Power & Market
Fed Profit = Society’s Loss
Given covid, the mutation, lockdowns, BLM protests and riots, the storming of the Capitol, impeachment and the first Biden stimulus bill on the horizon, it’s easy to miss headlines from the Federal Reserve. On Monday, the Fed released Reserve Bank income and expense data transfers to the Treasury for 2020. This is the central bank’s preliminary income statement and remittance figures for 2020, the headline number starting at:
$88.5 billion of their estimated 2020 net income to the U.S. Treasury.
Meaning, the Fed is to send $88.5 billion to “the people” via the US Treasury. However, more context and figures are required to reach a better understanding as to what this means.
Net income for 2020 was derived primarily from $100 billion in interest income on securities acquired through open market operations…
The Fed’s income primarily comes from owning US Treasurys and mortgage-backed securities (MBS), which makes sense because the Fed now owns $4.7 trillion and $2.0 trillion of these securities, respectively. This means $6.7 trillion was created and lent to the world. They can now receive over $100 billion a year in return (interest revenue) as compensation for their lending service.
Interest income on US Treasurys and MBS is hardly new. But this line item is:
The Federal Reserve Banks realized net income of $405 million from facilities established in response to the COVID-19 pandemic.
This might sound like a lot of money to most people, but is a relative drop in the bucket given the aforementioned $100 billion the Fed made off buying the nation’s debt.
As for the expenses, the largest cost to the Fed is the interest it pays to depository institutions (banks). This is interest paid to banks in order to compensate them for holding money at the Fed.
The Federal Reserve Banks had interest expense of $7.9 billion primarily associated with reserve balances held by depository institutions.
If this wasn’t confusing enough, it gets better:
We find operating expenses (mostly salaries and benefits) for $4.5 billion, plus $831 million for “producing, issuing, and retiring currency,” and $947 million for “Board expenditures.”
In what may come as surprise to most, the US Treasury is not the only entity the Fed is beholden to; this year the Fed paid:
$517 million to fund the operations of the Consumer Financial Protection Bureau.
And the payout to banks:
Statutory dividends totaled $386 million in 2020.
Numerous questions should come from this:
These numbers are preliminary. We won’t have the finalized figures until March. But so far, the $88.5 billion remitted to the Treasury seems to be “pretty good” given the low interest environment and when compared to the last decade of remittances.
Of course, something doesn’t seem quite right. In order for the Treasury to get a remittance from the Fed, the Fed must expand the balance sheet and money supply, therefore buying interest-bearing assets. The interest income earned by the Fed pays for expenses such as billions of dollars in salaries and interest payments to banks. This gets reduced even more after payouts to another government agency and dividends to banks. What’s left gets sent to the Treasury. Keep in mind the US Treasury does the actual “money printing.” In effect, a significant cost associated with the Fed is paying for their knowledge, allowing them to manage the money supply.
It’s a system implemented well over a century ago, a system in dire need of repair if not abolishment. An entity which can legally create money runs the risk of eventually owning the assets of an entire nation, being insensitive to prices and immune to bankruptcy. This, as well as other pernicious effects such as causing the boom-and-bust cycle, increasing malinvestment, price distortions, and asset bubbles all make it strange to think that society pays billions of dollars for this knowledge-based service. Central banking is a service so slanted toward the banks and government, and against society, that it’s no wonder the general public isn’t meant to understand its inner workings.
Food Prices Soaring
The latest data from the Bureau of Labor Statistics shows twelve-month food prices climbing at a 3.9 percent annualized rate for 2020.
Overall price inflation for the same period, as measured by the government's Consumer Price Index, rose 1.4 percent.
Bottom line: the goods people are buying during this lockdown period such as food are soaring.
The advance in food prices was pretty much across the board.
All subcategories from cereals to fruit showed gains far in excess of the Federal Reserve's "target" inflation of 2 percent. But, hey, if you don't eat, price inflation is not as high.
In the EPJ Daily Alert, I am warning that as the lockdowns ease, price inflation across the board will rise to meet the advance in prices we are seeing in food prices.
Hug your gold coins.
Reprinted from EconomicPolicyJournal.com.
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What the Literature Actually Reveals about Raising the Minimum Wage
Despite economist Thomas Sowell’s laconically phrased observation that the real minimum wage is zero, progressive elements within the Democratic coalition are likely to push for increasing the federal minimum wage once Biden takes office. While whether or not to raise the minimum wage is therefore ultimately a political question, a school of thought has gained purchase within mainstream economic circles in recent decades that contravenes long-held classical assumptions about supply and demand. If the cost of a commodity increases, demand should fall if the price rises beyond the point at which the marginal utility of acquiring another unit of that commodity is less than the cost of another unit of that commodity (Sowell 2011). Not so with labor, argue these economists (Harris and Kearney 2016; Tcherneva 2020; Stiglitz 2012, 2020; Pollin and Luce 2000; Reich 2017). Because pay to labor constitutes a large part of aggregate demand, higher wages translate into more purchasing and hence an approximately equivalent increase in the sales of businesses to offset the higher cost of labor.
Such demand-side economics trace their origins to Keynes, but interest was rekindled by the publication of Card and Krueger’s empirical study of fast food workers in New Jersey and Pennsylvania (Card and Krueger 1993). Widely cited following its publication, the next decade saw a strong shift in opinion among economists. A survey by the American Economics Association found that well over half of its members now disagree or doubt that minimum wages by themselves cause unemployment or underemployment (The Economist, August 2020).
Such cautious inquiry has translated in the world of the post-2008 k-shaped recovery to demands for almost doubling the federal minimum wage. A host of academics have voiced their support for the Seattle minimum wage coalition, with even the formerly skeptical Paul Krugman making an about-face, writing in the New York Times that wages were so low that significantly raising the minimum wage would do no harm to the economy (Krugman 1998, 2015).
According to the literature, however, the real picture is more nuanced.
Based on the large body of research being compiled, we find evidence that raising the minimum wage affects different sectors of the economy differently, and that it is not clear what would happen in the event that the minimum wage is significantly increased (Neumark and Wascher 2007; Jardim et al. 2017).
Because of this, even left progressive economists like Thomas Picketty are skeptical of broadly raising minimum wages in an effort to offset wealth and income inequality. He is likely correct, as most of the economic inequality in the United States is structural in origin, the result of technological displacement, skills hierarchies, geographic concentration, and trade, fiscal, and monetary policies (Moore 2014).
Given the potential dangers and inability of the government to successfully execute such microeconomic tinkering during the 1960s and 1970s, a time of much more functional governance than now, it seems unlikely and unwise to grant the federal government the power to set wages in this way in an attempt to optimize economic growth.
Research indicates average take home income since 2014 has increased slightly in some sectors, while going down in others, but with no noticeable uptick in the cost of basic consumer items (Vigdor et al. 2016, 2017). This may be unique to Seattle, a diverse and competitive economic zone. More local experimentation in the coming years is likely and will provide us with a better understanding of the impact of raising the minimum wage on various sectors of the labor market. While nationally it may be that the Biden administration, which so far has boxed out the more progressive elements of the Democratic coalition, will not prioritize the fight over federal minimum wages, in any event, the public should not be misled into believing that the data unequivocally supports the fight for a fifteen-dollar-an-hour federal minimum wage.
Resources and Works Cited:
Card, D., & Krueger, A. (1993). Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania. doi:10.3386/w4509.
Harris, B., & Kearney, M. (2016, July 29). The "Ripple Effect" of a Minimum Wage Increase on American Workers. Retrieved October 06, 2020, from https://www.brookings.edu/blog/up-front/2014/01/10/the-ripple-effect-of-a-minimum-wage-increase-on-american-workers/
Jardim, E., et al. (2017, June 26). Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle. Retrieved January 05, 2021, from https://www.nber.org/papers/w23532
Krugman, P. (1998, September). The Living Wage. Retrieved October 06, 2020, from http://www.pkarchive.org/cranks/LivingWage.html.
Krugman, P. (2015, July 17). Liberals and Wages. Retrieved October 06, 2020, from https://www.nytimes.com/2015/07/17/opinion/paul-krugman-liberals-and-wages.html
Moore, H. (2014, June 03). Seattle Misreads Thomas Piketty as its Minimum Wage Mascot. Retrieved January 05, 2021, from https://www.theguardian.com/money/us-money-blog/2014/jun/03/thomas-piketty-seattle-minimum-wage-risks-jobs
Neumark, D., Wascher, W. (2007). Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research: Cambridge.
Pollin, R., & Luce, S. (2000). The Living Wage: Building a Fair Economy. New York: New Press.
Reich, R. B. (2017). Saving Capitalism: For the Many, not the Few. London: Icon Books.
Rolf, D., & Bryant, C. W. (2016). The Fight for Fifteen: The Right Wage for a Working America. New York: The New Press.
Sowell, T. (2011). Basic Economics: A Common Sense Guide to the Economy. Fourth Edition. New York: Basic Books.
Stiglitz, J. (2012). The Price of Inequality. New York: W.W. Norton Company.
Stiglitz, J. E. (2020). People, Power, and Profits: Progressive Capitalism for an age of Discontent. UK: Penguin Books.
Tcherneva, P. R. (2020). The Case for a Job Guarantee. Cambridge: Polity Press.
Vigdor, Jacob, et al. (2017). The Seattle Minimum Wage Ordinance October 2017 Update: Report on Employer Adjustments, Worker Experiences, and Price Changes. Seattle. University of Washington, Daniel J. Evans School of Public Policy.
Vigdor, Jacob, et al. (2016). Report on the Impact of Seattle’s Minimum Wage Ordinance on Wages, Workers, Jobs, and Establishments through 2015. Seattle. University of Washington, Daniel J. Evans School of Public Policy.
What Harm do Minimum Wages do? (2020, August 13). The Economist. Retrieved October 6, 2020, from https://www.economist.com/schools-brief/2020/08/13/what-harm-do-minimum-wages-do
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Why We Think We're Free
There is a famous routine by the late, great American comedian George Carlin in which he talks about why he refuses to vote. In less than four minutes, he brilliantly captures the deep flaws of the US political process, and the futility of a system that has become irredeemably corrupt (“I’m sure as soon as the election’s over your country will improve immediately….This country was bought, sold, and paid for a long time ago”).
Italian-American lecturer and writer Piero Scaruffi opines that “a comedian is someone who tells the truth. Truth is the set of all jokes, told by all comedians in the world.” There is certainly more than an ounce of veracity in Carlin’s bit. But while that may be the case, the idea of abstaining from voting is seen by many as nothing less than the ultimate mark of disrespect to all those people who fought for “freedom” in the statist wars of the twentieth century.
Which prompts the question: What is freedom? Merriam-Webster defines it as “the quality or state of being free, such as…the absence of necessity, coercion, or constraint in choice or action.” If we agree on this definition (and—assuming the individual rights of another aren’t being violated by one’s actions—how could we not?) can we say that the tragic, bloodiest wars in history succeeded in delivering freedom to the citizens of the West?
Invisible force and The Freedom Delusion
Ask most people strolling down a London street, along a New York sidewalk, on the cobblestones of Dublin’s city center, or any other Western nation if they are free, and they will likely reply “yes, of course.” In the New Yorker’s case, he may even snap incredulously that this is the land of the free.
And looking at their surroundings, it may appear that these people are correct. When not in the middle of a pandemic (and the accompanying draconian government measures) they would usually walk around relatively free of physical force from police unless they’re breaking—or suspected of breaking—the law. (And when physical force is used, it is rarely seen as an assault on freedom.) But the apparent absence of physicality does not equate to a lack of coercion or constraint; like the invisible hand that guides the free market, there is an invisible hand of government which quells liberty.
In most if not all Western democracies, this semblance of a free society is in fact a mirage borne of sheer ignorance, effective indoctrination, or a mere misunderstanding of what it means to be free. A nation of denizens who believe they are free without knowing the true meaning of freedom is a nation enrapt in a collective hallucination (or a Bernaysian propagandist trap). This widespread phenomenon can be referred to as the Freedom Delusion.
The “Inviolability” of Democracy
Some argue that the act of voting renders the system “voluntary,” but this is not the case.
To channel Mr. Carlin, those who vote in modern democracies are merely party to a transfer of power from one corrupt or misguided cabal to another (“garbage in, garbage out”). And the vote which people in the West cast every few years is, flagrantly, a vote to empower the winning coalition to attack the individual rights of citizens.
Yet the legitimacy of democracy is almost universally (in the West at least) considered unquestionable, and any criticism of it taboo.
Yet, in practice, Western democracies in their current form amount to the tyranny of the majority, the continual assault on individuals, and the restriction of liberty.
What Genuine Freedom Means
A truly free society allows for some to purchase land and voluntarily attempt a socialist utopia, and for others to purchase land and live in a stateless, free-market, private-law society.
Be it anarcho-capitalism or minarchism, socialism or social democracy, communism or anarcho-syndicalism, or any other social system, genuine freedom in essence means the freedom to choose, so long as no one is compelled to join in. Some may freely choose to enter a “socialist” community and thus voluntarily give up much of their fundamental freedoms, subjugating themselves to the collective; others may freely choose to enter a communal agreement for an anarcho-capitalist society. The Freedom Delusion prevalent in the West today, however, essentially means that these ideas and questions surrounding what it means to be free are rarely—if ever—raised in mainstream debates over what freedom means.
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The Wall Street Journal Disappoints Yet Again
The Wall Street Journal asked a valid question on Tuesday in an article titled: “How Much Debt Is Too Much? It Depends on Your View of Inflation.” Spoiler alert: for those who love liberty and freedom, this doesn’t end well.
The tone is quickly set when the author notes how Western nations have the highest debt-to-GDP ratio since World War II, citing “the pandemic” as the cause, not socialist governments nor their anti-capitalist central banks. Considering that long before covid, the world was already reaching exponential increases in debt and money supply, it seems unfair to absolve those responsible by putting the blame on the pandemic.
Per the article, we are told fears of high debt-to-GDP ratios have been repeatedly proven wrong. Despite this, some, like the UK Treasury chief who called public finances “unsustainable,” are now trying to set the nation’s debt limit. To combat the rising debt level, the author presents two choices for fiscal policy in one very vague either/or fallacy:
Should they aim to stave off “bond vigilantes,” or simply not stoke inflation?
The author tries to explain that the answer lies in our understanding of “how inflation works”:
If governments keep borrowing too much, the theory goes, interest rates will rise. At some point, printing money will be the only alternative to a default, creating inflation. By contrast, MMT [modern monetary theory] advocates see inflation as a result of too much spending, regardless of whether it is financed by money or debt.
The first view point is named the “traditionalist” school, though the name of the school or theory is never stated. According to this school, price inflation after money printing is the only solution to a default, and this only after governments borrow “too much” money causing interest rates to rise.
As for the MMT idea, it seems to say price inflation is a result of “too much” spending…
Generally, as a rule of thumb, anytime an economic idea cites “too much” of anything, whether it’s too much borrowing or too much spending, a red flag should go up. For anything to be too much would mean there exists a “too little” amount, or worse, an “ideal amount.” It’s ironic because the importance of data dependency is often touted, however, we’re only given vague notions which cannot be quantified. To say (price) inflation is the result of too much borrowing or spending doesn’t offer anything we can discern, while overlooking other crucial ideas such changes to money supply.
Beyond these ideas exists the problem with the “inflation” calculation, such as the consumer price index (CPI). This idea is somewhat touched upon:
What indicators should policy makers follow then? Inflation itself is a good bet, though consumer-price baskets are crude—they often obfuscate specific supply shortages, as happened this year.
While not taking the CPI as gospel is good, the article concludes with the solution that:
Governments will need to monitor and control consumer spending and industry bottlenecks, as well as automatically link stimulus programs to persistent increases in unemployment, rather than leaving them to officials’ discretion. Outside of the U.S., much more attention should be devoted to the exchange rate, since depreciation can create inflationary spirals.
In other words, governments should intervene further in the market, and in this instance literally control consumer spending and industry supply chains while stimulating the economy through programs to fight unemployment. The recommendation also mentions to pay more attention to the exchange rate. How this can be done is not offered, nor can an adequate solution exist unless one is to come up with the ideal exchange rate for the US dollar which the government defends at all costs.
So, how much debt is too much? We are never told. But as long as the Federal Reserve is in charge of our financial system, we’ll never be able to get out of debt. While the USA is unlikely to ever explicitly default, it will nonetheless continue to debase its currency to lessen the debt bill in real terms. Economics shouldn’t be about finding a view of monetary inflation that allows us to justify inflationary policies; yet, unfortunately, it seems we’ve come to that.
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If Congress Were Genuinely Interested in Democracy, They Would Welcome an Election Commission
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America stands over two months after Election Day, and yet tension remains in the air over the outcome of the presidential race. Legally, little has changed. The full expectation should be—as it has from the start—that Joe Biden will end up being inaugurated later this month. Appropriately, the event will be very limited for the public.
Even still, in spite of the clear legal advantage Joe Biden has, the behavior of various institutions of power is one of growing unease. This is understandable, Donald Trump remains a populist political figure willing to take down any political leader—regardless of party—who does not remain loyal to his convictions that he was the victim of a fraudulent election. As a result, an impressive number of elected Republican officials have remained in lockstep with the president and his team on challenging the results. We are witnessing an unprecedented breakdown in political norms, and those who have long enjoyed true, unquestioned power are not reacting well to even a modicum of uncertainty.
The response to all of this is predictable. The corporate press has been firm on the line that any skepticism about the legitimacy of this election is beyond the realms of acceptable opinion. They have drawn direct connections between questioning the election and their current go-to boogeyman QAnon. Democratic politicians are calling for treating any Republican colleagues loyal to Trump on par with members of the Confederacy during the Civil War. Establishment Republicans whose political relevance has long since passed are trying to remind those still in positions of power that the proper role of political conservatives is to politely surrender to their ideological enemies or else risk the GOP losing the approval of voters who are increasingly beyond persuasion.
While it is fair to question what significant dents the Trump administration has left on policy, the significance of this backlash is worth noting. What we are seeing is a major shift of power within the GOP in which elected Republicans in Washington actually fear the Trump base more than they fear names like McConnell, Ryan, and Cheney. While this has long been clear during the theater of primaries, it has been less so in terms of votes within Washington. It took less than two years for a large class of Tea Party freshman to bend the knee to many of these same types of actors.
What is amusing is that the go-to criticism waged by Very Serious People is that the actions of Trump’s Republican Party represent some grave threat to American democracy. In reality, what we are seeing is just the opposite. Elected Republican officials are choosing to place greater value in the demands of their own constituents, over abstract concepts like the “national interest.” The process is messy, but it gives American voters the illusion of representation and self-governance.
Given that the American empire has long enjoyed democracy as a purely ceremonial act, it is not surprising that the Beltway is not well adjusted to seeing it in action. As a result, the arrogance of Washington politicians may end up doing more to undermine the perceived legitimacy of DC than any legal option that Trump ever had on the table.
For example, one option that has been proposed by Senator Ted Cruz is the creation of a commission dedicated to looking into the 2020 election and proposing steps to improve election security in the future. Historically, commissions into national controversies have been an obvious step. By their nature, the political powers that be ultimately get to decide what is and is not written, and so in practice, they effectively serve to bolster—rather than undermine—the official narrative. This is true even if you have individual investigators genuinely interested in the truth.
As such, Cruz’s proposal should be seen as an obvious and moderate position. Instead, it has been portrayed as a radical attack on democracy.
The reason is simple. Elections have become a part of our civil religion, and the “popular will” has been increasingly held up as more important than pesky inconveniences like constitutionally protected rights. To allow for a commission about the election results is to normalize questions about how our politicians are chosen in general.
So, instead of trying to treat the concerns of tens of millions of American voters with respect and empath, tomorrow we will see a bipartisan effort to dismiss these concerns entirely.
The consequences of this could end up having a remarkable impact on politics for the rest of the decade. We have seen the difficulty Congress can have in the face of simple political polarization. What happens when the federal government tries to govern a country with tens of millions of people knowing it to lack any legitimate democratic mandate?
More interesting still, what happens when the federal government tries to intervene in a state where a majority does not believe it has any democratic legitimacy?
Once upon a time, those in power were smart enough to recognize the importance of popular support and went to great lengths to help ensure a level of general consensus. While technology has made the manufacturing of consent more difficult now than ever before, it is ultimately the arrogant behavior of those in power that is sowing the seeds of true subversion of federal authority. Washington today is an increasingly isolated, imperial city, occupied by legions of mediocre and arrogant dunces who are incapable of empathizing with the sincere concerns of average Americans. Ultimately, this is a recipe for political instability and decline.
At a time where there are many reasons to predict a lot of dire economic outcomes in the coming years, this is a political development that should be cheered on.
Just as Murray Rothbard understood.
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Wikipedia, Markets, and Collaboration
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On January 15, Wikipedia turns 20. Its anniversary is a good time to celebrate the success of a service that has become so useful to so many.
Members of my family, for instance, have undertaken university training in mathematics, economics, accounting, philosophy, English, art history, theology, counseling, women’s studies, education, and digital editing. All of us agree that Wikipedia is valuable. When used sensibly, it can be highly productive, particularly as a place to start learning about a topic.
A good place to see Wikipedia’s usefulness can be seen in its entry on itself. It is a lengthy piece (and recently updated, of course) which clearly strives for balance. My recent search turned up fifty major headings, 365 footnotes, and many references for further study. That it offers such easily accessible information and connections for further investigation has made it the most popular general reference work site on the internet, with 365 million readers, 55 million articles (over 6.2 million in English) in 285 languages, and still growing, and has ranked it among the fifteen most popular websites overall.
While almost everyone I have talked to about Wikipedia has a generally positive view of it, as an economist, I found certain things particularly important. As Wikipedia’s former executive director, Sue Gardner, wrote on its twelfth anniversary:
An encyclopedia is one of humankind’s grandest displays of collaborative effort, and Wikipedia takes that collaboration to new levels.
I don’t know of a comparable effort, a more diverse collection of people coming together, in peace, for a single goal.
Wikipedia has become an indispensable part of the world’s information infrastructure.
Each of these statements draws on something—the degree of collaboration, the extent to which it incorporates diversity, the degree to which it achieves its goal in peace, that it is an indispensable source of information for many—that should remind us that anyone who likes Wikipedia should like markets more, because voluntary exchange in markets is mankind’s most productive collaborative accomplishment.
Wikipedia, with its thousands of contributors and millions of beneficiaries, is still a much smaller demonstration of the beauty of collaboration than we find in the voluntary associations that make up markets. Exchange interactions bring everyone into collaboration, whether they intend to collaborate or not.
In markets, every participant’s preferences and values are incorporated into the results. Everyone who chooses to buy does so voluntarily, reflecting the fact that they place a greater value on what they receive than on what they give up. Everyone who chooses to sell does so voluntarily, reflecting the fact that they, too, place a greater value on what they receive than on what they give up. And those market relationships move goods and services to more highly valued forms, locations, and time periods, as well as to owners who place higher values on them, which are the only changes self-interested parties will mutually agree to. That is a far vaster field of social cooperation than Wikipedia. And everyone who uses the prices that result as information about the tradeoffs others are willing to make—that is, everyone—benefits from it.
Because markets reflect the choices—and therefore the preferences, abilities, and circumstances—of their participants, they also reflect the changes that impact them, communicating that information to others through relative price changes. While Wikipedia is far more nimble than other reference sources when it comes to incorporating new information, markets incorporate vastly greater amounts of useful new information far more quickly.
In fact, as Friedrich Hayek pointed out in “The Use of Knowledge in Society,” markets can incorporate information initially known only to one individual, even if she has no intention of benefiting others by that knowledge. That is because her self-interested market behavior will be reflected in price changes that communicate the consequences of that information, regardless of her intent. And that will allow for its productive use not just in the market where the information makes its initial appearance, but in markets for related products, such as substitutes, substitutes of those substitutes, complements, etc., in an expanding universe of effects.
Further, Wikipedia focuses on presenting facts that can be articulated and whose sources can be traced. But in markets, there is so much more information—including all the details of time and place that can change individual evaluations of goods and services—that it overwhelms our ability to know and process it. Much of that information is transitory and often not even articulable. Markets still incorporate that information by answering the question we are typically most interested in with respect to our productive associations: How much?
How much will someone else give me for something, or how much will someone else demand from me for it? While sparing us from the need to know all the infinitely complex combinations of who, what, when, where, and how, drastically economizing on information costs, it communicates the most essential things we wish to know through prices and changes in them.
When one thinks carefully about the beyond-remarkable feats of social coordination markets make possible, it is not hard to understand why Hayek concluded:
I am convinced that if [the market system] were the result of human design, and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind.
Add to these marvels the fact that the market’s amazing feats of cooperation are accomplished in peace. When one’s property rights are well defined and defended, only voluntary arrangements are possible. Or as Leonard Read put it in his most famous book, Anything That’s Peaceful is allowed, but nothing that is not. Force is employed only when necessary to stop those who would violate others’ rights.
Indeed, early leaders of the free trade movement emphasized not just markets’ advantages for society in general, and the poor in particular, but for the advancement of peace. In Richard Cobden’s words:
[We] advocated Free Trade, not merely on account of the material wealth which it would bring to the community, but for the far loftier motive of securing permanent peace [with] people…brought into mutual dependence by the supply of each others’ wants.
The peaceful nature of market interactions is all the more amazing in view of the fact that unlike the shared goals that motivate the writers of a Wikipedia article, markets do not advance a single agreed goal. They vastly expand social cooperation, but that cooperation is in service of individuals’ widely disparate, often conflicting, goals. For example, we all desire food, clothing, and shelter, but we do not want the same amounts or kinds of food, clothing, or shelter, nor do we want them for the same people, at the same time, in the same quality and form, or in the same place. And that holds for innumerable other things.
Markets are not just a far more “indispensable part of the world’s information infrastructure” than Wikipedia, they provide their services under a greater handicap: governments do not constantly attack and undermine the information Wikipedia provides. In contrast, the information infrastructure provided by markets is widely undermined by government through a panoply of intrusions, including price ceilings and floors, taxes and subsidies, protectionism (tariffs, quotas, and nontariff barriers), and regulations that deter entry and stifle innovation.
Wikipedia is an impressive success story. It is informative, collaborative, diverse, and peaceful. But it is not humanity’s greatest collaborative effort, nor its greatest source of useful information. Those arise from the incredible benefits of people’s peaceful, voluntary arrangements in markets, when they are not short-circuited by government interference and hindrances. Consequently, if we could only give voluntary market arrangements the kind of respect and freedom Wikipedia enjoys, it would provide a major step forward for humanity.
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Announcing the Winner of the Central Bank of the Year Award…
The Swiss National Bank (SNB) wins 2020! Unfortunately, the Federal Reserve's hubris could not compete with the smug assertiveness of the Swiss. SNB chairman Thomas Jordan invoked a Ben Bernanke–like assuredness when he made his case that deflation shouldn't happen here. This comes the day after the US Treasury named Switzerland a currency manipulator, after they met the arbitrary threshold of having a:
$20 billion-plus (CHF17.7 billion) bilateral trade surplus with the United States, foreign currency intervention exceeding 2% of Gross Domestic Product and a global current account surplus exceeding 2% of GDP.
Chairman Jordan rejected the title, reported by Reuters, by saying:
Just to be very clear. The U.S. treasury report has no impact on our monetary policy.
The SNB's policy has led to the lowest bank rate in the world at –0.75 percent, and it remains fixated on ensuring the Swiss franc doesn't become "too strong." Whether it's the threat of deflation or the fallacy that exports will suffer, it's always uncanny to see central bankers deflect their actions back on the public. Like the Fed, which normally caveats its actions by referring to its mandate given by Congress, the SNB uses a similar tactic, as Jordan told reporters:
Our monetary policy is necessary and legitimate, in fact it's the result of our mandate that we were given by the Swiss people and parliament to maintain price stability….It is very important that we maintain this price stability in order to avoid a deflation in Switzerland.
The coup de grace was delivered in a formal statement the same day, when the SNB declared in writing:
The SNB's expansionary monetary policy provides favourable financing conditions, counters upward pressure on the Swiss franc, and contributes to an appropriate supply of credit and liquidity to the economy.
Apparently unaware that there is no such thing as an optimal supply of money and credit, the SNB refutes this in the most Keynesian fashion of all: declaring a truth simply by declaring it true. Similar to the comment that their monetary policy is “necessary and legitimate,” the Swiss bank claims it has found the “appropriate supply of credit and liquidity” without the slightest bit of proof, rationale, or calculation.
Additionally, they declared that:
In light of the highly valued Swiss franc, the SNB remains willing to intervene more strongly in the foreign exchange market.
If true, the SNB will increase its foreign purchases, and as with all other central banks, the race for expansionary policy with the goal of price inflation should make for an interesting 2021.
Still, the comedic element is not lost on us, considering The Economist's Big Mac Index shows Switzerland is still home to the most expensive Big Mac in the world, costing over $7 USD as of July 15. Yet the central bank still commits itself to weakening the franc, because, apparently, there is nothing worse than a strong currency.
So the Swiss bank wins: currency manipulation, the lowest interest rate in the world, purchases of US equities and foreign currencies with money created out of thin air, all to support the untenable position of maintaining the "appropriate" supply of credit. While the US dollar remains the world's unofficial reserve currency, Switzerland's publicly traded central bank does things the Fed only dreams of. Similar actions would be unfathomable if ever implemented in America. We hope.
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A Just Society Is a Society Based on Political Liberty
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As we approach the calendar turn to 2021, many Americans’ thoughts will turn to New Year’s resolutions. Those I hear about from others typically revolve around things like getting in shape, quitting smoking, consuming fewer intoxicants, spending more time with family, etc. Of course, I have no objection to anyone trying to be better. But I also think that, at a time when proposals to undermine the rights that comprise our liberties have been ever more commonplace, resolutions to better defend and advance our liberties would make all of America better.
To help motivate such resolutions, I would turn to Lord Acton, who wrote, “Liberty is not a means to a higher political end. It is itself the highest political end…not for the sake of a good public administration…but for the security in the pursuit of the highest objects of civil society, and of private life.” And given the inexhaustible creativity politicians show in undermining our liberty, and with it our ability to pursue our own highest goals as we wish, one powerful weapon of defense is to focus on some absolutely essential aspects of a good life and a good society that are possible with liberty, but not in its absence.
So, with apologies to John Stuart Mill’s On Liberty, consider what only liberty offers individuals and the society they comprise, including what only economic liberty offers us.
Only Liberty
Only liberty is consistent with a society in which “thou shall not kill” and “thou shall not steal” are honored.
Only liberty is consistent with all individuals being of transcending importance, equally “made in the image of God.”
Only liberty provides equal respect for every individual’s inalienable rights.
Only liberty prevents some from ruling over others, who are sacrificed to the interests of those in power.
Only liberty is consistent with true peace between individuals and societies.
Only liberty allows moral and ethical development and improvement, increasing our integrity and generosity, because we cannot improve or grow without the freedom to make our own choices.
Only Economic Liberty
Only economic liberty—private property and free markets—allows the use of productive knowledge that no central planner, whether a single person or a group, can effectively employ.
Only economic liberty enables the greatest degree of human creativity and productive discovery, by allowing anyone the possibility to discover new and improved options and offer them to others without artificial restriction.
Only economic liberty guarantees that arrangements are mutually acceptable to those involved, given their circumstances and preferences, rather than coercive impositions by those more powerful on those less powerful.
Only economic liberty offers people the greatest incentives to do for others, even when they don’t know them or may not like them.
Only economic liberty allows adjustments to changed circumstances by way of price changes, without requiring coercion or nasty political battles for control.
Only economic liberty unlocks the potential for economic growth to the greatest possible extent, as history attests.
Asking what only liberty can do for us helps us see why resolving to better protect and advance it is so important. Liberty is essential to creating the most peaceful, prosperous, and profoundly improving society we can have. When combined with Acton’s recognition, that “Liberty alone demands, for its realization, the limitation of the public authority, for liberty is the only object which benefits all alike, and provokes no sincere opposition,” it can lead people to ask, “How could I even think of giving up the irreplaceable benefits of liberty for things that are so much less valuable?” And that question is crucial because, as Leonard Read powerfully expressed it in “Freedom and the Fate of Nations”:
it is only in an essentially free society that certain trends have the possibility of prevailing: self-responsibility, improved morals, a passionate striving for intellectual excellence, a will to overcome obstacles, an energetic enthusiasm turned toward self-improvement, and abounding entrepreneurial spirit, competition and free pricing.
Note: This article is adapted from a chapter in Gary Galles’ latest book, Pathways to Policy Failures, just released by the American Institute for Economic Research.
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The Angel Gabriel and Monetary Inflation
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Six hundred dollars, two thousand, or how about one million per person? How much money should a government give its people to get the wheels of commerce turning again?
If starting with the premise that many are struggling because they don’t have enough money, the obvious solution for government is to “give them more money.” Unfortunately, this idea has never worked and will never work. The idea of money creation for the purpose of wealth creation is nothing new. In 1912, when Mises published The Theory of Money and Credit, he cited David Hume, who in the eighteenth century discussed what would happen if overnight “every Englishman [were] miraculously endowed with five pieces of gold.”
Years later, Murray Rothbard used the ideas of Hume and Mises in works such as The Austrian Theory of Money and The Case against the Fed in what became known as the “Angel Gabriel model.” In The Mystery of Banking Rothbard uses the model to show that an increase to the money supply confers no social benefit to society:
The Angel Gabriel is a benevolent spirit who wishes only the best for mankind, but unfortunately knows nothing about economics. He hears mankind constantly complaining about a lack of money, so he decides to intervene and do something about it. And so overnight, while all of us are sleeping, the Angel Gabriel descends and magically doubles everyone’s stock of money.
If such an injection to the money supply were to happen today, many distinguished economists, politicians, and central planners might very well praise such “stimulus,” saying it’s exactly what the economy needs!
In the morning, Rothbard explains, everyone would be ecstatic to find they are now twice as rich as they were the previous night because they now have twice the amount of dollars in their “wallets, purses, safes and bank accounts.” They would go out to spend their money, but as the day went on they would find prices getting higher and higher. Eventually, he insists, they would find that:
Society is no better off than before, since real resources, labor, capital, goods, natural resources, productivity, have not changed at all.
The notion of “increasing the money supply” overnight, carries further implications such as unpredictable changes in prices and consumer preferences, plus a whole host of economic problems. But the overarching idea is that an increase in the money supply does not lead to better societal outcomes, specifically because there is no such thing as an “optimal money supply.” Therefore, whether the money supply is doubled or halved, it does not equate to a society that is twice or half as rich. These ideas were formulated centuries ago. Yet they appear to be lost on those who hold a monopoly on our currency.
Consider our real-life Angel Gabriel policy expected next year, only this time, rather than a $600 check per person, imagine $1 million is sent instead. Once the money is received, most people will find an increased demand to buy assets such as real estate, land, or stocks. Most people would not significantly increase their purchases of household items like hair dryers, bed sheets, or even eggs. We have no reasonable method to anticipate how much prices will change; but we can anticipate there will be countless changes to prices. The level of price distortion and economic chaos the $1 million per person would unleash remains unfathomable to those in developed economies. Whatever the outcome, it would be disastrous.
While $1 million per person sounds extreme, we can similarly say that even though $600 per person is understandably less extreme, the same economic chaos and negative outcomes exist, the only difference being the degree of damage. We can say $1 million destroys the economy at a quicker pace than $600. But this does not take away the fact that both outcomes are bad, nor does it mean $600 is good because it is “less bad,” than $1 million.
The real question becomes: Why do we use economic policies that have no known positive effects, only detrimental ones?
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