Power & Market
According to new jobs data released today by the US Labor Department, total nonfarm employment grew by 4.8 million in June (seasonally adjusted). The gain was even larger (5.1 million) in non–seasonally adjusted totals.
June's unemployment rate was 11.1 percent, a drop of 2.2 percent.
This means total employment is now "only" 14.6 million below the November peak, meaning the US is now back to where total employment was in 2015.
As we can see in the first graph, so far a "V-shaped recovery" looks possible. In April, employment crashed by the largest amount seen since the Great Depression. The economy recovered more than 3 million jobs in May in addition to June's 4.8 million jobs.
But it remains unclear if the current job recovery will continue at the same rate. In June it looked like government-imposed business closures might be disappearing, but by late June state governors and other policymakers had begun announcing or threatening new business closures and lockdowns. This will no doubt have an effect on employment in July, but the extent of the effect is impossible to predict at this time.
If the recovery continues at its current rate, then total employment could recover within a few months, making the 2020 recession (at least in terms of jobs) considerably shorter than the Great Recession. Here is total employment (by recession and final month in each cycle before job losses began) indexed to peak month, and the number of months that passed before employment returned to peak levels:
In recent weeks, however, unemployment claims have remained stubbornly flat. For the week ending June 27, new unemployment claims increased by 1.43 million. This was only down slightly from the previous week, when there were 1.48 million new claims. Since March, new unemployment claims have totaled over 48 million.
That 1.43 million number for last week remains very large. During the Great Recession, new unemployment claims peaked at around 660,000 in late 2009. So long as unemployment claims continue to number above a million, we're looking at job losses well above what would be considered "normal" even in a recession.
Moreover, continuing unemployment claims actually increased slightly from the week ending June 13 to the week ending June 20, climbing to 17.9 million.
If unemployment claims continue to move sideways, there's good reason to suspect employment in July may do the same.
At the same time, the unemployment rate could continue to fall if workforce participation continues to fall. As people leave the workforce, the unemployment rate could theoretically fall even without any job growth.
And workforce participation is indeed falling. In April of this year, participation (for all ages) fell to about a 43-year low, coming in around where it was in April 1976. Participation climbed again in May and June, but remains near a forty-year low for June.
The weak jobs market appears to be most impactful on young workers and old workers, as workforce participation in prime earnings years has not been as affected. For workers in the 25–54 category, workforce participation is back to where it was in 2015.
Unless we start to see a more rapid drop-off in unemployment claims, it's difficult to see how a V-shaped recovery will continue. Moreover, much will depend on how harsh ongoing business closures and partial "lockdowns" are in the US. Since these policies are set at the state level, employment numbers will likely be very uneven from state to state. As we saw in the state-to-state data for May, many states with particularly harsh lockdowns, such as New York and Michigan, were among the states with the highest unemployment rates.
With the venerable Dr. Thomas Sowell turning ninety this week, a question arises in the fintwit (financial Twitter) world: Who is the greatest living economist?
This question is more difficult than it appears. First, determining the "greatest" individual in any human field is always a highly subjective endeavor, whether we're talking about economists or basketball players. Do we mean the most brilliant economist, in terms of sheer mental horsepower, or the most influential? The most prolific? Most "correct"? Most respected? Most listened to, either by policymakers or the public? The economist with the most significant impact today? The most famous? Someone who is most popular among their academic peers, or best known to lay audiences? A wonkish technician, or a pop editorialist like Paul Krugman? Someone with a strong political orientation, like Thomas Piketty, or an ideologically inscrutable professor type? And should lay audiences have a vote, or only professional and academic economists equipped to judge the technical prowess and substance of a peer?
Again, this question is highly subjective and unlikely to produce a broad consensus answer. But let me offer three seemingly obvious criteria for greatness: (i) the individual has made significant original contributions to the existing economics literature, and not only in a very narrow area or subdiscipline; (ii) the individual has produced a significant treatise (not just a book or articles) synthesizing and expanding the existing body of knowledge in at least one important area of economics (e.g., money and banking); and (iii) the individual will continue to be widely read and cited after their death.
With all this in mind, I asked several economists to nominate the greatest living economist. Admittedly everyone I canvassed is Austrian or free market in their orientation, but all were asked to consider the profession as a whole in their answers. And I insisted they limit themselves to one name (but caved to the pressure and made an exception for Bob Murphy).
Here are some of the answers, to be updated as I receive more (some asked to sleep on it!):
Professor Walter Block, Loyola University New Orleans: Bill Barnett. "I vote for Bill Barnett. He’s been my mentor in econ for the last 20 years or so, particularly in money macro. He's brilliant, creative."
Professor Per Bylund, Oklahoma State University: Hernando de Soto. "I agree with the names that have already been mentioned. If I were to add a name with a different type of impact and importance, I might pick Hernando de Soto. For his uncovering of how poor people in poor countries have capital but lack the institutional support to use it. Had this been a couple of years ago I would have added Harold Demsetz to the list."
Professor Thomas DiLorenzo, Loyola University Maryland: Thomas Sowell. "Good Chicago-trained economist whose work has educated millions, everything from his Economics in One Lesson–style textbook to books on race and everything else."
Professor Carmen Elena Dorobăț, Manchester Business School: Jagdish Bhagwati. "Interesting question, difficult to answer because economics is so fragmented these days; no one is writing treatises and thus discussing economics as a whole. That said, my view is (probably biased) that work on monetary theory and/or international trade, by the nature of the subjects, comes closest to doing economics in its original sense (a unified explanation of how markets work). With that in mind, Jagdish Bhagwati and Douglas Irwin on the international trade side, and Robert Mundell on the monetary side are possible candidates. They all also do quite a bit of history of economic thought, and history of economic policy, which is becoming a lost art in the mainstream these days. If I had to rank them, it'd probably be Bhagwati, Mundell, Irwin. I hope this helps! And just to be clear, Joe Salerno is better than all of them."
Peter Earle, American Institute for Economic Research: Israel Kirzner. "I would choose Israel Kirzner. He bridged the gap between Austrian and neoclassical theory in a way which didn't compromise the methodological basis of the Austrian school and put the entrepreneur at the center of the market process: coordinating consumption demands with plans of production though constant relative movements of price and the interplay between profit (reward) and loss (sanction). A process whereby alertness within market systems leads to discovery and creation is vastly more nuanced than the prefiguring Walrasian model."
Professor Richard Ebeling, The Citadel: Israel Kirzner. "In my view, the greatest living economist is Israel M. Kirzner. Why? First, he is the last living giant of the modern Austrian school who has successfully helped to preserve and restore the 'Austrian' tradition (along with the late Murray N. Rothbard), and, second, due to his own unique and important contributions (building on Ludwig von Mises and Friedrich A. Hayek) to the theory of the entrepreneur and the market process."
Gene Epstein, Barron's (retired) and the Soho Forum: George Reisman. "Ironically, not because of what George happens to think is his major contribution (to the theory of profit) but for all the energetic and imaginative insights I find in his massive tome Capitalism. For example, I often cite his lucid explanation of why wages rise under free market capitalism, despite 'worker need & employer greed'; his recognition that, while land acquisition has historically unjust roots, the 'stain' gets wiped away under free market capitalism; or his balanced critique of Adam Smith as having written some of the best and worst stuff on free markets."
Dr. David Gordon, Mises Institute: Joseph Salerno. "Joe Salerno is the economist I would rely on for understanding Austrian economics."
Professor Steve H. Hanke, Johns Hopkins University: PENDING.
Professor Emeritus Hans-Hermann Hoppe, University of Nevada Las Vegas: PENDING.
Professor Peter Klein, Baylor University: Robert Lucas. "I'm going to interpret your question to refer not to economists I personally like, but to those who are universally recognized in the field for accomplishment, influence, etc. The way 'greatest economist' might have been interpreted in Menger's or Mises's day. That would rule out people like Krugman and Stiglitz who are widely regarded as politically motivated public intellectuals, not serious economists, along with highly cited, but younger scholars like Daron Acemoglu."
Professor Matthew McCaffrey, University of Manchester: Amartya Sen. "Sen's work on development marks a break from the narrow, technical accounts of development that treat it purely as a matter of increasing economic indicators like GDP. Although Austrians can find much to criticize in his broader approach to economics, his work raises interesting questions and challenges that are usually absent from mainstream research."
Dr. Robert Murphy, Mises Institute and Independent Institute: Robert Lucas, hedged with Dr. Joe Salerno. "The problem is that my personal views are so far removed from the profession that I will cheat and answer two related questions, rather than what Jeff asked. 1) Who is the most important economist among living Nobel laureates? I would say Robert Lucas. His critique of old-school Keynesian macroeconometric models was an amazing achievement in science, the way intellectuals conceive of the advancement of science. Then his work on rational expectations laid the foundation for RBC and a lot of the modern Chicago school approach to financial markets. Furthermore, he is quite simply a super smart guy; e.g., in grad school we used his textbook on recursive mathematical methods. Even his critics agree that the models in the literature he spawned were elegant and rigorous; they were just wrong. 2) The reason I don't say Lucas is the greatest living economist is that he's missing out on the importance of economic calculation as developed in the Misesian tradition. So, who is the single best living economist to exemplify what the rest of the profession is missing? Joe Salerno."
Professor Emeritus George Reisman, Pepperdine University: George Reisman. "The reasons why I name myself will become apparent to any knowledgeable reader who takes the trouble to read my Capitalism: A Treatise on Economics. The book contains a number of major original contributions any one of which is worthy of a Nobel Prize. As one example, my demonstration in Chapter 15 that, contrary to contemporary “macroeconomics,” most spending in the economic system is not consumption but rather is concealed under the heading of net investment."
Professor Mark Thornton, Auburn University and the Mises Institute: Robert Higgs. "I nominate Bob Higgs for his reinterpretation of modern American history. He transitioned from a mainstream economist to a radical Austrian."
Of course no single opinion is dispositive. But it's important to consider economists in the broader context of truth and human advancement, and assess their relative contributions. At the moment the discipline is at great risk of losing its place as a meaningful science thanks to an orgy of mathematical methods and politicized demands for a "new" economics. We need to build a generation of young economists who actually understand history and theory, and we need to build it fast.
Of all the problems 2020 has given the world, perhaps one of the greatest has been granted by the Fed to a handful of CEOs across the country, that is, if their corporation has a credit rating of junk bond or higher.
On Monday the Fed announced the opening of its much-anticipated Primary Market Corporate Credit Facility (PMCCF), the $500 billion program whereby the Fed will create money out of thin air and lend directly to “large employers” in America. The term sheet says the pricing will be “issuer-specific.” But we can assume that it will be below market, otherwise no one would borrow directly from a central bank.
The justification behind this has been provided by the New York Fed. This time it's:
In general, the availability of credit has contracted for corporations and other issuers of debt while, at the same time, the disruptions to economic activity have heightened the need for companies to obtain financing.
Times may be rough indeed, especially for large employers such as Microsoft, a company currently valued at $1.5 trillion and that has fallen on tough times of late. Just last week it announced the permanent closure of all of its eighty-three retail locations according to CNBC:
Microsoft said the closing of its physical locations will “result in a pre-tax charge of approximately $450 million, or $0.05 per share.”
We won’t know whether or not Microsoft decides to take up the Fed’s offer to buy debt until the end of the month, when the Fed provides its monthly lending facility reports to Congress.
Other than using the money to pay severance packages, a large employer could refinance existing debt. Per the PMCCF term sheet:
Issuers may approach the Facility to refinance outstanding debt, from the period of three months ahead of the maturity date of such outstanding debt.
This would be great, especially since Congress is funding the PMCCF with $50 billion. The taxpayers can help fund interest savings for their employers!
Of course, if refinancing isn’t an issue, share buybacks could be a solution. In 2019, many large employers and some companies on the verge of bankruptcy spent $730 billion on buying back their own shares, while in 2018, that number was $1.1 trillion as reported by Fox News, citing the S&P DOW indices. Maybe this liquidity will help corporations restore their spending habits to match pre-COVID levels?
In a time when physical store locations may prove both undesirable and problematic, and where existing debt levels are through the roof, what can the largest corporations in America do with this money other than restructure, replace old debt with new cheaper debt, or buy back their own shares? Sadly, we live in a time where a few billion dollars can only go so far.
It has long been said that the financial and economic education in the public school system is far from perfect. I, as a current high school student, can vouch for that claim. From promoting crazed statist ideologies to nonsensical Keynesian beliefs, the public school system is nothing short of a tool for the state to harness power.
In school, I was taught that the Federal Reserve was created in 1913 to manage prices and employment. Never once were we taught that the Fed’s mandate did not include anything about prices and employment until the Federal Reserve Act of 1977. It is likely that this was left out of the curriculum so that it would seem that the Federal Reserve has over one hundred years of experience in these matters, thus making them the so-called experts. However, the Federal Reserve’s mandate change was nowhere close to one hundred years ago and its experience has been far from perfect. Of course, its negative track record was left out of the teaching. Never once were we shown the drastic increase in prices and inequality since the mandate change.
In fact, we were told that the free market is the cause of inequality and that government intervention is the only way to fix it. Of course, we never learned about how perverse incentives, quantitative easing, and a fiat system are the forces that cause artificial inequality. It was for the promotion of the same idea—that government is the only answer—that we never learned about the vast inequality that blossomed after the dissolution of the Bretton Woods system.
The reality is that much inequality is the result of artificially high stock market prices due to easy money policies. Speaking of the stock market, I was taught in school that a stock market on the rise depicts a strong economy. Of course, this is not necessarily true. The stock markets of the Weimar Republic and Zimbabwe skyrocketed in their respective currencies as a result of their reckless counterfeiting policies, but surely you could not argue that hyperinflation is a sign of a strong economy. In fact, you do not even need to leave the United States for evidence. Recently, the stock market was at record highs before plunging into a recession and a sovereign debt crisis. COVID-19 was merely the catalyst, for the recession was coming anyway. It is hard to argue that a grossly overextended economy is somehow a strong economy simply because stocks were going up. But it was this type of thinking that made my fellow classmates think that since stocks had started to go back up after the mid-March sell-off that everything would be fine and there would be no recession. Sure, stocks may go up in nominal terms, but certainly not in real terms for the foreseeable future. This, of course, was never mentioned by any of my economics teachers. And it is this type of thinking that keeps the state in control. If the younger generation thinks that bailouts and intervention worked, why would they not vote for it in the future?
We were told that quantitative easing was a successful policy. But how is that we then needed multiple QEs after the one following the 2008 recession? If QE1 worked so well, why are we now on QE4? Surely, the dogmatic love of quantitative easing is a sign of insanity in its very essence. In addition to quantitative easing, we also learned about tightening policies and how the government attempts to limit its debt during economic booms. However, that is simply not true. The artificial market boom that took place during the Obama presidency and the first term of the Trump administration happened as the national debt ballooned up to catastrophic heights. Where exactly was the policy of quantitative tightening? Nonexistent. These unfortunate facts for the statists and their failed doctrines were completely left out of the curriculum.
It should be clear by now that the state-run schools cannot be trusted with teaching economics. To be sure, many of the teachers are simply teaching the curriculum mandated by the state and do not want to risk losing their jobs by teaching true economics. But the reality is that the only way to fix the problem is to abolish public schooling and state-mandated standards in exchange for private education—a cheaper and more efficient solution that eliminates the monopoly on schooling. Only then will the ideals of Ludwig von Mises and Rothbard be well understood and manifest into actual policies.
The first time governments imposed business closures in the name of fighting the spread of COVID-19, the job market imploded.
Forty million Americans lost their jobs, and at least 20 million of those are still unemployed. Income in America fell to such low levels that federal tax revenues fell by more than 50 percent year over year in April and remained down more than 25 percent in May. These are losses of historic proportions.
It remains to be seen if the country even began anything that could realistically be called a "recovery" in June. After all, new unemployment claims were still at over a million new applicants according to the most recent data. That's still off-the-charts bad. Nonetheless, we continue to hear about how, any day now, we'll see evidence of a "V-shaped recovery" in which jobs and economic growth will come roaring back.
But now we're already seeing governments—by which I mean a small cadre of governors and unelected bureaucrats who currently rule by decree—announcing another round of business closures and ongoing government regulations that micromanage every aspect of a business's daily interactions with customers.
This is likely to greatly slow any V-shapred recovery that might have been forming, and it will give businesses reason to further put off plans for implementing efforts at recovering from the economic crash experienced in April and May.
This is due to businesses being physically barred from hiring in many cases, but it's also due to "regime uncertainty."
Regime uncertainty is a wealth-killing, job-killing phenomenon in which business and property owners cannot plan for the future because of capricious, unpredictable, and incoherent government interventions.
This has happened a number of times in the past in the United States, an in each case, it prolonged economic depressions.
As shown by economic historian Robert Higgs, regime uncertainty was a significant factor in the long duration of the Great Depression. It again became a factor during the so-called Great Recession, when the US government began implementing a veritable smorgasbord of new regulations and bailouts.
During these periods, there were few limits on government action and the legal environment was prone to be substantially changed on short notice and in a succession of fits and starts.
Not surprisingly, under these conditions, businesses became reluctant to engage in new plans for expansion, employment, or investment.
Now, thanks to the coming "second round" of state lockdowns, businesses are once again in a similar position.
For example, yesterday Colorado governor Jared Polis announced that the governor's office was once again shutting down bars and nightclubs, after only a few weeks of being allowed to remain open. This comes after a tiny uptick in new cases in the state.
What was the legal process for dictating to these businesses that they must now remain closed? There was none. For all we know, Polis just decided in the shower yesterday morning that it "felt right" to close down bars again. There is no debate, no checks and balances, no period for public comment. We live in a world where a politician can simply decide to shut down businesses whenever the mood strikes him.
Polis certainly isn't the only politician of this type.
Governors in a number of states have taken similar actions, from California to New York to Texas and Florida. Bars, and other businesses, are again being closed by government edict. Or as in New York, they are not being allowed to open at all.
Some observers might shrug and say "well, it's only bars and a small minority of businesses. It's no big deal!" This might be true to some extent were other businesses able to obtain any useful information on the likelihood that they too will be shut down. After all, just because it's "only" bars being closed now doesn't mean it won't be all restaurants, barbershops, and offices later.
And how might businesses get this information for planning purposes? It's not as if any objective standards or guidance are offered by the secretive junta of bureaucrats that decides a business's fate.
A business could ask, "At what number of new cases/hospitalizations will you extend new business closures?" But the business is unlikely to receive any answer, because it is clear that governments have established no objective standards of any kind. These government planners apparently decide business closures based on personal whims or on political pressure. What's worse, these changes can occur without any warning at all. Even after months of talk about plans for dealing with COVID-19, governments have yet to announce or establish any standard at all by which to judge whether business closures or lockdowns are necessary. Exactly how many COVID-19 deaths or hospitalizations are necessary to "trigger business closures"? Virtually no government is willing to say. The only governor who appears to have even suggested an actual numerical standard is Greg Abbott of Texas who claims:
As I said from the start, if the positivity rate rose above 10%, the State of Texas would take further action to mitigate the spread of COVID-19.
But even in this case, government action is vaguely defined only as "further action." That could mean virtually anything. So business owners are left just guessing what governments might do next without anything we might call "due process" or even a "legislative process." It's just a matter of a single man or woman issuing diktats about whether or not a business owner is allowed to use his or her property. Moreover, just because it's someone else's business today, doesn't mean it won't be your business tomorrow. That's the nature of regime uncertainty. One round of regulations now doesn't mean there won't be something quite different and far worse coming down the line soon.
Under these conditions, there is little reason to assume there will be a V-shaped recovery. After a period of only one month of "reopening," governments are already enacting new business shutdowns and claiming the authority to engage in these shutdowns indefinitely. It's as if the system were designed to maximize regime uncertainty and destroy employment and income. For business owners, there's no end in sight.
June 30 is Frederic Bastiat’s birthday. That is noteworthy, as his contributions on behalf of liberty were not only massively important, but have stood the test of time.
As Julian Adorney and Matt Palumbo wrote for the Mises Institute, he used "taut logic and compelling prose to bring the dry field of economics to hundreds of thousands of laymen."
Murray Rothbard wrote that he was "a lucid and superb writer, whose brilliant and witty essays and fables to this day are remarkable and devastating demolitions of protectionism and of all forms of government subsidy and control. He was a truly scintillating advocate of an unrestricted free market."
The introduction to The Bastiat Collection, which incorporates his greatest works, summarizes his importance by saying that "If we were to take the greatest economists from all ages and judge them on the basis of their theoretical rigor, their influence on economic education, and their impact in support of the free-market economy, then Frédéric Bastiat would be at the top of the list."
For all the praise Bastiat has deservedly received, however, his greatest works don’t exhaust his wisdom, and people are far less aware of some of those other words of wisdom. In particular, in Frederic Bastiat: The Man and the Statesman, Liberty Fund has published a collection of 207 letters he wrote (including many to Richard Cobden, "the father of free trade"), but they have not gotten the same attention as his major works.
That is why it is worth celebrating Bastiat’s 1801 birth by looking to his letters for added words of wisdom, following his recognition that "Truth has power only when it is defused." Here are some that I found particularly striking:
- "As long as our deputies want to further their own business and not that of the general public, the public will remain just the tail end of the people in power."
- "Although there are a few souls who instinctively would like freedom to a certain extent, there are none who understand it in principle."
- "Let us raise the flag of absolute freedom and absolute principle, and let us wait for those with the same faith to join us."
- "We would not even be able to mention the word justice if we accepted the shadow of protection."
- "The liberation of trade will lead to political liberation…invasive politics will have ceased to exist."
- "I want not so much free trade itself as the spirit of free trade for my country. Free trade means a little more wealth; the spirit of free trade is a reform of the mind itself…the source of all reform."
- "The cause we serve is not bounded by the borders of a nation. It is universal and will find its solution only in its acceptance by all peoples."
- "[Many] have the same goal, tyranny. They differ only on the question of…in whose hands the despotism will be placed. This is why the thing they fear most is a spirit of true freedom."
- "The plentiful bounty of the state…the whole mechanism consists in taking away ten to give it back eight, not to mention the true freedom that will be destroyed in the operation!"
- "Anything that can, directly or indirectly, damage property, undermine confidence, or weaken security is an obstacle to the accumulation of capital and has an unfavorable effect on the working classes. This is also true for all taxes and irritating governmental interference."
- "How can industry revive when it is accepted in principle that the scope for regulation is unlimited? When every minute a decree on earnings, working hours, the cost of things, etc., can upset all economic decision making?"
- "The dominant notion…that has permeated every class of society, is that the state is responsible for providing a living for everyone….The real cause of the evil is certainly the false ideas of socialism."
- "The state has been required to provide for the welfare of its citizens directly. But….This means that the state or the public treasury has been plundered."
- "Every class has demanded from the state the means of subsistence, as of right. The efforts made by the state to provide this have led only to taxes and restrictions and an increase in deprivation, with the result that the demands of the people have become more pressing….[All] have called upon the law to intervene to increase their share of wealth. The law has been able to satisfy them only by creating distress in the other classes, especially the working classes. These therefore raised a clamor, and instead of demanding that this plundering should cease, they demanded that the law should allow them to take part in the plundering as well. It has become general and universal."
- "Each person should call upon his own forces to provide his means of existence and expect the state to provide only justice and security."
- "You need to be uncommonly absurd and foolish to believe that it is an act of courage to vote in favor of might…the majority, the passions of the moment, and the government."
- "Protectionism [is] the negation of the right of property."
- "Protectionism is a plague."
- "As long as the state is regarded…as a source of favors, our history will be seen as having only two phases, the periods of conflict as to who will take control of the state and the periods of truce, which will be the transitory reign of a triumphant oppression, the harbinger of a fresh conflict."
- "The legitimate functions of the government…once these functions have been understood and these limits set, the people governed will no longer expect prosperity, well-being, and absolute good fortune but equal justice for all from their governments….governments will have their ordinary action circumscribed, will no longer repress individual energy, will no longer dissipate public assets…and will themselves be freed from the illusionary hopes pinned on them by their peoples."
- "[Even] the best assembly is good only for preventing evil."
- "What I ask of the law is that it should be neutral between us and that it should guarantee my property in the same way as that of the blacksmith."
- "The government should guarantee security to each person and…should not concern itself with anything else."
"A keen wit and a clear pithy writing style," as Adorney and Palumbo described it, is clearly on display in Bastiat’s letters as well as his other, better-known writing. That is why his letters are worth our consideration as well. They even provide us with a toast worthy of emulating:
Allow me, in closing…this toast: To free trade among peoples! To the free circulation of men, things, and ideas! To universal free trade and all its economic, political, and moral consequences!
As I mentioned on Friday, a second round of lockdowns and stay-at-home orders will be both more economically damaging and more difficult to enforce. Yet politicians have clearly signaled they have more lockdowns in store.
Yet as economic hardship increases, and as more people doubt the official experts' demands, fewer will be willing to comply.
The first time around, lockdowns were largely peaceful.
Nationwide, we witnessed relatively few altercations with police during the first round of lockdowns. Certainly, there were still repugnant abuses committed by police who claimed to be enforcing "social distancing" laws. Here are just some examples:
- Police arrested a business owner for refusing to close his smoke shop.
- Police harassed and detained a man for playing softball with his family in a nearly empty park.
- In Delaware, "a local business owner was even arrested for personally violating Carney's stay-at-home order."
- Wisconsin police arrested a dog groomer for social distancing–related "violations."
- Shreveport, Louisiana, police threatened local business owners.
- NYPD officers assaulted a man for violating social distancing "laws."
- In Odessa, Texas, a SWAT team descended on a peaceful demonstration at a tavern.
But given the sheer scale of the lockdowns, we could have seen a lot more. The reason we didn't see more was that an overwhelming majority of Americans complied voluntarily out of fear of the disease.
It's now clear, however, that while total mortality may indeed be heightened in the age of COVID-19, it's certainly not catastrophic or apocalyptic. This is clear in US states, and in entire countries like Sweden that never imposed coerced lockdowns. Moreover, as incomes wane, rent payments are missed, and unemployment endures, many Americans will be even less inclined to comply with stay-at-home orders.
But if there's less voluntary compliance, that means a greater need for police to force compliance. Will the police make it happen?
Certainly, during the first lockdown, few police had qualms about destroying lives and businesses in the name of "public safety."
But that was before the "defund the police" movement grew, and some police departments have implemented work slowdowns in response.
In New York and Atlanta, for example, police officers have called in sick or called for strikes in protest against an alleged "anti-police climate."
The idea here is that police refuse to arrest violent criminals as a means of applying political pressure to both elected officials and the voters.
But will police forget about their slowdowns and strikes in time to crack down on peaceful citizens who violate the future stay-at-home orders now being threatened by politicians?
If the police—who in some cases acted with considerable restraint against protestors who were obviously in violation of bans on mass gatherings—engage in mass arrests against Americans who refuse to "#stayathome" or otherwise fail to comply with lockdown orders?
Will police ignore murders while they rush to close businesses and arrest fathers who take their children to a park?
Experience suggests this would just be par for the course. After all, the evidence has long shown that police focus on petty crimes while devoting few resources to serious violent crimes. There would be nothing shocking about a police force that refuses to pursue dangerous criminals while bringing the full wrath of a SWAT team against patrons at a tavern. It is easier—both practically and politically—to arrest a middle-aged mom who refused to close her business while letting violent rioters go free.
Politically, however, police would be well advised to refuse to enforce stay-at-home orders. After all, the police departments' list of allies grows thin. Middle-class voters are often inclined to be sympathetic to police, because middle-class voters don't want their homes and businesses burned down or broken into.
But if the cops plan to continue arresting business owners for noncrimes related to stay-at-home orders, they should expect little help the next time they want yet another budget increase.
For most fields of study, the goal is to progress ideas and seek truth. This doesn’t seem to be the case in economics.
It’s not just the Fed; it’s the entire global community. The Central Bank of Sweden recently shared a press release showing they have similar concerns to the Fed and want to facilitate the “supply of credit” while striving to hold market rates down. The bank further stated the difficulties faced with interpreting its inflation statistics during times of pandemic, noting:
For one thing, prices have been lacking for certain goods and services, as these have not been consumed, and for another thing the actual consumption by Swedes during the pandemic does not correspond to the weights in the consumer price index. Quite simply, the Swedish people have bought more toilet paper and fewer trips abroad than the weights in the consumer price index imply.
The problem with measuring “inflation” has also been expressed by the Bank of Canada. It’s not just the relative weights which are problematic, but also the volatility of the data that impacts the “inflationary experience” of the Consumer Price Index sample size, making interpretation difficult:
in any given month, the CPI can be quite volatile and not reflect its long-term trend. That’s because prices of items such as fresh fruit and vegetables or gasoline can jump around a lot, affecting the CPI.
Especially since “these aren’t normal times,”
Canadians are spending much less on gasoline and air travel, and more on food purchased from stores. And until very recently, they weren’t spending anything on haircuts. The implication is that the CPI isn’t fully reflecting people’s current inflationary experience.
In formulating an arbitrary basket of goods to include items such as gasoline, fruits, vegetables, and toilet paper and then assigning an arbitrary weight of relative importance to these items, central bankers obsess over consumer prices while ignoring asset prices such as those of stocks, bonds, and real estate.
In a great many states and municipalities, government executives have declared states of emergency. These are in most cases mayors and state governors who first declare a state of emergency and then begin unilaterally issuing a wide variety of executive orders without consent from any elected legislative body.
Historically, these emergency periods were limited to a specific duration, often thirty days.
The Lawfare blog has helpfully summarized the emergency declaration power of most states:
- In Texas, " A state of emergency concludes when the disaster has been deemed to have passed, if the legislature decides to terminate it, or if the declaration is not renewed by the governor after thirty days."
- In Colorado, "A state of emergency cannot last more than thirty days without the governor renewing it and the general assembly, by joint resolution, can terminate a state of disaster emergency."
- In Florida, "The state of emergency cannot continue for longer than 60 days unless the governor renews it."
- In New Jersey, "A public health emergency is automatically terminated after 30 days unless the governor renews it under the described standards."
- In New York, "any action the governor takes using his emergency power must not last for longer than 30 days. The governor can renew this emergency action for an additional 30 day period after reconsidering all of the relevant facts and circumstances."
Notice a potential problem here: the "time limits" are essentially meaningless, because all that is required to extend them is for a single person—the governor in these cases—to declare the emergency extended. Even worse, the same person who declares the emergency is the one who rules by decree during the emergency.
The only possible veto in many cases exists if the state's legislative body convenes and passes a resolution to end the emergency declaration, as happened recently in Pennsylvania. Such a process, however, throws the status quo strongly in favor of one-man rule by decree. It is assumed that a single person can declare an emergency and then govern as he or she wishes with virtually no institutional opposition until the full legislature can convene and take a vote. In some states, there isn't even a clear means for the legislature to meet when it is not already convened according to the usual calendar. After all, many state legislatures only meet part of the year. Some legislatures meet only once every two years.
In practice, the system should be the reverse: emergency declarations should provide for a veto from a small legislative committee or some other group of elected officials outside the governor's office.
F.A. Hayek discusses this in volume 3 of Law, Legislation, and Liberty:
"Emergencies" have always been the pretext on which the safeguards of individual liberty have been eroded—and once they are suspended it is not difficult for anyone who has assumed such emergency powers to see to it that the emergency will persist. Indeed if all needs felt by important groups that can be satisfied only by the exercise of dictatorial powers constitute an emergency, every situation is an emergency situation. It has been contended with some plausibility that whoever has the power to proclaim an emergency and on this ground to suspend any part of the constitution is the true sovereign. This would seem to be true enough if any person or body were able to arrogate to itself such emergency powers by declaring a state of emergency.
It is by no means necessary, however, that one and the same agency should possess the power to declare an emergency and to assume emergency powers. The best precaution against the abuse of emergency powers would seem to be that the authority that can declare a state of emergency is made thereby to renounce the powers it normally possesses and to retain only the right of revoking at any time the emergency powers it has conferred on another body. In the scheme suggested it would evidently be the Legislative Assembly which would not only have to delegate some of its powers to the government, but also to confer upon this government powers which in normal circumstances nobody possesses. For this purpose an emergency committee of the Legislative Assembly would have to be in permanent existence and quickly accessible at all times. The committee would have to be entitled to grant limited emergency powers until the Assembly as a whole could be convened which itself would then have to determine both the extent and duration of the emergency powers granted to government.
As is often the case, Hayek is quite milquetoast here, assuming that the civil government ought to enjoy significant leeway in what it can do during an emergency. But even this highly moderate view of Hayek's would be an immense improvement from the current status quo, which is one in which governors can appoint themselves de facto dictators for an open-ended amount of time, and in which the only way of ending the one-man rule is for the legislature to take extraordinary measures. It's a truly odd state of affairs in a country that claims—less convincingly with each passing day—to be a country that values the rule of law and opposes the arbitrary rule of a tiny number of privileged government agents.
Listen to the Audio Mises Wire version of this article.
Modern monetary theory (MMT) has a new champion, and a new bible. Stephanie Kelton, economics professor at SUNY Stony Brook, is the author of The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy. Professor Kelton was an advisor to the Bernie Sanders presidential campaigns, and her ideas increasingly find purchase with left progressives. It is certainly possible that she has a future either in a Biden administration or even on the Federal Reserve Board, which is a testament to how quickly our political and cultural landscape has shifted toward left progressivism. And left progressivism requires a "New Economics" to provide intellectual cover for what is essentially a political argument for painless free stuff from government.
Kelton's essential argument, first advanced by MMT guru Warren Mosler in the 1990s, is quite simple: federal spending is unconstrained by revenue. Taxes function only to regulate demand and hence inflation; federal borrowing functions only to regulate interest rates. Sovereign government treasuries can create and spend as much money as they like to stimulate growth, especially when the economy is underperforming. If inflation spikes, taxes can be imposed to take money out of the economy.
Thus the only constraints on unlimited government spending are political. Unleashing ourselves from these "self-imposed" constraints, as Mosler puts it, is purely a matter of political will. Revenue is irrelevant to how you fund a government, so why not use government to fund the economy as a whole?
I direct readers to Dr. Bob Murphy's recent substantive review of Kelton's book here, as Bob does a thorough and effective job of debunking MMT and providing Austrian rebuttals to her claims regarding money, debt, and deficits. But I would make three quick points of my own:
- MMT is not modern. Kings have used seigniorage and currency debasement for centuries to fund their endeavors, always at the expense of their subjects.
- MMT is not monetary. It is primarily a fiscal approach to state finance, focused on tax policy as the economic accelerator and brake. Its roots predate the US Federal Reserve Bank, and in fact predate the present notion of "monetary policy." MMT finds origins in early twentieth-century chartalism, whose proponents opposed gold in favor of paper money issued by government and mandated as legal tender. It is also a genealogical heir to the Greenbackers of the late 1800s, who believed Congress should direct the issuance of unbacked paper currency.
- MMT is not a theory. It is accounting. In fact, it relies on an accounting subterfuge which bizarrely claims government deficits represent private (societal) surpluses. Because government is the font from which currency springs, all financial assets (denominated in that currency of issue) exist thanks to government! Thus, under "national accounting," the more government spends, the richer we the people get. When tax revenue is $100 but government spends $120, Americans are richer by $20. And so on. This is not a theory; this is accounting gimmickry almost purposefully designed to obscure what's really going on.
In the relentlessly circular world of MMT, government is the source of all finance and in effect all wealth. Taxpayers don't fund government, because after all government first provides the "tokens" (currency) taxpayers need to pay their IRS bills! Government funds taxpayers, which is broadly speaking what the American left really believes. It's a version of Obama's "You didn't build that" rewritten into policy.
But let’s not kid ourselves: the US federal government already finances its operations, at least in part, using conjured money. 2020 federal spending may exceed $8 trillion as Congress and the Trump administration blow the roof off the authorized $5 trillion budget with COVID relief bills. More than half of that amount, maybe as much as $4 trillion, will be "deficit financed"—a nice way of saying not financed by tax revenue. This is a first in American history, to put it mildly.
This $4 trillion will not simply issue forth from Treasury Department printing machines, as Kelton would prescribe, but the effect is the same: the Treasury issues debt to cover the shortage, which the "public" buys, implicitly understanding that the Fed will always provide a ready market for such debt. And where does the Fed get the money to buy Treasurys? It creates it from nothing, in Keltonite fashion.
Chicagoites, market monetarists, supply-siders, NDGP targeters, and other free market proponents frankly don't have much to say about MMT. They already accept the premise of "monetary policy," i.e., that government or central banks should issue and control money in society. They already accept treating the money supply and interest rates as forms of policy tools. They already accept deficits and taxes as methods to prime or slow the economy. So although they may object to how Ms. Kelton wants to use money politically, they can't much object to whether money is used politically.1
Kelton deserves credit for writing a book aimed at lay audiences instead of for her peers in academic economics. Unlike most of those peers, she seems genuinely interested in helping us understand how the world works. And unlike most left progressive academics, she also seems interested in helping average people improve their lot in life. Perhaps most importantly, she does not display the kind of contempt and anger toward Red State America we see from the Paul Krugmans and Noah Smiths.
It's easy for those of a free market bent to dismiss MMT out of hand, but the impulse to create something from nothing resides deep in the human psyche, and politics is where this impulse finds expression. We should not underestimate the allure of MMT in the midst of our current upheavals, because it appears to make possible every left progressive program: unlimited public works and federal jobs, useless and uneconomic green energy schemes, reparations for black Americans, Medicare for All, free college, free housing, and a host of others. MMT is the perfect economic proposal for those who sincerely and deeply believe wealth simply exists in America, and will continue to exist, regardless of incentives. All we need to do is figure out how to more fairly divvy it up—and so why not through government spending?
The promise of something for nothing will never lose its luster. MMT should be viewed as a form of political propaganda rather than any kind of real economics or public policy. And like all propaganda, it must be fought with appeals to reality. MMT, where deficits don't matter, is an unreal place.
- 1. Austrians have always decried state-ordered or central bank monetary expansion per se, because it produces no new wealth in society but benefits those closely connected to the new money. And Austrians consistently apply Say's law to refute the entrenched idea that demand and consumption form the foundation of a healthy economy.