Power & Market
If you think that the “tax the rich” rhetoric from the left-wing of the Democratic Party is primarily about economics you would be sadly mistaken. After all, there isn’t enough tax revenue in the highest income bracket, even with a 90% marginal rate, to fund anyone’s pet social program for more than 48 hours. Do progressives know this? Of course they do.
The same observation holds true for the so-called ”Green New Deal” legislation recently proposed by Alexandria Ocasio-Cortez, the outrageous media darling from Queens. It’s true that this grab bag of environmental regulation, if enacted, would likely cost trillions and produce a systemic change in the American life-style. But you miss the deeper message if you think that the actual purpose of this legislative monstrosity is to save the planet before it expires in 12 years.
No, the current wave of extreme progressivism has a far more nefarious goal than simply higher taxes on the super-rich or carbon taxes to scrub down the environment. Indeed, the long-run objective of the new socialists and the gang of social justice warriors (SJW) is to gradually delegitimize the very foundations of modern capitalism by obliterating conventional notions of property rights, fairness and justice. If this sounds far-fetched you have not really been paying attention.
It is often assumed that capitalism is founded rock solid on economics. Not necessarily. Strictly speaking, economic considerations, though important, are secondary. Instead, it’s the relatively unique system of individual property rights that primarily legitimizes all capitalist institutions.
Take, for example, the most obvious and essential capitalist institution: the private stock corporation. It is solidly rooted in the notion that individuals have rights; that these rights include the right to incorporate; the right to instruct managers of corporations to maximize profits; and the right of owners to sell their shares. These individual rights (entitlements) are the “moral” foundation for the existence and operation of all modern business organizations.
This particular theory of property rights was made explicit in the 18th and 19th centuries by philosophers such as Adam Smith, John Locke and John Stuart Mill. It holds generally that it is morally appropriate for individuals to own property including, of course, their own labor; to exclusively determine its use; and to enjoy the benefits (income or otherwise) earned from production or exchange. Adam Smith, who taught “moral philosophy” (not economics) at Glasgow University in Scotland termed these rights “natural” and once famously observed that free markets and voluntary exchange were morally appropriate because they were “consistent with liberty and justice. ”
Modern progressives and socialists reject this classical approach to rights theory. They hold, instead, that rights to property (and capitalist institutions such as the corporation) are arbitrary constructs of an elite and conservative legal system; that there is nothing “natural” or legitimate about them; and that, therefore, they have no special moral status. But if they have no special moral status, then neither does the income and privileges that these “rights” currently generate for owners. Indeed, government may now alter these arbitrary property arrangements and redistribute income and privileges to, say, anyone in the name of fairness and social justice.
It is now apparent that this radically different approach to property rights can be employed by critics to rationalize higher taxes on the rich, a drastic reduction in CO2 emissions, an increase in the legal minimum wage to $15/hour, and even the federally chartering of corporations (an Elizabeth Warren pet proposal) in order to make them “socially responsible.” Indeed, there is almost no tax or regulation that cannot be justified from this perspective. And that’s precisely the point.
In conclusion, the social justice warriors and the new socialists are not primarily concerned with economics as such. The tragic lessons of, say, Venezuela are not their concern. Instead, their objective is to continue to delegitimize the classical foundations of property rights and then implement, through legislation and the courts, a radically different theory of justice in social affairs. Whether such a program will be successful has yet to be determined.
Sales of Class 8 trucks (18-wheelers) hit the ditch in January, with orders down 58 percent from a year ago hitting a level not seen since October 2016, near the end of the transportation recession, “when Class-8 truck orders had plunged to the lowest levels since 2009, and truck and engine manufacturers responded with layoffs,” writes Wolf Richter.
The other day I posted about the plunge in the Baltic Dry Index and now news is the Cass Freight Index dropped in December. The Cass “index covers shipments of merchandise for the consumer and industrial economy but does not include bulk commodities, such as grains or chemicals. It was the first year-over-year decline since the transportation recession of 2015 and 2016 — and trucking companies have seen this coming for months:”
Baltic Dry Index
Shipping indexes provide a barometer for how the economy is doing. Less shipping means less buying, selling, and producing. Government interference in the form of low interest rates and the threat of tariffs pulled economic activity forward. However, now the economy is digesting that bubble (malinvestment) of activity. Richter explains,
The trucking business is a barometer of, and dependent on, the goods-based economy. In late 2017 through the summer of 2018, demand for transportation services, such as shipping by truck, surged under the simultaneous impact of a strong goods-based economy led by red-hot e-commerce; a buildup of inventories; pandemic front-running of potential tariffs, a resurgence of drilling activity in the oil patch that required equipment and supplies to be trucked in, etc. Freight rates spiked. Squeezed shippers wheezed in their earnings reports about these spiking transportation costs, while truckers were on Cloud-9 and ordered new trucks to meet the demand, and truck manufacturers were swamped with orders.
Now shipping activity has cooled off and trucking capacity has improved.
The Flatbed Monthly Load-to-Truck Ratio by DAT tracks demand-capacity imbalances. After skyrocketing, the industry figured out how to deal with ELDs just as a slowdown in the industrial sector set in, particularly oil & gas. Now, the average load-to-truck ratio has plunged, down 41% from December a year ago.
After a month of “will he, won’t he” drama fitting for reality television, Donald Trump has announced his plans to declare a national emergency in order to get the funding he desires for his border wall. While the wall itself invites debate on subjects such as practical immigration policy, eminent domain, and government contractors – the use of a national emergency has brought a renewed look at executive power.
For weeks Trump has been warned by Republican leadership about the dangers of the precedent being set by such a decision. Nancy Pelosi has already suggested that a Democratic politician could use a “national emergency” to enact gun policy.
While such concerns are justified, it’s amusing to see such objections being raised by conventional beltway-types as the long-standing trend within Washington has been the gradual expansion of the executive branch. What is the practical difference, for example, between a president going around Congress for a border wall and a president going around Congress for military action? Or President Obama’s own immigration-related executive order that granted protection to “Dreamers” after Congress refused to bend to his will?
After all, if we are to buy in to the idea that political action is validated through participation, then it makes sense for the single political office voted on by the entire country to gradually expand its power – particularly given the obstructions to majority rules the Constitution purposefully placed on the legislative branch. The preference for general majority rule at the expense of state-based representation is also what motivates the modern lefts interest in effectively abolishing the senate and Electoral College – both of which act as checks on the imperialism of democratic excess.
While the 20th century set the stage for the modern state, it was Andrew Jackson who was the first American president to understand how the promotion of democracy could directly feed an imperial presidency. While Jackson could be praised for his views on central banking and federal debt, his presidency offered some of the most flagrant examples of hostility towards both states rights and limits to executive power.
In his first address to Congress, he outlined his vision of a truly democratic executive. He called for the abolishment of the Electoral College, and criticized the role of a large legislature in frustrating popular rule. In his view, “the first principle of our system…[is] that the majority is to govern.” As the best representative of what he saw as the will of the people, he placed his own interpretation of the Constitution as equal to all other branches of government – best illustrated by his rejection of John Marshall’s decision regarding the property rights of Native Americans leading to the Trail of Tears.
While Trump has gone the furthest in openly inviting comparisons to “Old Hickory,” Jackson’s view of the democratic presidency has long prevailed. In the words of John Yoo, “Jackson remains one of the greatest Presidents because he reconstructed the office into the direct representative of the American people.”
Unsurprisingly, it was Yoo who provided the legal defense for many of the excesses of the George W. Bush presidency.
Mr. Mark Lautman has given me permission to share the following letter:
When I started reading Rothbard’s book, I gave the three-line summary to my wife. “It’s a book written by Murray Rothbard in the 1950s about libertarian economics. It’s published by the Mises Institute. Rothbard was a disciple of an Austrian economist Mises.”
“Mises?” she asked. “Ludwig von Mises?”
“Yes. Do you know about him?”
“Do you know who Ludwig von Mises was? He was my grandfather’s cousin!”
Sure enough, Paul Lourie, my wife’s grandfather, mentions Ludwig von Mises in his memoirs!
David Rosenberg tweeted a graph of the plunging Baltic Dry Index with the comment, “Is there a more deflationary chart than the Baltic Dry Index of global freight rates?”
Perhaps, or there is the New York Times business headline, “ Some Central Banks Have Gold Fever, and It Might Be Sensible .”
However, central banks are notoriously bad in timing gold purchases.
Swaha Pattanaik slams gold enthusiasts while praising central bankers.
Gold bugs aren’t always rational. That’s not the case for central banks, whose purchases of the yellow metal last year were the highest since the United States broke the link between gold and the dollar in 1971.
Pattanaik gives us the numbers.
Central banks bought 651.5 tonnes of gold in 2018, the second highest annual total on record and up 74 percent from the year earlier, according to the World Gold Council. As in the past three years, Kazakhstan, Russia and Turkey were significant buyers, but were last year joined by the likes of Hungary, India and Poland.
Gordon Brown’s infamous sale of UK gold cost the Bank of England nearly £5 billion.
Christopher Hope wrote for The Telegraph in January 2009,
The sale of more than half of the country's gold reserves between 1999 and 2002 has proved to be deeply controversial. Critics say that signalling such a large sale of bullion to gold traders helped to drive the precious metal to a 20-year low. In 17 auctions, Mr Brown as Chancellor of the Exchequer sanctioned the sale of 395 tonnes of gold.
Today Jerome Powell got out of the beltway and enjoyed some southern hospitality at Mississippi Valley State University, speaking at the Hope Enterprise Corporation Rural Policy Forum.
Most of the Fed Chairman’s talk was dedicated to talking about how the Fed could the financial needs of rural areas, a questionable claim considering the direct role central banks have played in increasing wealth inequality. He did, however, provide some additional thoughts on the strength of the US economy as a whole.
In particular, when asked about future risk, he said he did not “feel that the probability of recession is at all elevated.”
What’s interesting is that this claim does not follow the models published by the NY Federal Reserve which shows the current risk of recession at the highest they’ve been since 2008.
(H/T @TexarkanaFed via Twitter)
Of course, given the poor track record of Federal Reserve models, perhaps more useful is that this rosy view of the US economy seems to contradict the recent policy trends from the Powell Fed.
This includes changes to recent FOMC statements and projections about the rate of future rate increases, as well as indicating a willingness to stall the slow normalization of the Fed’s balance sheet that is currently in process. As he said in late January:
We’re listening carefully with – sensitivity to the message that the markets are sending and we’ll be taking those downside risks into account as we make policy going forward...If we came to view that the balance sheet normalization or any other aspect of the normalization was part of the problem, we wouldn’t hesitate to make a change.
Though the statement was made in carefully managed “Fed Speak”, the message it communicated couldn’t have been more clear – particularly since Powell has long been an inner Fed voice concerned about the size of the Fed’s balance sheet. The market understood that Trump finally got the Dovish Federal Reserve that he has spent the last year campaigning for. The day of the announcement was the first in Powell's tenure that the market reacted positively to one of his rate-setting announcements.
Unfortunately for Powell, none of the arguments for “normalizing” monetary policy has changed since Powell first outlined his desires for a slow and gradual wind down. The economic data that the Fed claims to make its decisions off of continue to look strong and the dangers of facing a crisis with the monetary interventionists tools they desire have not gone away. So what has changed? Maybe, just maybe, it’s the perceived risk of a future recession that the Fed’s models, other signals, and a growing legion of economists are projecting.
Of course, in the Chairman’s defense, it would be a mistake to see the Fed’s top role as one of truth teller. The Fed’s job is necessarily a political one, to project an air of confidence and try to maintain confidence in the system. Unfortunately, hot air only goes so far, as Bernanke learned in 2007.
Brian Maher of the Daily Reckoning quotes Murray Rothbard and me in his incisive critique of Modern Monetary Theory (MMT), which has lately been embraced by proponents of the "Green New Deal."
But it’s not just a fiscal crisis. Social Security is also an increasingly bad deal for workers. Especially minorities with lower average lifespans. When compared to what they would get from a private retirement system, people are paying in too much and getting out too little.
There’s also another major problem with the program.
Academic experts have quantified how older workers are lured out of the labor force when they get money from the government. And since economic output is a function of the quality and quantity of labor and capital, this means we’re sacrificing wealth and reducing prosperity.
Here are some excerpts from a study by Professors Daniel Fetter and Lee Lockwood.
Many of the most important government programs, including Social Security and Medicare, transfer resources to older people… Standard economic theory predicts that such programs reduce late-life labor supply and that the implicit taxation reduces the ex-post value of the programs to recipients. Understanding the size and nature of such effects on labor supply and welfare is an increasingly important issue, as demographic trends have increased both the potential labor supply of the elderly and its aggregate importance, while simultaneously increasing the need for reforms to government old-age support programs. …We address these questions by investigating Old Age Assistance (OAA), a means-tested program introduced in the 1930s alongside Social Security that later became the Supplemental Security Income (SSI) program.
Here are charts illustrating how people are retiring earlier in part because of government payments.
And here are some calculations from the study.
Our estimates indicate that OAA significantly reduced labor force participation among older individuals. The basic patterns that we explore in the data are evident in Figure 2, which plots male labor force participation by age, separately for states with above- and belowmedian OAA payments per person 65 and older. Up to age 65, the age pattern of labor force participation was extremely similar in states with larger and smaller OAA programs. At age 65, however, there was a sharp divergence in labor force participation between states with larger OAA programs relative to those with smaller programs, and this divergence continued at older ages. Our regression results, which isolate variation in OAA program size due to state policy differences, imply that OAA can explain more than half of the large 1930–40 drop in labor force participation of men aged 65–74. …Our results suggest that Social Security had the potential to drive at least half—and likely more—of the mid-century decline in late-life labor supply for men. …Taken as a whole, our results suggest that government old-age support programs can have large effects on labor supply, through both their transfer and taxation components.
This chart captures how old-age payments in various states were associated with varying degrees of labor force participation.
By the way, I’m not sharing this information because it’s bad for people to retire at some point.
I’m merely establishing that there’s academic support for the common-sense observation that people are more likely to leave the labor force when there’s an alternative source of income (though it’s worth noting that there should be a sensible and sustainable system for providing that retirement income).
Moreover, people are likely to stop working when government systems give them money before age 65.
Three academics, Andres Erosa, Luisa Fuster, and Gueorgui Kambourov, have a study quantifying this problem in European nations.
There are substantial differences in labor supply and in the design of tax and transfer programs across countries. The cross-country differences in labor supply increase dramatically late in the life cycle…while differences in employment rates among eight European countries are in the order of 15 percentage points for the 50-54 age group, they increase to 35 percentage points for the 55-59 age group and to more than 50 percentage points for the 60-64 age group. In this paper we quantitatively assess the role of social security, disability insurance, and taxation for understanding differences in labor supply late in the life cycle (age 50+) across European countries and the United States. … The social security, disability insurance, and taxation systems in the United States and European countries in the study are modelled in great detail.
Here’s a sampling of their results.
The main findings are that the model accounts fairly well for how labor supply decreases late in the life cycle for most countries. The model matches remarkably well the large decline in the aggregate labor supply after age 50 in Spain, Italy, and the Netherlands. The results support the view that government policies can go a long way towards accounting for the low labor supply late in the life cycle for these European countries relative to the United States, with social security rules accounting for the bulk of these effects… relative to the United States, the hours worked by men aged 60-64 is…49% in the Netherlands, 66% in Spain, 44% in Italy, and 29% in France. …government policies can go a long way towards accounting for labor supply differences across countries. Social security rules account for the bulk of cross country differences in labor supply late in the life cycle (with its contribution varying from 50% to 100%), but other policies also matter. In accounting for the low labor supply relative to the US at ages 60 to 64, taxes matter importantly in the Netherlands (6%), Italy (6%), and France (5%); disability insurance policies are important for the Netherlands (7%) and Spain (10%).
And here’s one of their charts comparing hours worked at various ages in Switzerland, Spain, France, and the United States.The good news is that we don’t push people out of the labor force as much as the French and the Spanish.
The bad news is that we’re not as good as Switzerland (probably in part because the Swiss have a retirement system based on private saving, so they have the ideal combination of good work incentives and comfortable retirement).
But it shouldn’t matter whether other countries have good systems or bad systems. What does matter is that America’s demographic profile is changing. We’re living longer and having fewer children and our system of entitlements is a mess.
We should be reforming these programs, both for fiscal reasons and economic reasons.