Archive for March 2012

Why Can’t We Deleverage Gradually?

The richest and most successful Keynesian on Wall St has summarized his current policy advice succinctly. The Fed should monetize all kinds of debt in order to keep the nominal economic growth rate north of the nominal interest rate. In this way, necessary deleveraging can take place gradually and less painfully.

This policy of course won’t work. Instead of letting the economy adjust to reality, it will just make more ( and more painful) adjustment necessary. It might be nice to have a short but  more technical explanation of why it won’t work. If one of you wish to take this on, I would be glad to share it with the Keynesian in question for response.

Apropos of this, although QE 2 supposedly ended, the Fed is still growing the monetary base at a rapid clip ( 4.1% over the last 26 weeks). As Ned Davis has pointed out, this is like QE 3 in disguise. Some of this may be an attempt to deleverage the economy gradually, but it may also reflect the Fed’s fear that the government securities market will collapse without help. Over the same half year, global central banks have provided monetary ” stimulus” at a rate equaling about 50% of what was done at the peak of the crisis.

Coercion Is Your Friend?

As kids, many of us baby boomers were often told by well meaning adults, “The policeman is your friend.”  In the era of (relative) political innocence prior to the Vietnam War and Watergate, these adults could be forgiven their surpassing naiveté.  But now “mere libertarian” (his term) economist Dan Klein goes these adults one better and counsels us:  “Sometimes coercion is our friend.”  Dan’s rationale is summed up in a PowerPoint slide bullet point:   ”It is possible that a reform that increases initiation of direct coercion will in the long run  reduce coercion.”

Dan’s interesting take on Mere Libertarianism can be seen here.  His statement about coercion occurs about 13:38 into the video.

Who’s Afraid of Sticky Prices?

Retailer J.C. Penney just announced a new pricing policy that will make its prices more rigid and other retailers are moving in that direction.  Can depression and mass unemployment be far behind?

The linchpin of all varieties of Keynesian economics is the assumption that prices and wage rates are rigid and do not respond to changes in supply and demand, at least in the short run.  As was demonstrated in 1944 in a famous article by Franco Modigliani, himself a Keynesian and later a  Nobel laureate in economics, absent this assumption and the entire  Keynesian edifice falls to the ground.  It is because prices do not adjust immediately, say, to a fall in demand, that quantities must adjust, meaning that unsold goods pile up in inventories and an excess supply of labor goes unhired resulting in depression.   A modern version of this story is also invoked by modern free bankers to justify their conclusion that the supply of money must be continually adapted to changes in the demand to hold money, lest recession and unemployment emerge.  This version attributes the rigidity or “stickiness” of prices to objective factors like “menu costs,” which refer to the resource costs that the seller must incur every time he changes his array of product prices.

Of course our daily experience with coupons, early morning specials, restaurant blackboard specials, supermarket rewards cards, and so on makes this widely accepted story of intractable price rigidities ring hollow.  But whether prices are rigid or flexible is really beside the point.  The point is that the degree of price rigidity or flexibility is not determined by objective external factors such s menu costs, but is chosen by entrepreneurs as one of the dimensions of the good or service they bring to market.  As Hans Hoppe once succinctly put it, “Prices are as rigid or as flexible as they need to be.”  Entrepreneurial pricing policies are driven by and constantly adapted to the demands of consumers.  For instance, the prices of movie theater tickets change very slowly and appear somewhat sticky because consumers prefer it that way; in contrast the prices of theater concession items like soft drinks, popcorn,  and candy are continually varied by coupons, rewards cards and daily specials.  Now back to J.C. Penney.

Large retailers and transportation firms often vary their pricing policies, trying to achieve the optimal degree of price flexbility in a changing economic environment.   As reported this week, retailer J .C. Penney has introduced a radically new pricing policy in response to a shift in consumers’ shopping habits.  With the increasing availability of  shopping comparison apps for mobile electronic devices and the omnipresence of large Internet sellers like Amazon and eBay, consumers are increasingly shunning high mark-up items which they know will be eventually marked down.   In the case of J. C. Penney, in 2002 an item that cost the retailer $10.00 was typically marked up to $28.00.  That mark up was progressively increased and by 2011 a $10.00 item sold for $40.00.  But despite the greatly increased mark up, the average price that a consumer paid for a $10.00 item  rose only from $15.90 to $15.95 duing that same period  Thus consumers have become more savvy and resourceful in their shopping practices.   J. C. Penney has responded by slashing its prices by 40 percent and rounding all prices to the nearest dollar.  This new “fair and square” pricing policy introduces greater simplicity but more rigidity into its pricing structure and involves getting rid of daily sales on multiple items and establishing three pricing tiers: every day regular prices; month-long specials;  and “best prices” for clearance items on the first and third Friday of every month.  Walmart has responded very differently via a highly flexible price policy of an Ad Match Guarantee in which it promises to match, under specified conditions, the prices advertised by competitors.

It remains to be seen whether consumers accept J. C. Penney’s new pricing structure.  In 1992 American Airlines tried a similar scheme, slashing the number of prices in its computerized reservation system by 86 percent, from 500,000 to 70,0000.  In the process the average fare was reduced by 38 percent and first class fares by 20 to 50 percent.  The airline had estimated that the move would save $25 million annually and enable it to reallocate 600 employees to other tasks.  No sale—air travelers rejected it and within six months the plan was rescinded.

Entrepreneurial experimentation with diverse pricing policies is an integral part of the market process .  To single out sticky prices or, in technical jargon, “nominal rigidities” as a market failure and  the root cause of macroeconomic fluctuations is just plain silly.  It demonstrates the giant chasm that exists between lifeless macroeconomic models and the dynamic pricing processes of the real world.

Malinvestment in Malinvestments

Ben Bernanke is starting to get his way.  Matt Wirz writes for The Wall Street Journal that companies with junk credit ratings are bellying up to the debt trough like no other time in history.  The first quarter of 2012 will go down as the most active for junk bond issuance since 1980 when Thomson Reuters began keeping track, with 130 companies floating $75 billion in debt offerings.

Investors can’t get enough of that high-yield stuff, with banks and Treasuries paying just north of zero.   “The rally in junk bonds extends an advance that began in early 2009 and can be traced largely to the Federal Reserve’s policy of keeping benchmark interest rates near zero,” writes Wirz.

“It’s the only place I can find any yield whatsoever with a reasonable risk,” Lee Hevner, individual investor and first time junk bond buyer, told Wirz.  High-yield corporate borrowers paid an average rate of 7.98% on bonds they have sold this year, according to Thomson Reuters, the lowest since the junk-bond market was created in the 1980s.

The Fed’s rate stomping even has Wall Street looking at rental homes.  Warren Buffett, mastermind of Berkshire Hathaway, Inc. told a CNBC audience he would buy “a couple hundred thousand” single-family homes if he could given the high yields on rentals.

The Wall Street Journal’s Nick Timiraos, Robbie Whelan and Matt Phillips write

Economists at Goldman Sachs estimate the annual yield on an investment on rental property nationwide averages about 6.3%, but can exceed 8% in cities that were hit hard during the housing bust, including Las Vegas, Detroit and Tampa.

Fannie Mae is looking to bulk sale 2,500 divided into eight regional pools.  The total current market value is $320 million.  If the sale goes well, Fannie and Freddie have plenty of inventory to sell.  Fannie Mae has 120,000 foreclosed properties. However, the buyers are lining up.

“A pretty robust cottage industry has developed and is absorbing this at an incredibly fast pace,” Richard Smith, chief executive of Realogy Corp., tells the WSJ.

Bernanke’s Fed has kept the rate it controls at just above zero for going on four years now.  And he has promised continued low, low interest rates until 2014.  Jim Grants told the New York branch of the Federal Reserve that holding rates stable is de-stabilizing.  While speculators know what to do with cheap money, the uninformed pay the price.

With 11 million underwater homes, the housing market has not come close to clearing the housing boom malinvestment.  Companies forced to pay high interest rates are being signaled by the market, not to take on more debt, but instead to de-lever.  All cheap refinancing does is mask poor management or a poor-quality product.  The Fed’s pushing of investors to higher risk allows enterprises that should be liquidated to continue wasting capital.

The Fed’s policy is squashing these market signals.   We now have malinvestment in malinvestments, making the eventual crash a catastrophic one.

Meanwhile, the average Joe is looking for some divine intervention in the form of winning the  Mega Millions lottery with a jackpot of at least $640 million and possibly much more the way people are lining up for tickets.  In Katy Texas convenience store manager Salim Turk said lottery ticket sales have been off the charts this week. The store sold more than $1,000 in tickets by 11 a.m. Friday. Sales on Thursday exceeded $3,500 and reached about $2,800 Wednesday. The typical jackpot only draws about $1,000 in sales a day, he said.

More than 1,000 people lined up and waited 4 hours to buy Mega Millions tickets at the Primm Valley Lotto Store on the California-Nevada border just south of Las Vegas.

It is unknown how many Mega Millions tickets Ben Bernanke has purchased.


Austrian Economics, Laissez-Faire, and Consumer Primacy

In the first chapter of Classical Liberalism and the Austrian School, Ralph Raico considers the connection between Austrian economics and laissez-faire.  For the most part, the early Austrian economists Menger and Bohm-Bawerk, stuck to pure theory, and did not venture much into advocacy.  Just how liberal they were is a fascinating question that Raico probes thoroughly.  But what is certain is that they were not nearly as overt in their support for the free market as their followers Mises and Rothbard were.

So why, even from the earliest days, were socialists and interventionists so terrified by Austrian insights?  Why, with or without a theory of objective ethics like Rothbard’s, does Austrian economics so naturally lend itself toward laissez-faire positions?  According to Raico, it is its consumer-oriented view of the market process.

But probably the clearest and most convincing grounds for associating Austrian economics with the free market has to do with the general conception of economic life propounded by the Austrians, beginning with Menger. In Hayek’s view:

It was this extension, of the derivation of the value of a good from its utility, from the case of given quantities of consumers’ goods to the general case of all goods, including the factors of production, that was Menger’s main achievement. (1973: 7)

This was the perspective that became standard with all of the founders. Kauder (1958: 418) notes that: “For Wieser, Menger, and especially for Böhm-Bawerk, the wants of the consumer are the beginning and end of the causal nexus. The purpose and cause of economic action are identical.” Kirzner argues that it was this central vision that explains why, despite the particular and varying policy views of its founders (see below), Austrianism was perceived to be the economics of the free market. The founders’ works

expressed an understanding of markets which, taken by itself, strongly suggested a more radical appreciation for free markets than the early Austrians themselves displayed. It is this latter circumstance, we surmise, which explains how, when later Austrians arrived at even more consistently laissez-faire positions, they were seen by historians of thought as somehow simply pursuing an Austrian tradition that can be traced back to its founders. (1990: 93, emphasis in original)

Thus, Kirzner implicitly endorses the position Mises upheld in his reply to F.X. Weiss (see below). What is crucial is not the historically and personally conditioned policy views of the first Austrians, but the “overall vision of the economy” that was novel in Menger and shared by his successors. They saw the market economy as

a system driven entirely and independently by the choices and valuations of consumers—with these valuations transmitted “upwards” through the system to “goods of higher order,” determining how these scarce higher-order goods are allocated among industries and how they are valued and remunerated as part of a single consumer-driven process. (Kirzner 1990: 99)

In contrast to the classical economists, who perceived the capitalist system as producing the greatest possible amount of material goods, Menger’s view was that it was “a pattern of economic governance exercised by consumer preferences.” (Later, W.H. Hutt coined the term “consumer sovereignty” for this state of affairs.) As Kirzner points out, “it was this thoroughly Mengerian insight which nourished Mises’s lifelong polemic against socialist and interventionist misunderstandings of the market economy” (Kirzner 1990: 99–100). And, it may be added, it was this fundamental insight into the nature of the private property system that discomfited and incensed Marxists and other socialists even to the present day.

I completely agree with this line of thinking.  When Menger brought the consumer back into the picture, and placed him in the captain’s chair of the market process, he humanized the market, and paved the way for Mises’ utilitarian case for the laissez-faire.

The singular tendency of the market economy, as it is seen in the Austrian perspective, is to provide for individuals the satisfaction of their wants according to the extent of their contribution to the satisfaction of the wants of others. Through the market process, the consumers tend to reward each producer according to his contribution to consumer satisfaction. Thus in the market economy, individuals are encouraged to, in their own interest, ever adjust their choices of roles and actions so as to ever improve their contribution to the satisfaction of human wants.

The relative importance of some consumers’ wants are greater than that of others in this process. But, as Mises stresses, the relative importance of any given consumer’s wants, insofar as that relative importance has been determined on the market, is a function of how much he contributed to satisfying the wants of other consumers in his role as a producer.

Thus, under capitalism, human choices, through their interplay, coordinate each other so as to provide for human welfare as fully as possible.

Every state intervention into the market nexus — every tax, regulation, redistribution, or expansion of bureaucracy — only slackens the ties linking contribution and income, thereby hampering the instrumentality of the market by making producers less responsive to consumers, and thus leading to reduced consumer satisfaction.  And because, with regard to economic provision, we are all consumers first and foremost and producers only subordinately, reduced consumer satisfaction means reduced public welfare.

This is the picture of the market economy, characterized by what might be called consumer primacy, that Menger made possible when he wrote the book (Principles of Economics) that “made an economist out of” Mises.  And with this picture in mind, it is awfully hard not to be a laissez-faire liberal.

Congratulations Dr Kraus !

Wladimir Kraus, a former Rowley Fellow at the Mises Institute, successfully defended his doctoral dissertation “Essays on Reisman’s Net Consumption Theory of Profit and Interest” yesterday at the University of Aix-Marseille in southern France.

Read More→

Austrian Economist Philipp Bagus with Ron Paul

The Vegas Cab Cartel

Las Vegas has the reputation as being a libertarian city, but like anyplace else, certain business interests would rather use the force of government to stifle competition rather than compete in a free market.  Cab drivers in Las Vegas have immense political power.  In 2005, then Governor Kenny Guinn vetoed a bill that would have outlawed cabdrivers from receiving kickbacks for delivering customers.

“Taxicab drivers contribute greatly to the economy of this state,” Guinn said.  “I cannot support Section 133 of AB 505 because it singles out and hurts the financial well-being of taxicab drivers.”

Visitors to Vegas will notice that there is no public transportation from the airport to the hotels, or hotel shuttle buses for that matter.  The Las Vegas Monorail doesn’t even come close to McCarran Airport.  If it did maybe someone would ride it.

Now a San Francisco company called Uber Technologies Inc. wants to challenge the livings of Las Vegas cabbies.  Joe Schoenmann reports for the Las Vegas Sun that Uber offers a high-tech livery service in nine cities.  The company “runs dispatch centers that customers access via a smartphone. To provide the rides, the company partners with licensed companies that use sedans, SUVs or limousines, using those vehicles during the companies’ down time. No cash changes hands — the transaction, including tip, is paid for using the phone.”

Uber provides a smartphone app that allows customers to view a map and follow where their vehicle is and how long before it arrives.

But the problem is that southern Nevada livery services are required by law to charge $40 to $45 per hour, with a one–hour minimum, making them uncompetitive with taxis for short rides.

Uber has never encountered these high minimum charges anywhere else.

The Nevada Taxicab Authority, which regulates the taxi industry, has its eye on Uber, according to Schoenmann.  Charles Harvey, Taxicab Authority administrator, told the Sun, an “unregulated, unlicensed quasi-taxi operator is a concern,” and that the agency is doing research on the company and talking to the limousine regulator, the Nevada Transportation Authority.

Uber could request a lower minimum rate, because the Nevada Transportation Authority approves rates for each operator.  “But even if a livery company figures it can make a profit with a minimum hourly rate of, say, $15,” writes Schoenmann, “sources said opposition from the powerful cab companies would make it difficult, if not impossible, to get regulators to go along.”

Local Taxi-cab strongholds are nothing new.  In the June 1988 edition of The Free Market, Sam Wells wrote,

Taxi monopolies are powerful on the city level.  They lobby government to make new drivers go through lengthy procedures or acquire expensive licenses to own a taxi.  These laws don’t exist to protect the public; they protect a privileged industry from competition and work against the public interest.

The tourism business in Vegas still has not recovered.  Allowing cash-strapped tourists options for transportation would help.

Laundered Money

Cross-posted from Mises Daily.

Under cover of its multiplicity of fabricated wars on drugs, terror, tax evasion, and organized crime, the US government has long been waging a hidden war on cash. One symptom of the war is that the largest denomination of US currency is the $100 note, whose ever-eroding purchasing power is far below the purchasing power of the €500 note. US currency used to be issued in denominations running up to $10,000 (including also $500; $1,000; $5,000 notes). There was even a $100,000 note issued for transactions among Federal Reserve banks. The United States stopped printing large denomination notes in 1945 and officially discontinued their issuance in 1969, when the Fed began removing them from circulation. Since then the largest currency note available to the general public has a face value of $100. But since 1969, the inflationary monetary policy of the Fed has caused the US dollar to depreciate by over 80 percent, so that a $100 note in 2010 possessed a purchasing power of only $16.83 in 1969 dollars. That is less purchasing power than a $20 bill in 1969!

Despite this enormous depreciation, the Federal Reserve has steadfastly refused to issue notes of larger denomination. This has made large cash transactions extremely inconvenient and has forced the American public to make much greater use than is optimal of electronic-payment methods. Of course, this is precisely the intent of the US government. The purpose of its ongoing breach of long-established laws regarding financial privacy is to make it easier to monitor the economic affairs and abrogate the financial privacy of its citizens, ostensibly to secure their safety from Colombian drug lords, Al Qaeda operatives, and tax cheats and other nefarious white-collar criminals

Now the war on cash has begun to spread to other countries. (Click here to read the whole article.) Read More→

The Ron Paul of the Second Reich

In his recent wonderful book, Classical Liberalism and the Austrian School, Ralph Raico gives Eugen Richter (1830-1906), the neglected hero of authentic German liberalism, his due.  As I read the chapter, I kept feeling as if I was reading about Ron Paul.

Just as Ron Paul has been “Dr. No” in Congress, Richter was a veritable “Herr Nein” (or as one German historian called him, “the eternal nay-sayer”) in the Reichstag.

Like Paul, Richter waged a one-man “two-front war” against statism on both the right (the imperialism, paternal welfarism, and crony capitalism of Bismarck and his ilk) and the left (the outright Marxism of the Social Democrats).  And just like Paul, he was mocked by both sides for his intransigent commitment to liberty.

And yet, even Richter’s enemies, like Paul’s, couldn’t help but admire such resoluteness in their uncynical moments.  Bismarck himself said that Richter was,

“Very well informed and conscientious; with disobliging manners, but a man of character. Even now he does not turn with the wind.”

This is a particularly remarkable compliment coming from a man who Richter often drove to the point of exasperation.  Raico tells us,

“His tireless probing into every single expenditure once caused Bismarck to cry out that in this fashion one would never come to the end of a budget.”

Raico also tells us,

Regarding his interrogation of a minister on a financial matter, Richter wrote, with proud underscoring: “But I didn’t let go.”

Ron Paul could proudly say the same for himself after his many interrogations of Greenspan and Bernanke.

Had Germany heeded the warnings of Eugen Richter about imperialism and economic interventionism, its people would have been saved from the countless sufferings that befell them after Richter’s passing in 1906.  Let that be a lesson for America, as it considers the warnings of its own champion of authentic liberalism.

Note: Also see Richter’s prescient work of dystopian fiction, Pictures of a Socialist Future.