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Remembering the Man Who Turned Numbers Into Hope – Article by Steven Horwitz and Sarah Skwire

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Categories: Economics, Education, Tags: , , , , , , , , ,

The New Renaissance HatSteven Horwitz and Sarah Skwire
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After the spate of celebrities who died in 2016, the death of a Swedish professor of international health might not seem very newsworthy. However, Hans Rosling, who died of pancreatic cancer on February 7th, was no ordinary or obscure professor.

The story of his life and career can be found both at Wikipedia and in this marvelous Nature profile. What those sources cannot quite convey is Rosling’s importance as a role model for intellectual honesty, personal warmth and charisma, and a willingness to go where the facts took him, regardless of whether those facts adhered to any simplistic political narrative of humanity’s past and future. Both Rosling’s intellectual fearlessness and the substance of his work have importance for those who care about human freedom and progress.

Intellect and Humanity

But it isn’t just the content of Rosling’s work that matters. He was an amazing rhetorician. He had a unique ability to use and present data in easy to understand and visually appealing ways that were very effective at conveying an argument. He also was able to think creatively about the linkages among the various causes of wealth and the improvements they made in human well-being. His natural storytelling ability gave him the capacity to put those complex historical factors into narratives that not only got the history right, but did so in a way that appealed to our shared humanity.

All of these skills are on display in his two most famous videos, both of which impart lessons in presenting ideas and interpretations of data that classical liberals will find very useful.

Underlying much of Rosling’s work as a public intellectual was a concern with how we enable all of humanity to share in the health and wealth that has come to characterize the Western world.

With his background in health and demographics, Rosling was interested in the factors that led to the rising health and longevity of the West. First, of course, he had to document just how much better things had become in the West, then he had to explore the causes.

Presenting the raw data about the improvement of the West was the centerpiece of his BBC video “200 Years, 200 Countries, 4 Minutes.” Using real-time data visualization techniques, he shows how every country in the world was poor and sick 200 years ago and then showed the path by which so many countries became wealthy and healthy. There is no better visualization of the progress of humanity than this one.

For those of us who work with students, this video gives us the opportunity to talk about the factors that made that growth happen, including the role of liberal institutions and the rising moral status of the individual in that process. It is a great complement to the work of Deirdre McCloskey.

The video also provides a way to talk about global inequality. What is clear from the visualization of the data is that 200 years ago, countries were far more equal than now, but they were equally poor.

It’s true that the gap between rich and poor countries is greater now than back then, but everyone has improved their absolute position. And two of the countries that have improved the most are two of the most populous: China and India. Rosling’s presentation opens up countless useful discussions of the importance of economic growth for increases in life expectancy, as well as what exactly concerns us about growing inequality.

As he concludes, the task before us now is to figure out how to bring the rest of the world up to where the West is. Though he does not discuss it, the economic evidence is clear that those countries that have experienced the most growth, and therefore the biggest increases in longevity and other demographic measures of well-being, are those that have the freest economies. By giving us the data, Rosling enables classical liberals to engage the conversation about the “why” and “how” of human betterment.

Inspirational ‘Edutainer’

But our favorite video of Rosling’s is definitely “The Magic Washing Machine.” Here Rosling uses the example of the washing machine to talk about economic growth and its ability to transform human lives for the better.

Rosling’s focus is on the way the washing machine is an indicator of a population that has grown wealthy enough not only to buy such machines, but also to provide the electricity to power them. The washing machine is a particularly valuable machine since it relieves most of the physical burden of one of the most onerous tasks of the household, and one that has historically fallen entirely to women.

No one who has seen the video can forget the story of Rosling’s grandmother pulling up a chair in front of the new washing machine for the sheer joy of sitting and watching while the clothes spin. Her excitement becomes even more poignant when one considers that this must have been the first time in her life when she was able to sit while laundry was done, instead of standing over a tub of hot water and soap.

Rosling points out, in a moment of calling his fellow progressives to task, that while many of his students are proud of biking to class instead of driving, none of them do their wash by hand. That chore, though green, is simply too onerous for most moderns to take on. He then goes on to discuss how we have to find ways to create the energy needed as billions of people cross the “wash line” and start to demand washing machines.

The video ends with him reaching into the washing machine and pulling out the thing that the machine really made possible:  books. The washing machine gave his mother time to read and to develop herself, as well as to read to young Hans and boost his education as well.

The visual image of putting clothes into a washing machine and pulling out books in exchange captures all that is good about economic growth in a succinct and unforgettable way. Rosling concludes the video with a heart-felt roll call of gratitude to industrialization and development that has been known to reduce free market economists to tears.

What Rosling does in that video is to effectively communicate what classical liberals see as the real story of economic growth. He gets us to see how economic growth, driven by markets, has enabled women to live more liberated lives. Classical liberals can talk endlessly about the data, but until we talk effectively about the way in which industrialization and markets have made it possible for women (and others) to be freed from drudgery that was literally back-breaking, we cannot win the war on the market.

Thank You

Bastiat said that “The worst thing that can happen to a good cause is, not to be skillfully attacked, but to be ineptly defended.” Hans Rosling’s work is the best possible example of the best kind of defense of a good cause. He was a model and an inspiration.

Rosling ends “The Magic Washing Machine” by saying “Thank you industrialization. Thank you steel mill. Thank you power station. And thank you chemical processing industry that gave us time to read books.”

We say, “Thank you, Dr. Rosling. Thank you, data visualization. Thank you TED talks. And thank you, Mrs. Rosling, for buying a washing machine and reading to your son.” We are richer for the work he did. We are poorer for his loss.

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Hayek’s Modern Family: Classical Liberalism and the Evolution of Social Institutions. He is spending the 2016-17 academic year as a Visiting Scholar at the John H. Schnatter Institute for Entrepreneurship and Free Enterprise at Ball State University.

He is a member of the FEE Faculty Network.

Sarah Skwire is the Literary Editor of FEE.org and a senior fellow at Liberty Fund, Inc. She is a poet and author of the writing textbook Writing with a Thesis. She is a member of the FEE Faculty Network. Email

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author. Read the original article.

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Trump’s Economic Plan Faces Well-Deserved Ridicule – Article by K. William Watson

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The New Renaissance HatK. William Watson
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Earlier this week, the Trump campaign released a white paper written by senior policy adviser Peter Navarro to elaborate and quantify the candidate’s economic plan.  The goal of the paper is to explain how Donald Trump’s promises to renegotiate trade agreements and raise tariffs will promote economic growth and raise revenue for the government.

The plan betrays embarrassing ignorance of how trade negotiations work and a farcically simplistic and erroneous understanding of economics.  In essence, the plan justifies Trump’s policies by reimagining how the world works.

Trump’s entire view of trade and its impact on the U.S. economy is wrong.  He believes that trade is good for the United States only if we export more than we import and that trade relations are a contest between countries, which we are losing because they sell more stuff to us than we sell to them.  He claims to be the tough-guy who will the save the American economy from shrewd foreign cheaters and the inept government officials who let them beat us.

Since that’s not how things work in the real world, he has to rely on falsehoods and bad economics to justify disastrous policies.  This new white paper is just a continuation of that tactic.

But you don’t have to take my word for it.  If you think I’m being too harsh or would like to learn more about the “Trump Trade Doctrine” and what’s wrong with it, I recommend you read lengthier condemnations from experts who have called the plan’s analysis “truly disappointing,” “not only wrong, but foolish,” “magical thinking,” “a complete mess,” and the sort of thing “that would get you flunked out of an AP economics class.”

Bill Watson is a trade policy analyst with Cato’s Herbert A Stiefel Center for Trade Policy Studies. His research focuses on U.S. trade remedy policies, disguised protectionism, and the institutional aspects of global trade liberalization. He manages Free Trade, Free Markets: Rating the Congress, Cato’s online database that tracks votes by Congress and its individual members on bills and amendments affecting the freedom of Americans to trade and invest in the global economy. Watson received a BA in political science from Texas Christian University, a JD from Tulane University Law School, and an LLM in international and comparative law from the George Washington University Law School.

This work by Cato Institute is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License.

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Does Star Trek Boldly Go Beyond Scarcity? – Article by Frederik Cyrus Roeder

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The New Renaissance HatFrederik Cyrus Roeder
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As a long-time Trekkie (with several conventions and selfies with William Shatner) and an economist, I was more than delighted when a good friend of mine gave me the recently published book Trekonomics: The Economics Behind Star Trek by Manu Saadia.

Saadia’s highly exciting book attempts to explain the economy of Star Trek and describes the Federation of United Planets (which includes Earth) as a post-scarcity society that no longer uses money because everyone maximizes their utility by just doing what they want to do. The main driving force behind people’s behavior is vanity, not profit. He calls this economic system “Trekonomics.”

Economics Is an Intergalactic Concept

While describing a post-scarcity society, Saadia admits that there are some resources that are scarce. He mainly focuses on dilithium crystals that are the source of energy in the Star Trek universe:

Logic would dictate that near-absolute abundance has driven prices to zero on all but few strategic goods. These strategic goods are of limited use for most people anyway. I do not need a big chunk of dilithium crystals in the course of my everyday life. Matter-antimatter power plants require it, whether on board starships or on the ground, but not me. I am not in the market for it, society as a whole is.

While Saadia praises the replicator (Star Trek’s version of the universal 3D printer) as the driving force behind post-scarcity, he omits the fact that replicators (and holodecks, and warp drives needed in delivery shuttles bringing the latest vintage of Chateau Picard to your cottage on Mars) require energy in order to create food out of nothing.

If there’s a shortage of dilithium, there needs to be a market in order to efficiently allocate energy. Therefore, every individual is interested in a sufficient supply of dilithium crystals. An analogy to our world can be seen in oil dwells or nuclear power plants. While individuals rarely explore oil fields or build power plants, they do purchase their product (energy) on a daily basis.

Even if every one of the tens of billions of citizens of the Federation would act altruistically, it would be impossible to allocate energy to the projects with the highest priority. Only central planning or a market for energy can solve this.

The 24th century’s technological progress has reduced all physical resources to one: energy. Humans and aliens can nearly produce everything out of energy. This is great and probably significantly cuts down value/supply-chains, but there is still scarcity.

Price Controls in the Trek Universe

The value chain of the Federation’s economy most likely includes the following few stakeholders: dilithium explorers and miners, dilithium transporters/shippers, dilithium power plant operators, power grid operators, B2B replicator manufacturers (those replicators that replicate replicators), replicator owners, and replicator maintenance providers. 

Assuming there’s a natural monopoly in running these services, one company or institution running all of this might also be thinkable (though given our experiences with centrally managed energy supply, I would highly doubt that there’s a natural monopoly in the dilithium value chain).

Without a price for the resource energy, a single individual could deplete the Federation’s dilithium supplies by merely replicating a galaxy full of larger-than-life Seven of Nine action figures. Thus a price system for energy is crucial in order to allow consumer choice in the Federation. The only other way to solve this issue would be the creation of the United Socialist Republics of the Galaxy (USRG) and centrally plan the energy distribution. Good luck with queuing for holodeck time in that USRG!

Light-Speed, Among Other Things, Isn’t Immune to Scarcity

Dilithium seems to perfectly qualify as a private good because both rivalry (it is scarce and you need to find it somewhere in deep and hostile space) and exclusivity (it’s pretty easy to cut someone off the energy grid) apply.

While Saadia acknowledges the scarcity of dilithium, he misses several other scarce goods:

Private Property: rivalry also exists when it comes to the use of land. Imagine a beautiful cliff in Europe that gives you a perfect view of Saturn during sunset. The cliff has space for exactly one cottage. Who decides who can build and live there? Galactic homesteading is probably a feasible means of solving this problem in times of early inter-planetary exploration, but the moment the galaxy gets more crowded, a land-registry proving property rights will be necessary in order to prevent and solve disputes and facilitate the transfer of ownership.

Unique locations and goods: Saadia admits that there’s a scarcity of seats at Sisko’s restaurant or bottles of the famous Chateau Picard, but as people have overcome the idea of enjoying status, they are not interested in over-consuming such gems in the galaxy.

In trekonomics, the absence of money implies that status is not tied to economic wealth or discretionary spending. Conspicuous consumption and luxury have lost their grip on people’s imaginations. The opposition between plenty and scarcity, which under our current conditions determines a large cross section of prices and purchasing behaviors, is no longer relevant.

This reasoning comes short in explaining how people demand dinner at Sisko’s or a good bottle of wine at all, and what happens if the demand is higher than the supply. Would first customers start hoarding? Are there black markets for these non-replicated goods and experiences?

Incentives: a Terran settler on Mars craves the 2309 vintage of Chateau Picard and wants to get it delivered in light speed from the South of France. How do we incentivize the shuttle pilot (beaming wine spoils the tannins) to stop soaking in the sun in the Mediterranean and swing his body behind the helm of a shuttle? How do we compensate him for the time and energy he spent delivering the wine to the Red Planet? If vanity is the major driving force in trekonomics, one can just hope that someone sees more vanity in the delivery of this excellent wine instead of chugging it day-in day-out himself. A more realistic way of getting people to do (annoying) things is to create incentives (e.g. to pay in dilithium units).

Live long and prosper as long the central planners allow it?

Star Trek Federation is a great thought experiment on what a post-scarcity society could look like. However, there are major shortcomings such as the allocation of property rights, a price system for energy, incentivization of services, and the existence of rivalry.

A free, prosperous, and open society such as the Federation can only function with a price system in place in order to deal with the scarcity of energy. If trekonomics would really be applied in the Federation, we would see a much more repressive version of this interplanetary union forcing its citizens to work in certain professions and rationing energy.

frederik-roeder


Frederik Cyrus Roeder

Fred Roeder is the Vice President of Students for Liberty and member of the Executive Board at Young Voices. He is based in Germany.

This article was originally published on FEE.org. Read the original article.

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Trump and Hillary Don’t Know How to Fix the Economy – Article by Justin Murray

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The New Renaissance HatJustin Murray
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Recently, Hillary Clinton was taped ridiculing Donald Trump for lacking a detailed plan for the American economy. The message, so it goes, is that Trump is not suited for the presidency because he doesn’t have a plan on how to turn the American economy around.

But is it really more dangerous to elect a president who makes up economic policy on the fly than one who proclaims to have a detailed plan for us?

The answer to this is no, it is not more dangerous to elect someone who makes up economic policy by the seat of his pants — as Donald Trump is prone to do — than it is to elect someone who thinks she can have the future of the economy neatly mapped out. However, this does not imply that seat-of-the-pants method is less dangerous either. The underlying problem is we have two competing people who think they can manage the American economy.

The core of why both philosophies are equally dangerous is best summarized by F.A. Hayek and the pretense of knowledge. Hayek notes in his speech in 1974:

Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones … in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process … will hardly ever be fully known or measurable.

We are incapable of knowing what the future will bring. No president can come up with a detailed or air tight plan or can accumulate a sufficient stable of experts to be able to guide the behavior, wants, and needs of 320 million people.

For example, if we were to have asked George Bush and his economic experts in 2002 to develop a five year plan for cell phones, we would have built up a massive production capacity and R&D structure around miniaturizing phones as that was all the rage. If someone said in 2002 that people in the future would give up physical buttons and want larger screens, they would have been looked upon as mad. People are buying smaller and smaller phones, there’s no way they could touch the screen and get anything done! But come 2007, Apple introduces the iPhone and the older-style button phone has nearly vanished from the marketplace. Had the government decided it needed to plan the economy around smaller phones, we wouldn’t be enjoying a mobility revolution.

This extends well beyond cellular phones and into all walks of our lives. We don’t need central planning on how we consume our energy, what cars we can buy, what we charge people for borrowing money, and so forth.

All behavior is risky. Even if central planners could somehow canvass all of our wants and needs, figured out when exactly we want to satisfy those needs, and determined who gets what in a world of scarcity, the planners would still fail. This is because even we have no idea what we’ll want in the future. If we were to ask someone to write down exactly what they would buy on August 14, 2017 and put it in an envelope then open it up and compare it to what was bought on that day, there is little doubt the results would be wildly different.

The planner is going to do no better. Instead of a single individual failing to predict his own habits in a fun exercise, we’ll be malinvesting untold amounts of money into unwanted industries and imposing counterproductive and dangerous rules on businesses — the effects of which are impossible to predict. Furthermore, central planning shuts down innovation and the entrepreneurial process because it assumes to know today what is wanted tomorrow. Most innovation arises when someone produces a product we had no idea we wanted and couldn’t fathom existing.

Does Hillary Clinton’s plan for the economy make her a more qualified president than Donald Trump, who will likely create plans spontaneously? No, it makes them equally dangerous as both assume they have the ability to do what countless officials over the centuries have never managed to do — predict the future.

Justin Murray received his MBA in 2014 from the University of St. Gallen in Switzerland.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

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What Did Fed Chairman Yellen Tell Obama? – Article by Ron Paul

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The New Renaissance HatRon Paul
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This week, President Obama and Vice President Biden held a hastily arranged secret meeting with Federal Reserve Chairman Janet Yellen. According to the one paragraph statement released by the White House following the meeting, Yellen, Obama, and Biden simply “exchanged notes” about the economy and the progress of financial reform. Because the meeting was held behind closed doors, the American people have no way of knowing what else the three might have discussed.

Yellen’s secret meeting at the White House followed an emergency secret Federal Reserve Board meeting. The Fed then held another secret meeting to discuss bank reform. These secret meetings come on the heels of the Federal Reserve Bank of Atlanta’s estimate that first quarter GDP growth was .01 percent, dangerously close to the official definition of recession.

Thus the real reason for all these secret meetings could be a panic that the Fed’s eight-year explosion of money creation has not just failed to revive the economy, but is about to cause another major market meltdown.

Establishment politicians and economists find the Fed’s failures puzzling. According to the Keynesian paradigm that still dominates the thinking of most policymakers, the Fed’s money creation should have produced such robust growth that today the Fed would be raising interest rates to prevent the economy from “overheating.”

The Fed’s response to its failures is to find new ways to pump money into the economy. Hence the Fed is actually considering implementing “negative interest rates.” Negative interest rates are a hidden tax on savings. Negative interest rates may create the short-term illusion of growth, but, by discouraging savings, they will cause tremendous long-term economic damage.

Even as Yellen admits that the Fed “has not taken negative interest rates off the table,” she and other Fed officials are still promising to raise rates this year. The Federal Reserve needs to promise future rate increases in order to stop nervous investors from fleeing US markets and challenging the dollar’s reserve currency status.

The Fed can only keep the wolves at bay with promises of future rate increases for so long before its polices cause a major dollar crisis. However, raising rates could also cause major economic problems. Higher interest rates will hurt the millions of Americans struggling with student loan, credit card, and other forms of debt. Already over 40 percent of Americans who owe student loan debt are defaulting on their payments. If Federal Reserve policies increase the burden of student loan debt, the number of defaults will dramatically increase leading to a bursting of the student loan bubble.

By increasing the federal government’s cost of borrowing, an interest rate increase will also make it harder for the federal government to manage its debt. Increased costs of debt financing will place increased burden on the American people and could be the last straw that finally pushes the federal government into a Greek-style financial crisis.

The no-win situation the Fed finds itself in is a sign that we are reaching the inevitable collapse of the fiat currency system. Unless immediate steps are taken to manage the transition, this collapse could usher in an economic catastrophe dwarfing the Great Depression. Therefore, those of us who know the truth must redouble our efforts to spread the ideas of liberty.

If we are successful, we may be able to force Congress to properly manage the transition by cutting spending in all areas and auditing, then ending, the Federal Reserve. We may also be able to ensure the current crisis ends not just the Fed but the entire welfare-warfare state.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

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Actually, “Neoliberalism” Is Awesome – Article by Scott Sumner

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The New Renaissance HatScott Sumner
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Unfortunately, What’s Best for the World Is Not Best for Every Subset of It

I am seeing more and more articles, even at respectable outlets such as the Economist and the Financial Times, suggesting that the rise of right-wing and left-wing populism shows that something is wrong with the neoliberal model.

Nothing could be further from the truth. The past two decades have been by far the best two decades in human history, and that’s what really matters.

Naysayers will sometimes acknowledge that hundreds of millions of people have recently risen out of poverty, but then claim that living standards have stagnated in America. That’s also nonsense, as I explained in this post.

The next fallback position is that while real incomes in America have risen, the gains have gone to corporations, not workers. That’s also nonsense, as I explained in this post. The share of national income going to workers today is the same as it was 50 years ago, the supposed heyday of the working class.

The next fallback position is that while wages have done fine, even in real terms, wage income is becoming less equal. Bingo! Finally we get to an accurate statement. Fifty years ago, blue-collar workers at General Motors often made more than college professors. People with short attention spans sometimes act like this period was “normal”, ignoring 10,000 years of human history. They seem to suggest that our most pressing problem is that young men who don’t study in school and just shoot rubber bands across the classroom should be able to earn an income that (in relative terms) was never possible in any period of world history before the 1950s and has never been possible in any period of world history after the 1970s. It reminds me of when farmers used to set the “parity” of farm prices with other goods prices based on the relatively high levels of 1909-14, treating that ratio as normal for purposes of farm subsidies.

Don’t get me wrong: I have nothing against blue-collar workers. I’m relatively intellectual, and even I found the public schools to be mind-numbingly boring. I could hardly stay awake. I can’t even imagine how students less interested in ideas than I am could’ve gotten through the day. Nor am I one of those conservatives that will trash low-income whites for their lifestyle choices. As far as blue-collar workers are concerned, I wish them well. But I wish everyone well (except Trump), and the unfortunate truth is that the set of economic policies that is best for the world right now is probably not optimal for a subset of American blue-collar workers.

When I point out that the most important factor in trade policy is the impact on the poor in developing countries, some of my commenters tell me that the US shouldn’t have to import from China or India because they have lots of other countries to sell to. As Marie Antoinette might’ve said “let them sell to Canada.” That’s right, progressives ease their conscience by claiming that other developed countries won’t follow the same evil trade policies that progressives like Sanders want the US to follow, so things won’t actually be that bad for poor people in Bangladesh. More often, they entirely ignore the issue.

I know that progressives like to think of themselves as the good guys, but the honest truth is that on trade they are increasingly becoming the bad ones, right along with Trump.

And here’s what else people don’t get. Not all the problems in the world are caused by neoliberal economic theories, for the simple reason that not all economic policies reflect neoliberal economic theories. Even if everything people say about inequality is true, there’s nothing wrong with the neoliberal model, which allows for the EITC, progressive consumption taxes, and sensible reforms of intellectual property rights, occupational licensing, and zoning laws.

I can’t help it if Democratic politicians oppose reforms of intellectual property rights. I can’t help it if progressives that once favored progressive consumption taxes now oppose progressive consumption taxes. I can’t help it if Democrats voted to repeal the luxury tax on yachts soon after having enacted a luxury tax on yachts. I can’t help it if progressives suddenly feel that a $15 an hour minimum wage is not a loony idea.

The simple truth is that neoliberal economic policies work, as we’ve seen in Denmark and Switzerland and Singapore, and socialism doesn’t work, as we’ve seen in Venezuela. So I’m asking all those wavering neoliberals in the respectable press (Thatcher called them “wets“) to stop your handwringing and get out there and boldly defend the neoliberal model. It’s not just the best model; in the long run it’s the only model that really works.

Scott B. Sumner is the director of the Program on Monetary Policy at the Mercatus Center and a professor at Bentley University. He blogs at the Money Illusion and Econlog.

This article was originally published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

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The Myth of Primitive Communism – Article by Mike Reid

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The New Renaissance HatMike Reid
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Generosity Is an Investment in Human Capital

All my students starved to death. Again.

Here’s what they learned the hard way: generosity today can be a way of saving for tomorrow.

They were survivors of a plane crash on a desert island. They knew they’d be trapped there for months and that the only food would be the large but elusive fish in the sea.

When one of my students managed to catch a fish, he ate as much as he could, then stored the rest for himself under some rocks near the beach.

Other students, less successful as fishermen, starved to death promptly.

Soon, the initially successful fisherman found himself alone on the island. With no refrigeration, the food he’d stashed rotted away. And when he ventured out fishing again, he was unlucky and got stung by a deadly jellyfish.

With no one left to take care of him, he, too, perished.

Every year, I play this game with my students. We use a big square of desks to represent our island, pennies to represent fast-decaying fish fillets, and dice to randomize the fishers’ success or failure. (If a student decides not to fish, he has no chance to catch food but also no chance of encountering the dreaded jellyfish.)

“Primitive Communists”
We play this game while studying the famous Ju/’hoansi hunter-gatherers. Until the colonial encroachments of the 20th century, most Ju/’hoansi lived in small, nomadic groups in the Kalahari desert, the men hunting with bows and arrows and the women collecting nuts, berries, and roots with digging sticks and carrier sashes.

Every year, in the discussions that follow our brief reading on this culture, my students remark with amazement that whenever a Ju/’hoan man or woman finds food, he or she shares it widely with the community.

This behavior seems to be an important part of why Richard B. Lee, the most prominent anthropologist in the study of the Ju/’hoansi, describes them as “primitive communists” in the Marxian sense. And many of my students each year seem to get the idea that the Ju/’hoansi share their food so freely with each other because they are in some way more charitable, more natural, or otherwise more moral than us.

Sometimes, a student remarks, “That’s like socialism, right?”

So I like to play this little starvation game to disabuse my students of their romantic notions about communist noble savages in the African wilderness.

What, I ask, would happen if a bunch of greedy, selfish people like us found themselves in the same economic situation the Ju/’hoansi face?

The Economic Constraints of Foraging Life
Nomadic foragers like the Ju/’hoansi have unreliable “incomes” in terms of the food they find from day to day and week to week.

They are often masterful trackers and foragers. But, no matter how competent you are, when you pursue a giraffe on foot with a bow and arrow, sometimes the giraffe gets away.

Furthermore, it’s difficult for nomadic foragers to store food or other forms of material wealth. In fact, the Ju/’hoansi are even less inclined to store food than many other nomadic foragers. Perhaps this is because, while they can dry meat to last a couple of months, they also know a sudden rainstorm could ruin their savings. And because they travel repeatedly over the year to new water holes and food sources, as Lee says, “it would be sheer folly to amass more goods than can be carried along when the group moves.”

So if one were to ask a Ju/’hoan man in the morning what he’s going to eat that night, he could honestly respond, “I don’t know; I haven’t caught it yet.”

Cultural Heritage and Human Survival
Every year, in the game with my students, one of two things happens:

  1. Successful fishermen imitate the Ju/’hoansi. They give away their excess food freely, starting with their friends or closest neighbors at the game table.
  2. The students starve to death en masse.

My students tend to go into this game with an idealistic view of the Ju/’hoansi as selfless, altruistic people.

They tend to finish the game realizing that, even if you were the greediest, most selfish nomadic forager in the world, your best move would still be to share food with your neighbors.

Since nomadic foragers have a difficult time storing physical capital, especially food, their response all around the world, in culture after culture, is to promptly turn it into human capital by giving it to friends, relatives, and neighbors.

Like my students, Ju/’hoansi men and women are tempted to hoard their own wealth. Indeed, Ju/’hoansi elders often lament that they have given generously all their lives and would now like to keep just a little for themselves.

But the Ju/’hoansi also have a massive corpus of gift-exchange rituals, conversational habits, and even stock jokes that they use to bolster their own patience and to bring hoarders peacefully into line. These behaviors represent the heritage of thousands of years of spontaneous-order cultural development under economic conditions in which short-run greed is tantamount to stupidity.

What makes the Ju/’hoansi seem selfless, or communistic, or morally superior to us is their age-old cultural adaptation to the fact that, for each individual in their situation, the best strategy to save for the future is to share widely in the present.

Culture and Markets
In the very different economic and technological circumstances of the industrialized West, we have our own roundabout methods by which our selfish desires lead to social prosperity. In markets, each of us can still provide best for his or her own future by helping others — especially strangers — for the right price.

Would this same system work for hunter-gatherers?

If a group of 19th-century Ju/’hoansi equipped with digging sticks and bows and arrows had tried the ethics of the modern market for themselves, many might have starved to death before they recognized their error and began to recreate a culture more appropriate to their own ecology and technology.

But what works for the Ju/’hoansi would be devastating for us. If we today, in a market society made up largely of strangers, attempted to practice the ethics of profligate sharing and meek humility — or even worse, to enforce such ethics on noncompliant others through government policies — we would drive our whole society into chaos and penury.

The Ju/’hoansi’s strategy works only for people in the Ju/’hoansi’s situation.

Our own great wealth and our own social order are built on savings and investment — and on using our resources to benefit strangers through market exchange.

Mike Reid is a publishing consultant at InvisibleOrder.com and the publications impresario at Liberty.me. He also teaches anthropology at the University of Winnipeg. Mike lives in Manitoba with his wife and two children.

This article was originally published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

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Bernie Sanders’ Anti-Foreign Crankery – Article by Daniel Bier

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The New Renaissance HatDaniel Bier
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A Vesuvius of Tribalism and Economic Illiteracy

At Sunday’s Democratic presidential debate, Bernie Sanders attacked American trade with Mexicans, Chinese, Vietnamese, and presumably all other foreigners who might try to steal our jobs. Sanders harangued Hillary Clinton,

NAFTA, supported by the Secretary, cost us 800,000 jobs nationwide, tens of thousands of jobs in the Midwest. Permanent normal trade relations with China cost us millions of jobs.

Look, I was on a picket line in early 1990’s against NAFTA because you didn’t need a PhD in economics to understand that American workers should not be forced to compete against people in Mexico making 25 cents an hour.

… And the reason that I was one of the first, not one of the last to be in opposition to the TPP is that American workers … should not be forced to compete against people in Vietnam today making a minimum wage of $0.65 an hour.

Look, what we have got to do is tell corporate America that they cannot continue to shut down. We’ve lost 60,000 factories since 2001. They’re going to start having to, if I’m president, invest in this country — not in China, not in Mexico.

First, let’s note his dodgy job numbers. As Dan Griswold noted in 2011, in response to a similar claim about jobs “lost” from the “trade deficit” with Mexico,

In the first five years after NAFTA’s passage, 1994-98, when we could have expected it to have the most impact, the U.S. economy ADDED a net 15 million new jobs, including 700,000 manufacturing jobs.

Behold, the horror unleashed on US manufacturing jobs by trade with Mexico:nafta-manufacturing

In fact, since NAFTA went into effect in 1994, total US employment has increased by 28 million jobs. Even if we buy the dubious claim that NAFTA “cost us 800,000 jobs” over the last 22 years, this amounts just 36,000 jobs a year.

As Griswold noted, even in good times, 300,000 Americans file for unemployment each week. The US economy creates and destroys more than 15 million jobs every year. This alleged displacement amounts to less than one day’s worth of job losses.

It’s true that, in the long-run, manufacturing jobs have been in decline in the United States. But this is not because manufacturing is in decline. The myth (promoted by the other nationalist blowhard in the race) that United States “doesn’t make stuff anymore” is not just wrong — it couldn’t be further from the truth.

Real US manufacturing output is the highest it has ever been. Simply put, the US makes more stuff than ever.

manufacturing-indexHow can this be? Because manufacturing productivity — the amount of value added per hour worked — has gone up dramatically in recent decades. Manufacturing employment is declining because of automation; a US factory worker today can add a lot more value per hour than one in 1970.

manufacturing-employees-output-per-hour

It’s simply not true that trade devastated the US economy and wiped out millions of jobs. Employment has shifted within the US economy, out of industry into service jobs, and manufacturing has shifted around the globe, aligning production with the comparative advantages of each country’s labor and capital markets.

The resentment stoked by nationalists like Trump and Sanders is based on a nonsensical proposition, a mirage of high-paying blue collar jobs stolen by conniving foreigners, which we could reclaim if only we had the will to wage a trade war.

But the machines and global production chains are here to stay, and the jobs being done in Vietnam and China for fifty cents an hour are on the extreme low end of the value-added chain — which should be obvious, when you think about it, since they pay so little. (On the back of every iPhone is a short economics lesson on this point: “Designed by Apple in California. Assembled in China.”)

Do we really want to “bring those jobs back”? Do we envision a future where the American middle class is sewing textiles in sweatshops for a dollar an hour? Of course not. Americans today likely wouldn’t do those jobs at any wage, but especially not at the wages paid to low-skilled workers in developing Asian and Latin American countries. Those jobs only exist at those wages; at higher wages, they are scarcer, higher-skilled, and more capital intensive.

True, we could make t-shirts and Happy Meal toys in the United States, but we’d be doing it with far, far fewer workers and a lot more capital. Instead of 30 workers at fifty cents an hour, it’d be one person with a machine for $20 an hour.

The real difference would be that everyone would be poorer as a result: consumers paying higher prices, foreigners working in worse conditions and for less money, and American resources being diverted away from where they are most productive.

This is where economic ignorance stops being morally neutral and becomes a real threat to the life and well-being of the poor, especially in the developing world.

Not content to merely keep Mexicans from working in the United States (where, thanks to US capital and infrastructure, they could earn three or four times more than they make in Mexico), Bernie Sanders now objects to the right of Mexicans to work in Mexico, if they dare to sell goods and services to Americans — or, God forbid, try to compete with American firms.

For a champion of the poor like Sanders, there’s a double irony here, in that poor Americans are already much wealthier than poor Mexicans, and that tariffs also make goods more expensive for native consumers, disproportionately hurting the poorest Americans. Not only are poor Mexicans made worse off, by losing access to the US market and thus losing jobs, but poor Americans are also made worse off by having less disposable income, which is thus not spent elsewhere in the economy to sustain other American jobs.

And this is just the first order effects of closing off trade with Mexico. When the Mexican government inevitably retaliates, US exports to Mexico (which totaled $236 billion in 2015) will also be devastated and more jobs will be lost. And of course, simply multiply this orders of magnitude for China, Vietnam, and every other country on the nationalistic hit list.

Who gains from this? In the long run, nobody, which is why (after decades of gradual reform) we finally got relatively free trade with our closest neighbors, signed into law by a liberal Democrat. But in the short run, a few US corporations and labor unions would benefit from trade tariffs — at the expense of both poor foreigners and poor Americans as a whole.

(For those keeping score, this makes it an ironic hat trick for Sanders, whose tirades against free trade and open borders are laced with fear-mongering about “corporations.”)

Finally, let us ponder Sanders’ Alice-in-Wonderland solution to the imagined ills of free trade:

Look, what we have got to do is tell corporate America that they cannot continue to shut down. We’ve lost 60,000 factories since 2001. They’re going to start having to, if I’m president, invest in this country — not in China, not in Mexico.

Did I say Alice in Wonderland? I meant Atlas Shrugged. Ayn Rand was justly accused of having unbelievable, one-dimensional stereotypes, but sadly, American politics seems to have the same problem.

It’s anyone’s guess how Sanders imagines he could force factories not to close and order companies to stay in the United States, but the “you can’t shut down” solution is almost directly lifted from “Directive 10-289,” the order that Rand’s antagonists use to try to “stabilize” the economy:

All workers, wage earners and employees of any kind whatsoever shall henceforth be attached to their jobs and shall not leave nor be dismissed nor change employment… All industrial, commercial, manufacturing and business establishments of any nature whatsoever shall henceforth remain in operation…

Faced with economic decline, the government believed that the only option was to stop the decline, rather allowing people to go where they choose, buy what they choose, and make what they choose. “What it comes down to is that we can manage to exist as and where we are, but we can’t afford to move!” archvillain Wesley Mouch exclaims. “So we’ve got to stand still… We’ve got to make those bastards stand still!”

When Rand first published this in 1957, this was hyperbole about the fear of change, the reductio ad absurdum of the argument for keeping things as they are. Now, it’s an applause line for mainstream presidential candidates.

Daniel Bier is the site editor of FEE.org He writes on issues relating to science, civil liberties, and economic freedom.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

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A Conversation with My Neighbor “Sam” – Article by Mark Brandly

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The New Renaissance HatMark Brandly
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Lately, I’ve wondered how my neighbor, Sam, affords to buy so much stuff. He appears to have an unlimited budget. When I asked him about this, Sam asked, “Do you think I’m spending too much?”

“That depends,” I said, “How much money do you make?”

“I take home $100,000 a year.”

That surprised me. I would guess that he’s spending more than that. But I tried to be encouraging, “That sounds like plenty of income. With a little planning, you should be able to budget your spending and be financially stable.”

“But my finances are a mess,” Sam replied. “I spend more than I take home. Last year I had to borrow $12,000 just to cover my spending.”

“Well maybe things will be better this year,” I said, hoping that Sam’s spending issues was a one year problem.

“No,” Sam replied. “Actually, in the first three months of this year, I’ve already spent $19,000 more than I’ve made. It looks like my budget deficit this year will be much worse than it was last year.”

Now I was starting to worry. “Have you been borrowing money to cover your spending for a long time?”

“Oh yes. I have a lot of debt. Part of the problem is that I owe myself $150,000.”

I wondered if Sam misspoke, “Wait, wait, wait, you owe yourself $150,000? Why do you think that you’re in debt to yourself?”

“Well you see, over the years I promised myself that I was going to use my paychecks to pay for a fund for my children’s education, but instead of spending $150,000 on colleges, I spent the money on other expenses. So I figure that I owe myself this money so that I can pay for my children’s college tuitions.”

Obviously Sam doesn’t understand the definition of the word “debt.”

I tried to be polite in my response: “That doesn’t make any sense. It’s true that you’ve made some horrible decisions regarding your spending, but it’s ridiculous to claim that you owe yourself money. A debt occurs when one person owes another person money. Just because you changed your mind about how to spend your paychecks doesn’t mean that you’ve borrowed money from yourself.

“So the first thing you need to do is to think clearly about the amount of debt you have. You don’t owe yourself any money. Now, forgetting about this ridiculous notion of self-debt, how much do you owe?”

“Alright, I think I see your point. Let’s just talk about the rest of my debt. I owe various banks about $420,000. This debt is more than four times my take-home income.”

Sam often lies about his income and spending issues, but he always understates his budget problem. If he’s lying now, then I can be sure that the problem is even greater than he says. I wanted more information.

“That a pretty high debt to income ratio. But that might be somewhat manageable, although unwise, if you’ve borrowed that money at low interest rates.”

“I have some good news and some bad news,” Sam said. “Interest rates are low. In fact, in the last fourteen years, my debt has more than quadrupled, but my interest payments have increased less than 50 percent. That’s because interest rates have collapsed during that time. Isn’t that good news?”

“I suppose, but do you know that interest rates are going to increase over the next several years?”

“Yes, that’s the bad news. In the past year, I only paid $7,000 of interest, but within ten years my debt will increase over 50 percent, and possibly much more, and with higher interest rates I expect to be paying at least four to five times that much in interest annually.”

“That’s a huge problem. So to be able to make your loan payments, I assume that you’ve taken out some long-term loans.”

“No, no, no. In order to take advantage of the low interest rates, most of my borrowing is short term. I rollover my loans quickly. In the past year my principal payments on these loans totaled $207,000.”

“Let me get this straight. Your loan payments, including principal and interest, are well over twice your take home pay?”

“Yes, I take home a little over $8,000 per month and my loan payments are over $17,000 per month. But it’s no problem. In the past year I borrowed $223,000 to cover everything.”

Shocked, I said “How can you say borrowing more than twice your income is not a problem?”

“I simply borrow all the money I need to make all of my loan payments. I never pay any of the loans down. I’ve been doing this for years, ever since I started spending more than I make.”

“Okay. Most of your borrowing goes to cover your increasingly large principal and interest payments. And as interest rates rise, interest payments will become a bigger percentage of your spending. When that happens, your total debt will increase faster than your income. What is your plan, say in the next ten years, to correct this situation?”

“Well I don’t have a plan for correcting anything, because I don’t see how I can cut my spending.”

“What if the banks stop loaning you money to make your payments on your loans? What happens then?”

“I guess I’m assuming that won’t happen.”

Sam’s Budget Situation in Real Numbers
If one of our neighbors budgeted in this manner, we would obviously conclude that the guy is crazy. No such plan could work. Eventually lenders would refuse to fund Sam’s spending.

However, Sam’s situation looks a lot like the federal government budget plan. Take a look at some recent federal budget information and some Congressional Budget Office projections:

  • In FY (fiscal year) 2015, the feds had a budget deficit, counting only debt held by the public, of $339 billion, which is about 10 percent of their tax revenues of $3,248 billion. The deficit has been declining the last few years, but that is now changing.
  • In fact, in the first three months of FY 2016, according to the Treasury Department, federal debt held by the public increased $548 billion. Admittedly, some of this debt was due to the fact that the feds were cooking the books in FY 2015 when they hit the debt ceiling limit. Nonetheless, the first quarter 2016 deficit is already 60 percent larger than the overall 2015 deficit.
  • The federal government claims to owe itself over $5 trillion (they call it intragovernmental debt here). This $5 trillion represents tax revenues that were earmarked for specific spending programs, such as Social Security, but were spent on other programs. Since the feds collected taxes to pay for Social Security, but spent the money on something else, they conclude that they owe it to themselves to collect those tax revenues again. That’s the essence of intragovernmental debt. We should not count this as debt. Give the Treasury Department credit for ignoring this type of “debt” in their Daily Treasury Statements and in their end of the year debt reports.
  • As of September 30, 2015, the feds had $13.1 trillion of debt owed to the public. FY 2015 tax revenues totaled $3.248 trillion. So just like Sam the government has a 4-to-1 debt-to-tax-revenue ratio.
  • In the past fourteen years, from September 30, 2001 (the start of George Bush’s first budget) to September 30, 2015 (the end of Barack Obama’s sixth budget), debt owed to the public increased from $3,339.3 billion to $13,123.8 billion. That’s an increase of 293 percent.
  • According to the Daily Treasury Statements, in the past fourteen years, interest on treasury securities increased from $162.5 billion in fiscal year 2001 to $233.1 billion in fiscal year 2015. That’s a 44 percent increase during the same period when federal debt owed to the public almost quadrupled.
  • In FY 2015, again according to the Daily Treasury Statements, the feds borrowed $7,251.4 billion (see the Public Debt Cash Issues for September 30, 2015), an average of almost $20 billion per day. They spent $6,740.3 billion of this borrowing rolling over their debt. So, Federal principal and interest payments are more than double federal tax revenues.
  • According to the Congressional Budget Office’s baseline projections, debt held by the public in 2025 should exceed $21 trillion and during that time interest rates are expected to increase. Interest rates have been kept artificially low for years. If interest rates return to a more normal level, say to the rates they were paying when George Bush took office fifteen years ago, then interest payments in 2025 will exceed $1.2 trillion. That’s over a 400 percent increase compared to the FY 2015 interest payments. I should note here that the baseline budget projections are optimistic. We should expect the debt situation in 2025 to be significantly worse than these projections.

The federal government’s debt has exploded under the Bush and Obama administrations. Low interest payments due to the low interest rates have masked their budget problems. As interest rates and the spending gap on entitlement programs such as Social Security both increase, the budget problem will compound.

The federal government’s plan is to borrow all of the money they need to pay all of their principal and interest payments and to also pay for the budget deficits in their spending programs. The question we should ask is: what’s going to happen when the world’s lenders refuse to bankroll DC’s spending schemes?

Mark Brandly is a professor of economics at Ferris State University and an adjunct scholar of the Ludwig von Mises Institute.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

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Central Banks Should Stop Paying Interest on Reserves – Article by Brendan Brown

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The New Renaissance Hat
Brendan Brown
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In 2008, the Federal Reserve began paying interest on reserve balances held on deposit at the Fed. It took more than seven decades from the US leaving the gold standard — in 1933 — for the fiat regime to do this and thus revoke a cardinal element of the old gold-based monetary system: the non-payment of any interest on base money.

The academic catalyst to this change came from Milton Friedman’s essay “The Optimum Quantity of Money” where he argued that the opportunity cost of paper money (any foregoing of interest compared to on alternative money-like instruments such as savings deposits) should be equal to its virtually-zero marginal cost of production. Opportunity cost could indeed be brought down to zero if base money (bank reserves, currency) in large part paid interest at the market rate. Under the gold standard, the opportunity cost of holding base money largely in metallic form (gold coin) was indeed typically significant. All forms of base money paid no interest. And the stream of interest income foregone in terms of present value was equal in principle to the marginal cost of gold production (this was equal to the gold price).

Interest on Reserves are Important to Controlling Markets and Imposing Negative Rates
Friedman, however, did not identify the catch-22 of his proposal. If the officials of the fiat money regime indeed take steps to close the gap between the marginal production cost and opportunity cost of base money, with both at zero, then there can be no market mechanism free of official intervention and manipulation for determining interest rates.

That is what we are now finding out in the few years since central banks in the US, Europe, and Japan started paying interest on reserves. (The ECB was authorized to do this since its launch in 1999, while the Fed and BoJ began following the 2008 financial crisis.) Central banks can now bind the invisible hand operating in the interest rate market to an extent almost unprecedented in peacetime. In some cases, central banks have even deployed a negative interest rate “tool” which would have been impossible under the prior status quo where base money paid no interest.

How We Got Here
The signing into law of the Financial Services Regulatory Relief Act in 2006 authorized the Federal Reserve to begin paying interest on reserves held by depository institutions beginning October 1, 2011. On the insistence of then Fed Chief Bernanke, that date was brought forward to October 1, 2008 by the Emergency Economic Stabilization Act. He was in the process of dispensing huge loans to troubled financial institutions but wanted nonetheless to keep interest rates at a positive level (one purpose here was to protect the money market fund industry).

Accordingly, the Federal Reserve Board amended its regulation D so that the interest rate paid on required reserves and on excess reserves would be at levels tied (according to distinct formulas at the start) to market rates. An official communiqué explained that the new procedure would eliminate the opportunity cost of holding required reserves (and thereby “deregulate”) and help to establish a lower limit for the Federal Funds rate, becoming thereby a useful tool of monetary policy.

This was useful indeed from the viewpoint of rate manipulators: by setting the rate on excess reserves the Fed could now determine the path of short-term interest rates and strongly influence longer term rates regardless of how the supply of monetary base was growing relative to trend demand. By contrast, under the gold standard and the subsequent first seven decades of the fiat money regime, interest rates in the money market were determined by forces which brought demand for base money into balance with the path of supply as set by gold mining conditions or by central bank policy decision respectively. A rise in rates meant that the public and the banks would economize on their direct or indirect holdings of base money and conversely.

Back Before the Fed Paid Interest on Reserves
Yes, under the fiat money system the central bank could effectively peg a short-term rate and supply whatever amount of base money was needed to underwrite that — but the consequential growth of supply in base money was a variable which got wide attention and remained an ostensible policy concern. Right up until the Greenspan era, the FOMC implemented policy decisions by directing the New York Fed money desk to increase or reduce the pace of reserve growth and changes in the Fed funds rate occurred ostensibly to accomplish that purpose. This old method of determining money market interest rates under a fiat regime — in which banks’ need for reserves was minute given deposit insurance, a generous lender of last resort, and too-big-to-fail — depended on the banking industry enduring what was essentially a tax on its deposit business, which was then magnified by fairly high legal reserve requirements. Thus, it is not surprising that the original impetus to paying interest on reserves, whether in the US or Europe, came from the banking lobby. There was no such burden under the gold standard even though the yellow metal earned no interest. Banks in honoring their pledge to deposit clients that their funds were convertible into gold had to visibly hold large amounts of the metal in their vaults or at hand in a reserve center. Actual and potential demand for monetary base by the public is more limited under a fiat money regime than under the gold standard as bank notes are hardly such a distinct asset as gold coin from other financial instruments.

More Problems with Friedmanite “Solutions”
Friedman, when he advocated eliminating the opportunity cost of base money under a fiat regime, hypothesized that this could occur under a long-run declining trend of prices rather than by the payment of interest. The real rate of return on base money could then be in line with the equilibrium real interest rate. This proposal for perpetually declining prices would also have been problematic, though. The interest rate would fluctuate, and in boom times be well above the rate of price decline. In any case, the rate of price decline would surely vary (sometimes into positive territory) in a well-functioning economy even when the long-run trend was constant (downward). The equilibrium real interest rate would be below the rate of price decline sometimes (for example, during business downturns), meaning that market rates even at zero would be too high. That situation did not occur often under the gold standard where prices were expected to be on a flat trend from a very long-run perspective and move pro-cyclically (falling to a low-point in the recession from which they were expected to rise in the subsequent business expansion, meaning that real interest rates would then be negative).

What Can Be Done?
So what is to be done to escape the curse? A starting point in the US would be for Congress to ban the payment of interest on bank reserves. And the US should use its financial power with respect to the IMF to argue that Japan and Europe act similarly within a spirit of G-7 coordination such as to combat monetary instability. We have seen in recent years how rate manipulation and negative rates are made possible by the payment of interest on reserves, and are potent weapons of currency warfare. Yes, the ban in the immediate would force the Federal Reserve to slim down its balance sheet so that supply and demand for base money would balance at a low positive level of interest rates. The Fed might have to swap its holdings of long-maturity debt for T-bills at the Treasury window so as to avoid any dislocation of the long-term interest rate market in consequence. That, not the Yellen-Fischer “rate lift off day and beyond,” is the road back to monetary normalcy.

Brendan Brown is an associated scholar of the Mises Institute and is author of Euro Crash: How Asset Price Inflation Destroys the Wealth of Nations and The Global Curse of the Federal Reserve: Manifesto for a Second Monetarist Revolution. See Brendan Brown’s article archives.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

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