction, and talk about lofty aspirations rather than tangible institutional characteristics.
“Charting new destinations for humanity” and “democratizing the economy” are nice buzzphrases, but what does this mean, in practice? How would “the people” manage “their” economy jointly? Would we all gather in Hyde Park, and debate how many toothbrushes and how many screwdrivers we should produce? How would we decide who gets what? How would we decide who does what? What if it turns out that we don’t actually agree on very much?
These are not some trivial technical details that we can just leave until after the revolution. These are the most basic, fundamental questions that a proponent of any economic system has to be able to answer. Almost three decades have passed since the fall of the Berlin Wall—enough time, one should think, for “modern” socialists to come up with some ideas for a different kind of socialism. Yet here we are. After all those years, they have still not moved beyond the buzzword stage.
Secondly, the authors do not seem to realize that there is nothing remotely new about the lofty aspirations they talk about, and the buzzphrases they use. Giving “the people” democratic control over economic life has always been the aspiration, and the promise, of socialism. It is not that this has never occurred to the people who were involved in earlier socialist projects. On the contrary: that was always the idea. There was never a time when socialists started out with the express intention of creating stratified societies led by a technocratic elite. Socialism always turned out that way, but not because it was intended to be that way.
Contemporary socialists completely fail to address the deficiencies of socialism in the economic sphere.
Socialists usually react with genuine irritation when a political opponent mentions an earlier, failed socialist project. They cannot see this as anything other than a straw man, and a cheap shot. As a result, they refuse to address the question why those attempts have turned out the way they did. According to contemporary socialists, previous socialist leaders simply did not really try, and that is all there is to know.
They are wrong. The Austro-British economist Friedrich Hayek already showed in 1944 why socialism must always lead to an extreme concentration of power in the hands of the state, and why the idea that this concentrated power could be democratically controlled was an illusion. Were Hayek to come back from the dead today, he would probably struggle a bit with the iPhone, Deliveroo and social media—but he would instantly grasp the situation in Venezuela.
https://capx.co/john-mcdonnells-excuses-for-venezuela-just-dont-stack-up/
Thirdly, contemporary socialists completely fail to address the deficiencies of socialism in the economic sphere. They talk a lot about how their version of socialism would be democratic, participatory, non-authoritarian, and nice and cuddly. Suppose they could prove Hayek wrong and magically make that work. What then?
Economics Matters
They would then be able to avoid the Gulags, the show trials and the secret police next time, which would obviously be an immeasurable improvement over the versions of socialism that existed in the past. But we would still be left with a dysfunctional economy.
Ultimately, the contemporary argument for socialism boils down to: “next time will be different because we say so.”
Contemporary socialists seem to assume that a democratized version of socialism would not just be more humane, but also economically more productive and efficient: reform the political system, and the rest will somehow follow. There is no reason why it should. Democracy, civil liberties, and human rights are all desirable in their own right, but they do not, in and of themselves, make countries any richer.
A version of East Germany without the Stasi, the Berlin Wall, and the police brutality would have been a much better country than the one that actually existed. But even then: East Germany’s economic output per capita was only one third of the West German level. Democracy, on its own, would have done nothing to close that gap.
A version of North Korea without the secret police and the labor camps would be a much better country than the one that actually exists. But even then: the North-South gap in living standards is so vast that the average South Korean is 3–8cm taller than the average North Korean, and lives more than ten years longer. Democracy would not make North Koreans any taller, or likelier to reach old age.
Ultimately, the contemporary argument for socialism boils down to: “next time will be different because we say so.”
After more than two dozen failed attempts, that is just not good enough.
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https://twitter.com/scandalofmoney?lang=en
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It was today in 1723 that the economist Adam Smith was born. Like Benjamin Franklin, Adam Smith is credited with “inventing” something—capitalism, in this case—that of course had existed since the dawn of time. But what people don’t know about Smith is what a profoundly moral and just person he was (his best book is The Theory of Moral Sentiments). They also don’t know the source of his keen moral sensibility: Stoicism. Smith’s teacher, Francis Hutcheson, was actually a translator of The Meditations of the Emperor Marcus Aurelius Antoninus, which may have been how Smith was introduced to Stoicism.
In any case, we find in Smith’s work constant reference to the Stoics and how Stoicism influenced his belief in capital markets, the “invisible hand,” and the beauty and wonder of the efficiency of people pursuing their self-interest. You could say that Stoicism was what tempered Smith’s belief in capitalism and why he would have rejected the later Ayn Randian-narcissism and heartlessness that many capitalists would try to justify through him. As he writes,
“One individual must never prefer himself so much even to any other individual, as to hurt or injure that other, in order to benefit himself… and who does not inwardly feel the truth of that great stoical maxim, that for one man to deprive another unjustly of any thing, or unjustly to promote his own advantage by the loss or disadvantage of another, is more contrary to nature, than death, than poverty, than pain, than all the misfortunes which can affect him, either in his body, or in his external circumstances.”
It’s ironic that the father of market capitalism makes the Stoics sound like communists. Marcus Aurelius has a phrase, διάνοια δικαία καὶ πράξεις κοινωνικαὶ (“a just mind and acts for the common good.”) He says elsewhere, “What’s bad for the hive is bad for the bee.” This is actually what Smith believed too: That if we take care of ourselves, if we hold ourselves to high standards, and we actively work not to hurt other people (because we are all citizens of the same world, as Marcus put it), then we indirectly and directly make everything better for everyone.
It’s important to remember that Stoicism is not sociopathy. No, it’s about responsibility. To yourself. To “nature.” To virtue. To your work and your skills. The baker serves his fellow citizens by being a great baker, a great businessman, a great father, a great friend, and a good Samaritan. That’s what Adam Smith believed, and how he rendered to the world—developing and modern alike—an enormous service by articulating and popularizing the market economy.
The question for each of us then is whether we are going to properly play our role or are we going to be one of the bad actors who abuses the freedom we’ve been given to take advantage of other people?
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Does the income increase one person makes take away from the income of the others or does the size of the economic pie grow with each person's growth? This is the key difference between Leftist myth and real, measured and proven economics.
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Quote of the Day, Cafe Hayek: "… is from page 4 of Alan Reynolds’s excellent 2006 book, Income and Wealth:"
https://cafehayek.com/2018/07/quotation-of-the-day-2497.html#.W03Jsn1sECk.facebook
The two young founders of Google, Larry Page and Sergey Brin, quickly made something like $12 billion each by greatly facilitating our information, education, and shopping efficiency. Why should anyone care how much money the founders of Google, Apple, or Microsoft made? Some might object that they earned a larger share of income, but in what sense can we regard their income as shared? Google is something new – without Google there could be no income from Google. The Google founders have their income and you have yours. What they earn has nothing to do with how much or how little you can earn, except that their invention may help you earn more (personally, I feel as though I owe them a really big check).
- Alan Reynolds’s 2006 book, Income and Wealth, p.4
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Doug: Dynamic capitalism up close can look ugly as it happens but is better than all the alternatives. By contrast, the poor and the working people always fare far worse in countries that have no rich, no capital, no capitalists. See Venezuela, Republic of the Congo, North Korea.
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If nobody owns anything, nothing is maintained much less improved. If property rights are insecure, long-term planning and contracts are impossible. - Alan Reynolds
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The above should be so obvious as to go without saying, however the left is alive and well and in control of the media, Academia and what up are political parties. Look at Venezuela. They took away property rights and look at what happened. Look at New York City, Alexandria Ocasio - whatever her name is. Capitalism will not always be here on Earth. Look at the Democratic Party, Bernie Sanders almost won the nomination and Hillary adopted his views. Keith Ellison is vice chair. Their messages are the antithesis to property rights. These basic economic arguments go on until our demise.
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Credit Larry Elder on radio for bringing this issue forward. I didn't hear all of his sources but found this:
https://www.libertarianism.org/publications/essays/how-laissez-faire-made-sweden-rich
Johan Norberg: "I got interested in theories of economic development because I had studied a low-income country, poorer than Congo, with life expectancy half as long and infant mortality three times as high as the average developing country.
That country is my own country, Sweden—less than 150 years ago.
At that time Sweden was incredibly poor—and hungry. When there was a crop failure, my ancestors in northern Sweden, in Ångermanland, had to mix bark into the bread because they were short of flour. Life in towns and cities was no easier. Overcrowding and a lack of health services, sanitation, and refuse disposal claimed lives every day. Well into the twentieth century, an ordinary Swedish working-class family with five children might have to live in one room and a kitchen, which doubled as a dining room and bedroom. Many people lodged with other families. Housing statistics from Stockholm show that in 1900, as many as 1,400 people could live in a building consisting of 200 one-room flats. In conditions like these it is little wonder that disease was rife. People had large numbers of children not only for lack of contraception, but also because of the risk that not many would survive for long.
As Vilhelm Moberg, our greatest author, observed when he wrote a history of the Swedish people: “Of all the wondrous adventures of the Swedish people, none is more remarkable and wonderful than this: that it survived all of them.”1
But in one century, everything was changed. Sweden had the fastest economic and social development that its people had ever experienced, and one of the fastest the world had ever seen. Between 1850 and 1950 the average Swedish income multiplied eightfold, while population doubled. Infant mortality fell from 15 to 2 per cent, and average life expectancy rose an incredible 28 years. A poor peasant nation had become one of the world’s richest countries.
Many people abroad think that this was the triumph of the Swedish Social Democratic Party, which somehow found the perfect middle way, managing to tax, spend, and regulate Sweden into a more equitable distribution of wealth—without hurting its productive capacity. And so Sweden—a small country of nine million inhabitants in the north of Europe—became a source of inspiration for people around the world who believe in government-led development and distribution.
But there is something wrong with this interpretation. In 1950, when Sweden was known worldwide as the great success story, taxes in Sweden were lower and the public sector smaller than in the rest of Europe and the United States. It was not until then that Swedish politicians started levying taxes and disbursing handouts on a large scale, that is, redistributing the wealth that businesses and workers had already created. Sweden’s biggest social and economic successes took place when Sweden had a laissez-faire economy, and widely distributed wealth preceded the welfare state.
This is the story about how that happened..." More at the link.
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I will be giving this a close read.
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I will be giving this a close read.
Thank you. Everyone on our side should learn these lessons fully. The actual policies of Venezuela are identical to those proposed by the American Left, but when you confront them on that they point to Scandinavia stead and not to Venezuela. But Sweden and Denmark did not build what they have under a socialist system. They turned to a social safety net after they became prosperous and that worked during the time that receiving welfare had a stigma and their entire homogenous culture had a strong work ethic. Now their biggest problem is the same as the rest of Europe, immigration. You cannot have a generous safety net and open borders.
Yes, there is a lesson for the American lLeft in Scandinavia.
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The world runs on individuals pursuing their separate interests.
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There is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by the free-enterprise system.
https://www.goodreads.com/quotes/241181-well-first-of-all-tell-me-is-there-some-society
Proven right, over and over and over.
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http://thefederalist.com/2018/08/21/want-economic-power-people-choose-capitalism/
The Federalist
Want More Power To The People? Choose Capitalism
Capitalism encourages people to improve their lives by satisfying others’ needs and desires, by providing things other people want at a price they can pay.
By Andy Pudzer
The debate between capitalism and socialism is at least partly a debate over morality. The left claims benevolent socialism is necessary to protect the masses from the immorality of capitalist greed. Much of America’s youth appears to be buying into this myth.
A recent Gallup poll found that young Americans were actually more positive about socialism (51 percent) than about capitalism (45 percent). The percentage of young Americans with a positive view of capitalism has declined 23 points since 2010, when 68 percent viewed capitalism positively. That’s not surprising, given that most of these young people have been educated in a system controlled by progressives and fed leftist ideology as entertainment.
Filmmaker Oliver Stone personified the progressive notion of capitalist greed in the 1987 movie “Wall Street,” in which his character, Gordon Gekko—the Left’s stereotype of a capitalist—utters the phrase “Greed is good.” But, outside Hollywood, greed is not good, and capitalism is not based on greed. To the contrary, capitalism encourages people to improve their lives by satisfying others’ needs and desires, by providing the products or services that other people want at a price they can pay.
There’s a reason for the business mantra “the customer is always right.” To be a successful capitalist, you have to shift your focus outward, to the consumer. When I was the CEO of CKR Restaurants, Inc., the owner of the Carl’s Jr. and Hardee’s restaurant chains, we spent millions of dollars every year trying to determine exactly what consumers wanted. Under capitalism, knowing what your customers want and offering it to them at an affordable price is the key to success. In fact, it’s the key to survival.
Capitalism is a kind of economic democracy, where consumers vote with every dollar they spend, determining which businesses succeed and fail. Look at the thousands of products in your local grocery store, shopping mall, or on Amazon, all vying for your attention. These products represent entrepreneurs striving to meet your needs as the way to achieve their own success. That may not be purely altruistic conduct, since capitalism depends on the desire of people to better their own lives, but it channels that natural desire into focusing on the opinions and preferences of a broad class of consumers.
In a socialist economy, rather than meeting the needs of others, you improve your life by getting more for yourself from the limited supply of goods, services, or benefits the government either makes or allows others to make available. Whether you get those goods depends on how well you please the political elites. People who are willing and able to make themselves useful to the powerful get special privileges, and since socialist systems produce so little wealth, everyone who is neither useful nor well connected stands in the inevitable bread line or waits her turn for gasoline.
In Venezuela today, under socialism there is a shortage of almost every basic consumer product. But you can bet that Venezuelan President Nicolas Maduro’s inner circle of friends, and the army troops that keep them in power, can get whatever they want. That’s the “benevolence” of socialism.
To distract from socialism’s history of failure, its proponents point to Nordic countries, Denmark in particular, where they claim that a new form of Democratic socialism has succeeded. But Denmark is not a socialist state. Rather, Denmark is a free market economy with an expanded welfare system.
You can argue about the costs of such a system and the point at which it reduces individual initiative, thus doing more harm than good. The Danes have been debating exactly those issues for years. But only a capitalist free market economy can produce the wealth necessary to sustain such programs.
In a 2015 speech at Harvard University, Denmark’s prime minister stated: “I know that some people in the U.S. associate the Nordic model with some sort of socialism, therefore I would like to make one thing clear. Denmark is far from a socialist planned economy. Denmark is a market economy.” In 2016, a noted Danish economist told CNN that Denmark’s major political parties would oppose many of democratic socialist Sen. Bernie Sanders’ regulatory policies “as being too leftist.”
Rather than a heavily regulated socialist economy, the Heritage Foundation/Wall Street Journal’s 2018 Index of Economic Freedom ranks Denmark the 12th most economically free nation in the world, well ahead of the United States at 18th. It’s no coincidence that the impoverished socialist nations Cuba, Venezuela, and North Korea are listed as numbers 178, 179, and 180 out of the 180 nations the index ranks.
I have good news for young Americans today. Despite what you’ve been taught, the economic system in which you live is the best system ever devised for the poor and the marginalized. It gives them power, creates the opportunities that make them prosperous, and encourages everyone who wants to get ahead to satisfy the needs of others.
That system is currently driving a tremendous economic surge, lifting Americans from every class and race into a better life. It’s called capitalism.
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https://twitter.com/TheAtlasSociety/status/1039959993527627776?s=17
2 minutes, judge capitalism versus socialism on its results not its ideals.
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"[Freshman Tiger Woods] took my Economics 1 course in 1996. He was the best economics student: he learned opportunity costs so well that he left Stanford and joined the pro tour."
- John B. Taylor https://economicsone.com/
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We continue teaching the whole principles course in one term combining micro and macro. I think this approach makes economics more interesting for students, and is especially needed when discussing key topics like the financial crisis of ten years ago. The crisis along with the slow recovery and other associated changes can only be understood with a mix of micro and macro. As I wrote earlier, “One must know about supply and demand for housing (micro), interest rates that may have been too low for too long (macro), moral hazard (micro), a stimulus package (macro) aimed at such things as health care (micro), a new type of monetary policy (macro) that focuses on specific sectors (micro), debates about the size of the multiplier (macro), excessive risk taking (micro), a great recession (macro), and so on.” It you look at any explanation of the crisis and the slow recovery, you’ll see a mix of micro and macro.
I think a combined micro-macro approach works no matter what your view is of the crisis and the policy response.
https://economicsone.com/2018/09/24/econ-1-tiger-woods-and-the-crisis10/
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That seems right.
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Fake Economics To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 11/12/2018
Politics and economics are interwoven. Government grants licenses, enforces contracts and the rule of law, provides fire and police protection, a national defense, and can call on resources to recover from crisis. Without these institutions, activity would slow. No one is building billion-dollar hotels in Syria, Libya, or Iraq; stability and certainty support investment.
The rule of law and stable institutions don't create growth by themselves, but they do provide the framework. It's entrepreneurs that see opportunity and reorganize existing resources in a different, more efficient, and more profitable way. That's how growth happens. Human nature, however, doesn't change. Politicians want to take direct credit for growth. Remember when Al Gore said he helped "create" the Internet?
One of the greatest myths in all of economics is the "Government Spending Multiplier" sometimes called the "Fiscal Multiplier." This concept came from a Keynesian, demand-side analysis of the economy that looks at something called the "marginal propensity to save." Someone who earns $100 but only spends $90 has a 10% marginal propensity to save. In the demand-side world, where consumption drives economic activity, the $10 in savings is seen as a negative. Having $10 less spending means $10 less in demand.
Politicians argue that taking that $10 from the saver, and giving it to someone who will spend it, increases growth. For example, Nancy Pelosi said back in 2013 that "unemployment benefits remain one of the best ways to grow the economy" because it "injects demand into our markets." She said every dollar spent on unemployment creates up to an extra $2 in GDP.
This is magic, it's like turning lead into gold. All you have to do is win election, raise taxes, put those taxes in the hands of someone with a 0% marginal propensity to save, and voila, you've created your own economic growth.
But clearly, this is a myth. Imagine we redistributed away all the savings in an economy. Without savings there would be no investment, and without investment there would be no long-term growth. That's why we focus on the supply side of the economy. From a supply-side view of the world, new inventions create growth and new inventions need savings and investment. Demand did not create the cell phone or apps. Before the inventors of Bird or Lime, consumers were not prowling the streets looking for electric scooters to ride.
From 2010-2017, real GDP grew just 2.1% per year, in spite of massive deficits and the largest share of GDP redistributed in the history of the U.S. In the past year, following deregulation and tax cuts, and the number of people receiving unemployment benefits falling to its lowest level since 1973, real GDP growth has accelerated to 3%. This is evidence that the "fiscal multiplier" is a myth.
This brings us to infrastructure spending, which many think will be one of the first things the newly divided government will agree on. Of course, good infrastructure helps promote efficient economic activity. But it won't create net new jobs. By borrowing or taxing money from the private sector to build the infrastructure, politicians harm growth elsewhere. In the long run it may be positive, but in the short-run, at best, it's neutral. Beware of politicians saying they can create jobs and speed growth. That's demand-side thinking, and it hasn't worked anywhere in the world up to this point.
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Tax rates increased hoping to get more revenue out of high income earners. Bush broke his pledge and risked and lost his Presidency for the greater
good evil.
Revenues decreased after a significant rate increase - same as for every retailer. (Who knew?)
WHY DID THIS HAPPEN? Famous people NOT reading the forum.
https://www.cato.org/blog/1990-bush-tax-increase-reduced-taxes
(https://pbs.twimg.com/media/DuEhsWVXQAAhUf3.jpg)
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Also in the numbers above, Bush's last year growth rate that media reported still in recession (fake news) had a higher growth rate than Clinton's first year that followed.
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Which is more important, income equality or prosperity for all?
Choose one.
(https://pbs.twimg.com/media/DuEwqzhW0AEc9vX.jpg)
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Tax rates increased hoping to get more revenue out of high income earners. Bush broke his pledge and risked and lost his Presidency for the greater good evil.
Revenues decreased after a significant rate increase - same as for every retailer. (Who knew?)
WHY DID THIS HAPPEN? Famous people NOT reading the forum.
https://www.cato.org/blog/1990-bush-tax-increase-reduced-taxes
(https://pbs.twimg.com/media/DuEhsWVXQAAhUf3.jpg)
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Also in the numbers above, Bush's last year growth rate that media reported still in recession (fake news) had a higher growth rate than Clinton's first year that followed.
If you get to keep your money, that makes you less dependent on government. They prefer you not be in such a state.
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Continuing my many complaints about economic reporting:
Like climate data, "Real GDP Growth" is the adjusted data. Actual, measured data is seldom reported and never discussed:
http://www.multpl.com/us-gdp-growth-rate/table/by-quarter
http://www.multpl.com/us-real-gdp-growth-rate/table/by-quarter
The difference is the inflation adjustment which is imperfectly measured.
The presumption is that the inflation component of the growth is automatic, guaranteed and so it doesn't count. It is neither automatic nor guaranteed. If not Jimmy Carter, ask Hugo Chavez and Nicolas Maduro about that.
Growing the economy and minimizing inflation are two different things. Combining two different measures into one does not always give you better information.
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Politicians, media and even academia refer to the top 1% as if it is one group who dominate the economy year after year after year, enriching themselves at the expense of the rest of the people. That is wrong on so many levels, but first, it is not one group. It is more like a parade of people taking turns at incredible success.
"According to IRS data, 4,474 unique people had turns with the top 400 highest taxpayers in America between 1992 and 2013, yet 72 percent appeared only once."
https://niskanencenter.org/blog/the-70-tax-and-progressives-tall-poppy-syndrome-ocasio-cortez/
72% of US taxpayers who make it into the ‘Top 400’ are there for only a single year!
84% of the top earners made it into the “Fortunate 400” only once or twice.
https://www.aei.org/publication/new-irs-data-show-that-72-of-us-taxpayers-who-make-it-into-the-top-400-are-there-for-only-a-single-year/
https://www.irs.gov/pub/irs-soi/13intop400.pdf
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“The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of Socialism is the equal sharing of miseries.”
— Winston Churchill, House of Commons, 22 October 1945.
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Interesting that these are not new arguments.
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(https://i2.wp.com/freedomandprosperity.org/wp-content/uploads/2017/05/Poland-Spain-1990.jpg?zoom=2)
Anyone wonder what the difference is policies is? Poland moved strongly toward economic freedom during this time. Relative to other countries Spain moved backwards on the country rankings of economic freedom.
https://danieljmitchell.wordpress.com/2017/05/09/polands-reward-for-good-economic-policy/
In Spain, taxes are so absurdly high that a guy with a modest income (1000 euro/mo.) only gets to keep one-third of the money he earns!
https://danieljmitchell.wordpress.com/2019/02/18/low-income-workers-are-victimized-by-spains-suffocating-taxation/
Other comparisons links at the links above:
Here are additional examples showing the long-run benefits of pro-market policy.
Chile vs. Argentina vs. Venezuela
Hong Kong vs. Cuba
North Korea vs. South Korea
Cuba vs. Chile
Hong Kong vs. Argentina
Singapore vs. Jamaica
United States vs. Hong Kong and Singapore
Botswana vs. other African nations
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https://www.youtube.com/watch?time_continue=4&v=aK3lyNR_vV8
Small government creates rich nations - Watch and share!
Increased economic freedom brings increased prosperity.
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https://www.nytimes.com/2016/12/23/business/growth-not-forced-equality-saves-the-poor.html?referer=http://m.facebook.com
Growth, Not Forced Equality, Saves the Poor
By Deirdre N. McCloskey
Dec. 23, 2016
Anger about economic inequality in the United States dominated the presidential election. But while polemics about the issue have flourished across the political spectrum, clarity has not.
Lack of clarity about inequality has been around for a long time. Look, for example, at the Illinois state constitution, adopted in 1970. It sought to “eliminate poverty and inequality.”
Note the linkage of poverty and inequality. It sounds good. Who wouldn’t want to eliminate both of them?
But think it through.
Eliminating poverty is obviously good. And, happily, it is already happening on a global scale. The World Bank reports that the basics of a dignified life are more available to the poorest among us than at any time in history, by a big margin. Shanghai, a place of misery not very long ago, now looks like the most modern parts of the United States, though with better roads and bridges. The real income of India is doubling every 10 years. Sub-Saharan Africa is at last growing. Even in the rich countries, the poor are better off than they were in 1970, with better food and health care and, often, amenities like air-conditioning.
We need to finish the job. But will we really help the poor by focusing on inequality?
Anthony Trollope, the great English novelist, gave an answer in “Phineas Finn” in 1867. His liberal heroine suggests that “making men and women all equal” was “the gist of our political theory.” No, replies her radical and more farseeing friend, “equality is an ugly word, and frightens.” A good person, he declares, should rather “assist in lifting up those below him.” Eliminate poverty, and let the distribution of wealth work.
Economic growth has been accomplishing exactly that since 1800. Equality in the most important matters has increased steadily, through lifting up the wretched of the earth. The enrichment in fundamentals for the poor matters far more in the scheme of things than the acquisition of more Rolexes by the rich.
What matters ethically is that the poor have a roof over their heads and enough to eat, and the opportunity to read and vote and get equal treatment by the police and courts. Enforcing the Voting Rights Act matters. Restraining police violence matters. Equalizing possession of Rolexes does not.
The Princeton philosopher Harry Frankfurt put it this way: “Economic equality is not, as such, of particular moral importance.” Instead we should lift up the poor, in the style of Trollope’s radical liberal, to a level Mr. Frankfurt labeled “enough” — enough for people to function in a democratic society and to have full human lives.
Another eminent philosopher, John Rawls of Harvard, articulated what he called the Difference Principle: If the entrepreneurship of a rich person made the poorest better off, then the higher income of the entrepreneur was justified. It works for me.
It is true that conspicuous displays of wealth are vulgar and irritating. But they are not something that a nonenvious principle of public policy needs to acknowledge.
Poverty is never good. Difference, including economic difference, often is. It is why New Yorkers exchange goods with Californians and with people in Shanghai, and why the political railing against foreign trade is childish. It is why we converse, and why today is the great age of the novel and the memoir. It is why we celebrate diversity — or should.
A practical objection to focusing on economic equality is that we cannot actually achieve it, not in a big society, not in a just and sensible way. Dividing up a pizza among friends can be done equitably, to be sure. But equality beyond the basics in consumption and in political rights isn’t possible in a specialized and dynamic economy. Cutting down the tall poppies uses violence for the cut. And you need to know exactly which poppies to cut. Trusting a government of self-interested people to know how to redistribute ethically is naïve.
Another problem is that the cutting reduces the size of the crop. We need to allow for rewards that tell the economy to increase the activity earning them. If a brain surgeon and a taxi driver earn the same amount, we won’t have enough brain surgeons. Why bother? An all-wise central plan could force the right people into the right jobs. But such a solution, like much of the case for a compelled equality, is violent and magical. The magic has been tried, in Stalin’s Russia and Mao’s China. So has the violence.
Many of us share socialism in sentiment, if only because we grew up in loving families with Mom as the central planner. Sharing works just fine in a loving household. But it is not how grown-ups get stuff in a liberal society. Free adults get what they need by working to make goods and services for other people, and then exchanging them voluntarily. They don’t get them by slicing up manna from Mother Nature in a zero-sum world.
We could use state violence to take wealth from billionaires like Bill Gates and give it to the homeless, achieving more equality. (Mr. Gates is in fact giving away his fortune, to his credit.) Short of expropriation, we can and should join in supporting a safety net, keeping the violence to a minimum. K-12 public education, for example, should be paid for by compelled taxes on all of us. But we should not be doing a lot more.
As a matter of arithmetic, expropriating the rich to give to the poor does not uplift the poor very much. If we took every dime from the top 20 percent of the income distribution and gave it to the bottom 80 percent, the bottom folk would be only 25 percent better off. If we took only from the superrich, the bottom would get less than that. And redistribution works only once. You can’t expect the expropriated rich to show up for a second cutting. In a free society, they can move to Ireland or the Cayman Islands. And the wretched millionaires can hardly re-earn their millions next year if the state has taken most of the money.
It is growth from exchange-tested betterment, not compelled or voluntary charity, that solves the problem of poverty. In South Korea, economic growth has increased the income of the poorest by a factor of 30 times real 1953 income. Which do we want, a small one-time (though envy-and-anger-satisfying) extraction from the rich, or a free society of betterment, one that lifts up the poor by gigantic amounts?
We had better focus directly on the equality that we actually want and can achieve, which is equality of social dignity and equality before the law. Liberal equality, as against the socialist equality of enforced redistribution, eliminates the worst of poverty. It has done so spectacularly in Britain and Singapore and Botswana. More needs to be done, yes. Namely, more growth, which is sensitive to environmental limits and will require a proliferation of rich engineers. Let them have their money from devising carbon-fixing techniques and new sources of energy. It will enrich all of us.
To borrow from the heroes of my youth, Marx and Engels: Working people of all countries unite! You have nothing to lose but stagnation! Demand exchange-tested betterment in a liberal society.
Some dare call it capitalism.
Deirdre N. McCloskey is professor emerita of economics, history, English and communication at the University of Illinois at Chicago.
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http://www.dklevine.com/general/intellectual/againstnew.htm?fbclid=IwAR2crJrqpLroOfAMxKHM0m_GDwm5LcAqs684hd-x8-kLC9IQ6Bv2jVh3nlE
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Does anyone here know what the federally mandated minimum wage is now and what it will be after proposals like Bernie Sanders' are passed into new law?
Answer is zero. You are not required to hire anyone and most poor and middle income people don't. And the more above market you are required to pay, the less likely you are to hire. When the market rate is above the minimum rate, then the law is irrelevant.
Trump and Republican policies are raising wages, not passing "so-called" minimum wage laws as a false substitute.
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https://www.forbes.com/sites/theapothecary/2015/01/21/the-real-minimum-wage-zero/#70452df2215f
"the real minimum wage is zero--the wage you get if you're unemployed."
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https://danieljmitchell.wordpress.com/2019/04/25/denmark-socialism-and-free-markets-part-i/
https://danieljmitchell.wordpress.com/2019/04/26/denmark-socialism-and-free-markets-part-ii/
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https://danieljmitchell.wordpress.com/2019/04/25/denmark-socialism-and-free-markets-part-i/
https://danieljmitchell.wordpress.com/2019/04/26/denmark-socialism-and-free-markets-part-ii/
Tax it heavily and get less of it, hours worked in Denmark vs. USA.
(http://freedomandprosperity.org/wp-content/uploads/2019/04/Apr-25-19-CEPOS-Work.jpg)
Spending restraint in Denmark, not exactly what Bernie proposes here.
(http://freedomandprosperity.org/wp-content/uploads/2019/04/Apr-26-19-Denmark-Golden-Rule.jpg)
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(https://danieljmitchell.wordpress.com/2011/10/30/mitchells-golden-rule/)
The private sector should grow faster than the government.
It's not rocket science.
Examples of spending restraint:
(https://danieljmitchell.files.wordpress.com/2014/04/golden-rule-examples.jpg)
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https://www.cnbc.com/2019/05/03/buffett-no-textbook-predicted-the-strange-economy-we-have-today.html
8-)
Tho lets see , another gigantic big government program of 2 trillion (infrastructure - the nickels and dimes will be impossible to account for - Pelosi's relatives all ready to make bids on proposed projects!)
and we will be up to what 24 or more trill in debt . what comes after trillion ? quadrillion?
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Just saving and sharing the definition of a term that comes up in economics. I don't really like the term but the concept is important, very closely tied to crony
capitalism governmentism.
Rent-seeking is a concept in public choice theory as well as in economics, that involves seeking to increase one's share of existing wealth without creating new wealth.
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Capitalism measures and rewards only how much and how well you are able to help others.
All the other forms of economics, socialism, communism, fascism, all involve some receiving something for nothing through the coercive taking from others.
And then they tell you capitalism is the system that is cold and uncaring.
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https://www.bloomberg.com/opinion/articles/2019-06-04/trump-should-give-the-medal-of-freedom-to-supply-side-economics
Economics
Arthur Laffer Deserves Some Kind of Award
The central goal of supply-side economics was to reduce inflation with minimal damage to the economy, and it worked.
By Karl W. Smith
June 4, 2019, 7:00 AM CDT
Karl W. Smith is a former assistant professor of economics at the University of North Carolina's school of government and founder of the blog Modeled Behavior.
From the article:
...
[Arthur Laffer's] boldness was crucial in the development of what came to be known as the “Supply Side Revolution,” which even today is grossly underappreciated. In the 1980s, the U.S. economy avoided the malaise that afflicted Japan and much of Western Europe. The primary reason was supply-side Laffer Curve, which demonstrates the relatively uncontroversial point that the maximum amount of revenue is raised by a tax rate of something less than 100%. This is emphatically not the same as saying that a tax cut of any size will always lead to a rise in revenue and a reduction in the deficit.
In fact, the Laffer Curve is only described (it does not appear) in a footnote to the 1975 essay that coined the term supply-side economics and laid out its basic tenets: “The Mundell-Laffer Hypothesis: A New View of the World Economy,” by Jude Wanniski, then an editorial writer for the Wall Street Journal.
The article is primarily devoted to inflation, trade and exchange rates. The footnote explains that, if there is full employment, a reduction in tax rates might be expected to reduce revenues. When the economy is depressed, however, tax cuts would not only increase the incentive to expand output, but would also inject money into the economy — in effect, a Keynesian stimulus.
This double effect would increase tax revenue enough to cover the interest payments on the debt incurred. As long as the payments were made, future taxes would not have to be raised to “pay for” the tax cut. The economy could simply grow its way out of the debt, as it did after World War II.
That, in turn, meant that it was possible to reduce inflation quickly with the right combination of tax cuts and tight monetary policy. Reducing inflation with minimal damage to the economy was the central goal of supply-side economics.
At the time, most economists agreed that inflation could be brought down with a severe enough recession. But they also thought that the process could require a decade-long slump. Conservative economists argued that the long-term gain was worth that level of pain. Liberal economists argued that inflation was better contained with price and income controls.
Robert Mundell, a future Nobel Laureate, argued that there was third way. Restricting the money supply, he said, would cause demand in the economy to contract, but making large tax cuts would cause demand to expand. If done together, these two strategies would cancel each other out, leaving room for supply-side factors to do their work.
Mundell himself focused on the fact that tight money would lead to a rising dollar and falling prices for natural resources. Laffer suggested that permanent reductions in taxes and regulations would increase long-term economic growth. A faster-growing economy would increase foreign demand for U.S. financial assets, further raising the value of the dollar and reducing the price of foreign imports. These effects would speed the fall in inflation by increasing the supply of goods for sale.
...
Supply-side economics helped the U.S. fight both inflation and unemployment more effectively than most conventional economists expected
In Europe, meanwhile, efforts to bring down the rate of inflation led to persistently high unemployment and sporadic bouts of inflation that plagued the continental economy through the 1990s. The European Union accepted Mundell’s monetary theory in the creation of the euro, but rejected the budget-busting tax cuts associated with Laffer.
[more at link]
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https://www.youtube.com/watch?time_continue=352&v=i_Yg-mlKAAo
Funny how this issue remains the same. He hits a huge number of very important points.
In 1987 Alan Reynolds was invited to Harvard to a debate on Income Inequality with John Kenneth Galbraith, Lester Thurow and others.
The young Reynolds is quite witty and insightful. Everyone except the opposing professors laugh at his clever observations.
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July 2, 2019
By George Friedman
Socialism and Capitalism
Socialism is a global political movement that emerged from the French Revolution. Its goal was to speak for the dispossessed, only sometimes as a democratic political party. In all of its guises, it has been a powerful political force in most of the world. In the United States, however, it has been relegated to the political margins, seen largely as alien to the American ethos. It has now emerged explicitly as a subject of debate in American politics and therefore requires some thought.
Origin Stories
The important difference between socialism and capitalism – even more important than what each actually preaches – is that capitalism is less an intellectual or moral system than a reality born of the industrial revolution. Socialism, on the other hand, has always been an intellectual movement, crafted by intellectuals such as Saint-Simon, Fourier, Lassalle and Marx, all of whom made the moral case for socialism and imagined what such a system would look like. These intellectuals loathed inequality and despised the intellectual shallowness of the rich and sought to create a political movement that could bring their vision to life. It was commandeered by politicians such as Karl Kautsky in Germany, and Vladimir Lenin in Russia.
Socialism argued that the private ownership and control of investment capital, which created the means of production, was flawed in two ways. First, it diverted wealth from the common good to the private benefit of the rich. Second, in investing on the basis of the highest return on capital, capitalism neglected investment in social goods that had a lower or no return on capital. It limited human possibilities.
In general, socialism advocates a radical restructuring of society – the means of production should be transferred to state control, and the state should determine the investment strategy. There were three underlying goals to this argument. First, that socialism would make possible the political equality that wealth inequality did not allow for. Second, that the state would produce for the common good, since state officials would not profit from the decisions they made. Finally, that the state would be controlled democratically, and therefore be under control of the public.
Capitalism did not attempt to make the case for itself. In fact, it was not something imagined and planned for. It was the reality that emerged alongside the Industrial Revolution. The industrial revolution could not develop without investment, and the investors hoped to make a profit, and that profit was reinvested. The capitalists’ wealth came to dwarf that of the old European aristocracy, and it grew larger as capitalists pursued more wealth. The capitalist did not contemplate the virtue of wealth, or the effects of industrialism on the human condition. The capitalist considered the moment and acted on it. Capitalism was not an ideology, nor did intellectuals defend it until the 20th century, when Hayek and Friedman, among others, sought to make the moral case. In the United States, capitalists bound their work to Christian notions of charity, but they had no systematic vision of their own.
Capitalism’s greatest explicator was Adam Smith, who wrote “The Wealth of Nations.” In it, he described how individual decisions, driven by self-interest, would culminate in an increase in the wealth of nations. In one of his lesser-read books, “The Theory of Moral Sentiments,” Smith made the argument that moral principles do not derive from external theories (by which he implicitly meant socialism and religion) but rather from pragmatic, necessary solutions to problems. So, Smith’s ultimate defense of capitalism is that it worked. But by this he meant that it maximized wealth – not that it limited inequality.
The capitalists determined where money was invested, based on expectations of returns on capital. In this sense, they controlled the direction capitalism would go, in that they didn’t care where it went so long as their wealth increased. From this came the towering structures of Euro-American civilization, along with the reality that the wealth of nations left vast swaths of society serving the system as workers and excluded many others from the system. Human action usually comes at the expense of others.
Reallocating Capital
The socialist argument was that, so long as capitalists pursued their own immediate interests, the wealth of society would accumulate in their hands, and the matters of inequality and poverty would not be addressed. At the core of the socialist argument was that the very indifference to ideology by the capitalists would create vast wealth for the few, without alleviating the suffering of the many. Therefore, there had to be a reallocation of capital. Some capital would go toward easing the suffering of the excluded. But even more would go to the state, which would assume responsibility for investment. The state was a superior agent of investment the individuals making investment decisions would either be civil servants or an elected representative of the people, and, having no personal interest in the outcome, would make the best decisions possible based on democratically defined ends.
The clash between capitalism and socialism has many dimensions, but the most important is this: Capitalist investment is not centralized. Investment capital comes from many sources, and there are countless investors making decisions. The diversification of capital limits the consequences of any single decision. It makes capitalism vulnerable to cycles and fads, but devastation is not the same as annihilation. It can and (and regularly does) recover from devastation. But the emphasis is on what the investment process can recover from, not the havoc that the devastation might cause to the public.
Socialism places confidence in the state, and control of the state in the hands of the public. The public as a whole has an understanding of what it needs but is not sensitive to the price paid. The state, then, must either abide by the will of the many or make investment decisions regardless of the public will, but for the good of the public (or at least what the state regards as their good). Since the state is an abstraction, the decisions are actually made by state officials. Given the vastness of the decisions made by the state, it must devolve to an army of civil servants who individually hold minimal power, but who collectively would take the place of investors, unbound by the demand of self-interest.
Democratic socialism cannot be democratic because of the scope and scale of modern economies. It either evolves in a Soviet direction, to name one extreme, or, as in oft-cited Sweden, leaves most investment decisions to private investors, taxing them and transferring money to the rest of society. In the Soviet model, the state tries to manage mid-level civil servants by terrifying them with death. In the Swedish model, the battle is formed by demands of increasing social benefits and decreasing investment capital.
Under capitalism, the diversification of capital sources protects against bad decisions made by centralized governments. But it must, by its nature, create inequality and occasional social crisis. The flow of money into the hands of the investor class must generate crises as industries are shut down and as new ones are created. The speed of what Joseph Schumpeter called “creative destruction” generates rapid and intense crises that can turn just as rapidly into social unrest, chaos or repression. Capitalism has generally solved this in the same way that social democracy has: It has left investment to private investors and then imposed taxes on them to cushion social dislocation.
In short, the distinction between modern industrial capitalism and social democracy is minimal. Leaving aside socialist fantasies about the abolition of greed or capitalist fantasies in which a state will expect nothing from its citizens, the two systems have more or less merged. Capitalists and socialists accept private investment. Both expect economies to grow and from that growth they will pay taxes. In both Sweden and the United States, taxes are hated by the public, but the benefits are loved. Still, the political system decides the taxes and the politicians do what they were meant to do in a democracy – pander to the public. What may differentiate one politician from the next is the amount of taxation they propose, but even that is used to balance the system.
Even within today’s hybrid system, democratic socialism has risen as a topic of debate within the Democratic Party. I would argue that the reasons for the emergence can be explained this way. The Democratic Party was defeated by Donald Trump in the last presidential election because he seemed to speak for the interests of the industrial working class that is in decline. This class had been the foundation of the New Deal coalition that had dominated the Democrats and from which the Democrats shifted, focusing instead on other sectors of society.
The conversation around socialism in the Democratic Party represents an attempt to woo the voters feeling intense pain who voted for Trump. Whether this group will respond is a key question. For the most part, the conversation will appeal most to those already committed to the Democratic left. That is where the battle is going on now. So it seems designed to win the Democratic nomination and lose the general election. But I am not a politician, so they may see things I can’t. What I can say is that the discussion of socialism is purely symbolic and intended to indicate a commitment to unspecified radical change. But structurally, there is little there that can substantially change the economic system, because there has been a massive convergence between the socialists rising from the French Revolution and the industrialists rising in the factories of Edinburgh. The debate is functionally archaic – but perhaps of some symbolic power.
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I disagree with Mr. Friedman, in part.
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August 8, 2019 by Dan Mitchell, [article about spain]
https://danieljmitchell.wordpress.com/2019/08/08/spain-and-lessons-on-supply-side-tax-policy/
At the risk of over-simplifying, the difference between “supply-side economics” and “demand-side economics” is that the former is based on microeconomics (incentives, price theory) while the latter is based on macroeconomics (aggregate demand, Keynesianism).
When discussing the incentive-driven supply-side approach, I often focus on two key points.
Marginal tax rates matter more than average tax rates because the incentive to earn additional income (rather then enjoying leisure) is determined by whether the government grabs a small, medium, or large share of any extra earnings.
Some taxpayers such as investors, entrepreneurs, and business owners are especially sensitive to changes in marginal tax rates because they have considerable control over the timing, level, and composition of their income.
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Learn here what you will learn in no public school in America, our economic system entrepreneurial capitalism, the system that has lifted more people out of poverty than all others combined.
https://fee.org/articles/capitalism-encapsulated-mises-in-four-easy-pieces/
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(https://i1.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2016/05/12/20160512_soc.jpg?zoom=2)
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Listen up Bernie, Fauxcahontas and all the well meaning Democrats out there:
Economics of the Apple Orchard
After you make the big investment and take the risks and do the work and you somehow get a good crop of apples, how do you harvest the apples? Do you pick them from the tree or cut down the tree?
If you chop down the tree it might be easier to pick the apples, but you won't have apples next year. Apples are the income, the tree is the capital.
We don't want politicians double, triple and quadruple taxing capital [cutting down the tree] even if it wins them votes.
https://www.youtube.com/watch?time_continue=1&v=iCbmsUc-99Q
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National Bureau of Economic Research, 1980
No one saw this coming. People who work more, make more.
https://www.nber.org/chapters/c11300.pdf
"The richest fifth of families supplied over 30 percent of total weeks worked. . . while the poorest fifth supplied only 7.5 percent. Thus on a per-week-of-work basis, the income ratio between rich and poor was only 2:1. This certainly does not seem like an unreasonable degree of inequality."
"A similar calculation comparing the richest tenth and the poorest tenth
brings an apparent 15:1 ratio in the raw data down to only 2.8:1"
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He is responding to something political, Elizabeth Warren's wealth tax and assault on the rich, but really this is about explaining how our economy works at its best [what this thread is about].
A necessary 'evil', capitalism requires capital - and capitalists, and no other system has lifted as many people up out of poverty than capitalism.
(https://html1-f.scribdassets.com/2g9o7wiv0g7cuskt/images/1-3128f7f060.jpg)
(https://html1-f.scribdassets.com/2g9o7wiv0g7cuskt/images/2-d2058a55b0.jpg)
(https://html2-f.scribdassets.com/2g9o7wiv0g7cuskt/images/3-0fe0b174a2.jpg)
(https://html1-f.scribdassets.com/2g9o7wiv0g7cuskt/images/4-0746543c17.jpg)
(https://html2-f.scribdassets.com/2g9o7wiv0g7cuskt/images/5-caec157c22.jpg)
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A recent working paper by Gerald Auten and David Splinter, economists at the Treasury and Congress’s Joint Committee on Taxation, respectively, reaches a striking new conclusion. It finds that, after adjusting for taxes and transfers, the income share of America’s top 1% has barely changed since the 1960s (see chart 1).
https://www.economist.com/briefing/2019/11/28/economists-are-rethinking-the-numbers-on-inequality
https://www.economist.com/img/b/1280/672/85/sites/default/files/images/print-edition/20191130_FBC532_0.png
http://davidsplinter.com/AutenSplinter-Tax_Data_and_Inequality.pdf
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This corrects errors made by alarmists like Piketty Saez who ignore taxation, redistribution and most of the income of the poor.
Before tax reforms like Reagan's, the income of the rich was more hidden in tax shelters, harder to measure so other studies (see above) didn't count it.
If you're not going to count the income of the rich then or of the poor now, then don't make conclusions about how inequality is changing.
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Economist Milton Friedman was once traveling overseas and spotted a construction site in which the workers were using shovels instead of more modern equipment like bulldozers. When his host responded that the goal was to increase the number of jobs in the construction industry, Friedman replied, “Then instead of shovels, why don’t you give them spoons and create even more jobs?”
https://www.aei.org/carpe-diem/milton-friedman-shovels-vs-spoons-story/
https://fee.org/articles/why-universal-job-guarantees-are-fool-s-gold/
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Years ago I saw this as a joke in Playboy :-D
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Current politicians (cf. Elizabeth Warren) want to address corruption by expanding the size and power of government. The right answer is just the opposite.
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A 2012 study, titled “Live Free or Bribe,” looked at the number of government officials convicted in a state for crimes related to corruption and found that the more economic freedom there was in the state, the less corruption resulted.
“Economic freedom,” the study found, “has a negative impact on corruption.”
These studies point to two possible root causes of corruption: the bigness of government and the smallness of economic freedom.
https://www.sciencedirect.com/science/article/pii/S0176268011000991
https://fee.org/articles/elizabeth-warren-s-anti-corruption-plan-what-s-it-for-and-will-it-work/
http://projects.iq.harvard.edu/files/gov2126/files/goelnelson_1998.pdf
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Years ago I saw this as a joke in Playboy :-D
Now that you mention it, it does look familiar.
Couldn't find the citation but here is a Playboy interview with Milton Friedman, 1973. On the issue of the day, inflation and price controls, he argues for a rules-based Fed, like Stanford Prof. John Taylor argues now. Interview covers minimum wage, financial aid scandal to higher education, pollution tax,negative income tax, health insurance, racial justice regulatory failure, 1973. So little has changed.
https://jeepers1.wordpress.com/2010/02/21/a-1973-interview-with-milton-friedman-playboy-magazine/
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Well I saw in on the flip side of the pull out of the Playmate of the Month :-D
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https://www.washingtonexaminer.com/opinion/coronavirus-oil-panic-will-help-prove-predatory-pricing-doesnt-work
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https://www.epi.org/publication/issuebriefs_ib137/
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https://www.youtube.com/watch?time_continue=2469&v=SvWbjpcy9jI&feature=emb_logo
40 minute interview, many morsels of brilliance in his analysis.
"The belief that wealth can be found in definable, static things that can be seized and redistributed is the materialist's superstition. It stultified the works of Marx [Chavez, Obama, etc.]. It betrays every person who seeks to redistribute wealth by coercion. The means of production of entrepreneurs are not land, labor and capital, all the accountant economists add up, but minds and hearts. Capitalism begins not with taking, but with giving."
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https://www.discovery.org/v/george-gilder-for-prager-university-what-creates-wealth/
George Gilder: What creates wealth? Video for Prager University
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https://www.principles.com/the-changing-world-order/
Comments please.
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https://www.principles.com/the-changing-world-order/
Comments please.
I meant comments by others, not me...
Dalio identifies the great empires of the last 500 years, their rise and fall. Sees all the signs of our unavoidable fall. He is mostly right but I differ from him in some important ways.
I believe ascension and decline are both choices available to us right now.
He says fix the flaws of capitalism. I say, fix the flaws of governmentalism. He says bipartisan commissions and public private partnerships. I say the opposite.
He says the gap between the haves and have nots just gets too big. I say, then get more people to switch over to produce and to have.
He falls for the exaggerations of 'experts', then warns of it.
Most importantly, the polarized politics we race today between right and left is NOT a split between rich and poor or capitalist and worker. The redistributive Left oddly combines the elite rich with the welfare poor and the pro-business, pro-growth right includes the lower income working class. The split is ideological, not economic.
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Ultimately a crash ends big government, and most any level of government. I'm pretty sure we are going to see how that works.
https://www.principles.com/the-changing-world-order/
Comments please.
I meant comments by others, not me...
Dalio identifies the great empires of the last 500 years, their rise and fall. Sees all the signs of our unavoidable fall. He is mostly right but I differ from him in some important ways.
I believe ascension and decline are both choices available to us right now.
He says fix the flaws of capitalism. I say, fix the flaws of governmentalism. He says bipartisan commissions and public private partnerships. I say the opposite.
He says the gap between the haves and have nots just gets too big. I say, then get more people to switch over to produce and to have.
He falls for the exaggerations of 'experts', then warns of it.
Most importantly, the polarized politics we race today between right and left is NOT a split between rich and poor or capitalist and worker. The redistributive Left oddly combines the elite rich with the welfare poor and the pro-business, pro-growth right includes the lower income working class. The split is ideological, not economic.
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quote author=G M
Ultimately a crash ends big government, and most any level of government. I'm pretty sure we are going to see how that works.
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Thanks G M. Economic collapse is most certainly on the ballot this year. I just don't see why people would choose it.
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People will choose it (hopefully not enough) because Orange Man BAD! and FREE SH*T!
At least Trump has experience negotiating bankruptcies.
quote author=G M
Ultimately a crash ends big government, and most any level of government. I'm pretty sure we are going to see how that works.
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Thanks G M. Economic collapse is most certainly on the ballot this year. I just don't see why people would choose it.
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city-journal.org/thomas-sowell-race-poverty-culture
Amazing man. Great article. Starts with his childhood.
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My favorite posts happen when others express clearly and succinctly what I struggle to explain.
Brad Polumbo, Hat tip Alan Reynolds:
Let's discuss government intervention into the economy to promote equality. First, what do we mean by equality? Well, from your first note, I gather that you are concerned, at least to some extent, with equality of outcome. The type of economic inequality measured by the Gini Coefficient. For example; Sarah has twice the income of Paul.
I do not inherently care about equality of outcome, and I would argue that you should not either. Much more important are the processes by which the outcome is reached, equality of opportunity, and absolute/objective measures of poverty and material wealth.
I know you do not advocate for complete, perfect equality — few do — so please do not take this as a straw-manning of your position. But it's worth challenging the notion, which most of us intuitively assume, that more economic equality (separate this conceptually from legal equality, civil rights, etc.) is generally and inherently a good thing.
It is not. Very simply, we are not all equal in our ability, work ethic, and potential. We do not all deserve the same outcome, and if treated perfectly fairly and all given equal opportunity, we would not all reach equal outcomes.
Indeed, it is this very inequality of outcome that drives people to be better, work harder, and do more. It is the very engine of free-market capitalism that has created so much wealth and profoundly reduced absolute poverty both in the U.S. and globally.
So when examining economic inequality in the United States we cannot assume that simply because large-scale inequality exists, therefore this is a problem in need of government correction. Some of that inequality may, indeed, be a problem, if it was acquired through crony capitalism or rent seeking; i.e., Amazon getting a sweetheart tax deal or giant subsidies for professional sports stadiums.
But the rest? I don't think it's a problem at all.
First, you cite important statistics, and I certainly agree that one of if not the single most important objective for policymakers should be improving the standard of living for the worst-off among us. Where I break from you is twofold:
that inequality is a useful metric in this pursuit
that progressive policy solutions would actually achieve said improvements in living standards
Inequality tells us little, if anything, about the actual standard of living poor people face. For example, according to the Gini Coefficient (for readers, this is an international index of economic inequality) Ethiopia, Nigeria, Pakistan, and India are more "equal" than the United States. Yet I'm sure you would agree with me that the poor in America are miles better off than in these countries by any reasonable assessment or metric.
My point is that poverty isn't best viewed as a relative metric. If you have a nice comfortable life and your neighbor's net worth doubles, you are not truly materially better or worse off.
So, yes, I want to increase educational outcomes, reduce child poverty, fix the housing crisis and more. From occupational licensing reform to school choice to zoning deregulation, I have many ideas for how to get there. But the "inequality" of it all is secondary, if at all relevant. (Other than, yet again, inequality via cronyism, which I share your opposition to. I would happily abolish the tariffs, subsidies, etc. that enable it).
I also think the moral indignation over the prevalence of billionaires misses the point. Yes, it is glaring that we have some individuals with so much wealth while others struggle. But it is economic fallacy to think that — except for aforementioned crony abuses — these billionaires took this wealth from other people.
Economics is not zero-sum in a capitalist society. Many billionaires and millionaires created wealth for themselves by creating wealth for others. Consider Apple CEO Steve Jobs, for example. He died with a net worth of $10 billion.
Surely it's obscene and unjust that anyone have that much money while others starve!
But if you think about it, through direct and indirect effects Steve Jobs must have created hundreds of thousands if not millions of jobs, and increased the standard of living for millions of people. If we had, say, as Rep. Alexandria Ocasio-Cortez has suggested, a top marginal income tax rate of 70% kicking in after a certain threshold in the millions, Jobs would have stood to gain almost nothing financially from the years of sweat and toil he put into Apple after his first few millions were made. And we'd all be worse off for it — even if we might be more "equal" in the Gini measurements.
Jobs isn't some isolated example. Economist Deirdre McCloskey has estimated the innovators, on average, see just roughly 2% of the wealth they create for society.
This brings me to perhaps my most important conclusion: The progressive "solutions" for income inequality often aren't solutions at all.
Artificially inflating the minimum wage will end up decreasing workers net earnings (as hours are slashed) and causing unemployment. As you seem to concede, "rent control" laws backfire and limit the supply of housing, eventually leading to higher rents. Student loan subsidies meant to promote educational opportunity end up further inflating the cost of college and putting it out of reach for even more Americans. Tariffs meant to "protect" workers jobs kill more jobs than they create. The list goes on and on.
So, should the government intervene in the economy to reduce inequality? If what we truly hope to do is improve the standard of living for all, the answer is a resounding no.
- Brad Polumbo
https://letter.wiki/conversation/853#letter_2702
https://fee.org/people/brad-polumbo/
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I avoid Amazon and don't like Jeff Bezos. I took forever to read this tab I opened because I wasn't interested in hearing his version of his story. That said, his story of starting and building a company is pretty amazing. We need more risk taking entrepreneurs; that is the key to the economy and its success. We don't need monopolies, but monopolies should be judged by their abusive market behaviors, not by their size.
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My mom, Jackie, had me when she was a 17-year-old high school student in Albuquerque, New Mexico. Being pregnant in high school was not popular in Albuquerque in 1964. It was difficult for her. When they tried to kick her out of school, my grandfather went to bat for her. After some negotiation, the principal said, “OK, she can stay and finish high school, but she can’t do any extracurricular activities, and she can’t have a locker.” My grandfather took the deal, and my mother finished high school, though she wasn’t allowed to walk across the stage with her classmates to get her diploma. Determined to keep up with her education, she enrolled in night school, picking classes led by professors who would let her bring an infant to class. She would show up with two duffel bags—one full of textbooks, and one packed with diapers, bottles, and anything that would keep me interested and quiet for a few minutes.
My dad’s name is Miguel. He adopted me when I was four years old. He was 16 when he came to the United States from Cuba as part of Operation Pedro Pan, shortly after Castro took over. My dad arrived in America alone. His parents felt he’d be safer here. His mom imagined America would be cold, so she made him a jacket sewn entirely out of cleaning cloths, the only material they had on hand. We still have that jacket; it hangs in my parents’ dining room. My dad spent two weeks at Camp Matecumbe, a refugee center in Florida, before being moved to a Catholic mission in Wilmington, Delaware. He was lucky to get to the mission, but even so, he didn’t speak English and didn’t have an easy path. What he did have was a lot of grit and determination. He received a scholarship to college in Albuquerque, which is where he met my mom. You get different gifts in life, and one of my great gifts is my mom and dad. They have been incredible role models for me and my siblings our entire lives.
You learn different things from your grandparents than you do from your parents, and I had the opportunity to spend my summers from ages four to 16 on my grandparents’ ranch in Texas. My grandfather was a civil servant and a rancher—he worked on space technology and missile-defense systems in the 1950s and ‘60s for the Atomic Energy Commission—and he was self-reliant and resourceful. When you’re in the middle of nowhere, you don’t pick up a phone and call somebody when something breaks. You fix it yourself. As a kid, I got to see him solve many seemingly unsolvable problems himself, whether he was restoring a broken-down Caterpillar bulldozer or doing his own veterinary work. He taught me that you can take on hard problems. When you have a setback, you get back up and try again. You can invent your way to a better place.
I took these lessons to heart as a teenager, and became a garage inventor. I invented an automatic gate closer out of cement-filled tires, a solar cooker out of an umbrella and tinfoil, and alarms made from baking pans to entrap my siblings.
The concept for Amazon came to me in 1994. The idea of building an online bookstore with millions of titles—something that simply couldn’t exist in the physical world—was exciting to me. At the time, I was working at an investment firm in New York City. When I told my boss I was leaving, he took me on a long walk in Central Park. After a lot of listening, he finally said, “You know what, Jeff, I think this is a good idea, but it would be a better idea for somebody who didn’t already have a good job.” He convinced me to think about it for two days before making a final decision. It was a decision I made with my heart and not my head. When I’m 80 and reflecting back, I want to have minimized the number of regrets that I have in my life. And most of our regrets are acts of omission—the things we didn’t try, the paths untraveled. Those are the things that haunt us. And I decided that if I didn’t at least give it my best shot, I was going to regret not trying to participate in this thing called the internet that I thought was going to be a big deal.
The initial start-up capital for Amazon.com came primarily from my parents, who invested a large fraction of their life savings in something they didn’t understand. They weren’t making a bet on Amazon or the concept of a bookstore on the internet. They were making a bet on their son. I told them that I thought there was a 70% chance they would lose their investment, and they did it anyway. It took more than 50 meetings for me to raise $1 million from investors, and over the course of all those meetings, the most common question was, “What’s the internet?”
Unlike many other countries around the world, this great nation we live in supports and does not stigmatize entrepreneurial risk-taking. I walked away from a steady job into a Seattle garage to found my startup, fully understanding that it might not work. It feels like just yesterday I was driving the packages to the post office myself, dreaming that one day we might be able to afford a forklift.
Amazon’s success was anything but preordained. Investing in Amazon early on was a very risky proposition. From our founding through the end of 2001, our business had cumulative losses of nearly $3 billion, and we did not have a profitable quarter until the fourth quarter of that year. Smart analysts predicted Barnes & Noble would steamroll us, and branded us “Amazon.toast.” In 1999, after we’d been in business for nearly five years, Barron’s headlined a story about our impending demise “Amazon.bomb.” My annual shareholder letter for 2000 started with a one-word sentence: “Ouch.” At the pinnacle of the internet bubble our stock price peaked at $116, and then after the bubble burst our stock went down to $6. Experts and pundits thought we were going out of business. It took a lot of smart people with a willingness to take a risk with me, and a willingness to stick to our convictions, for Amazon to survive and ultimately to succeed.
(more at link: https://blog.aboutamazon.com/policy/statement-by-jeff-bezos-to-the-u-s-house-committee-on-the-judiciary?tag=bisafetynet2-20)
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He [Bezos] "must be the greatest business man of the 20th century"
to pull out dominating two separate industries impressed Buffett even more than what he did with the online market place.
says he has NEVER seen that done before:
https://www.cnbc.com/2018/05/15/warren-buffett-on-amazons-cloud-success-you-do-not-want-to-give-jeff-bezos-a-7-year-head-start.html
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He [Bezos] "must be the greatest business man of the 20th century"
to pull out dominating two separate industries impressed Buffett even more than what he did with the online market place.
says he has NEVER seen that done before:
https://www.cnbc.com/2018/05/15/warren-buffett-on-amazons-cloud-success-you-do-not-want-to-give-jeff-bezos-a-7-year-head-start.html
Yes, amazing market successes. Amazon is a bit of a mystery because business reporting is so bad. 'They don't pay any taxes' is of course untrue but it looks like they reinvest in their businesses in a way that keeps them out of corporate income taxes. Our double taxation system plays a role in that. Hiring more people and opening more locations, these are legitimate business expenses.
If profits are outsized, it is because of lack of competition. Where are the other Jeff Bezos out there? Where are the entrepreneurs? Where is the innovation? Who is the next facebook, the next google? Where are our competitive choices. An economy of 330 million needs thousands of entrepreneurs to launch new enterprises like Amazon of the 1990s, Microsoft of the 1980s, Apple, Google, Facebook of the 2000s, that have the potential to do new, amazing things for people. We criticize these behemoths for doing what we need far more of, building profitable, innovative, employing enterprises that improve productivity and quality of life.
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https://www.investopedia.com/news/how-much-would-it-cost-buy-manhattan/
based on traditional PE should be what ~ 30 billion
there is no end to this kind of concentration of wealth?
how much could be describes as creation of wealth versus movement of wealth into Amzn?
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https://www.investopedia.com/news/how-much-would-it-cost-buy-manhattan/
based on traditional PE should be what ~ 30 billion
there is no end to this kind of concentration of wealth?
how much could be describes as creation of wealth versus movement of wealth into Amzn?
Zero sum economy = Not true
If he exchanged his company for all the RE in Manhattan, it would be a step down.
If his company suddenly offered only the quality, choice and service of Kmart, his net worth would instantly be zero.
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but Doug
he is getting money from consumers
it is not all created out of thin air
if not for him people would be sending their income to other companies
the several time normal PE is all speculation which is out of thin air
the revenues comes out of other people's pockets
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but Doug
he is getting money from consumers
it is not all created out of thin air
if not for him people would be sending their income to other companies
the several time normal PE is all speculation which is out of thin air
the revenues comes out of other people's pockets
(Repeat disclaimer, I don't like taking Amazon's side on anything.)
Micro economics: Every consensual transaction is a mutually beneficial event. Not in a small way. At the moment of each purchase, that is exactly the problem or opportunity that consumer is most focused on solving or pursuing. Most likely directly tied to their other highest priorities, raising their children, increasing health or comfort, etc.
Macro economics: Now multiply those benefits times (approaching) a billion transactions per year. That's a lot of damn MUTUAL benefit to consumers going on out there.
Second, Amazon manufactures none of this. The producers, companies, employees, and communities where they are located are benefiting enormously, equally. They can fill far more orders per hour than retail, where lookers and buyers get the same attention.
The efficiency gain of all this compared getting in your car, dropping everything else, parking, walking through malls and box stores, the efficiency gain multiplied by a billion is mind boggling.
This is not zero sum. The total does NOT add up to what it what have been if done the old way. Nowhere near.
If you just look at consumer dollars spent, it is not a fixed amount. Economists don't stop there. They look at velocity of money:
MV = PQ Milton Friedman's license plate:
(https://azizonomics.files.wordpress.com/2013/03/268621-127539779936939-erwan-mahe_origin.jpg)
"Velocity" of money is directly tied to GDP (PQ).
Regarding their "PE" stack ratio, I have not looked deeply into Amazonomics but it seems to me they are reinvesting everything into their business in a way that it is (legally) tax deductible, hiring people, securing facilities, advertising, etc. They show little or no income and pay little of no direct income tax (allegedly) as they expand exponentially. If the value of the company is false, then he is not filthy rich.
Remember Harvard business Professor Clayton Christensen's 'Innovators' Dilemma'.
https://en.wikipedia.org/wiki/The_Innovator%27s_Dilemma
The entrenched players in the market, let's say Sears, Target, Walmart, Kmart et al, were not capable of creative innovation that destroys the steady revenue stream they formerly enjoyed. Only a startup could pull that off. Then they respond - because they HAVE to.
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My license plate: TAO JONZ
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Wealthy people are going to move to places with fully functional police departments, because they can.
Poor people will be stuck living in places with “defunded” police departments, which will not work out well.
https://mobile.twitter.com/RakestrawJeff/status/1296223303372279808
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https://www.npr.org/templates/story/story.php?storyId=5626506 6 minute NPR interview
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Low Rates Forever!
The Federal Reserve takes a leap into the monetary unknown.
By The Editorial Board
Aug. 27, 2020 7:24 pm ET
Jerome Powell’s Federal Reserve on Thursday released a long-awaited review of its policy framework, and it’s a mixed bag. On the upside, the central bank will no longer throttle the economy whenever “too many” Americans have jobs. On the downside, the Fed may never raise interest rates again.
The Fed was overdue to rethink how it pursues its dual mandate of full employment and price stability. Most obviously, the two goals no longer appear to conflict in the way monetary economists once assumed.
Starting in the 1980s, the U.S. economy achieved unprecedented low unemployment without an uptick in consumer prices as orthodox theory had predicted. Instead, as Mr. Powell noted in announcing the new strategy, business cycles now seem more likely to end in financial panics than in inflationary spikes that trigger interest-rate increases.
One happy result is that the Fed is all but abandoning the discredited Phillips Curve, the theory that policy makers must trade off between employment and inflation. The Fed previously tried to head off inflation by raising rates whenever it thought the unemployment rate was falling too far—whatever that meant—but now the Fed will wait for inflation to appear before acting.
Abandoning the Phillips Curve is a win for the economy, but it comes at a substantial cost in this review as the Fed also is overhauling its inflation target. Since the Fed adopted inflation targeting in the late 1990s and early 2000s (and formalized a 2% target in 2012), policy makers have viewed the target as a ceiling.
No longer. The Fed now will aim to achieve “average” inflation of 2%, meaning it will tolerate periods of faster price rises to compensate for periods when inflation falls short. Mr. Powell believes such a symmetrical target is necessary to “anchor” inflation expectations.
This is a political minefield because the definition of the inflation time period will always be open for debate. Mr. Powell and future Fed chairs will face pressure to maintain low rates to compensate for some protracted period of low inflation, or because a Senator or Twitter-happy President “believes” inflation will fall below target in the near future.
That increases the economic risk that the Fed might end up looking through inflation until it’s too late. Having effectively admitted it no longer fully understands the relationship between economic growth, employment and inflation, the Fed still promises to decide in real time when its healthy above-target inflation has become dangerous. If the central bank gets this wrong, it could be forced to raise rates much higher, much faster than it would want.
The more glaring problem is the long list of questions the Fed didn’t review. The most important is Mr. Powell’s observation, offered without elaboration Thursday, that business cycles now end in destructive financial crises. The Fed thinks this is a regulatory problem to be solved with stricter capital rules and stress tests.
It might instead ask whether its preference over two decades for “looking through” rising asset prices such as oil, gold and housing to keep rates low is contributing to financial instability instead of economic growth. Without exploring this question, the Fed has adopted a strategy with a built-in bias for low rates. The result is almost certain to be more financial manias, panics and crashes.
There are other unanswered questions. For instance, the Fed now assumes that the economy’s natural rate of growth, and thus its natural interest rate (“r-star” in the lingo) are in a natural decline for demographic or other reasons. Mr. Powell cites this as a justification for the Fed’s new symmetrical inflation target.
Well, what if there’s nothing natural about falling growth because the Fed’s policies are causing it? Research suggests sustained low rates can dent an economy’s growth potential by steering investment to unproductive uses, sustaining zombie companies, rewarding corporate financial engineering instead of capital expenditure, and contributing to asset booms and busts. It’s a shame the Fed has decided to double down on its low-rate, quantitative-easing bets before such a self-examination.
The Fed says its review is a result of careful study, including a national listening tour in which officials met with ordinary Americans. The truth is that it’s a leap into the monetary unknown and potentially a very expensive one.
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I don't agree with this but as we know Trump probably trying to beat the CRATs to the punch and the MSM who will show crying children sitting on a street curb on their living room sofa if he doesn't do it.
too bad for landlords
they don't deserve to feed THEIR families :
https://www.nationalreview.com/corner/trumps-eviction-moratorium-is-state-sanctioned-theft/
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I don't agree with this but as we know Trump probably trying to beat the CRATs to the punch and the MSM who will show crying children sitting on a street curb on their living room sofa if he doesn't do it.
too bad for landlords
they don't deserve to feed THEIR families :
https://www.nationalreview.com/corner/trumps-eviction-moratorium-is-state-sanctioned-theft/
A characteristic of third world countries is that they don't respect property rights and don't legally enforce contracts.
From the article: "Property rights and the sanctity of those contracts are vital in a lawful society. The latter are now being torn up by government decree."
If you are not renting someone else's property, i.e. exchanging an agreed amount of money for your use of it, why are you still possessing it? Criminal trespass, except not criminal because this trespassing is sanctioned by government.
Yes, landlords are hurt by eviction bans. For many, it's not a debt issue but it's their life savings and livelihood.
More importantly, the market for rental housing is hurt by eviction bans and therefore renters are hurt.
This is an unconstitutional intervention by government IMHO. The government purse could be open at the eviction court. If they want tenants to stay without ability to pay, they can pay. I thought that was the point of the unfunded trillions spent. Government closed a business; government can pay for it.
If this crisis were real, allowing the broken housing contract to run its course would actually LOWER the cost of housing for low income renters. This government intervention does the opposite. Keeping properties off the market drives UP the cost of housing for every unit that actually goes to market.
Are investors rushing to build more rental units during covid eviction bans? I sincerely doubt it. So we go from short term disruption to long term trouble.
CDC is involved with this? Government can prosecute speeding tickets remotely, but housing court? No way. It's the same, damn virus you morons.
"We are from the government and we are here to help you." - Run when you hear this.
I would rather have my property vacant than be adversely occupied.
Good politics (no sane landlord will vote for Biden), and bad economics. Bad combination. Bad precedent.
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Prof Sowell, you were once a Leftist. What changed your mind?
Sowell: "Evidence.
Referring to coronavirus, Presidential candidate Joe Biden keeps saying he's going to listen to the scientists. Too bad that never applies to economics.
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We can't just call it socialism. That term has better than 50% popularity within some important voting groups. We have to explain what's wrong with it, why it doesn't work. I call it denial of science, denial of math and denial of history, and that still doesn't persuade white, college educated young people. Some black people are starting to see that the free money promised from the social programs doesn't begin to match the real money of free market prosperity available to anyone who wants to try - if your government will let you.
https://www.intellectualtakeout.org/article/why-socialism-failed-idea-never-dies/?fbclid=IwAR1gRSUfcnXt00En0OO6VVYYAkfRsAKHPS0DqyHOP0xVXCNE9UmtWjbl0yE
What would you say to an amateur chef who baked a cake following a certain recipe only for everyone who ate a slice to fall ill quickly afterward? Being such an enthusiastic baker, they bake the same cake a second time just a few weeks later, again following the same recipe, but this time with one or two slight adjustments. Unfortunately, the result is the same – everyone who eats the cake soon ends up feeling sick.
The cake baker repeats this more than two dozen times, always modifying the recipe a little, but the basic ingredients remain more or less the same despite the fact that their guests throw up every time. Of course, there’s no way such a thing would happen. The cake baker would soon realize that there is a major problem with the recipe and throw it away.
More Than Two Dozen Failed Experiments
Yet this is exactly what socialists have done:
Over the past hundred years, there have been more than two dozen attempts to build a socialist society. It has been tried in the Soviet Union, Yugoslavia, Albania, Poland, Vietnam, Bulgaria, Romania, Czechoslovakia, North Korea, Hungary, China, East Germany, Cuba, Tanzania, Benin, Laos, Algeria, South Yemen, Somalia, the Congo, Ethiopia, Cambodia, Mozambique, Angola, Nicaragua and Venezuela, among others. All of these attempts have ended in varying degrees of failure. How can an idea, which has failed so many times, in so many different variants and so many radically different settings, still be so popular? (p. 21)
This is the central question asked by this extremely important book from economist Kristian Niemietz, who works at the London Institute for Economic Affairs. He manages to provide the answer to his question in one sentence:
It is because socialists have successfully managed to distance themselves from those examples. (p. 55)
As soon as you confront socialists with examples of failed experiments, they always offer the following response: “These examples don’t prove anything at all! In fact, none of these are true socialist models.” During the “heyday” of most of these socialist experiments, however, intellectuals held quite a different view, as Niemietz illustrates with many examples.
Venezuela – “Socialism of the 21st Century”
The latest example of socialism’s failings is Venezuela, which just a few years ago was being hailed by leading intellectuals and left-wing politicians as a model for “Socialism of the 21st Century.” At a demonstration in commemoration of Hugo Chávez in London in March 2013, for example, current British Labour Party leader Jeremy Corbyn said:
Chávez… showed us that there is a different, and a better way of doing things. It’s called socialism… In his death, we will march on, to that better, just, peaceful and hopeful world. (p. 239)
And even as late as June 2015, when the failure of the socialist experiment in Venezuela was already evident, Corbyn repeated:
When we celebrate – and it is a cause for celebration – the achievements of Venezuela, in jobs, in housing, in health, in education, but above all, its role in the whole world as a completely different place, then we do that because we recognize what they have achieved, and how they’re trying to achieve it. (p. 246)
Just a few weeks later, he enthusiastically declared that “the Bolivarian revolution is in full swing and is providing inspiration across a whole continent.” Venezuela was praised as a successful counter-model to “neo-liberal policies.” (p. 247)
Praises of Stalin
Niemietz shows that even mass murderers such as Josef Stalin and Mao Zedong were enthusiastically celebrated by leading intellectuals of their time. These intellectuals were not outsiders but renowned writers and scholars, as Niemietz demonstrates with numerous examples. Even the concentration camps in the Soviet Union, the Gulags, were admired:
They were presented as places of rehabilitation, not punishment, where inmates were given a chance to engage in useful activities, while reflecting upon their mistakes.
A then-well-known American writer explained:
The labor camps have won high reputation throughout the Soviet Union as places where tens of thousands of men have been reclaimed. (p. 72)
Even journalists and intellectuals who didn’t completely turn a blind eye to the regime’s crimes found arguments to justify what was happening:
But – to put it brutally – you can’t make an omelet without breaking eggs and the Bolshevist leaders are just as indifferent to the casualties that may be involved in their drive toward socialization as any General during the World War who ordered a costly attack. (p. 80)
These sentences were written by The New York Times’ Moscow correspondent, who was head of the newspaper’s office in the Russian capital from 1922 to 1936.
Niemietz concedes that some socialist intellectuals did criticize the Soviet Union. But for many, their antipathy was the result of using utopian standards as a yardstick for judging real-world systems – utopian fantasies that no system in the world would have been able to live up to.
If one’s idea of socialism demands the immediate abolition of the police, the army, the court system, the prison system, etc., if it requires people to voluntarily give up money, private property, exchange, etc., and if one does not accept any compromises, halfway measures or phase-in periods, then yes, such a person would not have been seduced by Leninism. But this is simply because they would have set the bar impossibly high. A lot of early socialist critics of the Soviet Union fall into this category. (p. 98)
Adulation for Mao
Many Western intellectuals were enthusiastic in their support for Mao Zedong and his cultural revolution despite the 45 million lives lost during socialism’s greatest experiment – the Great Leap Forward – at the end of the 1950s alone. After Mao’s death, when Deng Xiaoping’s reform policies liberated hundreds of millions of Chinese from bitter poverty, these same intellectuals were nowhere near as enthusiastic about China as they had been in Mao’s day.
Just as ironically, the enthusiasm of Western intellectuals for China began to fade when the most murderous period was over… Western intellectuals had lavishly heaped praise on China when millions of Chinese people were starving or worked to death in forced labour camps. But when a programme of relative liberalisation lifted millions of people out of poverty, those intellectuals were conspicuous by their silence. Market-based reform programmes, no matter how successful, will never inspire pilgrimages. (p. 110-111)
Even the North Korean dictator Kim Il Sung and the murderous Khmer Rouge regime in Cambodia found admirers among Western intellectuals, as Niemietz demonstrates in two chapters of his book. And that’s not to mention Cuba and Che Guevara, who became a pop icon in the West.
When the Experiment Fails: “That Was Never True Socialism”
In his thorough historical analysis, Niemietz shows every socialist experiment to date has gone through three phases.
During the first phase, the honeymoon period (p. 56), intellectuals around the world are enthusiastic about the system and praise it to the heavens. This enthusiasm is always followed by a second phase, disillusionment, or as Niemietz calls it, “the excuses-and-whataboutery period.” (p. 57) During this phase, intellectuals still defend the system and its “achievements” but withdraw their uncritical support and begin to admit deficiencies, although these are often presented as the result of capitalist saboteurs, foreign forces, or boycotts by US imperialists.
Finally, the third phase sees intellectuals deny that it was ever truly a form of socialism, the not-real-socialism stage. (p. 57) This is the stage at which intellectuals line up to state that the country in question – for example, the Soviet Union, China, or Venezuela – was never really a socialist country. According to Niemietz, however, this line of argumentation is rarely presented during the first phase of a new socialist experiment and becomes the dominant view only after the socialist experiment has failed.
Nowadays, Western socialists do not even attempt to oppose real-world capitalism with historical examples of socialism. Instead, they put forward arguments based on the vague utopia of a “just” society. Sometimes, they cite “Nordic socialism” – i.e. the variant of socialism that emerged in countries like Sweden – as an example, although they completely forget that the Nordic countries, having learned from their failed socialist experiments of the 1970s, have long since abandoned the socialist path. Today – despite having higher taxes – they are no less capitalist than, for example, the United States.
In the author’s place, I would have dealt explicitly with “democratic socialism,” which has also always failed miserably. After all, the policies pursued by socialists in Great Britain and some high-profile members of the Democratic Party in the United States, namely very high taxation on the rich and a high level of state regulation of the economy, has certainly also been seen before in democratic countries, including Sweden and Great Britain in the 1970s. But even these experiments, despite not ending in totalitarian rule or even mass murder, were catastrophic for the economy and led to stubborn declines in prosperity.
Socialists who criticize Stalinism and other forms of real-world, historical socialism always fail to analyze the economic reasons for the failures of these systems. (p. 28) Their analyses attack the paucity of democratic rights and freedoms in these systems, but the alternatives they formulate are based on a vague vision of all-encompassing “democratization of the economy” or “worker control.” Niemietz shows that these are the exact same principles that initially underpinned the failed socialist systems in the Soviet Union and other countries.
When contemporary socialists talk about a non-autocratic, non-authoritarian, participatory and humanitarian version of socialism, they are not as original as they think they are. That was always the idea. This is what socialists have always said. It is not for a lack of trying that it has never turned out that way. (p. 42)
This is an incredible book and should be compulsory reading at schools and universities, where today the song sung by anti-capitalists reigns supreme. Niemietz argues with intellectual authority as he weighs, differentiates, and marshals a wealth of historical evidence in support of his thesis. No other author has so far managed to so convincingly explain why socialism has nevertheless continued to remain so attractive to this day despite the sharp lessons of bitter historical experience.
In his Lectures on the Philosophy of History, the German philosopher Hegel observed,
But what experience and history teach is this, – that peoples and governments never have learned anything from history, or acted on principles deduced from it.
It could well be that Hegel’s verdict is too harsh. Nevertheless, it does seem that the majority of people are unable to abstract and draw general conclusions from historical experience. Despite the numerous examples of capitalist economic policies leading to greater prosperity – and the failure of every single variant of socialism that has ever been tested under real-world conditions – many people still seem incapable of learning the most obvious lessons.
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This article was originally published on FEE.org.
https://fee.org/articles/why-socialism-is-the-failed-idea-that-never-dies/
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(https://pbs.twimg.com/media/Eh97RM2XkAEO3yg?format=jpg)
https://mobile.twitter.com/AlanReynoldsEcn/status/1305898602527707141/photo/1
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What a great find!
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https://www.nationalreview.com/2020/09/data-dispel-keynesian-economics-again/?utm_source=Sailthru&utm_medium=email&utm_campaign=NR%20Daily%20Monday%20through%20Friday%202020-09-23&utm_term=NRDaily-Smart
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https://www.youtube.com/watch?v=RWsx1X8PV_A
Donahue: "You see around the globe the mal-distribution of wealth, the desperate plight of millions of people in underdeveloped countries.
When you see so few haves and so many have-nots, when you see the greed and the concentration of power … did you ever have a moment of doubt about capitalism, and whether greed’s a good idea to run on?"
Friedman: "Well first of all, tell me, is there some society you know that does not run on greed? Do you think that Russia doesn’t run on greed? Do you think China doesn’t run on greed? What is greed? Of course none of us are greedy; it’s only the other fellow who’s greedy. The world runs on individuals pursing their self-interest.
The great achievements of civilization have not come from government bureaucrats. Einstein did not construct his theory under order from a bureaucrat. Henry Ford didn’t revolutionize the automobile industry that way.
The only cases in which the masses have escaped from the kind of grinding poverty you’re talking about, the only cases in recorded history, are where they have had capitalism and largely free trade.
If you want to know where the masses are worst off, it is exactly in the kinds of societies that depart from that. So that the record of history is absolutely crystal clear, that there is no alternative way so far discovered of improving the lot of ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system."
https://imkane.wordpress.com/2019/03/08/milton-friedman-defends-capitalism-and-kos-phil-donahues-feel-good-socialism/
Full interview: https://www.youtube.com/watch?v=1EwaLys3Zak
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"Deficit spending is simply a scheme for the confiscation of wealth."
- Alan Greenspan
http://libertytree.ca/quotes/Alan.Greenspan.Quote.37A2
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https://imprimis.hillsdale.edu/future-prospects-for-economic-liberty/?utm_campaign=williams&utm_medium=email&_hsmi=101929147&_hsenc=p2ANqtz-_0OBIk_wlKAidlkfDsa29tNO5Lo0I5bcQqp7JAVV4Fgc5n9KaX9r2AMW1VAIWbGjj0I9GRf0LhyLlvLM2aUlYsZtlpzA&utm_source=housefile
One of the justifications for the massive growth of government in the 20th and now the 21st centuries, far beyond the narrow limits envisioned by the founders of our nation, is the need to promote what the government defines as fair and just. But this begs the prior and more fundamental question: What is the legitimate role of government in a free society? To understand how America’s Founders answered this question, we have only to look at the rule book they gave us—the Constitution. Most of what they understood as legitimate powers of the federal government are enumerated in Article 1, Section 8. Congress is authorized there to do 21 things, and as much as three-quarters of what Congress taxes us and spends our money for today is nowhere to be found on that list. To cite just a few examples, there is no constitutional authority for Congress to subsidize farms, bail out banks, or manage car companies. In this sense, I think we can safely say that America has departed from the constitutional principle of limited government that made us great and prosperous.
On the other side of the coin from limited government is individual liberty. The Founders understood private property as the bulwark of freedom for all Americans, rich and poor alike. But following a series of successful attacks on private property and free enterprise—beginning in the early 20th century and picking up steam during the New Deal, the Great Society, and then again recently—the government designed by our Founders and outlined in the Constitution has all but disappeared. Thomas Jefferson anticipated this when he said, “The natural progress of things is for liberty to yield and government to gain ground.”
To see the extent to which liberty is yielding and government is gaining ground, one need simply look at what has happened to taxes and spending. A tax, of course, represents a government claim on private property. Every tax confiscates private property that could otherwise be freely spent or freely invested. At the same time, every additional dollar of government spending demands another tax dollar, whether now or in the future. With this in mind, consider that the average American now works from January 1 until May 5 to pay the federal, state, and local taxes required for current government spending levels. Thus the fruits of more than one third of our labor are used in ways decided upon by others. The Founders favored the free market because it maximizes the freedom of all citizens and teaches respect for the rights of others. Expansive government, by contrast, contracts individual freedom and teaches disrespect for the rights of others. Thus clearly we are on what Friedrich Hayek called the road to serfdom, or what I prefer to call the road to tyranny.
As I said, the Constitution restricts the federal government to certain functions. What are they? The most fundamental one is the protection of citizens’ lives. Therefore, the first legitimate function of the government is to provide for national defense against foreign enemies and for protection against criminals here at home. These and other legitimate public goods (as we economists call them) obviously require that each citizen pay his share in taxes. But along with people’s lives, it is a vital function of the government to protect people’s liberty as well—including economic liberty or property rights. So while I am not saying that we should pay no taxes, I am saying that they should be much lower—as they would be, if the government abided by the Constitution and allowed the free market system to flourish.
And it is important to remember what makes the free market work. Is it a desire we all have to do good for others? Do people in New York enjoy fresh steak for dinner at their favorite restaurant because cattle ranchers in Texas love to make New Yorkers happy? Of course not. It is in the interest of Texas ranchers to provide the steak. They benefit themselves and their families by doing so. This is the kind of enlightened self-interest discussed by Adam Smith in his Wealth of Nations, in which he argues that the social good is best served by pursuing private interests. The same principle explains why I take better care of my property than the government would. It explains as well why a large transfer or estate tax weakens the incentive a property owner has to care for his property and pass it along to his children in the best possible condition. It explains, in general, why free enterprise leads to prosperity.
Ironically, the free market system is threatened today not because of its failure, but because of its success. Capitalism has done so well in eliminating the traditional problems of mankind—disease, pestilence, gross hunger, and poverty—that other human problems seem to us unacceptable. So in the name of equalizing income, achieving sex and race balance, guaranteeing housing and medical care, protecting consumers, and conserving energy—just to name a few prominent causes of liberal government these days—individual liberty has become of secondary or tertiary concern.
Imagine what would happen if I wrote a letter to Congress and informed its members that, because I am fully capable of taking care of my own retirement needs, I respectfully request that they stop taking money out of my paycheck for Social Security. Such a letter would be greeted with contempt. But is there any difference between being forced to save for retirement and being forced to save for housing or for my child’s education or for any other perceived good? None whatsoever. Yet for government to force us to do such things is to treat us as children rather than as rational citizens in possession of equal and inalienable natural rights.
We do not yet live under a tyranny, of course. Nor is one imminent. But a series of steps, whether small or large, tending toward a certain destination will eventually take us there. The philosopher David Hume observed that liberty is seldom lost all at once, but rather bit by bit. Or as my late colleague Leonard Read used to put it, taking liberty from Americans is like cooking a frog: It can’t be done quickly because the frog will feel the heat and escape. But put a frog in cold water and heat it slowly, and by the time the frog grasps the danger, it’s too late.
Again, the primary justification for increasing the size and scale of government at the expense of liberty is that government can achieve what it perceives as good. But government has no resources of its own with which to do so. Congressmen and senators don’t reach into their own pockets to pay for a government program. They reach into yours and mine. Absent Santa Claus or the tooth fairy, the only way government can give one American a dollar in the name of this or that good thing is by taking it from some other American by force. If a private person did the same thing, no matter how admirable the motive, he would be arrested and tried as a thief. That is why I like to call what Congress does, more often than not, “legal theft.” The question we have to ask ourselves is whether there is a moral basis for forcibly taking the rightful property of one person and giving it to another to whom it does not belong. I cannot think of one. Charity is noble and good when it involves reaching into your own pocket. But reaching into someone else’s pocket is wrong.
In a free society, we want the great majority, if not all, of our relationships to be voluntary. I like to explain a voluntary exchange as a kind of non-amorous seduction. Both parties to the exchange feel good in an economic sense. Economists call this a positive sum gain. For example, if I offer my local grocer three dollars for a gallon of milk, implicit in the offer is that we will both be winners. The grocer is better off because he values the three dollars more than the milk, and I am better off because I value the milk more than the three dollars. That is a positive sum gain. Involuntary exchange, by contrast, means that one party gains and the other loses. If I use a gun to steal a gallon of milk, I win and the grocer loses. Economists call this a zero sum gain. And we are like that grocer in most of what Congress does these days.
Some will respond that big government is what the majority of voters want, and that in a democracy the majority rules. But America’s Founders didn’t found a democracy, they founded a republic. The authors of The Federalist Papers, arguing for ratification of the Constitution, showed how pure democracy has led historically to tyranny. Instead, they set up a limited government, with checks and balances, to help ensure that the reason of the people, rather than the selfish passions of a majority, would hold sway. Unaware of the distinction between a democracy and a republic, many today believe that a majority consensus establishes morality. Nothing could be further from the truth.
Another common argument is that we need big government to protect the little guy from corporate giants. But a corporation can’t pick a consumer’s pocket. The consumer must voluntarily pay money for the corporation’s product. It is big government, not corporations, that have the power to take our money by force. I should also point out that private business can force us to pay them by employing government. To see this happening, just look at the automobile industry or at most corporate farmers today. If General Motors or a corporate farm is having trouble, they can ask me for help, and I may or may not choose to help. But if they ask government to help and an IRS agent shows up at my door demanding money, I have no choice but to hand it over. It is big government that the little guy needs protection against, not big business. And the only protection available is in the Constitution and the ballot box.
Speaking of the ballot box, we can blame politicians to some extent for the trampling of our liberty. But the bulk of the blame lies with us voters, because politicians are often doing what we elect them to do. The sad truth is that we elect them for the specific purpose of taking the property of other Americans and giving it to us. Many manufacturers think that the government owes them a protective tariff to keep out foreign goods, resulting in artificially higher prices for consumers. Many farmers think the government owes them a crop subsidy, which raises the price of food. Organized labor thinks government should protect their jobs from non-union competition. And so on. We could even consider many college professors, who love to secure government grants to study poverty and then meet at hotels in Miami during the winter to talk about poor people. All of these—and hundreds of other similar demands on government that I could cite—represent involuntary exchanges and diminish our freedom.
This reminds me of a lunch I had a number of years ago with my friend Jesse Helms, the late Senator from North Carolina. He knew that I was critical of farm subsidies, and he said he agreed with me 100 percent. But he wondered how a Senator from North Carolina could possibly vote against them. If he did so, his fellow North Carolinians would dump him and elect somebody worse in his place. And I remember wondering at the time if it is reasonable to ask a politician to commit political suicide for the sake of principle. The fact is that it’s unreasonable of us to expect even principled politicians to vote against things like crop subsidies and stand up for the Constitution. This presents us with a challenge. It’s up to us to ensure that it’s in our representatives’ interest to stand up for constitutional government.
Americans have never done the wrong thing for a long time, but if we’re not going to go down the tubes as a great nation, we must get about changing things while we still have the liberty to do so.
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In the process of giving this a proper read:
https://reason.com/2020/12/24/money-is-social-media/
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never heard of him
interesting story
especially since my grandfather worked at standard oil - don't know when born 1880s and died 1970s
but early 1900s I guess in the Bayway NJ
my father did some consulting there in 70s
these stacks where the gasses are burned off are famous along NJ turnpike and US Rt. 1 :
https://www.google.com/maps/uv?pb=!1s0x89c3b2d943daf969%3A0x91e5777841507c2c!3m1!7e115!4shttps%3A%2F%2Flh5.googleusercontent.com%2Fp%2FAF1QipNlUAXl7OYIy-GZlJwF83iuU8Mdsx8eEZq6IGQx%3Dw213-h160-k-no!5sbayway%20refinery%20nj%20exxon%20-%20Google%20Search!15sCgIgAQ&imagekey=!1e10!2sAF1QipNlUAXl7OYIy-GZlJwF83iuU8Mdsx8eEZq6IGQx&hl=en&sa=X&ved=2ahUKEwiV8_HNwe_tAhXiQd8KHakpA6cQoiowCnoECBQQAw
I used to be able to see the burn off from my bedroom window in Elizabeth as child
Occasionally we would get these very noxious odors
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As a child growing up in NYC who visited my father every other weekend in Philadelphia, being driven to and from Philly was a part of the experience so I too remember the burn off and the smell.
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Please spread the wisdom of Thomas Sowell to more voters and more generations. Search Thomas Sowell books, Thomas Sowell interviews. This one I think is from 2010. All of it is still vitally relevant today.
https://youtu.be/cdBn7MUM3Yo
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Info from urban issues thread, let us not kid ourselves, what is happening here is the long term consequence of long term economic policies.
Chicago ends 2020 with 769 homicides as gun violence surges
https://apnews.com/article/homicide-chicago-violence-coronavirus-pandemic-gun-violence-be4b972267e31358dd165925d5a33cce
Policies have consequences. Our policies decimated the family. Our policies since the beginning of the so called war on poverty systematically left these young males out of the culture of personal and family responsibilities.
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https://danieljmitchell.wordpress.com/2021/01/02/successful-entrepreneurs-make-the-rest-of-us-richer/
https://www.nber.org/papers/w10433
"producers only capture a tiny slice of the wealth they create for society"
Professor Nordhaus won the Nobel Prize for his work on climate change, is affiliated with the Brookings Institution, and he supports a carbon tax. So he’s not some fire-breathing libertarian with a mission of defending capitalism.
He simply crunched the data and found innovators produce far more wealth for society than they do for themselves.
https://www.aier.org/article/capitalists-get-rich-but-consumers-capture-the-benefits/
"each innovator would surely like to capture a much larger share than 2.2 percent, the robust forces of market competition oblige even the most successful of innovators to give the bulk of the benefits of their innovations to strangers in the form of price cuts, expanded outputs, and improved quality."
(https://i1.wp.com/freedomandprosperity.org/wp-content/uploads/2020/08/Aug-24-20-Schumpeter.jpg?zoom=2)
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"The absence of a bottom line doesn’t reduce greed and self-dealing — it removes a constraint on greed and self-dealing."
- Prof Glenn Reynolds
http://www.usatoday.com/story/opinion/2014/06/02/shinseki-retire-va-scandal-veterans-health-care-obama-column/9838541/
Greed is always with us. The question is whether greed is channeled in productive ways. In a free market, greedy people can only become rich by providing the rest of us with valuable goods and services.
In statist systems, by contrast, greedy people manipulate coercive government policies in order to obtain unearned wealth.
- Dan Mitchell
https://danieljmitchell.wordpress.com/2014/06/03/be-thankful-for-capitalism-and-rich-entrepreneurs/
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https://www.heritage.org/progressivism/commentary/three-nations-tried-socialism-and-rejected-it
Socialists are fond of saying that socialism has never been tried. But in truth, socialism has failed in every country in which it has been tried, from the Soviet Union beginning a century ago to three modern countries that tried but ultimately rejected socialism—Israel, India, and the United Kingdom.
While there were major political differences between the totalitarian rule of the Soviets and the democratic politics of Israel, India, and the U.K., all three of the latter countries adhered to socialist principles, nationalizing their major industries and placing economic decision-making in the hands of the government.
...
Israel, India, and the United Kingdom all adopted socialism as an economic model following World War II. The preamble to India’s constitution, for example, begins, “We, the People of India, having solemnly resolved to constitute India into a Sovereign Socialist Secular Democratic Republic . . .” The original settlers of Israel were East European Jews of the Left who sought and built a socialist society. As soon as the guns of World War II fell silent, Britain’s Labour Party nationalized every major industry and acceded to every socialist demand of the unions.
At first, socialism seemed to work in these vastly dissimilar countries. For the first two decades of its existence, Israel’s economy grew at an annual rate of more than 10 percent, leading many to term Israel an “economic miracle.” The average GDP growth rate of India from its founding in 1947 into the 1970s was 3.5 percent, placing India among the more prosperous developing nations. GDP growth in Great Britain averaged 3 percent from 1950 to 1965, along with a 40 percent rise in average real wages, enabling Britain to become one of the world’s more affluent countries.
But the government planners were unable to keep pace with increasing population and overseas competition. After decades of ever declining economic growth and ever rising unemployment, all three countries abandoned socialism and turned toward capitalism and the free market. The resulting prosperity in Israel, India, and the U.K. vindicated free-marketers who had predicted that socialism would inevitably fail to deliver the goods.
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“Crafting the right response to China’s unrepentant “innovation mercantilism” is difficult because it appears the free world has never faced such an adversary before. But in fact, the free world has faced such an adversary: Germany for the first forty-five years of the twentieth century. As noted development economist Albert O. Hirschman wrote in 1941, Germany was neither a free trader nor a protectionist. It was a “power trader” that used trade as a key tool to gain commercial and military advantage over its adversaries. Likewise, China’s trade policy is guided neither by free trade nor protectionism, but by power trade, with remarkably similar strategy and tactics to those of 1940s Germany. Understanding how Germany manipulated the global trading system to degrade its adversaries’ capabilities, entrap nations as reluctant allies, and build up its own industries for commercial and military advantage, just as China is doing, can shed light and point the way for solutions to the China challenge.” itif.org, international-economy.com
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That resonated rather strongly for me.
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Speaking of Supply Side Economics, George Schultz: "the best stimulus of an ailing economy is almost always to reduce the tax and regulatory burdens weighing it down."
Let's take a look at Demand Side Economics, proven failed but Democrats are still trying to pump another $1.9 trillion into it.
FDR's Treasury Secretary, 1939, see below: "We have tried spending money. We are spending more money than we have ever spent before and it does not work."
Keynesianism and the The New Deal were all about demand side economics. The book on it might be called, how to take a run of the mill downturn and make it last forever, or at least until a world war snaps us out of it. Take a look:
(https://ci4.googleusercontent.com/proxy/pSQx3FxWZlk0-tnCohC37Iqo01QI69uRX9BLSWs_Oqg9O3SypAC1AbD7C1je6_p9DKmQ9cQqgkFGnGUNtTsAKhywPzyBh3F4m4b6t7edzqRvFjobQGfi_u_wuQTzFKpP_mT8ZTrsp0M1TiMGE0iQ1Rjgnn50eg=s0-d-e1-ft#https://mcusercontent.com/dc8d30edd7976d2ddf9c2bf96/images/c9b7e0c6-3930-416a-887b-14e468b93038.jpg)
https://mailchi.mp/8b203ad12729/unleash-prosperity-hotline-862590?e=17d44a0477
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Contrast with supply side and eight years of the Reagan Administration:
20 million new jobs were created
Inflation dropped from 13.5% in 1980 to 4.1% by 1988
Unemployment fell from 7.6% to 5.5%
Net worth of families earning between $20,000 and $50,000 annually grew by 27%
Real gross national product rose 26%
The prime interest rate was slashed by more than half, from an unprecedented 21.5% in January 1981 to 10% in August 1988
https://www.reaganfoundation.org/ronald-reagan/the-presidency/economic-policy/
History repeats itself - on way or the other.
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Back to FDR's New Deal and admittedly failed Demand Side Economics:
Henry Morgenthau, Jr. was FDR’s Secretary of the Treasury from 1934-1945. In the following important quote, he admits that the big New Deal stimulus spending programs had failed.
(p. 2) We have tried spending money. We are spending more money than we have ever spent before and it does not work. And I have just none interest, and if I am wrong . . . somebody else can have my job. I want to see this country prosperous. I want to see people get a job, I want to see people get enough to eat. We have never made good on our promises. . . . I say after eight years of this administration we have just as much unemployment as when we started . . . . And an enormous debt to boot!
Source:
Folsom, Burton W., Jr. In New Deal or Raw Deal? How FDR’s Economic Legacy Has Damaged America. 4th ed. New York: Threshold Editions, 2008.
(Note: ellipses in Folsum’s version of the quotation.)
Folsum says that this statement was from testimony before the House Ways and Means Committee in May 1939; and can be found in Morgenthau’s Diary entry for May 9, 1939 at the Roosevelt Presidential Library.
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https://www.youtube.com/watch?v=J_Bzw8W1rS8&feature=emb_logo
This is a great video about how free enterprise delivers prosperity for the masses.
And because wealthy societies have lots of financial resources, capitalism also is correlated with good outcomes such as reduced pollution and increased literacy.
Hannan makes three key points in his video.
First, he makes the should-be-obvious case that it’s possible for all groups in a society to become richer if the economic pie expands. I’ve shown this with U.S. data and I’ve shown it with global data.
Second, he echoes the great insight of the late Walter Williams by pointing out that you get rich under capitalism by serving others. In government-controlled economies, by contrast, you get rich by stealing from others.
Third, he cites Joseph Schumpeter’s sage observation about how capitalism makes life better for ordinary people. That’s never happens in government-controlled economies.
Indeed, the only possible shortcoming in the video is that it truncates Schumpeter’s quote.
As you can see below, it’s not just that free enterprise makes goods available for those at the bottom, it does so in a way that is increasingly affordable over time
(https://danieljmitchell.wordpress.com/2021/01/02/successful-entrepreneurs-make-the-rest-of-us-richer/)
https://danieljmitchell.wordpress.com/
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Walter Williams On Property, Rights and Justice
1. My definition of social justice: I keep what I earn and you keep what you earn. Do you disagree?...how much of what I earn belongs to you--and why?
2. If one person has a right to something he did not earn, of necessity it requires that another person not have a right to something that he did earn.
3. Nothing in our Constitution suggests that government is a grantor of rights. Instead, government is a protector of rights.
4. There is no moral argument that justifies using the coercive powers of government to force one person to bear the expense of taking care of another.
5. Government has no resources of its own…government spending is no less than the confiscation of one person’s property to give it to another to whom it does not belong.
6. We don’t have a natural right to take the property of one person to give to another; therefore, we cannot legitimately delegate such authority to government.
7. Exercise of a right by one person does not diminish those held by another.
8. No matter how worthy the cause, it is robbery, theft, and injustice to confiscate the property of one person and give it to another to whom it does not belong.
9. The better I serve my fellow man…the greater my claim on the goods my fellow man produces. That’s the morality of the market.
10. The act of reaching into one’s own pockets to help a fellow man in need is praiseworthy and laudable. Reaching into someone else’s pocket is despicable.
Liberty versus Coercion
Government is about coercion. Limiting government is the single most important instrument for guaranteeing liberty.
Democracy is little more than mob rule, while liberty refers to the sovereignty of the individual.
The true test of one’s commitment to liberty and private property rights…comes when we permit people to be free to do those voluntary things with which we disagree.
In a free society, government has the responsibility of protecting us from others, but not from ourselves.
The essence of government is force, and most often that force is used to accomplish evil ends.
Economic planning is nothing more than the forcible superseding of other people’s plans by the powerful elite backed up by the brute force of government.
If we buy into the notion that somehow property rights are less important, or are in conflict with, human or civil rights, we give the socialists a freer hand to attack our property.
Substituting democratic decision making for what should be private decision-making is nothing less than tyranny dressed up.
It’s government people, not rich people, who have the power to coerce and make our lives miserable.
The moral tragedy that has befallen Americans is our belief that it is okay for government to forcibly use one American to serve the purposes of another–that in my book is a working definition of slavery.
Protecting our Rights and Liberties
Always be suspicious of those who…claim their way is the best way and are willing to force their way on the rest of us.
People who denounce the free market and voluntary exchange…are for control and coercion.
Economic planning is nothing more than the forcible superseding of other people’s plans by the powerful elite backed up by the brute force of government.
Politicians have immense power to do harm to the economy. But they have very little power to do good.
What our nation needs is a separation of “business and state”…That would mean crony capitalism and crony socialism could not survive.
The best good thing that politicians can do for the economy is to stop doing bad. In part, this can be achieved through reducing taxes and economic regulation, and staying out of our lives.
If we care about our remaining liberties we must at some point …let politicians and bureaucrats know we will not tolerate further encroachment on our God-given rights to liberty.
The public good is promoted best by people pursuing their own private interests.
Most of the great problems we face are caused by politicians creating solutions to problems they created in the first place.
If we’re ignorant, we won’t even know when government infringes on our liberties. Moreover, we’ll happily cast our votes for those who’d destroy our liberties.
Walter Williams had a great deal of wisdom to offer, and he passed that wisdom on to many. But there are many more of us who could still benefit from it.
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The Mercatus Center at George Mason University is the world's premier university source for market-oriented ideas—bridging the gap between academic research and public policy problems."
https://www.mercatus.org/about
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https://www.cato.org/blog/american-compass-shouldnt-reject-economics-immigration?&utm_source=twitter&utm_medium=social-media&utm_campaign=addtoany
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That was pretty long so I just superskimmed it; did I get it correctly that he seems not to distinguish legal and illegal immigration, as well as the issue of the characteristics required for legal immigrants?
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That was pretty long so I just superskimmed it; did I get it correctly that he seems not to distinguish legal and illegal immigration, as well as the issue of the characteristics required for legal immigrants?
You are right, not covered in this article. To me, immigration only includes legal. Illegal entry introduces so many other factors, covid for example, gangs, criminals, lack of assimilation, no control of the flow, etc. Second, there are at lot of reasons we should manage the number rate, backgrounds and origin of legal immigrants. Seeing the labor and capital economics of how immigrants affect wages of native workers and capital flows can help us answer those questions, who should come in, at what rate. None of that can be done with an open, undocumented, lawless border.
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John Childs in the New York Sun:
The first thing to be said about Senator Elizabeth Warren’s plan for a wealth tax is that it attacks one of the pillars of American greatness. It is hard to imagine anything more un-American than an attack on wealth. Accumulation of wealth is central to our right to life, liberty, and the pursuit of happiness. It is the fruit of that uniquely American personality trait — optimism.
That can-do spirit has beaten the odds countless times, including all the Horatio Alger stories that populate American history.
Mrs. Warren’s basic threat is a 2% annual tax on household net worth between $50 million and $1 billion. While 2% might sound low, it adds up over a decade to 20% of the value of the asset in question.
https://mailchi.mp/c8eca0a42c23/unleash-prosperity-hotline-865024?e=17d44a0477
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1) It will only affect people with assets over $50 million? Is Lucy holding the football again?
2) It is a denial of science that hurting only these people won't hurt those people in an interconnected economy.
3) You can't take 20% of asset. You can only force a sale and take 20% of the proceeds.
We've gone from, "You didn't build that" to "You built it and we're taking it". It's morally wrong. Thou shalt not steal. It's not a 'fair' law that applies to everyone. The main selling point is that is doesn't.
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Doug,
Today's dems give absolutely zero fucks for the concepts of right and wrong, fairness, traditional American beliefs or anything resembling logic.
John Childs in the New York Sun:
The first thing to be said about Senator Elizabeth Warren’s plan for a wealth tax is that it attacks one of the pillars of American greatness. It is hard to imagine anything more un-American than an attack on wealth. Accumulation of wealth is central to our right to life, liberty, and the pursuit of happiness. It is the fruit of that uniquely American personality trait — optimism.
That can-do spirit has beaten the odds countless times, including all the Horatio Alger stories that populate American history.
Mrs. Warren’s basic threat is a 2% annual tax on household net worth between $50 million and $1 billion. While 2% might sound low, it adds up over a decade to 20% of the value of the asset in question.
https://mailchi.mp/c8eca0a42c23/unleash-prosperity-hotline-865024?e=17d44a0477
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1) It will only affect people with assets over $50 million? Is Lucy holding the football again?
2) It is a denial of science that hurting only these people won't hurt those people in an interconnected economy.
3) You can't take 20% of asset. You can only force a sale and take 20% of the proceeds.
We've gone from, "You didn't build that" to "You built it and we're taking it". It's morally wrong. Thou shalt not steal. It's not a 'fair' law that applies to everyone. The main selling point is that is doesn't.
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I prefer the efficiency argument in taxation, but sometimes it's necessary to at least point out the obvious distinctions of right versus wrong.
Tearing down companies from the successful people who built them, for the sin of being successful, isn't in anyone's best interest.
Problem is that we don't teach the good of capital and capitalism. It is thought of as a (zero-sum) lottery; you took some payment from all these people and gave it to the few, and the truth couldn't be any more the opposite. The innovator on average keeps 2% of the wealth he or she helped to create, and everyone around them benefits, customers, suppliers, employees plus the positive multiplier effect that radiates outward from all of them. Labor without capital is nearly worthless. The most recent tax rate reductions helped the incomes of working people more than anyone else, even though they seemed to target businesses, meaning employers.
I want to pick off the honest Democrat voters, one by one. How long can each one handle the contradiction that their chosen for now political economic choices are built on a foundation of dishonesty?
Doug,
Today's dems give absolutely zero fucks for the concepts of right and wrong, fairness, traditional American beliefs or anything resembling logic.
John Childs in the New York Sun:
The first thing to be said about Senator Elizabeth Warren’s plan for a wealth tax is that it attacks one of the pillars of American greatness. It is hard to imagine anything more un-American than an attack on wealth. Accumulation of wealth is central to our right to life, liberty, and the pursuit of happiness. It is the fruit of that uniquely American personality trait — optimism.
That can-do spirit has beaten the odds countless times, including all the Horatio Alger stories that populate American history.
Mrs. Warren’s basic threat is a 2% annual tax on household net worth between $50 million and $1 billion. While 2% might sound low, it adds up over a decade to 20% of the value of the asset in question.
https://mailchi.mp/c8eca0a42c23/unleash-prosperity-hotline-865024?e=17d44a0477
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1) It will only affect people with assets over $50 million? Is Lucy holding the football again?
2) It is a denial of science that hurting only these people won't hurt those people in an interconnected economy.
3) You can't take 20% of asset. You can only force a sale and take 20% of the proceeds.
We've gone from, "You didn't build that" to "You built it and we're taking it". It's morally wrong. Thou shalt not steal. It's not a 'fair' law that applies to everyone. The main selling point is that is doesn't.
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Let me know when you convince one you know personally.
I prefer the efficiency argument in taxation, but sometimes it's necessary to at least point out the obvious distinctions of right versus wrong.
Tearing down companies from the successful people who built them, for the sin of being successful, isn't in anyone's best interest.
Problem is that we don't teach the good of capital and capitalism. It is thought of as a (zero-sum) lottery; you took some payment from all these people and gave it to the few, and the truth couldn't be any more the opposite. The innovator on average keeps 2% of the wealth he or she helped to create, and everyone around them benefits, customers, suppliers, employees plus the positive multiplier effect that radiates outward from all of them. Labor without capital is nearly worthless. The most recent tax rate reductions helped the incomes of working people more than anyone else, even though they seemed to target businesses, meaning employers.
I want to pick off the honest Democrat voters, one by one. How long can each one handle the contradiction that their chosen for now political economic choices are built on a foundation of dishonesty?
Doug,
Today's dems give absolutely zero fucks for the concepts of right and wrong, fairness, traditional American beliefs or anything resembling logic.
John Childs in the New York Sun:
The first thing to be said about Senator Elizabeth Warren’s plan for a wealth tax is that it attacks one of the pillars of American greatness. It is hard to imagine anything more un-American than an attack on wealth. Accumulation of wealth is central to our right to life, liberty, and the pursuit of happiness. It is the fruit of that uniquely American personality trait — optimism.
That can-do spirit has beaten the odds countless times, including all the Horatio Alger stories that populate American history.
Mrs. Warren’s basic threat is a 2% annual tax on household net worth between $50 million and $1 billion. While 2% might sound low, it adds up over a decade to 20% of the value of the asset in question.
https://mailchi.mp/c8eca0a42c23/unleash-prosperity-hotline-865024?e=17d44a0477
-------------------------------------------------------------
1) It will only affect people with assets over $50 million? Is Lucy holding the football again?
2) It is a denial of science that hurting only these people won't hurt those people in an interconnected economy.
3) You can't take 20% of asset. You can only force a sale and take 20% of the proceeds.
We've gone from, "You didn't build that" to "You built it and we're taking it". It's morally wrong. Thou shalt not steal. It's not a 'fair' law that applies to everyone. The main selling point is that is doesn't.
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https://www.cfo.com/the-economy/2018/11/the-federal-government-does-not-need-revenue/
HT to CCP
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1 Hour. Watch it. Share it.
https://www.youtube.com/watch?v=WK4M9iJrgto&t=2s
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Deniers of Science, economic science.
Source: Alan Reynolds Econ Twitter, Mar 8 2021
Financial Times: "Biden on brink of passing historic $1.9tn boost to US economy"
Alan Reynolds: Why is adding $1.9 trillion to taxpayer debt assumed be a boost rather than a burden to factors of production? Additions to corporate or household debt are not assumed to add to their net worth.
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(Doug). Did the New Deal that kept us in depression for a decade 'stimulate' the economy? Did shovel ready jobs, Solyndra or cash for clunkers stimulate the economy during the nation's slowest recovery?
Politicians and media lie to us, then pollsters tell us it must be true because most people agree. That is not data based science.
Two trillion in new debt with real interest is a helluva burden - if we intended to pay it back. Since we don't, it is economic damage in untold ways.
At 45,000 per household so far, must ask, did someone else get your share?
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https://bombthrower.com/articles/the-transition-overview-building-companies-that-matter/
Have not yet gotten to:
https://bombthrower.com/
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(https://i1.wp.com/www.powerlineblog.com/ed-assets/2021/04/Screen-Shot-2021-03-28-at-7.00.31-PM.png?resize=768%2C748&ssl=1)
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For more on Robert Mundell, read The Seven Fat Years by Robert Bartley, then Editor of the WSJ.
https://en.wikipedia.org/wiki/Robert_Mundell
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https://www.nysun.com/editorials/robert-mundell/91468/
Robert Mundell
Editorial of The New York Sun | April 5, 2021
Our favorite story about Robert Mundell, the Nobel laureate in economics who at age 88 died Sunday at his villa in Italy, illuminates what a country would do for an hour of his time. It was the late 1980s. We were based in Brussels as an editorial writer for the Wall Street Journal. One day at 7 a.m., our phone rang. It turned out to be Mundell, calling to thank us for mentioning him in that morning’s editorial.
“Gee, Bob,” we said, “it’s 2 a.m. in New York. How’d you get the Journal so early there?” He turned out to be in Geneva and had read it in the Journal’s European edition. Just then, a second line on the phone lit up, and we asked Mundell where he was staying. He said he was in room 306 at the Beau Rivage. We said we’d call him right back, dropped his call, and picked up the other line.
It was Jacques Raiman, adviser to Édouard Balladur, France’s minister of the economy. “By any chance,” Raiman said, “do you know how I could reach Professor Mundell.” Sure, we said, he’s in room 306 of the Beau Rivage in Geneva. Raiman said he wanted to get Mundell on the blower with Balladur. “Splendid,” we said. “Even better, you could bring him up to Paris for lunch.”
Raiman, we later learned, did invite Mundell to coffee with Balladur in the minister’s magnificent office in the Rue Rivoli. Mundell said he absolutely had to be back in Geneva for dinner. He was reassured and told to head to the airport. Soon Balladur gets a call from the Sûreté, saying that an aging hippy was at the Air France check-in at Geneva, lacking a ticket but insisting he had an appointment with the minister.
The hippie, the detective said, was wearing a blazer, blue jeans, and shoulder-length hair. Soon Mundell was seated in the minister’s magnificent office. They had a fine talk, and at 5 p.m., Balladur looked at his watch and said, “I understand I’ve promised to get you back to Geneva for dinner.” A gleaming Renault Vingt-Cinq limousine, motor purring, was waiting in the ministry courtyard.
A liveried officer helped Mundell into the car. Then the vehicle roared into the Rue Rivoli, hauled up the Elysian Fields, and careered around the Arc de Triomphe, and swooped onto the beltway known as the Périphérique — where it stopped cold in the rush-hour traffic jam. In half an hour, they managed a quarter kilometer, but were now at a standstill. An impatient Mundell got out of the car to case the situation.
Suddenly, the Périphérique was enveloped in sirens and blue lights as motorcycle-riding flics swarmed through the traffic jam, slapping the vehicles and ordering them to pull over. Mundell scampered back into his car. “C’est pour vous!” his driver exclaimed, throwing the Vingt-Cinq into gear and swerving into a left lane that was now empty. Balladur had cleared the highway to Charles de Gaulle airport so the professor could catch his plane.
We don’t know what happened in Balladur’s meeting with Mundell. Was that when he clinched his idea for the euro, of which the economist would become known as the father? He’d already written “A Plan for a European Currency.” The euro, in any event, made its debut a few years later. Dayenu, we say. The amazing thing is that the euro was but one of Mundell’s astounding projects.
Mundell had already played a leading role in developing the economic strategy — high interest rates combined with supply-side tax cuts — that were so central to defeating the stagflation of the 1970s and enabling the Reagan boom. Mundell would go on to advise the central bank of China, which he had foreseen would emerge as an economic power. He launched the Nobel Laureates Beijing Forum.
Mundell inspirited and emboldened thousands of economists and students. In 1999, when Mundell won his Nobel, he invited the editor of the Wall Street Journal, Bob Bartley, who’d backed him through thick and thin, to join him in Stockholm. Economist Judy Shelton tells of how he reacted to a setback in her early career by inviting her to a conference on the coast, where he seated her between Paul Samuelson and James Tobin.
One of great economist’s tools was a villa in the glorious Tuscan Hills of Italy. He’d purchased the estate, we’re told, as a hedge against inflation. There he and his wife, Valerie, welcomed over the years what must be hundreds of economists, business leaders, politicians, and newspapermen in a running seminar on monetary reform that those who attended will never forget.
Early today from Santa Columba, Valerie cabled friends that she, their son Nicholas, and an aide had on a lovely day last week taken Mundell down to the garden “where the tulips, narcissi and hyacinths were starting to bloom and the trees were starting to bud.” Trailed by their dogs, the economist “kept repeating beautiful, beautiful and then fell asleep in the sun.” Back at the villa, “he slept continuously and peacefully — joined on the bed by our two cats” until he took Sunday the last breaths of one of the great lives of our time.
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I wonder if the pretend advocates of pretend Marxism like the BLM co-founder, who just bought the million dollar compound in LA, ever studied the real world attempts at Marxism that all ended in miserable failure. Take a look back at the Soviet Union and 'war communism', 1917-1921:
https://fee.org/articles/that-time-the-soviet-union-grudgingly-turned-to-free-markets-to-save-its-collapsing-economy/
"On May 9, 1918, a grain monopoly was announced over grain production in the country. All grain harvested across the country was now the property of the state."
...
"from 1909-1913, gross agricultural output averaged 69 million tons. By 1921, it was just 31 million. From 1909-1913, sown area was over 224 million acres. In 1921, only 158 million acres were sown. This lack of food resulted in a mass loss of population. From 1917 to 1922, the entire population declined by 16 million, not counting immigration and deaths from the civil war."
[Doug] Don't you think death of 16 million by unnecessary starvation is a particularly slow and grewsome way to go? The recent human tragedy in Venezuela had already been tried elsewhere. With all we've learned, why do we want this here?
More from the article: After a meeting of the Tenth Party Congress in March, a new set of economic programs was agreed upon. These changes would come to be known as the NEP, or New Economic Policy. The general levy on food was rescinded, allowing peasants to keep the surplus of their harvest and sell it on the market for their own gain. Small businesses would be allowed to operate once more. All systems of rationing were dismantled and money returned into the economy to facilitate exchange. Even though large parts of industry were still controlled by the state, the totalitarian control of War Communism had been rejected in favor of private enterprise and free markets.
“The restoration of the market brought life back to the Soviet economy. Private trade responded instantly to the chronic shortages that had built up over seven years of war, revolution, and the Civil War. By 1921, everyone was living in patched-up clothes and shoes, cooking with broken utensils. People set up booths and stalls; flea-markets flourished; peasants sold their foodstuffs in town markets; and “bagging” to and from the countryside once again became a mass phenomenon. Licensed by new laws, private cafes, shops, and restaurants, even small-scale manufacturers appeared like mushrooms after the rain. Foreign observers were astounded by the transformation.”
There was an almost immediate recovery of the Soviet economy. Where there once was empty shelves and empty stomachs, ample food and manufactured goods were now available for purchase. The constant shortages that had marked War Communism were replaced with businesses flushed with products to sell.
The Legacy of War Communism
What went wrong? The Bolshevik leaders had their own ideas about why their Communist utopia had failed to arrive. Lenin claimed that “state capitalism” was a necessary stage before communism could be achieved. Before all property and exchange could be discarded for good, a “mixed-economy” was first necessary. A convenient explanation for the failures of the state planning, no doubt. Some right-leaning figures in Moscow, such as Bukharin, became more favorable to the idea of private enterprise and embraced the NEP as being the ideal system, as opposed to a temporary necessity. Others, such as Stalin, saw the NEP as a mistake, and a return to state planning would work if given enough time.
Even if the Bolsheviks were divided on why War Communism failed, economics gives us a clear answer as to why central planning of an economy cannot work. It is because central planning cannot transfer information in the same way that markets can. Knowledge about the relative scarcity or abundance of any particular good or resource can be easily transmitted via prices.
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https://www.creators.com/read/alan-reynolds/04/07/what-supply-side-economics-means
What Supply-Side Economics Means
By Alan Reynolds
April 25, 2007 8 Min Read
In "The Seven Fat Years," Robert Bartley, the legendary former editor of The Wall Street Journal, wrote: "On March 26, 1976 Herb Stein coined a label, the 'supply-side fiscalists,' telling a conference at the Homestead Resort in Virginia that it consisted of 'maybe two' economists. Alan Reynolds passed this along to Jude (Wanniski), who promptly appropriated the label, though dropping 'fiscalists' as awkward and misleading." The label was new, but the basic concepts had been explained in Wanniski's Journal article of Dec. 11, 1974, "It's Time to Cut Taxes."
In 1977, Bruce Bartlett went to work for Jack Kemp, the congressional quarterback for what eventually became President Reagan's first round of tax rate reductions.
In a recent New York Times article, Bruce wrote: "I think it is long past time that the phrase (supply-side economics) be put to rest. ... It has become a frequently misleading and meaningless buzzword that gets in the way of good economic policy. Today, supply-side economics has become associated with an obsession for cutting taxes under any and all circumstances. No longer do its advocates in Congress and elsewhere confine themselves to cutting marginal tax rates — the tax on each additional dollar earned — as the original supply-siders did. Rather, they support even the most gimmicky, economically dubious tax cuts with the same intensity. ... Today, it is common to hear tax cutters claim, implausibly, that all tax cuts raise revenue."
Labels aside, those remarks are nothing new. In a July 2004 column, Bartlett correctly remarked that, "The vast bulk of tax cuts since 2001, in revenue terms, have gone for tax rebates, kiddy credits and other measures having no impact on marginal incentives."
Of course such "gimmicky tax cuts" lose tax revenue. But Wall Street Journal columnist Robert Frank, writing on economist Greg Mankiw's blog, recently imagined he had witnessed "the supply-sider Bruce Bartlett now conceding that tax cuts for top earners don't boost total tax revenues." Bartlett conceded no such thing. Revenues have risen impressively since the 2003 reduction of tax rates, and nearly all of the gains are from top earners, including profits, capital gains and dividends.
In 2004, Bartlett wrote that "with federal revenues at just 15.8 percent of gross domestic product (GDP) — well below their historical level of 18 percent — I don't think our economy is overtaxed." The Congressional Budget Office now estimates federal revenues of 18.6 percent of GDP this year and 19 percent next year.
Phrases intended to describe complex ideas in a word or two, such as Keynesian or monetarist, invariably become misused or hijacked after three decades. But such semantic abuses can't be halted by Bartlett's white flag. Like it or not, the phrase "supply-side economics" will doubtless continue to be used and abused.
Bartlett says, "The context in which the term had meaning no longer exists, and therefore it has become a barrier to communication." That context refers to a debate about the appropriate "policy mix" in a situation of double-digit inflation combined with severe recession, as in 1974-75 or 1980-82. The supply-side innovation, from Nobel Laureate Bob Mundell, was to suggest that (1) monetary policy is the right tool to keep inflation in check, and that (2) the focus of tax policy should be shifted from short-term accounting results (deficits) toward improving longer-term incentives for productive work and investment. The first part of that package is actually monetarist, and neither part ever ceases to be relevant to inflation and economic growth, respectively.
I wrote a paper on "The Fiscal-Monetary Policy Mix" for the Fall 2001 Cato Journal. It began by saying: "In the early postwar years, during the heyday of fiscal fine-tuning ... the predominant view was that the main function of monetary policy was to 'stimulate' debt-financed purchases by keeping interest rates low. Inflation was first considered a useful lubricant to be traded for lower unemployment, and inflation could be reduced only by tolerating high unemployment. In the late '60s and early '70s, when the shrinking dollar proved less popular than expected, inflation was routinely described by a thermal metaphor ('overheating') and regarded as an endemic problem to be endlessly 'fought' by using fiscal policy (a surtax) and incomes policy (wage-price controls), but never monetary policy."
The context of my remarks was the conventional unwisdom that gave us LBJ's surtax in 1968 and Nixon's price controls in 1971. In a blog commenting on Bartlett's piece, New York Times columnist Paul Krugman was irritated by Bartlett's comment that "Keynesians of that era" thought "monetary policy is impotent and inflation is caused by low unemployment." Krugman replied: "I was a grad student at MIT — the great Keynesian stronghold — in the 1970s, and this bears no resemblance to what was being taught. In fact, I still have my copy of Dornbusch-Fischer, 'Macroeconomics,' the 1978 edition — and it doesn't make any of those assertions."
By 1978, however, supply-side ideas were even getting attention in textbooks. In the 1978 edition of Campbell McConnell's best-selling "Economics" text, the "Last Word" on fiscal policy was a paper of mine that is still online at taxfoundation.org. The 1978 Dornbusch-Fischer text found supply-side tax policy "intriguing" and thought we may well need "fiscal policies that operate on aggregate supply."
Bartlett says: "I still think (supply-side economics) was the right cure for the economic problems we were facing in the late 1970s. I also think it embodies some fundamental truths that are applicable at all times. But these fundamental truths, such as the idea that high marginal tax rates are bad for the economy, are now almost universally accepted." That is almost true. Mainstream economics almost universally accepts "optimal tax theory" and the "elasticity of taxable income" — elegant elaborations of original supply-side themes. If incentives didn't matter, then we might as well discard the word "economics," not just supply-side (incentive-based) microeconomics.
Greg Mankiw is a "new Keynesian" scholar who thinks tax incentives matter a lot. Ed Prescott is a "real business cycle" scholar who thinks tax incentives matter even more. But Mankiw, Prescott, Martin Feldstein and others still quarrel with their retrograde peers. Being "almost universally accepted" is almost good enough, but not quite. When tax policy in most countries is as close to optimal as Hong Kong's, I will gladly stop mentioning supply-side economics.
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https://fee.org/articles/dirty-jobs-star-mike-rowe-just-totally-debunked-the-argument-for-a-15-minimum-wage/
“There is a ladder of success that people climb,” he continued. “Some of those jobs that are out there for seven, eight, nine dollars an hour, in my view, they're simply not intended to be careers. They're not intended to be full-time jobs. They're rungs on a ladder."
"[Those jobs] are ways for people to get experience in the workforce doing a thing that might not necessarily pay you as much as you'd like, but nevertheless serves a real purpose," Rowe added. "I worry that the path to a skilled trade can be compromised when you offer an artificially high wage for, I hate the expression, but an unskilled job.”
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"less energy and food" in small print:
https://www.bls.gov/cpi/
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https://thehill.com/opinion/finance/558555-biden-approaches-economic-point-of-no-return
total silence from MSM
Was it on Levin show where one economist said if we measure CPI in 1970s terms rather then today CPI we are already in double digit inflation
funny how numbers get distorted and played with and jumbled to make pols look better
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https://www.bea.gov/system/files/papers/WP2019-1_0.pdf
"Over the period, compensation has decreased as a share of household income over
time, while transfers have increased proportionally. These trends are seen most strongly in the bottom quintiles. Fourth, real mean and median income have increased over the period, with gains made by every income quintile. Finally, the effects of the Great Recession and subsequent gradual recovery can be seen very clearly to be affecting all income categories.
We view this exercise as an important step in furthering the discussion not only on inequality statistics, but also on working to close the often-cited “macro-micro” gap which
exists in estimates of income distributions."
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https://www.nysun.com/national/beyond-bretton-woods-it-was-as-close-to-economic/91617/
Turning point meeting, Friday the 13th, August 1971. Also see this chapter in Robert Bartley's Seven Fat Years. We went off of the Bretton Woods gold-based monetary system and implemented price wage controls when inflation hit 7%. By the end of the decade, inflation was double-digit. In a short column he also covers the main mistakes of the Great Depression.
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https://t.co/4spU4GtuPm?amp=1
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(https://i2.wp.com/www.powerlineblog.com/ed-assets/2021/09/IMG_4606.jpeg?w=960&ssl=1)
https://i2.wp.com/www.powerlineblog.com/ed-assets/2021/09/IMG_4606.jpeg?w=960&ssl=1
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(https://i2.wp.com/www.powerlineblog.com/ed-assets/2021/10/image001-7-copy-3.jpg?w=354&ssl=1)
https://i2.wp.com/www.powerlineblog.com/ed-assets/2021/10/image001-7-copy-3.jpg?w=354&ssl=1
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https://www.realclearhistory.com/articles/2021/09/27/churchill_truly_understood_communism_and_socialism_796439.html
[T]here can be no doubt that Socialism is inseparably interwoven with Totalitarianism and the abject worship of the State. … liberty, in all its forms, is challenged by the fundamental conceptions of Socialism. … there is to be one State to which all are to be obedient in every act of their lives. This State is to be the arch-employer, the arch-planner, the arch-administrator and ruler, and the arch-caucus boss.
A Socialist State once thoroughly completed in all its details and aspects… could not afford opposition. Socialism is, in its essence, an attack upon the right of the ordinary man or woman to breathe freely without having a harsh, clumsy tyrannical hand clapped across their mouths and nostrils.
But I will go farther. I declare to you, from the bottom of my heart that no Socialist system can be established without a political police. Many of those who are advocating Socialism or voting Socialist today will be horrified at this idea. That is because they are shortsighted, that is because they do not see where their theories are leading them.
No Socialist Government conducting the entire life and industry of the country could afford to allow free, sharp, or violently-worded expressions of public discontent. They would have to fall back on some form of Gestapo, no doubt very humanely directed in the first instance.
And this would nip opinion in the bud; it would stop criticism as it reared its head, and it would gather all the power to the supreme party and the party leaders, rising like stately pinnacles above their vast bureaucracies of Civil servants, no longer servants and no longer civil. And where would the ordinary simple folk — the common people, as they like to call them in America — where would they be, once this mighty organism had got them in its grip?
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January 4, 2022
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What We're Reading: Myths and Memoirs
Weekly reviews of what's on our bookshelves.
By: Ryan Bridges and Ekaterina Zolotova
The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy
By Stephanie Kelton
We’re all familiar with the old aphorism, “There’s no such thing as a free lunch.” I’m pretty sure it was the first thing I was told in school about economics. It’s also the first thing most critics of Modern Monetary Theory like to remind us. I didn’t expect Stephanie Kelton, the author of the MMT bible, to agree.
If you’ve been living under a rock, MMT is a school of thought that argues that a monetarily sovereign state cannot go bankrupt. Countries like the U.S., U.K. or Japan, which spend, tax and borrow in a fiat currency that they control, don’t much need to concern themselves with the budget deficit or debt because unlike other states or businesses or households they can always create more money – up to a point. It’s a simple idea that has attracted some excited proponents and even fiercer critics.
Now that I’ve read Kelton’s book, “The Deficit Myth,” I understand that what these critics are really telling us is that they haven’t done their homework. At no point does Kelton, now an economics and public policy professor at Stony Brook University, say that a government’s ability to print money and spend is limitless. Instead, she argues for “replacing an artificial (revenue) constraint [on what governments can do] with a real (inflation) constraint.” Orthodox economists are right that economies have speed limits, they’re just wrong about what they are. The true limits are defined by the economy’s productive resources, not flimsy math and not what it can extract from the private sector in the form of taxes and borrowing. To be frank, I’m not sure why this is controversial. The strongest criticisms I’ve seen of MMT were swept away before the first chapter.
But I’m also not entirely convinced that MMT’s implications are as profound as Kelton would have us believe. For one thing, I don’t think she addressed what makes some countries monetarily sovereign but not others. If a country can be one or the other, then presumably it can move between the two states. Is it possible, then, for a country to lose its monetary sovereignty through misguided policy? I’m not an economist by any stretch, but my assumption would be that a government that loses its credibility with international investors through perceived irresponsibility could lose its monetary sovereignty in the process. At that point, the conditions that make MMT feasible would cease to apply to it, and I assume catastrophe would ensue. Relatedly, Kelton, who focuses mostly on the U.S. in the book, makes no attempt to define what the American economy’s speed limit might be. The implications of MMT are radically different if the U.S. government could increase its spending by 25 percent or 5 percent.
Anyway, I highly recommend “The Deficit Myth.” It’s probably not what you’ve been told to expect; for various reasons, a lot of influential people have an interest in smothering MMT in the cradle. But Kelton’s book contains some interesting ideas about the purpose of taxes, as well as intriguing policy prescriptions, such as a federal jobs guarantee. Most important, it’s short, it’s not overly technical, and it could be the future.
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Dangerous ideology.
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Dangerous ideology.
The left is unconstrained by reality.
They will crash the economy with their lunacy. Plan accordingly.
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https://www.youtube.com/watch?v=OOZxMjo14pw
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Bertrand de Jouvenel writes:
“Inflation is the moral ruin of societies, for it authorises a debtor not to make effective repayment of the real sum which he and the creditor had in mind, but only of a smaller sum, which is the same only in name. It is a school of default on the substance of promises.”
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Bertrand de Jouvenel writes:
“Inflation is the moral ruin of societies, for it authorises a debtor not to make effective repayment of the real sum which he and the creditor had in mind, but only of a smaller sum, which is the same only in name. It is a school of default on the substance of promises.”
Good thing our society doesn't suffer from moral decay at any level!
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(https://mcusercontent.com/dc8d30edd7976d2ddf9c2bf96/images/04223aa6-1d47-adeb-af65-948fbc8c9c6c.png)
The best and the brightest?
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https://www.realclearpolitics.com/articles/2022/08/30/its_easy_being_a_socialist_in_america_but_heres_the_truth_148115.html
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https://www.realclearpolitics.com/articles/2022/08/30/its_easy_being_a_socialist_in_america_but_heres_the_truth_148115.html
"How come young people don't know this?"
https://www.anumuseum.org.il/blog-items/frankfurt-school-jewish-intellectuals-made-60s/
https://bigthink.com/the-present/yuri-bezmenov/ (Ignore the standard "OrangeManBad!" at the start of the article)
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https://dentonrc.com/opinion/the-2022-economics-nobel-should-come-with-a-warning/article_63028a0e-65e8-5a67-abc5-1d5052d29269.html
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https://www.nytimes.com/interactive/2022/10/24/magazine/bono-interview.html?searchResultPosition=1
"I ended up as an activist in a very different place from where I started. I thought that if we just redistributed resources, then we could solve every problem. I now know that’s not true. There’s a funny moment when you realize that as an activist: The off-ramp out of extreme poverty is, ugh, commerce, it’s entrepreneurial capitalism."
...
"I didn’t grow up to like the idea that we’ve made heroes out of businesspeople, but if you’re bringing jobs to a community and treating people well, then you are a hero."
--------------------------
2006, U2 leave Ireland over taxes
https://taxfoundation.org/u2-abandons-ireland-name-taxes/
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‘Adam Smith’s America’ Review: Wealth of a Nation
‘The Wealth of Nations’ was published the same year as the Declaration of Independence, and has informed American thinking ever since.
image
Economist Milton Friedman, 1980.
PHOTO: EVERETT/SHUTTERSTOCK
By Barton Swaim
Dec. 16, 2022 3:30 pm ET
Admirers of Adam Smith may be surprised to learn that there is an entire academic industry dedicated to the proposition that the great Scottish economist was not a proponent of free-market capitalism. Scholarly articles on Smith and the economic ideas of the Scottish Enlightenment frequently contain lengthy explanations of how he really didn’t promote amoral capitalism and unfettered markets but believed rather in a virtuous society that placed moral concerns above the market.
GRAB A COPY
Adam Smith’s America: How a Scottish Philosopher Became an Icon of American Capitalism
Academic debates aside, the basic point about Smith’s economic views isn’t in doubt. His magnum opus, “An Inquiry Into the Nature and Causes of the Wealth of Nations” (1776), made the case that economic growth is not the result of governmental planning but the natural outcome of many people pursuing their own self-interest in the confines of an ordered polity. The problem, for academic historians and economists over the last 60 years, is that from the 1950s to the 1980s a few well-known free-market economists overtly applied the chief contentions of “Wealth of Nations” to the major political and economic questions of the postwar liberal order. They recruited Smith, in other words, to make the case against central planning and high taxation. His metaphor of an invisible hand, in their view—the self-interested merchant going about his business is “led by an invisible hand to promote an end which was no part of his intention”—exploded the fantasy that faraway planners were best equipped to create widespread prosperity.
That put Smith, one of the great thinkers of the 18th century, on the side of Ronald Reagan, William F. Buckley Jr. and this newspaper’s editorial page. There was, if I could say it plainly, no possibility that modern academics would let that association stand.
Now to be fair, “Wealth of Nations” was far more than a paean to open markets. The ideas associated with 20th-century classical liberalism were fashioned in opposition to the collectivist ideologies of fascism and communism; Smith had no notion of such things. And although Smith attacked most forms of governmental intervention in economic matters, he advanced some views that free-market economists anathematize—most notably the labor theory of value (the notion that a thing’s worth arises from the labor put into its creation). Odd, too, is the fact that Smith, the first great proponent of free trade and the scourge of protectionism, took a position in 1778 as commissioner of customs in Edinburgh—a tariff inspector.
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The scholarly argument that Smith was no proponent of free-market capitalism, however, can get pretty abstruse. It generally incorporates his only other major work, “The Theory of Moral Sentiments” (1759). In that book, he argued that man’s sense of right and wrong derives from a capacity for “sympathy”: Seeing good or bad behavior, or seeing a person experience fortune or misfortune, enables one to put oneself in the place of another and thus think and act morally.
That “The Theory of Moral Sentiments” and “Wealth of Nations” appear to be in conflict—one an exploration of sympathy, the other, seemingly, a defense of selfishness—is commonly referred to as the “Adam Smith problem.” But academic discourse has settled on a solution. It goes something like this: “The Theory of Moral Sentiments” sets the moral premises for “Wealth of Nations” and shows us that the latter, more famous book doesn’t promote atomistic capitalism and unregulated markets at all. In this view, Smith in “Wealth of Nations” defended capitalism, yes, but with a lot of purportedly “moral” regulation. The academic consensus somehow perfectly matches the center-left consensus—amazing!
There is one small glitch: “The Theory of Moral Sentiments” isn’t very good. It is not a great work of philosophy. It’s mostly unreadable, to my mind. What’s more important, its thesis lacks cogency. Sympathy as Smith defines it is far too weak a foundation on which to build an elaborate theory of morality. If he had died after writing “Moral Sentiments,” Smith would be forgotten outside philosophy departments, and likely inside them.
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The allegedly vital connection between “The Theory of Moral Sentiments” and “Wealth of Nations” has become a kind of orthodoxy, even so. Even politicians know the formula. “I have come to understand that his ‘Wealth of Nations’ was underpinned by his ‘Theory of Moral Sentiments,’ his invisible hand dependent upon the existence of a helping hand,” remarked Gordon Brown, then U.K. chancellor, in a 2005 lecture.
And yet the idea of Adam Smith as a proto-capitalist won’t go away. It is, Glory Liu contends in “Adam Smith’s America,” a false understanding of Smith propounded by figures associated with the University of Chicago Department of Economics, particularly Friedrich Hayek, George Stigler and Milton Friedman. The “complexity and pluralism” of older interpretations of Smith, Ms. Liu writes, have been “overshadowed by the influence of the so-called Chicago School’s distillation of Smith’s ideas into a popular and powerful myth: that rational self-interest is the only valid premise for the analysis of human behavior, and that only the invisible hand of the market, not the heavy hand of government, could guarantee personal and political freedom.”
A “distillation” turned into a “myth”—those are strong words. In the same paragraph Ms. Liu, a lecturer in social studies at Harvard, calls the myth “a deliberate construction.” That sounds close to a fabrication, or lie. But she quickly backs away from that suggestion by saying she is “less interested in providing a definitive account of what Smith originally intended or meant than . . . in elucidating the demands that his readers have brought to his works and how that colored the lessons they have extracted from them.” I am not sure what that means, but I gather from it that Ms. Liu knows she doesn’t have the goods to claim that the Chicago School got any part of Adam Smith wrong.
The book bears the subtitle “How a Scottish Philosopher Became an Icon of American Capitalism,” but you don’t get to the bit where Smith becomes the capitalistic icon until the penultimate chapter. What lies in the middle is basically a history of Adam Smith’s reception in Europe and America. As a work of history the book has its virtues. I had not appreciated how influential “Wealth of Nations” was on the American Founders—Thomas Jefferson read it with care; Alexander Hamilton did likewise but forcefully disagreed with parts of it; John Adams owned two copies, one in French translation.
But a curious thing happens when Ms. Liu gets to the Chicago School. We learn that a pair of earlier Chicago School economists—Frank Knight and Jacob Viner, who taught and wrote mainly from the 1920s to the ’40s—faulted Smith for failing to grasp the function of prices in a free economy. This would seem to contradict Ms. Liu’s thesis that the Chicago economists falsely turned Adam Smith into a free-market hero: Knight and Viner were pointing out that Smith didn’t grasp an essential reality of markets. Yet somehow, according to Ms. Liu’s analysis, they were wrong to do so. “By framing Smith’s contribution and legacy in the pure, objective language of economics,” she writes, “his Chicago exponents constructed the social-scientific bases of their political outlook which privileged free enterprise over central planning, and market rationality over moral reasoning.”
Forgive me, but Smith, for all his greatness as an economist, was wrong about value and pricing. To say so isn’t to “privilege” free enterprise over central planning but to state what is the case. You get the feeling that no one, according to Ms. Liu, can write accurately about any one thing in Adam Smith’s oeuvre without also, at the same time, considering every other thing he ever wrote and so smothering any potential insight with a thousand qualifications.
This high-minded disapproval becomes absurd when Ms. Liu gets to Hayek, Stigler and Friedman. These scholars, concerned as they were about the advance of collectivism over much of the globe, emphasized Smith’s perception that the self-interest of merchants tends to promote the interests of society as a whole. Alas, says Ms. Liu, this “often entailed a flattening of Smith’s ideas in ways that smoothed over, or altogether obscured, the complexities, tensions, and other problematic aspects characteristic of earlier readings of Smith.” Thus did the Chicagoans give us “an invented Smithian tradition” bereft of complexities and tensions.
For all the talk of obscuring complexities and inventing traditions, one looks in vain in Ms. Liu’s treatment for any instance of Hayek, Stigler or Friedman misunderstanding or distorting a passage or idea in Smith’s writing. “Though Hayek’s readings of Smith may have been opportunistic,” Ms. Liu writes after quoting a passage from the Austrian economist’s lecture on Smith, “they were not inaccurate.” As for Stigler, the consequence of his work on Smith “was that certain aspects of Smith’s ideas were amplified and glorified, while others deemed irrelevant or unsatisfactory.” Oh, no!
Ms. Liu’s complaint seems to be that Hayek, Stigler and especially Friedman were, for lack of a less pretentious term, intellectuals. Friedman “mastered the art of distilling and repackaging abstract and complex academic theories into more palatable, usable language for a wider audience.” That phrase “mastered the art” sounds vaguely sinister, but this is a description of what intellectuals do.
We reach the point of comedy when Ms. Liu quotes the socialist agitator Michael Harrington’s criticism of Friedman’s use of the invisible-hand metaphor. “The problem with Friedman’s version of the invisible hand as a right-wing political agenda,” she concludes, “was not that it was a complete misinterpretation of Smith’s text.” (That word “complete” is sly.) “The problem, as Michael Harrington put it, was that it was ‘essentially a mythic, non-historical presentation of an abstract solution taken out of time which does not look to the tremendous evolution of capitalist society.’ ” This is preposterous. If we were to take Harrington’s complaint seriously, we would never again draw on an old book to illuminate a modern problem.
Free marketeers haven’t won many arguments lately, but they have won the argument over Adam Smith. No number of academic monographs and journal articles will persuade the ordinary reader that he doesn’t understand the defense of free enterprise and free trade in “Wealth of Nations” until he has first made his way through “The Theory of Moral Sentiments.” If Ms. Liu and her likeminded academic peers think I’m wrong about that, they’ll need to master the dark art of intellectual debate.
Mr. Swaim is an editorial-page writer for the Journal.
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Excellent article.
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(https://dw-wp-production.imgix.net/2022/09/gini_2021_tight.png)
https://www.dailywire.com/news/blue-states-have-worse-inequality-than-red-ones-new-census-data-shows
I would label inequality differences wider and narrower rather than better and worse, but the point is liberal-left policies make what they consider to be unacceptable much worse.
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Workforce participation rate was mentioned on the other economics thread as the best measure of the economy.
In general, it is falling for both men and women, worse for men.
How many people are pulling the wagon and how many people are riding on the wagon?
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"How many people are pulling the wagon and how many people are riding on the wagon?"
great metaphor
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"How many people are pulling the wagon and how many people are riding on the wagon?"
great metaphor
It is a great metaphor (or analogy?). Not original by me. I think I took it from Jack Kemp in the 1980s.
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More famous people caught reading the forum.
https://jewishworldreview.com/michael/barone010623.php3
From the article:
"Census Bureau statistics on income, on which just about everyone relies, do not include two-thirds of government transfer payments. (Income). ...
the bottom two quintiles on the income scale (each quintile is one-fifth of households) get 59% and 24% of their incomes from government transfers."
...
"Census income statistics don't account for taxes people pay. ...
the top quintile provides 83% of federal income tax revenue."
(When taking these two factors into account)
"the poverty rate, which government statistics peg at 12%, is only 2% when you cover government transfers."
(and)
"the ratio of top quintile to bottom quintile incomes from the Census Bureau's 16 to 1 decreases to Gramm, Ekelund and Early's 4 to 1."
...
"The authors also expose another myth, the idea that Americans' incomes have been stagnant over the past two generations. The reason again is misleading government statistics — inflation indexes, especially the oft-quoted CPI-U, that consistently overstate inflation and thus understate real economic growth. ...
(With real world adjustments)
then "real average hourly earnings would have risen 74% over the last fifty years rather than the official reported number of 8.7%."
(But who would want to spoil the narrative?)
More at the link.
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"that consistently overstate inflation"
I thought we were of a completely contrary point of view?
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"that consistently overstate inflation"
I thought we were of a completely contrary point of view?
I think they refer to the substitution effect over decades, people don't buy the same basket of goods when prices change.
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https://jeffreycarter.substack.com/p/never-trust-a-politician-with-your
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(Doug) For 2023-2024, I would simple change 'the level of taxes' to 'the burden of government'. And by more goods produced, we mean more products and services, and better ones, more innovation, more production.
Inflation will not be stopped by tightening alone. How many times do we have to learn that?
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"The level of U.S. taxes has become a drag on economic growth in the United States. The national economy is being choked by taxes—asphyxiated. Taxes have increased even while output has fallen because of the inflation. The unemployment has created vast segments of excess capacity greater than the size of the entire Belgian economy. If you could put that sub-economy to work, you would not only eliminate the social and economy costs of unemployment, you would increase aggregate supply sufficiently to reduce inflation. It is simply absurd to argue that increasing unemployment will stop inflation. To stop inflation you need more goods (produced), not less."[/b]
- WSJ, December 11, 1974
Robert Mundell quoted by editorial writer Jude Wanniski
https://newrepublic.com/article/161964/robert-mundell-supply-side-reaganomics
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Our basic infrastructure is falling apart around us. Hard to be a modern economic producer with a 3rd world infrastructure and a 3rd world population.
For 2023-2024, I would simple change 'the level of taxes' to 'the burden of government'. And by more goods produced, we mean more products and services, and better ones, more innovation, more production. Inflation will not be stopped by tightening alone. How many times do we have to learn that?
"The level of U.S. taxes has become a drag on economic growth in the United States. The national economy is being choked by taxes—asphyxiated. Taxes have increased even while output has fallen because of the inflation. The unemployment has created vast segments of excess capacity greater than the size of the entire Belgian economy. If you could put that sub-economy to work, you would not only eliminate the social and economy costs of unemployment, you would increase aggregate supply sufficiently to reduce inflation. It is simply absurd to argue that increasing unemployment will stop inflation. To stop inflation you need more goods (produced), not less."
- WSJ, December 11, 1974
Robert Mundell quoted by editorial writer Jude Wanniski
https://newrepublic.com/article/161964/robert-mundell-supply-side-reaganomics
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https://ifstudies.org/blog/the-housing-theory-of-marriage
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This seems to me to be a sound point.
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For some reason Kevin Williamson named his series, The way the world works, isn't that the name of Jude Wanniskis book?
Here he interviews libertarian leaning economist Veronique de Rugy. The starts kind of slow I think, about her career and starts into policy at about 16:30. If you hang in there I think there is wisdom and insights to be gained from someone with a career researching the benefits of freer markets and freer people.
https://youtu.be/TvuFaWtBOrk?si=nYhHDHv1-KpKrIkn
If you wanted just a short version skip to 59:30 where she regrets getting bogged down in details and away from talking about the importance of economic growth and abundance and the Disaster of getting away from economic growth, it's not just a loss of wealth...
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https://www.powerlineblog.com/archives/2023/12/those-lucky-argentines.php