Author Archive for David Howden

The Scottish Referendum

I’ve refrained from comments on the Scottish referendum on independence. Let people decide their own path is a reasonable stance to take, so let the Scots decide the future of Scotland.

Yet in discussion with one of my past students yesterday, the question arose “should other citizens of the United Kingdom have a say in the matter?”

Matters are often much more clear in theory than in practice. Any divorce is difficult. One person can put in motion the steps to one (“I want a divorce”), but the details of how the separation is achieved is a bilateral process. In dissolving a marriage, the couple needs to hash out who gets the house, the car, what percentage of debt, and so forth. Children complicate the matter by introducing a human element.

The divorce between the rest of the U.K. and Scotland would be no different. There are shared assets, and debts. How much of the public debt should Scotland take with it? How much of the U.K.’s military equipment would the newly independent country have a claim too? Would Queen Elizabeth still reign over the country, or would a governor general be appointed for her, or would the severance from the crown be complete?

These are thorny, but essential, issues. They are important enough that clear answers should have been provided in the vote. Without a defined pathway outlining exactly how the new country of Scotland would be formed, and what it would look like, people didn’t know exactly what they are voting for.

Instead of grappling with these issues, voters were given an easy yes or no question: “Should Scotland be an independent country?” It’s difficult, at least for me (but then I am far removed from any Scottish descent by now), to answer this question because the comparison is apples to oranges. I know what Scotland looks like today, but I have no idea what the independent country alternative will turn out like.

So the answer remains: “should the English, Welsh and Northern Irish also have had a say in the vote?”

I like the divorce analogy. Why bind one person in a relationship if they don’t want to be. But I can’t help but feel that many divorces are put in motion in the heat of the moment, and when the terms of separation are hashed out, regret ensues. The grass is always greener, after all. Knowing in advance exactly what the new future would look like could save a lot of heart ache.

The whole referendum was a fiasco from the start. It was a political sham. No one knew what was being voted on, except some vaguely appealing concept of “independence”. If the decision is “no”, as it looks right now, there will always be a portion of voters wondering what could have been. If it was turned out that a new country was formed, the melee that would ensue in working out the details of separation could prove to be the messiest divorce ever.

Think of the hard feelings that couples have while getting divorced after a few short years of marriage. Kris Humpries and Kim Kardashian knew each other for seven months, were engaged for 90 days, and married for only 72 more. The divorce took 536 days to settle.

Scotland has been married to the U.K. since 1707. That’s over 300 years, or 112,554 days (but who is counting?). Breaking up that history would be a nightmare.

Possible? Yes. Drawn out with more hard feelings than glee? Almost certainly.

I think it’s great that the Scots got to decide on their future. I wish more people had the opportunity. I just wish the politicians staging the vote spent more time informing them what that new future would look like.

(Cross posted at Mises Canada)

IMF: QE Encourages Risk

Headquarters_of_the_International_Monetary_Fund_(Washington,_DC)Recently the Fed released research stating that it encouraged moral hazard and risk taking with its QE programs. Never one to fall behind, now the International Monetary Fund is in on the trick.

After promoting QE for years (see here and here), the IMF is finally coming to realize what has been apparent for years now to almost everyone who doesn’t work for the Fed or the IMF : that low interest rates encourage risky decisions.

But [the IMF] also warned that financial market indicators suggested investor bets funded with borrowed money looked “excessive” and that markets could quickly deflate if there were surprises in U.S. monetary policy or the conflicts in Ukraine and the Middle East.

As the IMF put it in its technical language, “New downside risks associated with geopolitical tensions and increasing risk taking are arising.”

It’s reassuring that after years of prodding people to borrow and spend by taking advantage of low interest rates, the IMF now wants to warn us of the risks involved. Oh well, better late then never.

(Cross posted at Mises Canada.)

The Strike to End All Strikes

1280px-BC_Legislature_Buildings_and_Undersea_GardensThe teachers’ strike in British Columbia, Canada, is over… almost. On Thursday, 40,000 public school teachers in the province will vote on whether to accept the proposed contract. Neither side got everything it wants, and the main headline is that teachers will receive a 7.25% salary raise over 6 years. The province also pledged to add $100-million to an education fund to benefit BC teachers over the next five years.

Education minister Peter Fassbender is seemingly satisfied at a job well done: “We have guaranteed that every student’s educational journey in this school year will be kept whole.”

Right. Not counting the five weeks of shuttered classrooms lost so far this year. That’s over a quarter of the fall term, for those that are counting.

Premier Christy Clark was also pleased with the deal:

We’ve found a way to give teachers a fair raise, improve classroom composition – to really make it work for teachers, but at the same time that we’re making sure it still works for taxpayers. So we’re not going to have to raise taxes, we aren’t going to go into deficit and we’re not going to increase our debt.

No new taxes, but no new debt from this multi-million dollar deal. The money has to come from somewhere. For all of these points Ms. Clark raises to be true, the province must be cutting spending from elsewhere. She doesn’t say where that is, but I have a feeling the offsetting cuts figments of her imagination. My money is on a this settlement attributing to a deficit, or higher taxes, at some point in the future.

While encouraging teachers to accept the deal, BC Teachers’ Federation president Jim Ikers chimed “Be proud… There are meaningful achievements in this deal for teachers and students.”

And therein lies the rub. Everyone should be pleased with this outcome, because a painful strike is the only way it was going to happen. With a near monopoly on schooling in the province (nearly 90% of students are educated in the public system), there is no competitive check to let any of the belligerents settle their dispute elsewhere.

Parents are obviously upset because they don’t have any choice in the matter. Moving to a nice neighborhood with a good school is about all they can do to have a say in their child’s education. Contrast this with, say, buying clothes where you can go where you want and direct your money at the store that best suits you. Parents in BC pay their taxes, and lose all control of how that money is allocated.

It’s fun to poke fun at entitled teachers, but think about it from their point of view. You are in an industry with only one company to work for. Your pay is pre-determined according to a scale that you have no control over, by people you will never meet. Your colleagues cannot be let go if they do not perform. You enter the job wide-eyed and bushy tailed, only to find that for all the efforts you do, there is not much you can do to peaceably argue for better working conditions. No bantering over your salary raise for the coming year during the annual performance review. No back-and-forth with the boss over your working hours. If you are dissatisfied, it’s nearly impossible to quit your job and look for another in the same field (and licensing requirements across provinces make teachers trained for one system unemployable in others). There is only one recourse left to this group if they want a better work life – strike!

You can almost sympathize with the opprobrium felt by the teachers.

This strike will not be the strike to end all strikes, because the conditions for why the strike was necessary are not fixed. There is no competition in schooling as long as it remains in the public’s hands. Parents will continue feeling trapped and looking to the government to maintain services with minimal amounts of disruption, since they can’t vote with their feet and send their kids elsewhere. Teachers will continue protesting and threatening for better conditions the next time their contract expires because it’s the only way they can argue for a better working life.

If you want to understand why public school teachers’ strikes are so disruptive, think about the one main fact that separates that industry from others. It’s not hard to please customers (parents). It’s not demanding employees (teachers). It’s that the lack of competition means that a strike is the only way the two sides can settle disputes.

(Cross posted at Mises Canada.)

The Regret of War

Enlist_in_the_Navy_LCCN2002699395.tifWe all have regrets. But if you find yourself consistently ruing your past decisions, maybe it’s best to rethink your rashness.

Writing in the Financial Times this weekend, Richard McGregor gives some perspective on Americans’ change of heart for wars.

In the wake of a triumph in WWII, in 1950 65% of polled Americans supported sending troops to Korea. Two short years later only 37% felt the same way. We know what a boondoggle it turned out to be, but few would remember that nearly two-thirds of Americans supported the Vietnam War early on. As it neared the end, almost no one could stomach it any longer.

And speaking of boondoggles, don’t forget that when American went into Iraq in 2003 more than 70% of the population thought it was a good idea. By 2010 only around half that many thought so. The incursion into Afghanistan in the wake of 9/11 was the most “popular” war in America’s recent history – it was almost unanimous! 93% of polled Americans supported it. Today, public opinion is split 50/50.

We all make mistakes, but should heed Albert Einstein’s advice that the definition of insanity is doing the same thing over and over, expecting a different result.

Why is this troubling right now? With troubles brewing afresh in Syria and Iraq, 61% of Americans think there is a threat to the national interest, and only 13% disagree. Let’s hope cooler heads prevail.

(Cross posted at Mises Canada.)

Government Interest Payments Overwhelming

It’s not just homeowners who have to worry about rising interest rates, the Federal government might soon get a taste of its own medicine.

With the Fed doing all it can to stimulate inflation, increases to interest rates are taking a front seat amongst borrowers’ fears. From the admittedly partisan Republican Senate Committee on the Budget comes this report outlining how federal interest outlays will dovetail with other expenses in the future.

CBO - interest expense

To summarize:

The U.S. gross federal debt currently stands at $17.548 trillion, and net interest payments to our creditors are the fastest-growing item in the budget. In 2014, the Congressional Budget Office projects that the nation will spend $233 billion on interest payments. By the end of the budget window in 2024, however, CBO forecasts that interest payments will nearly quadruple to an astonishing $880 billion. Every dollar spent paying our creditors is a dollar wasted—money for which we get nothing in return. Interest payments threaten to crowd out every other budget item. To put the $880 billion, single-year interest payment in perspective, here is what we currently spend on other budget items:

  • Federal Courts – $7.4 billion

  • Department of Education – $56.7 billion

  • Secret Service – $1.8 billion

  • Food Inspection – $2.3 billion

  • Census Bureau – $1.0 billion

  • Border Patrol – $12.3 billion

  • National Parks – $3.0 billion

  • NASA – $17.6 billion

  • Centers for Disease Control – $7.1 billion

  • Federal Prison System – $6.9 billion

  • Workplace Safety Inspections – $0.9 billion

  • Immigration and Customs Enforcement – $5.6 billion

  • FDA – $2.6 billion

  • Federal Highway Budget – $40.4 billion

  • Coast Guard – $10.0 billion

  • Small Business Loans – $0.9 billion

  • Veterans’ Health Care – $55.3 billion

  • FBI – $8.3 billion


Every debt incurred today will be paid off in the future. The graph above may be shocking to some, but it’s only a very small part of the picture. This is just interest on debt, and doesn’t even include the costs of repaying the principal. Of course, the principal never really gets repaid as the government just borrows afresh to paper over its old debts. Interest payments, on the other hand, must be paid lest savers stop lending money to the government.

Nor is this only a concern for the future. Last year the government spent more on interest payments (c. $700 bn.) than it did on Medicare (a little under $600 bn.).

(Cross posted at Mises Canada.)

Final Call for Conference Papers

The 3rd Annual International Conference of Prices & Markets will be held on November 8th, with an opening reception the evening before. Hosted at the University of Toronto, last year´s event drew scholars from the across Canada and the States, as well as several from Europe.

The Conference is designed to combine the opportunities of a professional meeting, with the added attraction of hearing and presenting new and innovative research, engaging in vigorous debate, and interacting with like-minded scholars who share research interests.

The deadline for applications is tomorrow, September 10th. Scholars interested in presenting papers, serving as chairs/discussants, or proposing entire panels should submit proposals by email to David Howden at With all submissions, please include the following information for each participant, including non-attending co-authors:

1. Name
2. Affiliation (title and institution)
3. E-mail address
4. Telephone number
5. Title of paper(s)
6. Abstract(s) of no more than 100-200 words

Select papers from the conference will be published as Papers and Proceedings of the conference in the Journal of Prices & Markets, the flagship journal of the Ludwig von Mises Institute of Canada.

I hope to see you there!

Richmond Fed President Sees Fed as the Problem

250px-Federal_Reserve_Bank,_Richmond,_VirginiaHow large a problem is moral hazard caused by the Fed helping out troubled bank during financial crises? Pretty large, at least according to Jeffrey Lacker, President of the Federal Reserve Bank of Richmond.

One argument for central bank credit market activism rests on the notion that fragility is inherent in modern financial markets… Four decades of precedent [Fed and FDIC rescues of uninsured creditors] surely encouraged the belief that acute financial distress is likely to elicit some sort of rescue. Although this question is not yet settled, my view is that pre-crisis financial vulnerabilities were in large part induced by financial markets’ response to a long record of discretionary Federal Reserve interventions in credit markets.

Lacker heads one of the country’s 12 Federal Reserve districts, and thinks that the Fed is the problem. Unfortunately, he also thinks it is the solution.

One can appreciate how this interventionist tendency rose, though. When one is confronted with an instance of financial distress, an ex-post mindset makes it tempting to leave moral hazard problems for another day, to be dealt with after the crisis through tougher regulatory constraints on risk-taking.

If Lacker sees a “chicken or the egg” problem, he could appeal to the size of the problem. Richmond Fed economists estimated that at least 45% of financial sector liabilities were implicitly guaranteed by the government at the end of 1999. By the end of 2011 that figure rose to 57%. More than half of these guarantees were set by precedent, rather than explicit legislative solutions like deposit insurance.

Moral hazard is a problem, and every time it leads to a new chapter of crisis it gets worse. Ending Fed support for the financial sector today might cause some disruptions today, but at least it avoids a worse fate in the future.

(Cross posted at Mises Canada.)

International Conference of Prices & Markets

The International Conference of Prices & Markets is soon upon us. The third edition of the conference will be held at the University of Toronto on November 7-8th.

The Conference is designed to combine the opportunities of a professional meeting, with the added attraction of hearing and presenting new and innovative research, engaging in vigorous debate, and interacting with like-minded scholars who share research interests.

ICPM seeks papers that seek to improve the understanding of the role of markets in the economy. Submissions should seek to shed light on contemporary issues while being grounded in a praxeological reasoning. Papers are welcome from a variety of fields such as politics, sociology, and psychology, where ever they can bring relevance to economic and financial questions.

Scholars interested in presenting papers, serving as chairs/discussants, or proposing entire panels should submit proposals by September 10th, 2014. With all submissions, please include the following information for each participant, including non-attending co-authors:

1. Name
2. Affiliation (title and institution)
3. E-mail address
4. Telephone number
5. Title of paper(s)
6. Abstract(s) of no more than 100-200 words

Select papers from the conference will be published as Papers and Proceedings of the conference in the Journal of Prices & Markets, the flagship journal of the Ludwig von Mises Institute of Canada.

If you’re interested in seeing what we got up to last year at the conference, please do check out the previous Papers and Proceedings.

Please send your submissions by email only to David Howden at (with “ICPM2014” in the subject line of the e-mail).

Finally, the Fed Blames Itself

220px-Marriner_S._Eccles_Federal_Reserve_Board_Building (1)This is an historic time. After six years of the most novel and expansive monetary policies since its creation 100 years ago, the Fed is finally ready to admit its role in prolonging the current recession… kind of.

Two economists at the Federal Reserve branch in St. Louis recently wrote a commentary blaming the sluggish recovery on consumers more interested in “hoarding” cash then spending. Not much of a surprise there, but the two reasons cited as to why consumers have a change of heart are telling.

1. Increased uncertainty because of the crisis has caused an increase in money holdings.

2. The low interest rate policy of the Fed has removed much of the incentive to invest that consumers used to be faced with.

Put the two together, and you quickly see how the Fed is culpable. The tradeoff of investing is holding your savings as a cash balance. Since investment returns are dismal because of the Fed’s efforts to keep interest rates pegged to the floor, consumers are not foregoing much return by putting their hard-earned savings in illiquid investments. Better to keep that cash in the bank. Couple that with the fact that uncertainty from the recession already increased peoples’ precautionary demand for cash, and you get a tidy little explanation for why spending is down and why bank reserves are at record levels.

Of course, my own explanation above, pinning the blame directly on the Fed, couldn’t possibly get nods of agreement from any Fed economists, could it? Indeed, as the authors of the aforementioned study conclude (and I concur):

In this regard, the unconventional monetary policy has reinforced the recession by stimulating the private sector’s money demand through pursuing an excessively low interest rate policy (i.e., the zero-interest rate policy).

(Cross-posted at Mises Canada)

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.)