Power & Market
Oil prices headed upward more rapidly this week, hitting $68 per barrel (WTI), which is the highest price since December 2014.
Even if adjusted for inflation (according to the CPI), oil prices are still near a four-year high.
Trump took to Twitter this week to attempt to blame OPEC for the high prices, stating "Looks like OPEC is at it again. With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!"
While OPEC can no doubt take some credit for pushing down production totals, Trump had best look in the mirror if we wants to find another major contributor to the recent rise in prices.
After all, prices haven't exactly been helped downward by the Trump administration's continued promises of ongoing military action in the region. Although Syria is not an oil exporter, interventions that threaten to destabilize the region further aren't a boon for consumers of oil.
Essentially, what we have now is a president who is threatening a war in the Middle East, a trade war with China, and new sanctions against Iran.
An additional potential threat lies with Washington's habit of imposing and expanding sanctions on Russia. As Julian Lee at Bloomberg notes:
President Donald Trump already has Iran in his sights. The clock is ticking -- May 12 is the deadline for him to extend the waiver on sanctions that are suspended by the nuclear deal.
More recently he has turned up pressure on Moscow with a new raft of sanctions aimed at individuals and companies close to President Vladimir Putin.
In December, Russia — which is not a member of OPEC — had reached a deal with OPEC to limit its own production to keep prices up. Faced with uncertainly surrounding sanctions, it seems, Russia is now saying it will keep its options open when it comes to production.
But even if Russia wants to expand production, US sanctions may limit this ability since Russia needs capital to keep production going, and "[d]ue to sanctions and the inability for Russian energy companies to obtain funding in U.S. dollars, Russia often has to turn elsewhere for backing, including costlier Chinese funding."
That could impact total production, and thus drive prices up further.
Given that Russia vies with Saudi Arabia and the US to be the world's top oil producer — It was number 3 in 2017 according to the EIA — policies that lead to cuts in Russian production will lead to higher global prices, all else being equal.
In 2017, Russia provided 12 percent of global production, and Iran is an additional 5 percent.
If Trump were truly concerned about oil prices, he'd brush off continued efforts by Washington interventionists searching for yet more ways to isolate and limit trade with Iran and Russia.
Moreover, openness toward oil-exporting states is all the more important since "[g]lobal oil supply has already been tightened by the OPEC-led supply cuts, and boosted by the collapse in Venezuelan output and drop in Mexican production. The group is nearing "mission accomplished" in draining excess oil inventories."
In other words, if US policy succeeds in limiting production in any countries outside of OPEC — such as Russia — that's only helping OPEC.
As Ellen Wald at Forbes wisely suggested, though, Trump's blaming of OPEC for high prices is a savvy political move since the average America — who knows next to nothing about US sanctions, falling Mexican production, or the situation in Iran — will now associate pain at the pump with OPEC.
We already know that blaming foreigners is a winning political strategy — as with the current brewing trade war against China — so this tactic may work nicely also.
It's amazing what you can find in the Mises digital archives.
Here is a lecture by Ludwig von Mises on Socialism that he gave at the University of Houston. In the audience was a doctor from Lake Jackson, TX. After listening to this talk, he decided to run for Congress.
This was the only time Ron Paul met Mises, as he notes in his book Mises and Austrian Economics: A Personal View.
Because of my interest in individual liberty and the free market, I became closely associated over the years with friends and students of Mises, those who knew the greatness of Mises from a long-term personal friendship with him. My contact, however, was always through his writings, except on one occasion. In 1971, during a busy day in my medical office, I took a long lunch to drive 60 miles to the University of Houston to hear one of the last formal lectures Mises gave—this one on socialism. Although 90 at the time, he was most impressive, and his presentation inspired me to more study of Austrian economics.
Between Mises's Austrian accent and the recording quality of the 70s, it's not the easiest to understand. But still, a very neat piece of history.
In no area has President Trump differed more from his campaign rhetoric than the field of monetary policy. Yesterday Trump announced the nominations of Richard Clarida and Michelle Bowman to the Federal Reserve Board of Governors, with the former to fill the role of Vice Chair. Clarida’s nomination in particular illustrates how uninspiring Trump’s appointments have been, as he was a finalist for a Fed governorship under Obama until he withdrew his name from consideration. Interesting enough, doing so resulted in Jay Powell, Trump’s new Fed Chair, to fill the position.
Richard Clarida, a former Bush Treasury official, currently serves as a Columbia University professor and an adviser to Pacific Investment Management Co. He is a New Keynesian who has published a great deal on “Optimal Monetary Policy.” (Guido Zimmerman has an interesting QJAE article on the topic which references some of Clarida’s work.)
In terms of his policy views, he offers an interesting contrast to fellow Marvin Goodfriend – whose nomination has currently been stalled in the Senate. To Clarida’s credit, he reject’s Goodfriend’s support for negative interest rates – going so far as to question their legality for the Fed. In his advisory role at Pimco, his analysis has questioned the effectiveness of contemporary monetary activism. As he co-wrote in a June 2016 analysis:
In recent years we have described “riding a wave” of central bank interventions, as a range of unconventional policies have been rolled out across countries, driving asset price returns. This wave-riding has worked well in the past. Looking out over the secular horizon, however, diminishing returns to central bank interventions – and the potential for policy activism to do more harm than good, notably in the case of negative policy rates – advise against such an approach.
Of course he also differs in one area where Goodfriend is good, the use of the Fed’s balance sheet. Goodfriend has warned that the Fed’s buying of non-Treasury assets, like mortgage backed securities, gets it into the business of allocating capital. Instead, Clarida thought the Fed was too modest in buying up assets following the financial crisis.
Clarida thought the Fed could effectively respond to downturns by committing to buying as many bonds – including mortgage bonds and corporate bonds – as necessary to "cap" interest rates at the levels it wants:
Much of the existing literature either misses entirely or under-appreciates how robust an LSAP [large-scale asset purchase] program can be at lowering bond yields and/or credit spreads...a central bank can everywhere and always put a floor on any nominal asset price (or set of nominal asset prices) for as long as it wants...So long as the central bank is willing to buy an unlimited volume of those bonds (potentially including the entire outstanding stock) at the interest rate it wishes to put a ceiling on, it will succeed. And of course, the above reasoning also applies directly to an Lsap program targeted at corporate bonds or mortgage backed securities.
The Fed successfully capped U.S. government borrowing costs in the 1940s, and this experience was cited by the Fed's staff in mid-2003. While the idea failed to gain traction among American policymakers, the Bank of Japan has successfully used "yield curve control" to limit yields on Japanese government bonds since 2016. Clarida's position in 2010 suggests he would be keen on something similar, perhaps also including mortgage bonds and corporate bonds, should he be at the Fed during the next downturn.
In terms of Fed reform, Clarida is likely to be an ally for House Republicans who have pushed to make the Fed adopt a rules-based monetary policy framework. Clarida has long written about the advantages of a rules-based framework and even has his own “forward-looking” version of the Taylor Rule.
As a voting Fed member, Michelle Bowman will also have an impact on the future of monetary policy – but as far as I can tell she has made no public comment on the subject. Rather than being an economist, she’s an attorney who had a long career as Washington staffer. Her employers include Senator Bob Dole, House Transportation Committee, the House Oversight Committee, FEMA, and Homeland Security Secretary Tom Ridge. Not the best resume for draining the swamp.
- A Development of the Theory of the Ricardo Effect by Philip Ruys Is Garrison's Notion of "Secular Growth" Compatible With the Solow Growth Literature? by Robert P. Murphy
- Secular Growth in Garrison's Model: A Comment by Nicolás Cachanosky
- A Note on Block-Hoppe Debate on Indifference by Igor Wysocki
- Freedom, Counterfactuals and Economic Laws: Further Comments on Machaj and Hülsmann by Michaël Bauwens
- A Comparison of Investment and Cash Building of Savings: A Rejoinder by Alexandru Pătruți
Scandinavian Unexceptionalism: Culture, Markets, and the Failure of Third-Way Socialism by Nima Sanandaji. Reviewed by Per L. Bylund
Public Policy, Productive and Unproductive Entrepreneurship: The Impact of Public Policy on Entrepreneurial Outcomesby Gregory M. Randolph, Michael T. Tasto, and Robert F. Salvino Jr., eds. Reviewed by Per L. Bylund
The Captured Economy: How the Powerful Enrich Themselves, Slow Economic Growth, and Increase Inequality by Brink Lindsey and Steven M. Teles. Reviewed by David Gordon
Mark Pulliam of Misrule of Law has written a touching tribute to Sylvester Petro, one of the great labor law scholars of the 20th century.
Petro was also an a dear friend and early supporter of the Mises Institute, and we are proud to offer his book The Labor Policy of the Free Society for free in our online library. In fact, as Pulliam notes, Petro's dedication to the ideas of Austrian economics and a proper understanding of contracts and property came at a personal cost:
Why is Petro relatively unknown despite his prolific writing? Part of the explanation lies in academic politics; Petro was an unabashed libertarian, a proponent of Austrian School economics, and an unrelenting critic of the National Labor Relations Act (particularly as interpreted and enforced by the National Labor Relations Board). Petro believed that the ideal regulation of labor relations consisted of enforcing consensual contractual arrangements and prohibiting coercion and the use of force, in accordance with the common law. The NLRA squarely rejects this paradigm, substituting instead a regime of cartel-style “exclusive representation,” mandatory “collective bargaining,” significant impairment of employers’ contract and property rights, and legal privileges for certain union conduct.
Perhaps no area of law is so full of myths as labor law, and nobody was more committed to debunking those myths than Petro was. During Petro’s teaching career (1950-1978), such views–although popular in the business community–were decidedly out of the mainstream in legal academia. While Richard Epstein found greater acceptance for the libertarian point of view in the 1980s, along with the advent of the “law and economics” movement that validated application of free market principles to legal analysis, during the 1950s and 1960s Petro was unfashionably ahead of his time. Petro, out-of-style during the heyday of his career, was largely forgotten by an increasingly politicized professoriate after he retired. Later generations of labor law professors, at home with the premises of the NLRA, found it easier to ignore Petro than to respond to his withering critique. The current generation of progressive intellectuals ruling the academy scorns Petro as an “ideologically driven” scholar holding “radically anti-union views.”
Though Sylvestor Petro passed away in 2007, the influence of his work continues to this day. For example, his arguments against public sector collective bargaining were cited in the pending Janus v. AFSCME, a case that could have significant ramifications for government unions.
Civil libertarians: a wholly unaccountable government agency records 100% of your electronic communications.
Media: a private firm, accountable to its board, shareholders, and customers, has been sharing some information you gave it.
In New Hampshire today, President Trump announced his plan for tackling the opioid crisis. The main points from the plan, as reported by Axios, are:
- Work with coastal services and shipment services to set up screening technologies to detect illicit substances that are being shipped into the country.
- Support research and development efforts for technologies and additional therapies designed to prevent addiction and decrease the use of opioids in pain management.
- Reduce demand and the overprescription of opioids.
- Allocate funds for initiatives related to opioids to help states transition to a nationally interoperable Prescription Drug Monitoring Program network.
- Increase support for state and local drug courts to provide offenders with access to treatment "as an alternative to or in conjunction with incarceration, or as a condition of supervised release."
- Urge Congress to pass legislation that tightens sentencing penalties for drug dealers trafficking certain illicit opioids.
- Impose appropriate criminal and civil actions to hold opioid manufacturers accountable for any unlawful actions, and also screen federal inmates with opioid addiction and connect them to treatment services.
In short, it appears the Trump Administration's main objective is to ramp up law enforcement, spend taxpayer money on "research", and aim to "reduce demand," likely by increasing restrictions on physicians - which often pushes patients into more dangerous illicit drugs.
Sadly nothing here touches on the largest driver of the opioid crisis which, as Mark Thornton has explained, is a pain epidemic going on in America. Unsurprisingly, given the rhetoric from the administration, the idea of removing Federal restrictions on marijuana - something that appears to help actually address opioid usage - was not suggested.
Of course another much talked about part of the president's proposal is to introduce the death penalty for large scale dealers. This invites the question: should this mean the end of the CIA?
In the face of staggeringly high tax rates and growing housing costs, people are abandoning San Francisco at such a rate that U-Haul prices have skyrocketed in the area.
The start of the NFL off-season offers an amusing illustration of just how significant the California tax burden is compared to other states. As Mike Florio of ProFootballTalk notes, when center Daniel Kilgore was traded from the 49ers to the Miami Dolphins, he saw his roster bonus increase by over $300,000 dollars thanks to Florida not having California's 13.5% income tax.
Unfortunately for Kilgore, he won't be quite so lucky with his remaining $2.525 base salary. The majority of states with professional sports teams have what is often referred to as a "jock taxes," where states (and some times cities) steal from the game checks of pro athletes. It was these taxes that actually led to Cam Newton having to pay the State of California for the privilege of losing in Super Bowl 50. While Kilgore will avoid them every time he plays a home game, only one of his 2018 away games (against the Houston Texans) is in a state that doesn't engage in this practice.1
Still, Kilgore was a financial winner thanks to his trade to South Beach. Now whether the extra cash is worth moving from Jimmy Garrapolo to Ryan Tannehill is another matter altogether.
- 1. Along with Florida and Texas, Washington and Tennessee are the only other states without these taxes. Nevada will be the fifth, after the Raiders move to their new tax-payer subsidized stadium.
President Trump’s planned 25 percent tariff on steel imports and 10 percent tariff on aluminum imports may provide a temporary boost for those industries, but the tariffs will do tremendous long-term damage to the American and global economies. Tariffs raise the price of, and reduce demand for, imported goods. Tariffs ensure the preferences of politicians, instead of the preferences of consumers, to determine how resources are allocated. This reduces economic efficiency and living standards.
Some justify these economic inefficiencies as being worth it to save American jobs. This ignores how tariffs increase costs of production for industries reliant on imported materials to produce their products. These increased costs lead to job losses in those industries. For example, President Trump’s proposed steel tariff could cost nearly 40,000 jobs in the steel-dependent auto manufacturing industry. Tariffs also cause job losses in industries reliant on exports. This is especially true if — as is likely to be the case — other countries respond to President Trump’s actions by increasing tariffs on US products.
Many of President Trump’s critics do not themselves support true free trade, which is the voluntary exchange of goods and services across borders. Instead, they support the managed (by government) trade of NAFTA and the World Trade Organization (WTO). NAFTA and the WTO promote world government and crony capitalism, not free markets. Any libertarian or free-market conservative who thinks the WTO promotes economic liberty should remember that the WTO once ordered Congress to raise taxes!
Foreign manufacturers may make convenient scapegoats for the problems facing US industry. However, the truth is that most of the problems plaguing American businesses stem from the US government. American businesses are burdened by thousands of federal regulations controlling every aspect of their operations. The tax system also burdens businesses. Until last year’s tax reform bill, the US had the highest corporate tax rates in the developed world. The tax reform bill lowered corporate taxes, but the US corporate tax rate is still higher than that of many other developed countries.
The United States not only spends more on military weapons than the combined budgets of the next eight biggest spending countries, but also spends billions subsidizing the defense of developed counties like Germany, Japan, and South Korea. Bringing US troops home from these countries is an excellent place to start reducing spending on militarism.
The biggest cause of our economic problems is the Federal Reserve. America’s experiment with fiat currency has enabled a system based on private and public debt. This makes trade imbalances inevitable as the US government needs foreign investors to purchase its debt. Foreign investors get the money to purchase the US government’s debt by selling products to American consumers. A trade war could cause foreign investors to stop buying US debt instruments and could end the dollar’s world reserves currency status. This would cause a major economic crisis — but at least it would stop our shores from being flooded with “cheap foreign goods.”
President Trump’s claim that trade wars can be easily won is as credible as the neoconservative claim that the Iraq War would be a cakewalk. A trade war would likely push the global economy into a recession or worse. Instead of imposing costs on American businesses and consumers and putting those whose livelihoods depend on imports out of s job, President Trump should address the real causes of our economic problems: the welfare-warfare state, the IRS, and the Federal Reserve.