Author Archive for David Howden

Public High School Is A Failure

Over at Mises Canada, I address the question of why college tuition has increased by so much over the past few years. Turns out it might not have anything to do with the University system itself, but is the result of an increasingly failing public school system leaving its graduates with few options.

Long story short, University degrees don’t cost so much because the

salary earned from a job available to University graduates is particularly great. It’s mainly because the alternative is so much worse.

The failing of the public high school system, which accounts for 90% of high school graduates (and the vast majority of people who don’t even make it out of high school), has reduced the opportunity cost of going to University. Since high school diplomas no longer open any doors, students are “forced” to continue their education further if they want a better life. This increases the price that Universities charge in tuition, partly in response to the increased number of students willing to pursue a degree, and partly in response to a greater willingness to pay.

If someone is upset that University costs so much, they really don’t have to look any further than the failure that is the public high school system. If you want lower tuition rates, the best solution is to shore up the quality of high schools. Of course, with public school teachers now perennially striking any time someone tries to do just that, this task is easier said than done.

Read more here.

The Dow’s All-Time High

Photos_NewYork1_032The Dow Jones Industrials just closed above 17,000 for the first time ever. While they are celebrating the 4th of July, Americans can rejoice in the good fortune the stock market is giving them.

But wait, what’s actually driving the stock market to reach its highest level of all time?

Since its high in 2000, the Dow is up 45%. Over the same period the CPI is up 40%. Nearly all of the gain in the stock market is just because of prices going up, not because of real economic growth. In fact, if you factored inflation out of your stock returns over the past 14 years, you earned a miserly 0.2% per year.

There’s lots to celebrate this 4th of July weekend, but stocks for the long run is not one of them.

(Originally posted at Mises Canada.)

Asset Bubbles Aren’t Yellen’s Problem

Janet_yellen_swearing_in_2010Speaking at an IMF sponsored event, Fed Chairwoman Janet Yellen warned of growing risk factors in several asset classes. Unfortunately, she doesn’t see the most aggressive monetary policy in American history as the cause.

Analysts said Yellen was pushing back against some Fed officials who believe financial stability should be given a more prominent place in formulating monetary policy.

Jeremy Stein, who stepped down as a Fed governor in May, had sparked the debate by arguing higher rates should at least be considered to help stamp out possible asset bubbles, and a number of regional Fed bank presidents have warned of the dangers of keeping rates near zero for too long.

But Yellen made clear she did not see a need for the U.S. central bank to alter its current course. “I do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment,” she said.

She doesn’t dispute that monetary policy is playing role in creating bubbles. In fact, she recognizes that clearly with the mid-2000s housing boom. But it’s not her job to prick the bubble. And if the monetary policy being pursued under her watch is the culprit, well, I guess that’s not her problem either.

In his “Critique of Interventionism”, Ludwig von Mises warned that the unintended consequences of interventions would result in calls for further action. In short, intervention begets further interventions.

Fed monetary policy seems to be a good case of this. Not only is the Fed blowing bubbles with its QE policies, but now the person in charge of this wants further regulations to mitigate the pernicious effects of the original policy causing the problem.

I’m not sure if Yellen read Mises’ book, but maybe someone could post her a copy.

(Originally posted at Mises Canada.)

Spain´s New King

125px-Flag_of_Spain.svgOver at Mises Canada, I discuss the crowning of Felipe VI as the King of Spain. Austrian economists are in a good position to understand the role of monarchy in the political system since Hans Hoppe has written extensively on the topic in his A Theory of Socialism and Capitalism. Among other things, Hoppe outlines the longer view that monarchs were able to take over their Kingdoms, in contrast to the short-sighted nature of today´s politicians.

In fact, Spain´s new King assumed the throne after his father exercised just one example of this strength.

How man politicians voluntarily leave their position for the “good of the party”? Richard Nixon famously resigned office rather than be embarrassingly impeached, but otherwise I´m hard-pressed to come up with an example in recent history.

In fact, King Juan Carlos I gave up the throne twice. This more recent abdication was foreshadowed (in a way) in 1976. After the demise of the Franco dictatorship, King Juan Carlos became ruler of Spain. To forestall another bloody civil war he gave his responsibilities to the Congress in order to save his Republic. (Not only that, the man he appointed as the first prime minister of the newly democratic Spain, Adolfo Suarez, was the leader of the Movimiento Nacional Party. It included members who voted against recognizing him as King.)

Say what you will about him as a man, I can´t think of too many elected politicians that voluntarily renunciate their powers for the good of their country. King Juan Carlos did it twice.

Read more here.

Deposit Insurance is a Gamble

HoldemIn a letter to the Economist on May 3rd, Mark Neale, Chief Executive of the UK’s Financial Services Compensation Scheme (the country’s deposit insurance provider), chastised the magazine for its view of deposit insurance as a “corrosive trend” in the state’s involvement in finance.

Mr. Neale points out that deposit insurance is not funded by the government, but is financed through levies paid by the banking system. He further claims that “all insurance creates some moral hazard”, implying that deposit insurance is not radically different from other forms of insurance.

In these claims he is only half correct. The issue with deposit insurance is not one of who pays for it. It is a question of whether such insurance can actually exist in the first place.

In a wonderful little section in Human Action, Ludwig von Mises outlines the distinction between class events and case events. Cases are individual and unrelated occurrences, such as playing a football match or fighting a war. We have much knowledge about the protagonists, but of the outcome we know not much In distinction, there exist classes of events where we know very little about the individuals that comprise a class but the whole of them behave in a similar fashion. A roll of dice provides a good example. Whether snake eyes result from any given roll is relative unknown, but over a series of rolls we know that this outcome should occur roughly once out of every 36 times.

This distinction is important as only class events can be insured. Insuring bank deposits is not included in this category.

When one buys life insurance, the product does not make the individual live a more risky life. He doesn’t try to die a little earlier so that his life insurance product will pay off. In fact, if all goes well he would never have to use the product, but it is there just in case. (And if he lived his whole life, there would be not much need for a life insurance policy as the premiums paid in will amount to more-or-less the policy payout.)

Life insurance does not create moral hazard. Deposit insurance definitely does.

When your bank account is insured your criteria in selecting a bank change drastically. No longer are you worried about prudent financial management, but rather your aim is to maximize a sure bet. Since deposit insurance will pay you out whether your bank is liquid or not, you aim for the bank offering you the best bang for the buck. The lowest fees is a common criterion, as is the highest rate of return on the deposited funds. Banks compete on both these margins by taking on greater and more (hopefully) profitable risks. The problem arises when the risks don’t pay off, as was the case in 2007-08 when many bank investments turned sour.

Bank deposit insurance is unlike any other insurance product. In fact, it’s a complete misnomer to call it “insurance” at all. Like rolling the dice, it’s a gamble. And when investments turn sour, it’s a pretty bad one at that.

(Originally posted at Mises Canada.)

Bubbles Worry Central Bankers

Soda_bubbles_macroAfter years of QE and other loose monetary policies, central banks are starting to get jitters about the effects of their policies.

An organization representing the world’s main central banks warned Sunday that dangerous new asset bubbles were forming even before the global economy had finished recovering from the last round of financial excess.

Investors, desperate to earn returns even as official interest rates are at or near record lows, have been driving up the prices of stocks and other assets with little regard for risk, the Bank for International Settlements in Basel, Switzerland, said in its annual report published Sunday.

It turns out that low interest rates do have a cost. And that cost is not just limited to increased risk taking. According to Jaime Caruana, the general manager of the BIS, “during the boom, resources were misallocated on a huge scale… [I]t will take time to move them to new and more productive uses.”

The time it takes to move these resources to where they are valued most highly is being disrupted by central bank monetary policy. Consider the size of the financial sector, or the amount of leverage in the economy. Few would say that there either of these factors were not something that contributed to the crisis in 2008. By foisting low interest rates onto their economies, central banks have slowed or stopped altogether the deleveraging and shrinking of the financial sectors, none of the adjustments necessary for recovery.

Part of the problem is that central bankers don’t understand what interest rates are.

The B.I.S. also had harsh words for corporations, which it said were not taking advantage of booming stock markets to step up investment. That is one reason that gains in productivity — the foundation of sustained economic growth — have slowed in most advanced economies, according to the report. “Despite the euphoria in financial markets, investment remains weak,” it said. “Instead of adding to productive capacity, large firms prefer to buy back shares or engage in mergers and acquisitions.”

These central bankers are stuck in a mindset of “hydraulic Keynesianism” where prices are supposed to be manipulable to get the desired result. Never mind that corporations are currently trying to reduce risk exposure, and that low interest rates are hindering, not helping them do this.

(Originally posted at Mises Canada.)

How to Make Government Cost More

3542485690_f618e4156a_zThink the government is expensive? It’s about to cost a little more.

The Grow America Act, introduced earlier this month in the U.S. House of Representatives, contains “Buy American” language that would raise U.S. content to 100 per cent by 2018 from 60 per cent now.

The bill, which must pass both the House and Senate, is part of a resurgence of so-called Buy American rules in numerous recent federal spending bills amid angst about the weak economy.

In particular the Act will hurt Canadian manufacturers who specialize in bus and subway cars for American public transit systems.

Notwithstanding the North American Free Trade Agreement, the new Act, if passed, will effectively place a trade embargo on foreign-made goods.

Just think, what would have happened to the cars Americans drive if 30 years ago the government stopped letting foreign cars into the country. Actually, we already have a pretty good test case for this in the old Soviet bloc.

The Grow American Act might appeal to voters who think jobs will come home, but they’ll be wrong. The main result of the Act will be a less trade and a more expensive government.

(Originally posted at Mises Canada.)

Bank Deposits are Not “Idle”

8502557240_c67595911a_zOver at Mises Canada, my daily from earlier in the week addresses whether bank deposits are idle, as many fractional-reserve banking apologists claim.

Advocates of fractional-reserve banking err in claiming that deposits are “idle”. The prevailing belief amongst this group is that depositors don’t have any present need for their funds, and so they give them to the bank to care for them (or invest) until that point in time when they do need money.

Austrian economists are in a privileged position to address this claim, as they are amongst the few who understand money’s role in the economy.

Money is that unique good that serves as our uncertainty hedge. We don’t know when we’ll need to cover expenditures in the future, nor do we know how much they might cost. Uncertainty as to the future poses a problem to the individual. We know, in some vague way, that there are certain contingencies that can arise in the future that will demand that we spend money. It’s a toss up as to when or what these will cost.

The depositor doesn’t even know when he will need his deposit back. How is the bank supposed to estimate this?

Examples of bank runs are good examples of this disconnect. The depositor wants his money which he believes to be his for the taking. (Indeed, this is enshrined in law as the depositor is permitted to claim his deposit whenever he wants.) The bank, under the presumption of the “idleness” of this deposit has made use of it. If the depositor wants his money back he’ll have to wait for the bank’s investment to mature.

Of course, one can always resort to external help to make sure these deposit claims are always paid out in a timely manner: deposit insurance and a central bank lender of last resort are the two time tested methods. But neither of these “solutions” solves the initial problem of the lack of knowledge surrounding when the deposit will be needed. And both of those solutions come with their own set of problems.

Read more here.


Replace Striking Teachers with Babysitters

6976390139_894491b5bd_zWith British Columbia’s 41,000 unionized public school teachers still on strike, parents are scrambling for solutions. What is one of the more popular ones right now? Teenage babysitters.

It’s more than a little ironic that the province’s teachers strike has freed up the labor necessary to replace the out-of-work teachers.

“I thought that I could just help parents out and maybe start making some money during the strike,” said Amanda, who graduated from Vancouver’s Kerrisdale Elementary School this week.

“Right away, I got, like, four or five phone calls,” she said. In fact, business has been so good that she’s had to turn down requests.

“Business has been very busy but then I have my life that I have, too,” she said. “I’ve had to turn down some, but I still have many options because the parents are still working during the strike.”

On the first day of rotating strikes in May, about a dozen kids attended the Hendersons’ Strike Camp. In recent days, the attendance doubled.

“We got so many e-mails from panicked parents saying, ‘My child is so low-maintenance; can you please just let them in?’” said Adrienne, 16.

The problem when public workers go on strike is that there are no options. There are too many state monopolies, so we can only turn to one fire department, policing services or school system. When they go on strike it’s costly and difficult to find an alternative (if at all).

The fact that parents are turning to teenage babysitters to cope with the strike suggests that the competition for teachers comes from an unlikely source. With many parents seeing public schooling as a glorified day care, why not cut out the middle man of the state and let the public find its own babysitters?

(Originally posted at Mises Canada.)

Bank Deposits are Not Idle

From my Mises Canada article yesterday, I address the question of whether bank deposits are idle? Or are they held for a reason, albeit a reason that the depositor might not know about yet?

Advocates of fractional-reserve banking err in claiming that deposits are “idle”. The prevailing belief amongst this group is that depositors don’t have any present need for their funds, and so they give them to the bank to care for them (or invest) until that point in time when they do need money.

Austrian economists are in a good position to assess the role of bank deposits in the economy. The reason is that this group is amongst the few economists who understand what money represents and where its usefulness stems from.

We hold cash balances to shield us from uncertain future expenditures. Instead of being idle resources going unused in our accounts, like fractional-reserve banking advocates think, money on deposit is performing the very task we want it to. When banks make use of these deposits they create a conflict as they take that good which is performing a task for the depositor and put it to another use.

Read more here.

This Boom is a Problem

220px-Dangclass1.svgWriting for the Globe and Mail, Tom Bradley is worried about the markets:

It feels like investors have become complacent about – well – everything.

The strongest consensus I’ve seen in recent years relates to low interest rates. The rationale is, rates won’t go up because we can’t afford it. A question from a client last week embodies this view. He asked, “Can interest rates actually increase?”

Related to rates is an increasing comfort with debt. Carrying costs are low and families are okay with heavily leveraged balance sheets. Instead of, “How fast can I get my house paid off?,” the question is, “Should I get an investment loan to go with my mortgage, home equity loan, credit line, car lease and credit cards?”

One of the striking features of Austrian business cycles is the emphasis on the things one doesn’t see that are going wrong during the boom. In other words, while by all appearances the boom seems like a great time, in reality it is quietly sowing the seeds of its own demise.

It is exactly this feature – the emphasis on the unsustainability of the boom – that gives Austrian economists an advantage over other economists when assessing business cycles. No other look at the business cycle has any broad measures against which it can judge whether the boom “should” be happening in the first place. Instead the bust always gets the blame as the problem, which is only really true if it wasn’t caused by the boom that precedes it.

Bradley is correct about three facets of today’s markets. First, interest rates are at all time lows. While in the past this used to mean in real (inflation-adjusted terms), with central banks pegging their main financing rates at or close to zero, this is true in nominal terms as well. Second, not only are debt levels high but borrowers don’t have much incentive to pay them off any time soon. Finally, and most importantly, no one expects this situation to reverse any time soon. Why would it: don’t you know we’d all be doomed if interest rates rose?

The longer these imbalances continue, the more difficult the problem will be to unwind. There’s no such thing as a free lunch, and when interest rates rise again (probably in a response to rising risk due to bad investments made in the past) we’ll see whether this boom was sustainable or not. Of course, Austrian economists are able to answer that question already.

(Originally posted at Mises Canada.)

End QE and Pop the Stock Bubble

Writing in the Financial Times this weekend, John Authers is concerned with the lack of volatility in the stock market.

More remarkable than the market’s level has been its consistency. The US not seen a correction (a top-to-bottom fall of 10 percent or more) since the turbulence in the summer of 2011 that followed the decision by Standard & Poor’s to downgrade US sovereign debt from triple A…. This is strange. Markets seldom go up in a straight line like this. Progress is made bumpily, with rallies interrupted by sharp selloffs.

Since the Fed started its QE programs the stock market has been pretty buoyant. This is especially true with the latest and ongoing round known as QE3, which covers most of the period Authers is concerned with.

stocks 1

Indeed, the upward trajectory in the stock market follows the Fed’s quantitative easing programs almost perfectly. With the recovery on Main Street still sluggish, the Fed can at least claim that it has given Wall Street some relief.

stocks 2

Indeed, the relationship between the M1 money stock and the Dow has been about as good as any statistician could hope for upon first glance.

Of course, with the Fed starting to taper its easing program there is a fear that the luck of the stock market might run out. Of course with the Fed still committed to increasing the money supply by $65 bn. a month, it doesn’t look like Wall Street’s stimulus package is over quite yet.

None of this bodes well for the rest of us.

A stock market artificially propped up by the Fed’s loose money policies is sure to end badly. Ending the seemingly endless credit creation and popping this bubble is the lesser of two evils.

(Originally posted at Mises Canada)

Measuring Unemployment

1024px-Unemployed_men_queued_outside_a_depression_soup_kitchen_opened_in_Chicago_by_Al_Capone,_02-1931_-_NARA_-_541927Over at Mises Canada, my Saturday article worked through the finer points of a better way to discuss unemployment. One problem with current measures is that the actual unemployment rate has little bearing on how difficult it is to get a job. There are periods with high numbers of unemployed masses but with many people finding a job, and stagnant periods where not many people lack work, but not many unemployed people are able to find work either.

I previously discussed some of the other problems with the common measures of unemployment here.

Even though the unemployment rate was still north of 8% in early 2012, the average number of unemployed finding work was a healthy 2%. Today the unemployment rate is lower, but there is also a lower percentage of unemployed people finding work. In short, even though the total employment situation might be better today than it was two years ago, the average unemployed worker is going to have a more difficult time finding a job.

In fact, the average unemployed worker today has about as good a chance of becoming

Read more here.

End Ottawa´s Equalization Program

1280px-Flag_of_Ontario.svgHot off her Ontario electoral win, Kathleen Wynne is taking aim at Ottawa. The federal government´s equalization program distributes money between the provinces to help those with less fiscal capabilities deliver the same services. In an interview with the CBC, Wynne noted the unfortunate fact that:

There’s an unfairness in the way money comes back to the province of Ontario. There’s $1.28 billion that really should be coming back into our province for programs and services.

It´s a little ironic that she understands the “unfairness” of a system that distributes money between the provinces at the hands of a higher level of power, but that she doesn´t see the same problem within her own government.

After all, her electoral win relied on grabbing the Toronto vote. One way she secured this group was by pledging a large amount of infrastructure spending which would be paid for out of the province´s pockets (with some help from Ottawa, of course).

This is the same opprobrium she sees with the federal system. After all, it will be the taxpayers in counties far away from Toronto that will be paying for the infrastructure she promised. Maybe it´s time for Wynne to step back and realize the pain Ottawa causes Ontario is the same that she will soon be causing the plethora of communities within her own province.

(Originally posted at Mises Canada.)

Public Sector Strikes Need Competition

Flag_of_Quebec.svgIt’s not often police officers and firefighters light fires in the streets (in front of City Hall no less). That’s exactly what happened in Montreal recently, as public union members protested the Quebec government’s intent to reform their municipal pension plans.

The province’s Municipal Affairs Minister Pierre Moreau estimated that these public pensions are currently running a deficit of almost $4 billion.

Part of the shortfall is caused by mismanagement and part by an inability of the government to come to grips with the reality of pension demographics. Retirees are living longer and investment returns are not what they used to be given the current low-interest rate environment. But many municipal workers start working later in life (like police officers and firefighters who go through lengthy training regimes) and retire earlier than private sector workers. The result is few years spent contributing to an already generous pension plan.

To put pressure on the provincial government to not make reforms, 80 firefighters quit on the spot, closing two Montreal fire stations. (This was, one can presume, especially troublesome as this group also had a hand in lighting the street on fire in front of City Hall.)

When private sector pensions are managed incorrectly, the pensioner pays. When returns are less than expected, as they are now, contributors make up the difference. Defined benefit plans, such as Quebec’s public sector enjoys, are almost unheard off any longer. The advantage of knowing in advance what your pension will pay is from a bygone era. Market forces dictate returns, and private pension holders on defined contribution plans get what the market returns on their retirement. There is no reliance on the taxpayer to make up the shortfalls.

Reform of these municipal pensions is not only necessary, it’s fair. One reason reform won’t come is evident in the recent protest.

There is only one group of fire fighters in Montreal. When they go on strike, there is no replacement. The same holds for police, school teachers, and many other public monopolies. When these 80 fire fighters went on strike the citizens of Montreal had no options. It became not a matter of pension reform, but of life and death if someone had a fire!

In contrast, when your local hardware store has pension problems and goes on strike, consumers still have options. Nuts and bolts can be bought from a competitor.

Competition is missing from discussions about pension reform. With no options for these government services, the public is at a complete loss when fire fighters, police, doctors, nurses or teachers strike. As a result these workers have an advantage in negotiations that those in the private sector don’t have. They wield an undue amount of pressure when they sit at the negotiation table during a strike.

If public workers like these fire fighters want to strike, that’s fine. But don’t endanger the public by stopping them from being protected by fire fighting services. Let private competitors fill in the holes. It’s the only way to level the negotiating playing field, and as an added bonus consumers don’t have to fear for their lives because of a simple argument over retirement benefits.

(Originally posted at Mises Canada.)

Income Inequality Did Start Around 1970

Inequality-SymbolOver at Mises Canada today I discuss whether income inequality really is increasing, or whether it is a figment of some statisticians imaginations. It’s real alright, but the cause is more obvious than anyone wants to let on/

The income and wealth divide that is now seen as a problem did start right around 1970 (depending on what type of data you want to look at to judge this, it started as early as 1968 or as late as 1973). The income divide is not fabricated, nor are these dates just pulled from thin air.

The period of time right around 1970 was unique in recent history as it was the end of the Bretton Woods era and the start of a pure fiat standard by all the central banks of the Western world. It ushered in a period of unanchored central bank credit creation, and government deficit spending. If one wants to blame something for the inequality that coincided exactly with this momentous event, why not pick the obvious reason?

Read more here.

Meats and Poultry at Record Prices

300px-FoodMeatThe Bureau of Labor Statistics’ index of meats, poultry, fish and eggs just hit an all time high. Nor are these higher prices confined to just food items. Consumer prices across the board are registering their sharpest price increases in over15 months. Inflation is accelerating on a variety of goods, from airline fares to vegetables.

This must be good news to the Fed, as it has unleashed the most expansionary monetary policy of all time over the past five years. The explicit goal of all the QE programs was to prevent prices from falling.

According to USA Today, it’s not just the Fed that should be happy with higher prices. Consumers too should be upbeat about the rising cost of living:

The recent pick-up in consumer prices is generally considered good news for the economy because annual inflation was well below the Federal Reserve’s 2% target last year. Low inflation reflects a weak economy and can lead to deflation, or falling wages and prices, which often foreshadows recession.

Never mind that low inflation would be the norm if the Fed wasn’t constantly inflating the money supply. And never mind that deflation is beneficial as it means we can buy more goods with the same amount of money (who doesn’t love sale season?). We’ll also overlook the fact that there are many workers who can’t get a job because minimum wage bars them from lowering their wages to a competitive level. Deflation in wages would vastly improve these peoples’ lives by getting them off the dole.

Lastly, while the Fed may think rising prices are a boon to the economy, perhaps Janet Yellen should trying telling that to the masses of unemployed Americans. Over 10 million Americans are officially unemployed today, and millions of others are discouraged and have given up all hope of finding a job. Rising prices for the food they buy is anything but positive news for this sizable group.

(Originally posted at Mises Canada.)

We Don’t Owe It To Ourselves

7214463188_0ecb8b475c_zOnce upon a time it was claimed that the government’s debt didn’t matter because we “owe it to ourselves.” Each government bond is a claim on taxpayers, and if all of the bondholders are taxpayers from the same country the size of the debt would be irrelevant to the total sum of the country’s financial wealth.

Bob Murphy did a good job some years ago dispelling several myths of this reasoning.

Not all taxpayers are the same – some will gain from the government’s debt and some will lose. For example, a poor immigrant working paycheck to paycheck to make ends meet will not see much advantage from the taxes he must pay to settle the debts of a past government.

Perhaps more importantly, the debt represents government consumption of resources which may have been devoted to better ends. Neta Crawford and Catherine Lutz of Brown University recently estimated that the combined direct costs of the defense projects wars in Iraq, Afghanistan and Pakistan over the last decade cost up to $4 trillion (and that’s just the actual costs incurred overseas, excluding lost lives and resources that could have otherwise been used.)

What about that government debt that we don’t owe ourselves? It matters a great deal, as it means that when it is repaid Americans will have to transfer financial wealth to foreigners.

This year the amount of foreign buyers of U.S. Treasury debt hit a new record high. The U.S. government owes foreigners $5.95 trillion. That’s nearly $20,000 for every man, woman and child in the country. The cynic in me wants to point out that only a small portion of those people are actually privately employed and paying taxes which will service this debt. If we just count those “lucky” few, the average private American worker is in debt over $50,000. And remember, this figure just includes debt owed to foreigners by the U.S. government that the taxpayer will need to pay back some day. There is still all the debt that the government owes to Americans, plus the private debt these people hold that will need repayment someday.

We don’t just “owe it to ourselves”. There are real costs to the U.S. government’s borrowing. I suspect that when the bills start coming due and Americans have to pay for this debt through higher taxes we’ll be asking whether all this deficit spending was really such a good idea.

(Originally posted at Mises Canada.)

Institutions in Crisis, Now Online

download (1)In the heat of the crisis back in 2011, I edited the book “Institutions in Crisis.” The emphasis was on the policy failings at the root of the European crisis, and how they were exacerbating the situation rather than bettering it.

Three years on much of the analysis still stands. In fact, a number of chapters have proven quiet prescient, for example:

1. Anthony Evans´ discussion about how not all of Ireland´s economic rise was fake – much was real, and caused by a favorable tax and business policy. As it meanders its way to a slow recovery much of this real economic growth is coming back, while the malinvestments caused by low interest rates still languish.

2. My own chapter focused on Europe´s black markets as a silver lining amidst the unemployment crisis. As periphery European countries today see their unemployment rates normalize again, the role of the black market as a source of jobs cannot be overstated.

3. Antonio Zanella pointed to accounting rules as favoring some investments (mostly unstable ones) over more sustainable practices. These problems persist to this day and endanger the recovery.

4. In his now well-known analysis, Philipp Bagus pointed out the problems with the Eurosystem and the tragedies that can befall disparate countries all sharing a common currency.

5. Fernando Ulrich and Malte Kähler pointed to the fiscal ruin being fostered by discretionary and needless government policies.

6. Brian Ó Caithnia elaborated how the European Union´s single biggest fiscal policy – the Common Agriculture Policy – was a source of tension and reason why growth would remain sluggish. Today the policy remains fundamentally unreformed and is a source of political consternation and wasted euros.

Edward Elgar has just made the book available online at an affordable price.

As an added bonus, the preface by Jesús Huerta de Soto is available for free here.

Measuring Unemployment

The employment picture in America today is as bleak as it was  at the worst of the dot-com recession. In my recent Mises Canada daily I explain why the common unemployment measures that are paraded around give a false depiction of the true employment picture. I also argue that using the steady-state unemployment rate (SSUR) more ably deals with the tricky issues of part-time workers and discouraged job seekers:

Today the SSUR is hovering around 8%. It’s not such as a rosy picture as the U3 paints, but it’s quite a bit better than the U6. Notably this SSUR is the worst that America has faced in the past 14 years. The dot-com bust that led to a recession in 2001 found its bottom with an unemployment rate a hair over 8%, just like today. There has been a slow economic recovery, but the average Joe or Jill still has only as great a chance at getting a job than at the bottom of the second-worst recession of the past 30 years.

Read more here.