Power & Market
Why Didn't China Industrialize First?
Historians still ponder why, despite its dominance in prior centuries, China failed to industrialize before Europe. Some contend that the culture of conformity engendered by Confucianism prevented the influx of disruptive ideas able to spark an economic revolution. Meanwhile, there are those who posit that the Chinese preferred employment in the government service, instead of pursuing commercial activities. Although there is a kernel of truth in these arguments such assumptions are insufficient to explain the sluggishness of China, relative to Western Europe.
For example, notwithstanding the perceived conformity of medieval Europe there were pockets of intellectual dissent. Eminent medievalist Edward Grant posits that contrary to the stereotype of medieval Europe being mired in ignorance - the academy was characterized by lively debates. It is also largely unknown that during this era most students studied law and natural philosophy, since theology was a graduate degree requiring mature students. Moreover, Aristotle was the undisputed king of medieval philosophy and his arguments were frequently applied to the study of religion. Medieval scholars were never slaves to the scriptures as some would have us believe. Neither were they unwilling to engage with scientific experimentation. Let us not forget that the monk Theodoric provided scientific explanations of rainbows in the 14th century, using experiments with a water-filled spherical flask designed to imitate a raindrop.
However, compared to contemporary societies medieval Europe may seem conformist, but critics forget that the character of conformity is equally important. Whereas students in China were encouraged to regurgitate classical philosophers, the medieval scholar Bernard of Chartres promoted the view that one ought to enhance learning by refining the ideas of his intellectual ancestors, this outlook is expressed by the metaphor “Standing on the shoulders of Giants.” Hence the substance of conformity can positively impact creative output. By this account both medieval Europe and China were conformist, but they differed in their concept of conformity.
Furthermore, like in China, some scholars in Europe avoided technical professions, yet their ideas nonetheless revolutionized society. For example, the Protestant reformers placed a high value on literacy. Because people were becoming literate, they acquired an interest in books other than the bible, so indirectly the Protestant Reformation resulted in the secularization of society. Essentially the individualistic ethos of the Reformation implored people to seek knowledge on their own. As such, with the diminished importance of religion, men were primed to pursue science, economics, and other non-religious affairs.
Therefore, the Reformation indicates that ideas are crucial to revolutionary changes. Hence the paucity of highly intelligent men working in technical professions is an inept explanation for the failure of China to industrialize, because gifted people do not need to be industrialists for their ideas to promote growth. We have explored theories proffered by academics to describe China’s inability to industrialize before Europe, so we will now discuss possibilities offered by economic studies.
According to economist Mark Elvin, China suffered from a high-level equilibrium trap meaning that the efficiency of production processes limited the demand for innovations. Yet Jan Luiten Van Zanden and Bozhong Li in a 2010 paper note that lower labor costs in China did not stimulate the adoption of machines to minimize labor expenses. Based on these findings and those of Stephen Broadberry, it is apparent that economists exaggerated the productivity of pre-industrial China.
Another intriguing theory is proposed by scholars who argue that the clannish nature of Chinese society obstructed the formation of institutions facilitating large-scale partnerships. Avner Greif and Guido Tabellini write: ‘Clan loyalty and the absence of formal impartial enforcement limited inter-clan cooperation. There were, obviously cities in China. Yet, intra-clan loyalty and interactions limited urbanization, city size and self-governance. Considering large cities, China’s urbanization rate remained between three and four percent from the eleventh to the nineteenth century, while the initially lower urbanization rate in Europe rose to about ten percent. Including small cities, urbanization rates were comparable, but China’s small cities were venues for cooperation among members of local clans rather than their melting polt. While the European cities gained self-governance, this did not happen in China until the modern period.”
Unfortunately, kinship structures in China hindered institutional transfers across cities since they precluded the formation of associations independent of tribal ties. By impeding the creation of widescale trust kinship groups deterred the networks required to create successful innovations and boost growth.
Evidently, examining the failure of China to industrialize is a complicated task. Though it appears that this is due to an intricate interplay of factors ranging from economics to culture. Therefore, it is prudent for economists to adopt a multi-faceted approach by exploring how dynamic interactions between cultural beliefs and institutions aided in delaying the rise of an industrial China.
The Intangible Benefits of Economic Freedom
Societies are more prosperous when citizens produce and innovate without government intervention. Undoubtedly, regulations can slow the progress of innovation and by extension economic growth. Because economically free societies enable the efficient creation of wealth it is unsurprising that the Fraser Institute and the Heritage Foundation have documented a positive relationship between economic freedom and income growth.
However, less appreciated is that economic freedom improves well-being in ways not easily calculated on any ledger. Higher incomes afford people the opportunity to purchase high-quality amenities thereby enriching their quality of life. When increasing affluence allows people to secure better health care and superior schools they can expect to live longer and acquire lucrative jobs. Freed from worrying about the bare necessities of life makes it easier for people to pursue leisure and invest in building quality relationships.
As expected, Belasen and Hafer (2012) argue that across American states improvements in economic freedom led to higher levels of well-being even after controlling for other factors. Economic freedom gives people a sense of control over their affairs by ensuring the pursuit of entrepreneurial projects unfettered by government regulations. As such, economically free societies breed optimism. In a 2017 paper Boris Nikolaev and Daniel L. Bennett contend that people residing in economically free societies are more likely to report positive feelings. The authors further note that such people are also inclined to report feelings of excitement, success, and jubilation. Interestingly, those living in these societies are also less likely to feel restless, bored, or lonely.
Indeed, by boosting incomes, economic freedom avails us of new opportunities beyond mere material possessions. The truth is that having money increases our propensity to purchase worthwhile experiences. In fact, related research indicates that the degree of economic freedom in US states has a positive effect on both individual reported happiness and state average happiness. These findings are predictable since economic freedom boosts life satisfaction by directing people to chart their own course.
Another channel through which economic freedom improves society is tolerance. Open markets permit people to socialize and conduct business with outsiders thus engendering trust and respect for cultural differences. Nicolas Berggren and Therese Nilsson in the research article “Economic Freedom as a Driver of Trust,” posit that in economically free societies people are motivated to be trustworthy and entertain connections with outsiders in order to succeed in the marketplace. Moreover, doing business with outsiders forces us to become appreciative of diversity and embrace our universal humanity. Furthermore, it must be noted that the absence of government regulations ensures that people interact with each other as individuals with unique preferences and not as impersonal agents. In general, government regulations create barriers to commercial interactions.
Similarly, research by Thomas Coyle, Heiner Rindermann, and Dale Hancock shows that in free and open economies, innovative people are more productive with the human resources available.
Obviously, when government regulations do not hinder innovation, people are more likely to embark on risky ventures. Adam Thierer in Permissionless Innovation opines that the American start-up Free World Dialup (FWD) failed, because it sought approval from the FCC to operate whereas the founders of Skype bypassed U.S. regulatory approvals; therefore enabling the company to build a user base, so in the long-term it was able to outperform FWD.
But economic freedom is not only useful in the economic realm. Research reveals that it mitigates the effects of pandemics. Vincent Geloso and Jamie Pavlik in a fascinating paper exploring the effects of economic freedom on the Pandemic of 1918 submit that countries with higher levels of economic freedom tempered the damage induced by the pandemic because they were allowed to recover faster than regulated economies whose policies dampened recovery. Intriguingly, more recent research has confirmed the findings of Geloso and Pavlik by arguing that open economies in Europe demonstrate greater resilience in adjusting to the crisis of Covid-19.
Despite the rantings of regulators and politicians economic freedom is an ideal strategy for creating prosperous and resilient societies. Our failure to remained wedded to the principles of economic freedom will redound to our detriment, because it is the solution to ensuring a strong society, not the problem.
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Frank Buckley on Secession
Because of the deep division in America between red states and blue states, there has been much talk of secession. Is the United States too big? Would people be happier in smaller communities? Frank Buckley, a distinguished professor at the Scalia Law School, breaks with most of his fellow legal academics by taking these questions seriously. In a recent article in the American Mind, he suggests that secession today would be difficult but not impossible. “As I argued in American Secession (2020), a civil war would be unlikely, and we’d be more likely to see a pacific James Buchanan in the White House than an indominable Abraham Lincoln.”
Against those who argue that secession is unconstitutional, Buckley offers some strong arguments: “Finally, the legal barriers to secession are weaker than most think. Originalists on the Court would recognize that the framers had thought secession permissible, while its more liberal members would find it difficult to ignore the expressed wishes of voters in a state. Is an indissoluble union a more fundamental constitutional norm than democracy? Canada and Great Britain posed that question, and answered no. While the Supreme Court held that secession was unconstitutional in Texas v. White, that was a decision of a unionist Court right after the Civil War. Moreover, the decision assumed that the 1781 Articles of Confederation, which spoke of a “perpetual” union, had survived when the Constitution was adopted. Had that been the case, however, the Constitution would not have been ratified until the last state signed on in 1790, and George Washington’s election two years earlier would have been a nullity.”
Buckley is someone who “thinks outside the box,” and we badly need this quality today.
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Wall Street Journal Remembers the Great Inflation
The Wall Street Journal (WSJ) joined the chorus of headlines about rising prices by recounting price inflation with the article: When Americans Took to the Street Over Inflation, warning readers:
Today, after decades of nearly invisible inflation in the U.S., many Americans have little idea what it looks like... But America’s long inflation holiday shows signs of ending…
Ringing the alarm after the Labor Department’s Consumer Price Index (CPI) reading showed 5% in May, the author tells us:
History provides some useful lessons.
This is precisely the problem. How can any supposed solution of the 1970’s be applied to today?
The author begins the narrative:
The nagging inflation of the late 1960s and 1970s didn’t happen overnight. It took root over years, building through a cascade of policy missteps and misfortunes… It would take two deep recessions and new ways of thinking about economics to tame the inflation of that period.
Going back to as early as 1966, protests began to sweep the nation:
Fed up with the increasing cost of living, they marched outside of supermarkets with placards demanding lower prices...
Ironically, the CPI data illustrates the limitation of trying to understand price increases through the use of CPI data. Per the chart below, the mid-1960’s rise in the index doesn’t look anymore remarkable than the periods before:
The stated resolution of this inflation problem is the concerning point. It took two recessions and new economic ideas to somehow “tame” inflation.
This alleged taming remains stated but not proven. Suspension of belief is required to accept (price) inflation was defeated without prices ever decreasing. Two recessions being the cure is a grandiose claim! However, it’s difficult to disprove, as this commonly accepted thesis cannot be proven to begin with. Like a nod to Keynes himself, victory is declared through the declaration of victory itself.
Tidbits of history are provided, explaining various government failures in fighting price increases. There was LBJ’s Vietnam War effort and “Great Society” social programs which did nothing to lower prices. Nixon severed the international exchange of dollars for gold and the USD exchange rate went tumbling, while he also imposed price caps on meat. His administration famously urged housewives to try “shopping wisely.” Jimmy Carter had the Council on Wage and Price Stability, described by one director of the program as a “complete failure.”
The Fed gave into government, acquiescing to LBJ and Nixon’s urges to keep pumping money into the system to maintain low rates obliterating the strength of the dollar. As for mainstream economists, their models of the Phillips-Curve proved disastrous:
Some economists had thought that when unemployment rose, inflation would fall. Instead, both went up, giving rise to yet another new term, “stagflation.”
And to no surprise, women took some blame for the various missteps:
A flood of women into the labor force also made it harder to decipher a stable rate of unemployment.
Perhaps when “too many” women go to work it ruins the Fed’s predictive models?
Last but not least, Fed Chair (1979-1987) Paul Volcker continues to play the role of hero, the Chair who raised interest rates and, per the author, restricted growth of the money supply. How higher rates fixed the problem is peculiar. The restrictive money supply idea is curious as well. The M2 Money supply from 1960 to 2000 table below shows that under Volker, the money supply saw a steeper increase than the decades before, never decreasing.
We should learn from the past. But this becomes difficult when the method in which these problems were resolved was never made clear. Between government, the Fed and economists, it seems no one had an adequate solution, save for the legend of Paul Volker who apparently fought inflation. At least that is the prevailing story.
Few people want to say the obvious, that the Fed did nothing to stop price increases; society simply managed to live through hardship caused by government and central planners. Unfortunately, the most honest and consistent pattern over the decades is perpetual decline of the dollar, unaffordability of life for the masses, and ever-increasing debt levels showing no signs of letting up anytime soon. Society continues to not be capable of “taming” inflation as much as simply finding ways to “live through” inflation, made easier when we ascribe great feats to leaders said to have carried us through such trying times.
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3 Common Criticisms of Crypto—and Why They're Wrong
Peter Schiff is a well-known critic of bitcoin, and while he is an excellent resource on many economic and political topics, he misses the mark on cryptocurrency. To be fair, he is right that bitcoin and other crypto assets are high risk and volatile, and he correctly points out that using leverage or going into debt to buy bitcoin could end in financial disaster. However, he makes several errors in his analysis of bitcoin. He is wrong about its scarcity and its ability to hedge inflation, but his largest mistake is his guiding principle: that bitcoin (unlike gold) has no fundamental value.
For example, Schiff is quick to point out that gold has uses outside of being money. It is used in electronics, dentistry, and jewelry, to name a few. Given this, it's easy to see how—as Carl Menger noted—money could emerge in a free market from a state of barter. In short, gold had use cases independent of being money, but over time, it was recognized as a useful medium of exchange to facilitate more complex and indirect transactions. This led people to value it over and above its original use cases.1
Unlike gold, bitcoin cannot be used in dentistry; it cannot be fashioned into jewelry; and it cannot be used in electronics. This leads to Schiff to claim that bitcoin is unlike gold in that it has no fundamental (or objective) value. His mistake is obvious: there is no such thing as objective value, whether we're talking about gold or bitcoin. Value is subjective and determined internally by individuals. Bitcoin has no objective value, but neither does gold. Yes, gold can be used to build electronics, but that only has value because consumers subjectively value electronics (See Menger’s theory of imputation).
Schiff is also mistaken when he claims that bitcoin provides no shelter from inflation. Millions of people across the world have already used it to partly escape their failing currencies. In 2018, for example, the price of bitcoin in Venezuelan bolívares was doubling every eighteen days. It's important to keep in mind that any product can serve as a hedge against a devaluing currency—not just precious metals or cryptocurrencies. In the past, whiskey and cigarettes have been used for this purpose, as have many other consumer products. When a currency is failing, the demand for the currency declines and consumers rush to put their currency into physical products or other currencies.
On the other hand, Schiff may be correct that a dollar crash could lead to a decline in bitcoin prices (at least in the short term), but such an event would be disruptive to many assets. The most recent example of these effects occurred on March 6, 2020. As the US stock market crash deepened, both gold and bitcoin sold off sharply. When the margin calls hit, everything got sold. The simple truth is that anything that's not a dollar or a promise to pay dollars (i.e., bonds) represents a hedge against dollar inflation. This does not make them immune (in the short term) from a collapse of the global reserve currency.
Schiff’s last major mistake concerns bitcoin’s scarcity. The ultimate supply of bitcoin is fixed at 21 million units. Schiff discounts this limited supply by pointing out that thousands of crypto coins and tokens have been created since bitcoin. These copies, he claims, prove that bitcoin is not scarce. Would Schiff extend this logic to reproductions of the Mona Lisa? There is only one original, and it will remain scarce no matter how many copies are made. His stance also ignores the significant network effects that bitcoin enjoys. Like other networks, the value increases as the number of participants grows. Numerous forks of bitcoin have learned this lesson the hard way as their tokens have steadily lost value against the original. Finally, the existence of multiple cryptocurrencies is no more problematic than the existence of multiple precious metals. The total demand is simply divided between silver, gold, palladium, and others. It is likely that we are in a boom stage of crypto like the dot-com bubble. New coins are being created almost daily and most will not survive. It is up to the marketplace to determine if the price of bitcoin will go up or down. The same is true for gold.
- 1. Anyone who has played an online role-playing game in the past twenty years has experienced this phenomenon firsthand. Think "Stones of Jordan" in Diablo 2.
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Be Very Afraid: Why Today's Bureaucrats Love Fear-Based Politics
Outside of the D.C. Beltway, state capitols and city halls, bureaucrats receive something less than adulation from citizens. And libertarians often lead the chorus. But some bureau employees are necessary. One libertarian who recognized this long ago was Leonard Read, in “The Worrycrats,” part of his 1972 To Free or to Freeze.
Even when government is limited to codifying the taboos, invoking a common justice, and keeping the peace, there is…an operating staff: a bureaucracy…[following] procedures.
In other words, even a nation of “laws and not men” needs some people to enforce what laws there are, even though those people will often have far worse incentives in their bureaucratic determinations than in their private relationships (why America’s founders were so keen on carefully monitoring their behavior).
However, despite the necessity for some bureaucrats to defend legitimate laws, some clearly deserve our mistrust. Read called them Worrycrats.
Worrycrats…are a special breed of totalitarian bureaucrats who spawn rapidly as society is socialized. These people concern themselves with our health, education, welfare, auto safety, drug intake, diet, and what have you. Worrycrats today outnumber any other professionals in history, so rapidly have they proliferated.
Why should we mistrust them?
The activities of these worrycrats in no way resemble a free market operation. Freedom in transactions has no part in this political procedure. Citizens are coerced to pay these professional worriers whether they want their services or not. A nongovernmental operation of similar nature would be called a racket.
I question the propriety of our being coerced to pay worrycrats to worry about us. We worry enough on our own without paying to have our worries multiplied.
What is the evidence for the plethora of bureaucrats who want us to worry more?
Observe the massive outpourings of the worrycrats—over TV, radio, and in the press—about lung cancer, heart failure, mercury, cranberries, cyclomates, seat belts, groceries, and so on. Unless one sees through all of these unsolicited oral and verbal counsels, he is going to be unnecessarily concerned…ordinary fears and worries substantially multiplied...[but] fear and worry are far deadlier menaces than all the things from which the worrycrats pretend to protect us.
What are the qualifications of worrycrats as more effective worriers for us than we are? Little more than know-it-all overconfidence, reinforced by ignoring huge differences among individuals.
Are these political saviors really concerned about your welfare and mine? Actually, they do not know that you or I exist…What…[do] they know about what is good or bad for me…What is their competence...they are not experts when it comes to your welfare or mine.
Suppose that these worrycrats are the world’s most advanced physicians and scientists. Would they know enough of what is injurious or helpful to you or me to justify forcing this information upon us or frightening us about it?
Individuals vary widely…there is no average person!
I care not who sits behind the worrycrat desk…Prescribing for and presiding over 200 million distinctive, unique individuals is no more within man’s competence than… directing the Universe. Contrary to socialist doctrine, we are discrete beings—not a mass, a collective.
In fact, those worrying on our behalf may actually be undermining our health and well-being.
[There are] many illustrations of how death is hastened through fears, anxieties, rage, worries…The outpourings of the worrycrats tend to multiply our stresses, anxieties, worries…literally scaring us to death.
That does not mean there is not a role for government with regard to our health, but the role is essentially the same, rather than multiplied compared to other areas of the economy.
Ideally, there is a role for government with respect to health, education, welfare. That role is to inhibit misrepresentation, fraud, violence, predation, whether by doctors…or others. No false labels! No coercive impositions on anyone!...all of us should be prohibited from injuring others. Actions that harm others—not what one does to self—define the limits of the social problem and of governmental scope.
Americans are now confronted with an even vaster crazy-quilt of federal executive agencies, mandates, regulations, czars, etc., than when Read wrote (just under 50 years ago). Those bureaucracies now house phalanxes of worrycrats who inhibit choices individuals and groups would take in search of their own growth, fulfillment and well-being as they saw it, by infringing our right to choose how to live our lives, so long as we do not violate others’ equal rights.
Much that worrycrats do interferes with individual choices and mutual agreements with regard to risk. They try to scare us into “voluntary” compliance with what they decide is good for all of us, despite the huge variance in preferences, circumstances, health histories, etc., among us. Failing that, they move to forcibly override what we would choose because while they may not know us at all, supposedly they still “know better.”
It is not hard to see how such do-gooder regulations harms our economic health. What if mining, logging, cab driving, etc., were hugely restricted because they are “too risky,” even though people chose to take those risks voluntarily. Similarly, aren’t police and fire personnel, health care providers, etc., exposed to elevated risks? Should we ban those jobs? Asking the questions provides the answers. Even though there are vast differences in risks across many professions, that does not justify over-riding the choices adults make to bear those risks.
We are also faced with risk-justified restrictions and impositions that can actually impose greater risks in other areas. A good example is traffic-calming policies that may well increase heart attack deaths more than they decrease traffic deaths, by causing congestion that slows emergency vehicle response times. But there are many more.
Those also include many “green” policies that increase other forms of pollution and environmental hazards, such as wind farms (e.g., disposing of blades or the massive carbon emissions from the cement required) or battery backup systems, electric vehicle mandates, etc. (e.g., with cobalt and rare earth metals), or even kill oil pipeline projects, moving oil transportation into trucks with far greater pollution and risk of environmental harms. FDA regulations that unduly delay life-saving drugs in the name of safety fall in the same category. Similarly, efforts that force up energy costs reduce economic output and incomes, reducing the resources available to improve our health.
Leonard Read described worrycrats as practicing chicanery. And it is striking how much the scope of that chicanery has expanded since he wrote. But many people have started to see that as a result of the multiple forms of malfeasance COVID provided cover for, including a notable increase in more direct coercion and more violations of individual rights (e.g., mask mandates and the CDC’s unconstitutional ban on evictions). And Read ends his article with a good reminder for those thinking of such issues today:
You know yourself better than anyone else does. Better that you turn yourself toward what you think is your advantage than be turned by a worrycrat toward what he thinks is your advantage. You at least know something, whereas he knows nothing of you as an individual.
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The Real Tax Scandal
The self-styled investigative journalism outlet ProPublica recently published private IRS tax information—presumably embarrassing private tax information—for a host of ultrawealthy and famous Americans. I say "self-styled" because the organization claims a pretty lofty and self-important mission to use the "moral force" of journalism on behalf of the public interest against abuses of power. But does this apply to state power, such as when a federal agency employee illegally leaks sensitive material to media? And why is it presumed to be in the public's interest to have rich billionaires pay more in taxes? Maybe we'd rather have them investing in their companies, or at least buying megayachts and Gulfstream jets, rather than sending more resources to the black hole of DC? Why is the public interest always defined as "things progressives like"?
ProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years. The data provides an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.
And as an aside, it's worthwhile to recall the tremendous whopper of a lie President Franklin Delano Roosevelt told back in 1935—namely that no one other than the program's administrators would ever know your private Social Security number. Today, of course, Social Security numbers are the absolute linchpin of one's entire financial identity, and known by everyone from the IRS to your local credit union.
Yet the real scandal here is not the IRS leak, which was no doubt internal and designed to gin up public support for Biden's proposed tax increases while advancing a progressive inequality narrative. Political capture of federal agencies is nothing new or shocking; that's what presidents do (or have done to them). Nor is it particularly scandalous that the wealthiest people sometime pay little in federal income tax, at least relative to their income. After all, elites by definition tend to wield power rather than fear it, especially when it comes to state power. And they have lobbyists and accountants to make sure taxes remain something the little people pay.
No, the real scandal is this: federal income taxes are almost entirely about control and not revenue. The byzantine rules and selective enforcement are perfectly designed to keep ordinary people with limited means in mortal fear of the IRS. A tax audit, like cancer, can come out of nowhere and ruin your life. In some cases it can land you in jail. Tax enforcement is the ultimate check on the public's behavior; after all, who takes up the cause of a tax cheat? For middle-class Americans the IRS is an existential threat, but for Jeff Bezos it is another business expense to be minimized.
And as for revenue, consider that Uncle Sam borrowed nearly half of the dollars spent by Congress in fiscal 2020. With covid shutdowns, federal income taxes amounted to about $3.42 trillion, while spending was $6.55 trillion. If the federal government can finance 50 percent of its annual spending through deficits, why not 80 percent or 100 percent? Why do we need the IRS terror regime at all?
Again, this is about control. Progressives will never give up the income tax for this very reason. Proponents of modern monetary theory, for example, are almost uniformly left progressive in political outlook. These are the people cheering Biden's >$1 trillion infrastructure spending bill because of their fervent belief that deficits don't matter.
MMT rests on two central assertions.1 First, sovereign governments with their own currencies can print as much money as needed to fund operations without fear of insolvency or bankruptcy—unless a purely political decision is made to go broke. Government deficits per se do not matter, because the only real constraint in any economy is the amount of real resources available rather than the amount of money. In fact, MMT views government debt as private financial wealth—money inserted into the economy by the central state but not taxed back.
Second, sovereign governments with their own currencies can require tax payments to be made in that currency. Therefore any overheating in the economy in the form of inflation resulting from too much money can be fixed by pulling some money back to the Treasury via tax increases. This is the ostensible reason MMTers are not quite ready to give up on taxes altogether.
Yet I've never heard an MMTer express support for even a one-year moratorium on taxes to stimulate a bad economy (after a shock such as a worldwide covid pandemic). Why is this? If inflation really is so low, with the economy struggling in postcovid recovery mode, why pull any money back into federal coffers? Just damn the torpedoes! The bigger the deficit, the more "private wealth" we all have! Perhaps there is a political element to all the MMT jargon after all, one which relies on taxes both for control over people and to advance an advantageous but hollow trope about taxing the rich.
Federal income taxes have always been a tool for compliance. The IRS has always been a tool for presidents to go after rivals—or for rivals to go after presidents. Why would we expect otherwise?
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Kashkari Said What?
Right now there’s a big debate happening in economic circles about, is the economy overheating with all of this fiscal stimulus, are these higher inflation readings here to stay or not.
Followed by:
I don’t think they are here to stay because I believe we are going to bring women back into the labor force and workers who have been displaced, but if we fail to do that, then these high inflation readings would become a lot more concerning because then it would signal we are overheating the economy.
This is the exact phrasing Minneapolis Federal Reserve President Neel Kashkari said, according to Reuters. To Kashkari, the “big debate” happening in economic circles centers around an “economy overheating,” and how long prices of goods and services will continue to rise. In one sentence, the President illustrates numerous problems with the mainstream economic narrative.
For something so technical, mathematical, and statistical in nature, complex economic ideas are reduced to the vaguest of terms. The idea of an “overheating” economy due to fiscal stimulus attributes nothing to the Fed and its role in the money creation process. As for the notion of overheating, it requires some sort of arbitrary barometer, or other indicator allowing economists to know when an economy is “too hot” or “too cold.”
The question of higher (price) inflation readings and whether they are temporary continues to play out for the public while still making little sense. This idea of a transient period was hardly, if ever, mentioned even a few months ago. Now that it’s here, supposedly these price increases are okay, as the increases to follow won’t be as high. This negates the fact that prices are still rising, inflation compounds, and year over year life will continually become less affordable than the year previous.
In his second quote President Kashkari says price increases are not here to stay because women will soon re-enter the labor force…
He does not explicitly blame the lack of women in the labor force for an increase in prices, but presumably, once more women start working again, prices will decrease. Indirectly, this places a burden on women to help resolve rising prices.
In the two quotes above, Kashkari fails to mention central banking, the effects of the Fed or the money supply. The part about women going back to work offers little substance and seems contrived, rather than citing any economic theory or quantifiable data. Hence, he manages to say nothing of merit; yet he says a lot, namely that our central planners seem to be in the habit of making things up as they go.
He ends by claiming these high prices are indicative of an overheating economy. Whether it’s due to fiscal stimulus or the lack of women in the workforce, one thing is certain: any failure in the economy, and especially price increases, are caused by everyone else, except the Fed.
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Bond Trading at the Fed
One of the Federal Reserve’s “temporary emergency lending facilities” is being wound down! As announced on Wednesday, all assets purchased under the Secondary Market Corporate Credit Facility (SMCCF) are expected to be sold. The nearly $14 billion facility holds approximately $8.5 billion corporate bonds, plus various bond Exchange Traded Funds (ETFs) valued at approximately $5.2 billion. Bond ETFs are essentially bonds traded on the stock exchange. As the name of the facility implies, both asset purchases occurred on the secondary market.
This begs the question: Why did the Fed make bond purchases on the secondary market?
The primary market for bonds is one where a corporation issues a debt to investors in exchange for money, similar to an Initial Public Offering (IPO) for stocks. Whereas the secondary market is where bonds are traded between investors with hopes of earning a profit from investment activities, no different than trading stocks on the NASDAQ after an IPO.
Contrast the standard use of the secondary market with what the Fed claims was the purpose for buying these bonds:
The SMCCF proved vital in restoring market functioning last year, supporting the availability of credit for large employers, and bolstering employment through the COVID-19 pandemic.
This restoration of proper “market function” has yet to be examined, while providing credit to large employers and job creation doesn’t quite add up, as the most recent Report to Congress shows. As of May 10, the SMCCF Transaction-specific Disclosures (XLSX) reveals the Fed held or is currently holding bonds of just over 500 companies: mainly large corporations, like Citadel LP, the privately held hedge fund who bailed out Melvin Capital at the start of the GameStop short squeeze, and some of the big automakers such as Honda, Hyundai and Toyota.
Despite the investment choices of the Fed, considering these were all purchased in the secondary market means the money from the Fed did not go to the company whose bonds it was purchasing. Rather, the investor who previously held the bonds in the market were the recipient of the Fed’s payment.
How a central bank trading in the bond market, the payment to investors, or the trading gains or losses translates into supporting credit to large employers, and in the Fed’s own words “bolstering employment” seems strange. One might say the Fed’s intervention and newly created money influenced investor behavior, rates, prices and the bond market itself; but the effect of $14 billion in bond purchases in the $46 trillion US fixed-income market cannot be measured. Since the Fed cannot measure or even clearly identify the effect of its intervention, it becomes impossible to say whether the intervention was a successful endeavor.
With the Fed commencing sales on June 7 and the expectation of completing by the end of this year, it will be interesting to see whether the Fed makes profitable trades or finds ways to lose money. Should trading loses ensue, the fine print in Note 3 on the May 10 Report to Congress explains who will cover the loss:
equity investment from the Department of the Treasury and related reinvestment earnings of $13,897,250,997…
If there is any consolation, understand, it could have been much worse. The SMCCF combined with the Primary Market Corporate Credit Facility (PMCCF) had authorization of up to $750 billion to spend. Comparatively, $14 billion on bonds and another $14 billion of an equity investment from the Treasury is merely a “small” anti-capitalist infringement to benefit a handful of wealthy individuals at society’s expense, a little price we pay to have a central bank.
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Pregnant Woman Tries to Comply with Police Orders, Then the Cop Attacks Her
Last June, Arkansas resident Nicole Harper was driving near Jacksonville, Arkansas when Arkansas State Police trooper Rodney Dunn pulled in behind her and signaled to her to pull over.
Nicole Harper then did exactly what the Arkansas Driver License Study Guide tells drivers to do: she slowed down, put on her hazard lights, and looked for a safe place to pull over. Since the highway shoulder was very narrow at that location, Harper began to drive toward a exit ramp.
But although she did what she was supposed to do to "comply," she didn’t comply fast enough for trooper Dunn. Within two minutes of flashing his lights, Dunn used a so-called “PIT” (precision immobilization technique) to cause Harper’s car to spin out and flip over.
Dunn rammed his front bumper into the left rear edge of Harper’s car. Harper, who was pregnant at the time, then careened across three lanes of traffic and flipped over.
Dunn then approached Harper’s car and informed her that she got what she deserved, stating that because she didn’t stop fast enough, “this is where you ended up.”
Harper is now suing Dunn and other members of the Arkansas State Police for “negligently” using a PIT maneuver which put Harper’s life and the life of her unborn child at risk.
Naturally, rather than admit the officer acted rashly in response to what was a “textbook” and recommended response to a police traffic stop, the State of Arkansas will now use taxpayer funds to fight the lawsuit in court.
State police claim that Harper chose to “flee” and that she was a danger to other drivers. Of course, many rational people viewing the dashcam footage of Dunn’s actions could just as easily come to the conclusion that by flipping Harper’s car, it was Dunn who was endangering the public.
Harper’s attorney correctly notes that Dunn chose to use deadly force against a pregnant woman who was in the process of slowing down and looking for a safe place to pull over. Moreover, it is unlikely that Dunn had any knowledge of who was in the car, and whether or not small children were inside.
Unfortunately, this is just the latest case of police employing deadly force on citizens in the process of complying with police orders. For example, in the case of Philandro Castile—who did exactly what he was supposed to do as a concealed-carry driver—was shot dead while complying with police orders. And then there was the case of Atatania Jefferson, who was shot dead in her own living room without even being given the chance to comply. One might also consider the case of Phillip White, a 77-year-old, 140-pound blind man whose face was slammed into a ticket counter by police because he wasn’t complying fast enough with police orders. White was already handcuffed at the time.
In the Arkansas case, Harper's lawsuit is unlikely to have any personal effect on Dunn who, in accordance with Arkansas law, enjoys immunity from any personal responsibility for his actions. Dunn, who has received a taxpayer-funded government salary for more than thirty years, enjoys immunity from any personal liability in virtually all cases.
When commenting, please post a concise, civil, and informative comment. Full comment policy here
When commenting, please post a concise, civil, and informative comment. Full comment policy here