Archive for March 2012 – Page 2

Caplan on “The Awful Mill”

Bryan Caplan recently blogged about “the awful” John Stuart Mill, calling him  ”shockingly muddled.”

Rothbard, more than perhaps any other scholar, exposed Mill’s muddleheadedness and its likely roots.  His verdict on Mill was that he was a “woolly minded man of mush” and his philosophy “a vast kitchen midden of diverse and contradictory positions.”

Rothbard’s most extensive discussion of Mill can be found in Classical Economics, the second volume of his history of economic thought.

David Gordon will be teaching an online course on that volume starting April 24.  Rothbard’s profiles of Mill and other classical economists are so full and lively, that this should be one of Dr. Gordon’s most fun and fascinating courses yet!

Don’t Let This Opportunity Pass You By

According to an NPR story, Insider-Trading Ban Passes Congress, But Some See Missed Opportunity, Senator Charles Grassley was unhappy with the Stop Trading on Congressional Knowledge Act recently passed by Congress because it didn’t go far enough. NPR reports that the Act, passed unanimously by the Senate, gained its political momentum from a 60 Minutes story exposing the double standard of Congress exempting its members from the regulations it imposes on others.

Sen. Grassley thinks an opportunity was missed to include a provision requiring workers in the political intelligence industry to register as lobbyists. But why stop with chicken feed like banning Congress from insider trading, forcing it to pay minimum wages, or even making it conform to the host of other anti-social rules and regulations it imposes on the rest of us. Why not ride the wave of public sentiment against flagrant violations of a basic principle of justice all the way to the shore? Introduce the Stop Congressional Theft Act barring Congress from taxing us, the Stop Congressional Kidnapping Act barring them from conscripting us, or cutting to the chase, the Stop Congressional Legislation Act barring Congress from writing law. Congress, undoubtedly, would think that’s taking justice too far, but as Rothbard might have said (adapting the famous line of Mises), “there cannot be too much justice.”


Turkish Government Wants Their People’s Gold

Just one visit to Istanbul’s Grand Bazaar tells a visitor how Turks store value.   The Turkish monetary authorities have a history of debauching their currency so Turks store their wealth in gold and rugs.  There are 373 jewelers and 125 rug stores in the bazaar.

In 1966, one US dollar bought 9 lire. By 2001, a dollar bought 1.65 million lire. Four years later, six zeros were lopped off the lira and a dollar equaled 1.29 new Turkish lire. Today, a dollar can be traded for around 1.80 lire.

The last half-decade of tamer inflation has helped make the Turkish economy one of the strongest. However, Ahmet Akarli, an economist at Goldman Sachs in London, told The Economist last year, “The cyclical picture is looking ugly, imbalances are accumulating and financial vulnerabilities are growing.” Akarli says wages are up 18 percent, domestic demand is increasing 25 percent, and credit growth is 30 to 40 percent.

The Turkish government is facing a current-account deficit and now has its eye on the vast amounts of gold held by private citizens outside the nation’s banking system.   The Wall Street Journal reports,

Government officials say the banking regulator will soon publish a plan to boost incentives for consumers to park their household wealth inside the financial system. Banking executives said they are considering new interest-yielding gold-deposit accounts that would allow savers to withdraw gold bars from specially designed automated teller machines.

The moves come after the central bank in November announced that lenders could hold up to 10% of their local-currency reserves in gold, in part to tempt Turkey’s gold hoarders to deposit their jewelry, coins or bullion at banks.

This counting of gold deposits as reserves allows banks to use that gold to expand their balance sheets, create money, and help fund the country’s current-account deficit.

Just as Murray Rothbard explained that bank runs are an effective weapon against inflation, storing one’s gold outside the banking system, keeps banks from creating money through fractional reserves.  Money in a bank is lent out, but ownership of the money isn’t transferred.  The deposit remains in the account of the depositor, while the funds are lent to another party.  Banks keep 10% (or less) of their deposits around just in case people show up for their money, with the result being money is created out of nowhere.  Of course a central bank is needed to backstop the inflationary operation.

Instead of leaving their money in banks to be inflated away, Turks have learned to exchange their government’s money into things that have been stores of value in their culture for centuries:  gold and rugs.

The Istanbul Gold Refinery believes Turks are holding 5,000 metric tons of gold in their homes.  And with the Lira falling 20% against the dollar last year, gold demand doubled.  This ain’t the Turks first inflation rodeo.

That suggests that despite a tripling of incomes and a sharp reduction of unemployment in the past decade, Turks remain nervous that holding too much of their assets in banks could leave them exposed to losses.      

Memo to the Turks.  Stay nervous, keep your gold at home.

Peter and Paul Redux

Dana Milbank doesn’t like Paul Ryan’s budget proposal that was released this week.  Why?  Well, Ryan cuts spending on the poor in order to pay for tax cuts for the rich.  Milbank writes:

Paul Ryan, outlining his latest budget proposal in the House TV studio Tuesday morning, said the policies of the Republican presidential nominees “perfectly jibe” with his plan, which slashes the safety net to pay for tax cuts mostly for wealthy Americans.

In case we don’t get his point, he later repeats it:

Taken together, Ryan would cut spending on such programs by $5.3 trillion, much of which currently goes to the have-nots. He would then give that money to America’s haves: some $4.3 trillion in tax cuts, compared with current policies.

And later again:

To protect poor Americans from being demeaned, Ryan is cutting their anti-poverty programs and using the proceeds to give the wealthiest Americans a six-figure tax cut.

It would appear that Milbank believes in a sort of fiscal Brezhnev Doctrine, in which whatever claim on the percentage of GDP made by the Feds is considered permanent, while the status of unclaimed GDP is considered up for grabs.  In Dana’s world, the current level of redistribution is optimal (until next year, when a greater level of redistribution will assume that status).

Quite aside from whether Ryan proposes actual cuts, as opposed to decreases in an arbitrarily projected rate of increase, notice Milbank’s fallacy regarding reducing real wealth transfers to the “poor” in order to increase them to the “rich”—or of robbing poor Peter to pay rich Paul.  Instead, it’s a case of robbing Paul less (by reducing his taxes) while paying Peter less (by reducing his claim to coercive wealth transfers).

Which is not to defend the Ryan budget for reduced taxation and redistribution.  He and Milbank are just on  opposite sides of a typical D.C. debate among welfare-ists, in which the Republican budget increases the national debt by a $4 trillion over the next ten years and the Democratic one increases it by $3.5 trillion, with both budgets relying on rosy scenarios including the assumption that future Congresses will be constrained by the dictates of the present one.

Bernanke’s Deep Understanding

Federal Reserve Chairman Ben Bernanke went back to the classroom to educate young minds at George Washington University about the history and role of central banks and the Federal Reserve in particular.

On the topic of financial panics, Bernanke asks the students if they’ve seen the movie “A Wonderful Life.”  Not as many students had seen the movie as he had hoped.  Bank panics are a serious problem Bernanke explains.  Banks borrow short and make long-term loans that are illiquid.

This would have been a perfect time to talk about unviability of fractional-reserve banking.  However, Professor Ben avoided that and instead waxed eloquent about a perfect world where Jimmy Stewart would be able to borrow from a lender of last resort–the central bank–  and FDIC deposit insurance would quell unsettled depositors.

Bernanke cites Walter Bagehot’s axiom that central banks must lend freely in a panic, against good collateral, at penalty interest rates.  After all, the central bank doesn’t want borrowers taking advantage of cheap rates to get through the crisis.

No student hands shot up to question the Fed Chair as to how a Fed Funds rate of zero to 25 basis points could be defined as a “penalty rate.”

“Gold standards are far from perfect,”  Bernanke said.  “ They waste of resources,.”  citing Milton Friedman’s quip about taking gold from one hole in the ground just to transfer it to other hole.

Gold standards are far from perfect because government bureaucrats have always been in charge of managing them.   The mere fact that heavy costs and resources are involved to mine the yellow metal is one of the  factors making gold a perfect money.

A gold-shackled currency takes away central bank flexibility, which bothers Bernanke.  But the question is, how much Bernanke flexibility can the dollar stand before it falls apart completely?

The Fed Chair admitted that the gold standard provides price stability–but only in the long run.  He stressed that there have been short-term periods of price inflation and deflation under gold.  Well sure, prices increase and then correct, that’s what a gold standard does.  Under central bank management prices just increase; either slowly, quickly, or catastrophically.

Exchange rates are fixed under gold thus, Bernanke told the students, shocks in the money supply in one country will affect other countries.   He used the example that an accommodative monetary policy by his employer would cause inflationary pressures in China, because the yuan is tied to the dollar.

Bernanke cited speculative attacks on gold-backed currencies as a problem, saying that if it’s believed there isn’t enough gold backing the currency there can be a run on that currency.  This is a human problem, not a gold problem.  The same thing occurs more often under fiat currency systems. This is the way the market should work.

Amazingly, the Fed Chair rolled out the tired old “there isn’t enough gold to maintain a gold standard” argument.  Showing a slide of William Jennings Bryant, Bernanke told of farmers struggling with debt that was fixed, while the price of their crops was dropping.  Bryan called for a monetization of silver to increase crop prices.

Nigam Arora picks up on this theme in a piece for “The Trading Deck” on MarketWatch.   Mr. Arora writes that Bernanke did a great job and thinks his “comments today on the gold standard may help those who are genuinely trying to make money from their investments.”
Arora writes that there just isn’t enough gold for the modern economy and the production of gold can’t keep up.  He cites the Conference Board’s prediction that the world economy will grow by 3.6% this year, and gold production only grows 2-4% a year.

“The point is that the production of gold does not increase enough to accommodate growth in world economy,” Arora writes.  “Then there is a peak gold theory which states that gold production has either peaked or will peak sometime in the near future. In contrast, the world economy will continue to grow.“

But growing the money supply doesn’t grow an economy: only real savings does. “Neither the Fed nor the government can grow the economy,” explains Frank Shostak. “All that stimulatory policies can do is to redistribute real savings from wealth producers to nonproductive activities. And these policies encourage consumption that is not supported by useful production.”

The redistribution created by the Fed’s monetary pumping actually weakens the economy over time as real savings is squandered on malinvestments. With gold as money, real production and savings is stimulated.  Capital and savings flow to the most efficient and best producers.

Mr. Arora writes that South Africa is number one in gold mining followed by the US.  Actually both of these countries are behind China and Australia, with Russia on the verge of pushing South Africa into the number five spot.

His bigger point is that countries without significant gold production would not be interested in a gold standard.  No political class anywhere is interested in the gold standard because it limits government expenditures.

Arora’s hedge fund is short gold and owns inflation hedges “that have lower risk and higher rewards compared to gold.”  He writes, “playing gold as a speculation based on momentum and confusing it with the gold standard and monetary policy without deep understanding of these subjects is a losing proposition.”

Arora’s arguments give us an idea how deep his understanding is: about the same as Chairman Bernanke’s.

Private vs. Public Barbershop

The Supreme Court is going to consider the constitutionality of ObamaCare in the coming weeks, but the government takeover of healthcare didn’t start with the current president, but with Harry Truman decades ago.

We’re told the nation’s health care needs fixed: That the free market isn’t providing for this vital service adequately.  However, America’s healthcare hasn’t been left to the free market since World War II.   The president has promised that more government will make healthcare cheaper and more available.

A comparison of two capitol hill barber shops will shed some light on whether the president has it right.  The Senate and the House of Representatives each have a barbershop for member use.  In 1994, the House barbershop was privatized by Republicans who had taken over control of the House that year for the first time in decades.  The Senate shop has remained a government operation.

Before it was turned into a private enterprise, the House shop employed 16 barbers, each of whom received federal pensions and benefits. Now the shop has three employees, one of which is part-time.

“We’ve gone through a lot of changes, with members going back to their districts on the weekends and fewer customers because of the extra security that the House has put up after 9/11, but we’re all self-employed,” long-time House barber Joe Quattrone says. “Money’s not everything. I love coming to work every day. Would you rather go to a job you hated for $50,000 or one you liked for $40,000?”

The House shop actually turned a profit last year, despite occupying an inferior location in the Rayburn House Office Building, farther from the two adjoining House buildings than is the Senate’s barbershop.

Meanwhile, the Senate Hair Care Services, the formal name for the Senate barbershop, with its 11 employees, required a $300,000 taxpayer bailout to keep its barber pole lighted, despite not having to pay the government a dime in rent.

Having the advantage of government subsidy, one might assume senators pay less for their haircuts and shaves than House members.  Not hardly.  While the Senate barbershop charges $23 for a trim with water but no shampoo and $20 for a shave, the House barbershop charges $17 and $10.

So while many lawmakers are all for having the government take over healthcare and other things that private enterprise can provide better and cheaper, the inefficiency of the Senate barbershop has at least one big government cheerleader wondering.

Rep. John Conyers, D-Mich., is no fan of free markets, but says “I would like to know why the Senate barbershop is running its business into the red.”

Obama on Fair Trade

Barack Obama’s recent statement on fair trade, a statement applauded by some leading Republicans, contains some easily recognizable errors in international trade theory. The central problem with his remarks is seen in his following position:

Now, one of the things that I talked about during the State of the Union address was making America more competitive in the global economy. The good news is that we have the best workers and the best businesses in the world. They turn out the best products. And when the playing field is level, they’ll always be able to compete and succeed against every other country on Earth.

But the key is to make sure that the playing field is level. And frankly, sometimes it’s not.

Here we see the view, commonly held by the media and non-economists in our universities, that international trade is a competition, analogous to sports or military competition (sometimes, “trade competition” is compared to the Cold War). If the playing field is not level, then the trade is not fair. Economists, and this view is not limited to Austrians, understand that international trade is the fruit of cooperation, not competition. America and China are not trade competitors. Paul Krugman thoroughly demolishes this fallacy in “The Illusion of Conflict in International Trade” (reprinted in Krugman’s Pop Internationalism). Krugman explains that in international trade “it is the illusion of economic conflict, which bears virtually no resemblance to the reality, that poses the real threat.”

The danger in Obama’s position is that he pledges to do something about China’s trade practices:

Since I took office, we’ve brought trade cases against China at nearly twice the rate as the last administration, and these actions are making a difference. For example, we halted an unfair surge in Chinese tires, which has helped put over 1,000 American workers back on the job. But we haven’t stopped there.

Two weeks ago, I created a Trade Enforcement Unit to aggressively investigate any unfair trade practices taking place anywhere in the world. And as they ramp up their efforts, our competitors should be on notice: You will not get away with skirting the rules. When we can, we will rally support from our allies. And when it makes sense to act on our own, we will.

Obama is threatening China. Our government will “aggressively investigate,” other government’s actions, other countries “should be put on notice,” governments that obey Obama’s decrees are our “allies,” and he’s willing to take actions against those that refuse to bow down to the U.S. state. Fortunately, Obama does say that “we prefer dialogue” to more aggressive actions, but he doesn’t limit his actions to negotiations. Government managed trade in the name of fair trade reduces our gains from trade, but the danger in Obama’s position is that it could lead to real conflict with China that goes beyond the illusion of conflict seen by our political leaders.

For some sound reasoning on this issue, see Krugman’s Pop Internationalism. In addition to the paper mentioned above, I recommend “Competitiveness: A Dangerous Obsession” and my favorite chapter “What Do Undergrads Need to Know About Trade?”


Tyler Cowen Ignores the Unseen

Tyler Cowen is impressed over “how much war can spur innovation.”  He does not mention all the innovation that redirecting resources away from serving consumers and toward slaughter and destruction will at the same time preclude.

Promoting Entreprenuership, Wasting Capital

Small business is the subject for debate in today’s Wall Street Journal.  Small business is said to be the main job creator in the U.S. economy and with unemployment still high, and a punk business climate, a goosing from government policy is thought to be the tonic to put us right back comfortably in bubble land.

All we need is a massive wave of entrepreneurship and we’re off to the races.  And if you believe Noam Wasserman, who teaches entrepreneurship at Harvard Business School, we can all be entrepreneurs.  Dr. Wasserman says doctors, lawyers and engineers are trained, why not entrepreneurs?

Forget about the school of hard knocks, students can study other people’s mistakes, learning what pitfalls to avoid and presto:  any business school grad has what it takes to launch the next Facebook or maybe just  an internet cafe downtown.

But Ludwig von Mises contends,

What distinguishes the successful entrepreneur and promoter from other people is precisely the fact that he does not let himself be guided by what  was and is, but arranges his affairs on the ground of his opinion about the future.  He sees the past and the  present as other people do, but he judges the future in a different way.

Peter Klein explains that for Mises, entrepreneurial judgment is not a mechanical process of formulating values using known probabilities.  Instead it’s “a kind of Verstehan that cannot be formally modeled using decision theory.”   This echos the view of Frank Knight, who believed entrepreneurial decision making is not modelable.

Klein explains,

Mises emphasizes, some individuals are more adept than others, over time, at anticipating future market conditions, and these individuals tend to acquire more resources while those whose forecasting skills are poor tend to exit the market. Indeed, for Mises, the entrepreneurial selection mechanism in which unsuccessful entrepreneurs–those who systematically  overbid for factors, relative to eventual consumer demands–are eliminated from the market is the critical “market process” of capitalism.

Instead of the unfettered market directing capital to successful entrepreneurs, the Small Business Administration (SBA) seeks to direct capital to anyone who thinks they might be an entrepreneur, especially  if they fall into certain favored categories of race and gender.  Veronique de Rugy argues that the SBA is a waste of money, citing Frederic Bastiat’s insight that those helped by government policy are very visible, while those harmed  by the same policy go unnoticed.    Ms. de Rugy writes, “we don’t know how many more jobs might have been created if market forces determined the allocation of capital.”

Arguing the other side is Barbara Kasoff who claims the SBA “helps keep capital, contracts and know-how flowing to small businesses,” citing plenty of big numbers making the case for government’s capital steering involvement.   But the SBA assumes capital is homogeneous and that everyone (who can qualify for an SBA loan) is equally gifted as an entrepreneur.   However, if these borrowers had proven track records of entrepreneurial acumen, presumably no government guarantee would be needed for banks to be induced to make the loans in the first place.

The mere fact that government has interceded means capital is being misdirected away from those with proven entrepreneurial ability  and toward those who are lacking the same.  Over time, while its proponents claim the SBA program is creating jobs, it is in fact destroying capital, and jobs along with it.


Prize-Winning Essays on Money and Credit

Two $1,000 prizes were awarded at last week’s 2012 Austrian Scholars Conference for outstanding essays.  Fittingly, in the ASC celebrating the centennial of Mises’ first magnum opus, The Theory of Money and Credit (although, in the conference, Guido Hulsmann explained, among other mistranslations in the English edition of the book, how “credit” really should have been translated as “fiduciary media” instead), the prize-winning essays were, respectively, about money and credit.  The Lawrence W. Fertig Prize in Austrian Economics went to Malavika Nair for “Money or Money Substitutes? Implications of Selgin’s Small Change Challenge, and the O.P. Alford III Prize in Libertarian Scholarship went to Thorsten Polleit and Jonathan Mariano for “Credit Default Swaps from the Viewpoint of Libertarian Property Rights and Contract Theory,”  Congratulations Malavika, Thorsten, and Jonathan!