Power & Market

The Real Tax Scandal

06/09/2021Jeff Deist

The self-styled investigative journalism outlet ProPublica recently published private IRS tax information—presumably embarrassing private tax information—for a host of ultrawealthy and famous Americans. I say "self-styled" because the organization claims a pretty lofty and self-important mission to use the "moral force" of journalism on behalf of the public interest against abuses of power. But does this apply to state power, such as when a federal agency employee illegally leaks sensitive material to media? And why is it presumed to be in the public's interest to have rich billionaires pay more in taxes? Maybe we'd rather have them investing in their companies, or at least buying megayachts and Gulfstream jets, rather than sending more resources to the black hole of DC? Why is the public interest always defined as "things progressives like"?

ProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years. The data provides an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.

And as an aside, it's worthwhile to recall the tremendous whopper of a lie President Franklin Delano Roosevelt told back in 1935—namely that no one other than the program's administrators would ever know your private Social Security number. Today, of course, Social Security numbers are the absolute linchpin of one's entire financial identity, and known by everyone from the IRS to your local credit union.

Yet the real scandal here is not the IRS leak, which was no doubt internal and designed to gin up public support for Biden's proposed tax increases while advancing a progressive inequality narrative. Political capture of federal agencies is nothing new or shocking; that's what presidents do (or have done to them). Nor is it particularly scandalous that the wealthiest people sometime pay little in federal income tax, at least relative to their income. After all, elites by definition tend to wield power rather than fear it, especially when it comes to state power. And they have lobbyists and accountants to make sure taxes remain something the little people pay.

No, the real scandal is this: federal income taxes are almost entirely about control and not revenue. The byzantine rules and selective enforcement are perfectly designed to keep ordinary people with limited means in mortal fear of the IRS. A tax audit, like cancer, can come out of nowhere and ruin your life. In some cases it can land you in jail. Tax enforcement is the ultimate check on the public's behavior; after all, who takes up the cause of a tax cheat? For middle-class Americans the IRS is an existential threat, but for Jeff Bezos it is another business expense to be minimized.

And as for revenue, consider that Uncle Sam borrowed nearly half of the dollars spent by Congress in fiscal 2020. With covid shutdowns, federal income taxes amounted to about $3.42 trillion, while spending was $6.55 trillion. If the federal government can finance 50 percent of its annual spending through deficits, why not 80 percent or 100 percent? Why do we need the IRS terror regime at all?

Again, this is about control. Progressives will never give up the income tax for this very reason. Proponents of modern monetary theory, for example, are almost uniformly left progressive in political outlook. These are the people cheering Biden's >$1 trillion infrastructure spending bill because of their fervent belief that deficits don't matter.

MMT rests on two central assertions.1 First, sovereign governments with their own currencies can print as much money as needed to fund operations without fear of insolvency or bankruptcy—unless a purely political decision is made to go broke. Government deficits per se do not matter, because the only real constraint in any economy is the amount of real resources available rather than the amount of money. In fact, MMT views government debt as private financial wealth—money inserted into the economy by the central state but not taxed back. 

Second, sovereign governments with their own currencies can require tax payments to be made in that currency. Therefore any overheating in the economy in the form of inflation resulting from too much money can be fixed by pulling some money back to the Treasury via tax increases. This is the ostensible reason MMTers are not quite ready to give up on taxes altogether.

Yet I've never heard an MMTer express support for even a one-year moratorium on taxes to stimulate a bad economy (after a shock such as a worldwide covid pandemic). Why is this? If inflation really is so low, with the economy struggling in postcovid recovery mode, why pull any money back into federal coffers? Just damn the torpedoes! The bigger the deficit, the more "private wealth" we all have! Perhaps there is a political element to all the MMT jargon after all, one which relies on taxes both for control over people and to advance an advantageous but hollow trope about taxing the rich.

Federal income taxes have always been a tool for compliance. The IRS has always been a tool for presidents to go after rivals—or for rivals to go after presidents. Why would we expect otherwise?

  • 1. See Dr. Robert P. Murphy's definitive critique of MMT and Professor Stephanie Kelton's book here.
Image source:
TravelingOtter | Flickr | https://www.flickr.com/photos/travelingotter/4772935322
When commenting, please post a concise, civil, and informative comment. Full comment policy here

The "Woke" Fed

06/01/2021Ron Paul

President Joe Biden has ordered the Financial Stability Oversight Council to prepare a report on how the financial system can mitigate the risks related to climate change. The Financial Stability Oversight Council was created through the Dodd-Frank financial regulatory reform act and is supposed to identify and monitor excessive risk to the financial system. The council is composed of the heads of the major federal financial regulatory agencies, including the Federal Reserve.

Federal Reserve Chair Jerome Powell is no doubt pleased with Biden’s order. Powell has been pushing for the Fed to join other central banks in fighting climate change. Among the ways the Fed could try to mitigate the risks related to climate change is by using its regulatory authority to “encourage” banks to lend to “green” businesses and deny capital to “polluters.” The Fed could also use “quantitative easing” to give green industries an advantage over their non-green competitors. Another way the Fed could “fight climate change” is by committing to monetizing all federal debt created by legislation implementing the Green New Deal.

Climate change is not the only area where the Fed is embracing the agenda of the “woke.” Some Federal Reserve Banks have taken the lead in a series of events called “Racism and the Economy” that are concerned with dismantling “systemic racism.” The Fed’s commitment to ending systemic racism could lead the central bank to requiring that banks and other financial institutions further relax their lending standards for minorities. The role the Community Reinvestment Act played in the 2008 housing meltdown shows that when government forces financial institutions to give loans to otherwise unqualified applicants, the recipients of those loans often are unable to make their payments, lending to foreclosures and bankruptcies.

Racial justice arguments could also justify an easy money, low interest rate policy on the grounds that curtailing money creation slows economic growth, disproportionately harming minorities.

The Fed may court favor with the Biden administration and its congressional allies by going woke. However, it will face a backlash from those who oppose expanding government power to address nonexistent threats of climate change and to promote the lie that free markets are causing systemic racism. This backlash will be fueled by rising anger over widespread price increases. This will increase the already strong public support for the Audit the Fed legislation. A complete

Federal Reserve audit will provide to Congress and the American people the truth about the Fed’s conduct of monetary policy, including how politics affects the Fed’s actions.

The use of the woke agenda as an excuse to further politicize the allocation of capital and continue to expand the Fed’s easy money, low interest rate policy will hasten and deepen the next economic crisis. This crisis will either be precipitated by or result in the rejection of the dollar’s world reserve currency status. It will also likely result in the collapse of the entire Keynesian welfare-warfare system. Unfortunately, there is a likelihood that the current system will be replaced with a government even more authoritarian than the current one. But, if those of us who know the truth can educate enough people about liberty, we can make sure the next economic crisis leads to a rebirth of limited government, free markets, and individual liberty.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

The Federal Reserve’s Ballooning—and Risky—Balance Sheet

05/28/2021Bill Bergman

The Fed has embarked on a massive expansionary quest in recent years. In 2020, total Reserve Bank assets rose from $4.2 trillion to $7.4 trillion amidst the pandemic and related government lockdown and fiscal “stimulus” policies. That was roughly three times the extraordinary growth in the consolidated balance sheet for the Reserve Banks in the 2008-2009 financial crisis. And in the latest weekly “H.4.1” release, total assets were up to $7.8 trillion – rising about a hundred billions dollars a month so far this year. 

In banking, rapid growth isn’t hard to achieve, if you are willing to assume risk. In fact, rapid growth should always be questioned as a sign of possible undue risk taking. How about the Federal Reserve Banks? How much risk are they taking, and on whose dime? 

To answer these questions, we first have to identify the accounting principles on which the Fed’s balance sheet is based. 

In the United States, there are “Generally Accepted Accounting Principles” (GAAP) – but there are different strokes for different folks. Private sector companies follow accounting standards set by the FASB – the Financial Accounting Standards Board. State and local governments follow a different set of “generally accepted” rules that are set by the GASB – the Governmental Accounting Standards Board. The federal government of the United States follows yet another set of “generally accepted” principles, set by the FASAB – the Federal Accounting Standards Advisory Board.

Put aside for now the question whether “generally accepted accounting principles” can even exist in a world where there are more than three sets of them, including international accounting standards. Who sets the accounting standards for the Federal Reserve?

There are two main parts of the “Federal Reserve.” The Federal Reserve Board of Governors is an independent regulatory commission, a government agency, and it follows the standards for the federal government set by the FASAB. But the Federal Reserve Banks are another story: they follow accounting standards set by the Federal Reserve Board of Governors! Those standards are not GAAP.  

One way the Fed’s principles for the Reserve Banks differ from GAAP matters for understanding material risks facing the Reserve Banks, and in turn, the U.S. Treasury.

The Reserve Banks’ assets include trillions of dollars of bonds, most of them government or government-backed bonds. Like any bond portfolio, those investments are subject to interest rate risk. When interest rates go up, bond prices go down (and vice versa).

Under the Board of Governors’ accounting standards for the Reserve Banks, “unrealized” losses in bond investment value do not immediately find their way into the financial statements. Only when losses are “realized” (for example, when the bonds are sold) does loss enter the financial statements.

Today, short and long-term interest rates on government bonds rest near historic lows, important in part because the Fed massively expanded its purchases of government bonds. But low interest rates can’t be taken for granted, particularly if we get significantly higher inflationary expectations -- which appear to have begun to sprout in recent weeks.  

If we get significantly higher interest rates for that reason, the Reserve Bank balance sheet impact from losses on securities assets would arrive if the losses become “realized” – a realistic prospect if the Federal Reserve  reverses course and starts selling off securities as a means of conducting monetary policy amidst higher inflationary expectations.

This impact, and risk, is higher for entities with significant financial leverage. And the Reserve Banks are some of the highest-leveraged banks on the planet. On the 2020 balance sheet, which reported $7.4 trillion in assets, Reserve Banks reported “only” $40 billion in total capital – a capital/asset ratio of one-half of one-percent.

For a given percentage change in the value of assets, highly leveraged entities will see a greater percentage decline in the value of capital. In this case, Reserve Banks would begin reporting negative capital after losses amounting to just one-half of one percent of their total assets.

That is, if they were required to post the losses. Under current standards set by the Board of Governors, they won’t begin to do that until the losses are realized in sales on the open market. And even then, the Reserve Banks won’t show a negative capital amount because the Fed sets its own accounting standards, a least for the Reserve Banks, and changes them as it sees fit.

Back in 2011, after the first spike upward in Reserve Banks’ balance sheet with the financial crisis, the Federal Reserve Board of Governors changed the accounting standards for the Federal Reserve Banks. These changes limited  the possibility that the Reserve Banks’ capital account could ever turn negative. And more recently, some have argued that the Fed’s control over its own accounting principles could allow for even more creative ways of cushioning the blow from any investment losses.

But a free lunch for the Fed isn’t necessarily a free lunch for the rest of us.

The problem (and risk) facing the Treasury (and the rest of us) is compounded by the Fed’s legally dubious new practice of paying interest on reserves that banks maintain with the Reserve Banks. If short-term interest rates rise amidst heightened concern about inflation, under current policy, the Fed would pay higher interest on the massive multi-trillion dollars worth of reserve balances currently at the Reserve Banks.

Introducing its own balance sheet, a balance sheet with about $6 trillion in assets against nearly $33 trillion in (understated) liabilities, the federal government gives us the following comforting words:

There are, however, other significant resources available to the government that extend beyond the assets presented in these Balance Sheets. Those resources include stewardship PP&E in addition to the government’s sovereign powers to tax and set monetary policy.

In other words, we should be comforted that our government will be able to take our money away, or inflate the value of the dollar away, to pay off its debts. 

Maybe we shouldn’t be comforted by these assertions, especially because they arrive in a document theoretically providing  accountability of the government to the real sovereign in the United States – the people.

The Federal Reserve has returned earnings regularly to the Treasury for decades. And the government appears to see the Fed and monetary policy as its ace in the hole. But this is not  necessarily an ace in the hole for the people.

When justifying the fact that the Fed sets its own accounting standards, Fed leaders regularly assert that the value of central bank independence warrants this state of affairs. But how independent is the Fed, really, under current law and policy?

Back in 2010, the opinion of the Government Accountability Office (GAO) on the financial statements of the U.S. Government began including a cautionary note about the risks of the Fed’s ballooning balance sheet to the Treasury. The GAO opinion letters stopped including these notes in 2015. Now that the Fed’s balance sheet is ballooning again, these issues deserve greater scrutiny.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

The Benefits of "Price Gouging"

05/20/2021Connor Mortell

With the recent lack of availability in gasoline, Joe Biden came out with a clear message against price gouging stating:

I also want to say something to the gas stations: do not, I repeat, do not try to take advantage of consumers during this time. I’m going to work with governors of the effected states to put a stop to price gouging wherever it arises. And I’m asking our federal agencies to stand ready to provide assistance to state level efforts to monitor and any price gouging at the pump. Nobody should be using this situation for financial gain.

In Human Action, Ludwig von Mises left us with the perfect response to this:

Economics does not say that isolated government interference with the prices of only one commodity or a few commodities is unfair, bad, or unfeasible. It says that such interference produces results contrary to its purpose, that it makes conditions worse, not better, from the point of view of the government and those backing its interference.

This has been explained by some of the most simple and well known economics that have been explored in the link above by Mises, as well as by almost all other economists. The price system operates largely in response to supply and demand. As supply and/or demand shifts, the price shifts in response. In a natural market this current gas crisis would be resolved by allowing the price to the market forces at play. A pizza delivery guy may be willing to pay more to access gas as his particular conditions lead him to more highly value it immediately and will chose to take the hit in exchange for continued payment at his job. A job that has nothing to do with driving, however, will give that individual the option to potentially wait to get gas for a week or so while the supply builds up because that individual would find the cost of walking to work for a few days less in their own subjective value than the price of gas for the moment. As well, this would deter panic buying as the heightened price would ward off those buying more gas than they deem they need. Lastly, a free flowing price would lead to higher prices in states where it is needed most, encouraging suppliers to sell gas their more urgently, thus resolving the problem faster. However, in a world where we prevent price gouging, we see the results that we are seeing now: shortages.

The economics of this are fairly simple, however, the politics of price gouging get a little more murky. Even among those who agree with all of what I’ve set out already, it is not uncommon to see proponents of anti-price gouging laws. This is because the majority of instances in which price gouging enters into the conversation are in response to some kind of emergency. It is very rare that someone is concerned about the newest pair of shoes on the market being price gouged because they aren’t considered necessities. Whereas when hurricane season starts - or even more urgent, when a hurricane is actively detected on its way in – and prices start to rise sharply for water and batteries, the average individual is much more concerned that people will find themselves without necessities during an emergency. While the economics still hold and that option is still preferable to shortages, there is some political capital in convincing the people that you’re advocating for their ability to have low priced goods when they need them most. In addition to the economic principles listed above, this argument can be easily dismantled by taking it to its logical conclusion: if lower priced goods during an emergency are both preferable and possible, why stop at a dollar per water bottle or batteries? Why not drop to 50 cents? A quarter? Free? And if free is possible – why stop during an emergency? Why not provide that same thing all the time? Inevitably the logic of price controls has to break.

However, this particular situation leaves free market economists with a window of opportunity on which we should capitalize: this is not an emergency. Don’t get me wrong, this is in fact a very serious problem. However, houses are not collapsing, people are not starving en masse, rioting is not taking over. While it is the result of nonnormal circumstances, the effect on a day to day citizens is not much different from just a failure in supply chain. As a result now would be the perfect opportunity to finally demonstrate the benefits of the price system without the risk that would be inherent in an emergency situation. While I’d advocate for freedom in the price system under all circumstances, the standard claims against it are completely absent during this event. There has never been a better time to normalize so called price gouging. 

When commenting, please post a concise, civil, and informative comment. Full comment policy here

The Role of the Nuclear Family in Western Europe's Economic Development

05/17/2021Lipton Matthews

Though rarely stated the nuclear family—as opposed to the extended family or clan—played a seminal role in the growth of Western capitalism. Success in a modern economy requires us to trust strangers and think creatively. These traits were nurtured by the individualistic ethos of the medieval nuclear family. Not only were nuclear families, child-centered, but there was no obligation for parents to provide children with an inheritance. As such, children were motivated to plan long-term and work hard. Upon transitioning to adulthood, one was expected to exit the family home by relocating elsewhere and acquiring relevant skills.

Moreover, in northwestern Europe working prior to marriage was the norm for both men and women. Because people often pursued marriage at a later age, historians dubbed this development the Western European Marriage Pattern. This idea was popularized by John Hajnal who noted that since the sixteenth century parts of Europe have been characterized by late female marriage, high female celibacy, and the establishment of separate households for married couples resulting in the dominance of nuclear families.

Human capital formation also became an important pillar of the nuclear family. Parents were socially ambitious and wanted their children to eclipse them in status, so investing in education became a priority. Sociologist Brigitte Berger in her pathbreaking text The Family in the Modern Age opines that nuclear families could adapt to changes easier because they were freed from the constraints of the traditional extended family. So, essentially, the flexibility of the nuclear family stimulated creative thought that could unleash innovations.

Without a doubt, the transition to industrial capitalism for Western societies was more efficient, because the prevalence of the nuclear family minimized reliance on clans. Since citizens were no longer beholden to the strictures of the extended family, one had to develop a universal morality transcending loyalty to kin groups. So consequently, trusting strangers was not viewed as unfavorable. By increasing trust, the universal morality engendered by the nuclear family made it profitable to form business relationships with foreigners. Even in contemporary societies tribalism cultivates low outgroup trust and by extension prevents the emergence of pro-market institutions. Taking these factors into account the importance of the nuclear family in generating widespread trust is indeed an achievement.

Similarly, courtesy of economist Avner Greif, there is hard data indicating that medieval societies dominated by kinship groups were less efficient: “Monasteries, fraternities, and mutual-insurance guilds provided social safety nets against famine, unemployment, and disability. Most of the population belonged to such fraternities and guilds, at least in England. Because corporations provided social safety nets that were alternatives to those provided by kinship groups, they enabled individuals to take risks and make other economic decisions without interference by members of such groups. Relative to a society dominated by kinship groups, the nuclear family structure increased capital per worker by encouraging later marriages and fewer children, and it led to a more efficient distribution of labor and knowledge by facilitating migration.”

Interestingly, apart from the role of the nuclear family in fostering impartial norms, anthropologist Peter Frost suggests that evolution may have selected for weaker kinship ties in the west: “In North and West of the Hajnal line, kinship has been a weaker social force in relations since at least the early Middle Ages and perhaps the Mesolithic. Because of this weaker kinship environment, northwest Europeans cam to view social relations more through the lens of universal moral rules. Such rules were enforced by monitoring not only other community members but also oneself. The new mindset eventually developed within the bounds of phenotypic plasticity, but over time it would have been gradually hardwired through selection for independent social orientation and universal rule adherence...”

One cannot appreciate the rise of capitalism in the West without studying its relationship to the nuclear family. Studying the family can yield important insights into the socio-cultural evolution of society and capitalism. Economists commit a massive disservice by de-emphasizing the relevance of the family as an economic institution.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

These Are the Real Effects of a Minimum Wage Law

05/14/2021Dakota Hensley

In recent years, there's been a movement among the American Left to increase the minimum wage to $15 an hour. This is under the assumption that having a minimum wage helps workers and makes corporations pay their fair share. However, this is the opposite effect of a minimum wage, especially one that high. It keeps low-skilled (often black or other ethnic minority) workers from finding employment, forcing them to depend on government, and leads to closures of small businesses (especially black-owned businesses) which benefits corporations. To truly help workers and small businesses, we must abolish the minimum wage.

In 1931 came one of the first minimum wage laws, the Davis-Bacon Act. It required $2,000 (about $35,000 today) for contractors working on public works projects. It was introduced by Pennsylvania Senator and former Secretary of Labor James Davis and New York Congressman Robert Bacon. Davis was a eugenicist and Bacon was a racist who introduced a labor law because a Veterans' Bureau Hospital in his district had been built by black workers. As with Davis' other bill, this act was designed to keep low-skilled workers (mostly black) from being employed. The other Congressmen made it clear this was why they backed Davis-Bacon. Missouri Congressman John Cochran reported that he'd received "numerous complaints in recent months about southern contractors employing low-paid colored mechanics" and his colleague, Congressman Clayton Allgood, said that "cheap colored labor...is in competition with white labor throughout the country." Thirty years later, in the 1960s, minimum wage laws again caused black people to lose their jobs. Farmers were required to pay $1 an hour (about $9 today) instead of the $3.50 a day (about $31 today) they were being paid before. This led to thousands losing their jobs, causing one man's wife to say the dollar meant nothing if her husband didn't have a job.

While minimum wage advocates don't advocate for it for the racist reasons of Davis and Bacon, the effects are still discriminatory towards black people. Black workers tend to occupy low-skilled or semi-skilled trades. Immigrants, inner-city minorities, and young people also make up the majority of low-skilled trades. Making the hiring of these workers more expensive leads to poverty, homelessness, crime, and a host of other societal ills. Without a minimum wage, these low-skilled workers and their employers can agree on a wage and the worker can work as long as he or she wants. Once they have the skills (from, say, attending a trade school) and the work experience, they can move on to greener pastures to find an employer willing to pay them more. A minimum wage puts the employer in control, giving them plenty of reasons not to hire the lower-skilled. Without it, the worker is in control.

If the minimum wage is anti-corporate, why does Amazon, Google, Target, and Hobby Lobby support a $15 an hour minimum wage? It keeps out competition. They can afford almost $30,000 per employee. Small businesses can't. As USA Today notes, "The path would be clear for even more market dominance of big business and Wall Street, gained at the expense of Main Street." People couldn't buy local and corporations could expand their power.

This is especially true of black-owned small businesses. Black businesses have less money to find employees and must often use their own money to fund their business. They have less employees as a result. Imagine if they had to pay $30,000 per employee out of their own pocket. They'd lose the few employees they already have. That would kill black entrepreneurship and doom black communities. This could lead to gentrification where black communities become white and the original black residents are kicked out.

According to the CBO, a minimum wage hike would lift 900,000 out of poverty but put 1.4 million out of work. Young, less educated people account for a disproportionate share of those job losses. These low-skilled workers may not have the skills to get another job. We forget what a low-skilled job is. It's dishwashing, being a retail cashier, being a receptionist, and being a laundry attendant. It's not plumbing or automotive mechanics or carpentry. Those jobs pay tens of thousands. Those jobs require trade school, not just a high school diploma. A minimum wage punishes those who were born poor and weren't given the opportunities to go to trade school or college and get those skills.

The best way to help labor is to allow workers to negotiate the wages they want, not to apply a one-size-fits-all wage. The best way to save small and minority-owned businesses is not to make every employee an expensive commodity. Minimum wage laws hurt low-skilled, often black, workers. Implementing these laws lead to the growth of big business at small business' expense. To be truly pro-labor and anti-corporate, we need to abolish the minimum wage.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

The Swiss National Bank's US Stocks: $150 Billion and Counting

05/14/2021Robert Aro

This time last year, the Swiss National Bank (SNB) had US stock holdings of $94 billion. The portfolio of Switzerland’s central bank has grown by $56 billion since, reporting ownership of $150 billion worth of US listed stocks as at Q1 2021. Apple is currently the largest holding, at $8 billion, but the portfolio contains countless smaller publicly traded companies, like GameStop, valued at $25 million at quarter end this year.

At the recent annual general meeting, SNB Chairman Thomas Jordan said:

We would like to live in a world where the interest rates are positive. But in the current situation negative interest rates as well as readiness to intervene in the currency markets are essential.

Per the Chairman, it’s not the bank, the world just isn’t quite right. Apparently, due to the “current situation,” the bank is forced to act accordingly. As reported, despite a recent devaluation of the Swiss franc, the currency is still “highly valued.” For this reason, its appreciation must be moderated via monetary intervention.

Unfortunately, these actions create a few unconventional outcomes: a policy rate of minus 0.75% and the purchase of over 2,000 US publicly traded stocks in order to manage the foreign exchange market. This “essential” intervention has an upside for the SNB, a profit of $23 billion USD for year end 2020, of which nearly half came from foreign currency positions such as stock gains and dividends.

As if manipulation of foreign exchange markets is nothing more than routine policy, Reuters reports:

The SNB spent nearly 110 billion Swiss francs ($120 billion) on currency interventions in 2020…

It seems unfathomable that approximately $120 billion USD was spent by the SNB for the purpose of currency intervention during the year. This money was not the result of profit made from the sale of goods or services; the SNB is not a highly successful investment bank who is simply buying equities from past business dealings. Rather, it's a central bank. The purchases come from money creation for the purpose of buying stocks. This only works because they have a monopoly on one of the most desired currencies in the world. The SNB continues to do what only a handful of central banks can successfully get away with, for now.

Over the course of the year, they never wavered on this most lucrative of devaluation strategies. Their actions led to a hefty profit, money supply expansion of Swiss francs, and Switzerland having the lowest rates in the world. Like most central bank inflationary schemes, there is no end in sight. We are left to wonder what the value of the portfolio will be this time next year.

If this strategy works so well for Switzerland, there’s no reason the USA shouldn’t do the same. After all, the USD is still one of the strongest currencies in the world as well. But if the Fed employed the same strategy, buying $150 billion of stocks and making billions from dividend income, it would most certainly be considered problematic; the same sentiment should exist to the SNB.

It’s concerning why this story is only followed by a limited number of media outlets, and will likely never be important enough for mainstream economists to speak against. Few people in America or Switzerland seem to realize, nor care, what is going on. But it’s important to note the flagrant abuse of power, theft, and inflationist monetary policy that makes our already expensive stock market all the more expensive.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

The Socialists Who Supported Free Trade

05/14/2021Lipton Matthews

Many socialists think that protectionism benefits the poor. But these views deviate from the free trade tradition that can be found in some corners of socialist thought. Like liberal economists in the nineteenth century, some socialists also argued that protectionism served the interests of corrupt entrepreneurs. The forgotten contribution of socialists to the free trade tradition is clearly fleshed out in an article titled “Marx and Manchester: The Evolution of the Socialist International Free-Trade Tradition, c.1846-1946,” featured in The International History Review.

For scholars interested in unlocking the complex relationship between socialism and free trade this article is a must-read. Marc-William Palen ably disputes the notion that socialists are universally in favor of protectionism. However, he admits Marx and Engels proposed free trade because of the perception that it accentuated the socialist revolution: “Marx and Engels viewed the international turn to free trade as an advancement of the global capitalist project, the dawn of a new epoch of capitalist internationalism. For Marx, free trade was a progressive condition of industrial capitalism, moving it a step closer to socialist revolution. Protectionism, by contrast, was regressive and belonged to the pre- and proto-industrial capitalist era. For Marx’s close friend and patron Friedrich Engels, too, free trade was preferable to protectionism as the former would ‘expand as freely and as quickly as possible’ the capitalist system and thus hasten the destruction of ‘the whole system.”

Based on Palen’s presentation it appears that Marx and Engel advocated free trade due to the assumption that it would accelerate revolution. Yet he offers evidence indicating that both expressed genuine dislike for protectionism. Like classical liberals, Marx perceived protectionism as a function of backward economies. As Palen notes his condemnation of protectionism as archaic is quite revealing: “People are thus about to begin in Germany with what people in France and England are about to end. The old corrupt conditions against which these countries are rebelling in theory and which they only bear as one bears chains, is greeted in Germany as the dawn of a beautiful future.’’

Engel in his description portrays protectionism as being “at best an endless screw, and you never know when you have done with it. By protecting one industry, you directly or indirectly hurt all others, and have therefore to protect them too. By so doing you again damage the industry that you first protected and have to compensate it . . . and so on ad infinitum.” Interestingly, even Marx thought that protectionism fueled interstate conflicts, since antitrade policies could be construed as an act of aggression.

The tendency of protectionism to lead to war was also asserted by Karl Kautsky, as Palen reminds us: “The higher the tariff barriers between individual capitalist states grow, the more each of them feels the need to assure itself of a market which no one can exclude them from, and to gain supplies of raw material which no one can cut off,’ thereby creating an ‘arms race’ that ‘must grow ever greater and the danger of a world war come ever nearer.” In this arena, Kautsky, is like Kant who taught that trade nurtured international peace.

Probably, in the socialist tradition Eduard Bernstein is the most strident critic of protectionism. As such, Palen will be cited at length:

 Like Kautsky, Bernstein was consistent in his support for free trade over the course of his socialist political career. Bernstein believed free trade was not only progressive but also good for both the proletariat and the bourgeoisie. Also, like Kautsky (and Marx), Bernstein condemned List-inspired ‘infant industrial’ protectionism for creating geopolitical tensions and for being reactionary and atavistic, a throwback to the era of mercantilism and a stumbling block to modernization. His critique of militarism – for which he blamed jingoism, nationalism, protectionism, and the undue influence of arms manufacturers on German policymaking — owed much to the influence of later Engels. And like Kautsky, Bernstein’s critique shared much in common with Hobson and Schumpeter, as did his belief that free trade and industrialism were the foundation stones of a peaceful economic order, such that R. A. Fletcher posits that Bernstein was ‘not only fundamentally more British than German but also thoroughly imbued with the values of Cobdenite radicalism.

Moreover, the hostility of some socialists to protectionism was not unique to Europe. Palen contends that during the Great Depression, American labor leaders were vehemently opposed to protectionism:

A Marx-Manchester ‘utopian’ planned supranational vision of free trade and peace prevailed not only among European socialist federal unionists, but also among socialist internationalists in 1930s and 1940s America. Under the political and intellectual leadership of Norman Thomas and Scott Nearing, American socialists renewed their Marx-Manchester commitments in response to the Great Depression and continued Republican protectionism.

Palen singles out Thomas for his raging denouncement of protectionism: “Under his leadership, the Socialist Party of America made sure to single out the GOP’s protectionist 1930 Smoot-Hawley Tariff, calling it ‘the most monstrous tariff legislation in the history of the country. . . . It has, in effect, declared economic war against the rest of the world and served to aggravate the instability of world economy and world trade.” Clearly, unlike their contemporary counterparts, socialists in an earlier tradition understood that protectionism did not elevate the poor.

Yet despite the evidence against protectionism as a tool to improve living conditions, it is gaining traction on the left and right. But socialists and their friends on the right can save us from the dangers of protectionism by applying the wisdom of the maverick thinkers discussed in this piece. I urge them to read Dr. Marc-William Palen.

Image source:
Image: Eduard Bernstein
When commenting, please post a concise, civil, and informative comment. Full comment policy here

Two Invisible Hands: Politics vs. the State

05/11/2021Nicholas Baum

In 1759, economist and philosopher Adam Smith wrote one of the greatest descriptions of the free market ever produced. Writing about a market economy based on voluntary exchange, Smith likened the process of self-minded producers catering to the consumers’ interests as a process managed by an invisible hand. He states, “Every individual … intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

This quote, perhaps the most famous passage from his book The Theory of Moral Sentiments, reveals both the morality and simplicity in which a free economy operates. We, as individuals, are not guided by some altruistic vision for the betterment of others, but rather the fulfillment of our interests and gains. Yet in the free market, pursuing our own self-interest makes all of society better off.

This is because in order to get what we want, we must voluntarily trade. The only way voluntary trade can happen is if each individual likes what the other has more than what they have. Therefore, in the process of obtaining what we want and enjoy, we enable someone else to also obtain what they want and enjoy. Otherwise, the trade wouldn’t happen in the first place, and we wouldn’t be benefiting others.

In a bigger picture, this means that we work jobs, sell products, and own businesses not for the sake of our customers or bosses, but for our own individual interests. Yet in the process of obtaining the money to further our own interests, we contribute a good or service that can benefit many others; whether that be working at a restaurant, owning a store, or running a lemonade stand, we contribute to a larger, common good. Through voluntary exchange, the prerequisite for furthering our own desires is by fulfilling others’.

The invisible hand of the free market, fueled by voluntary exchange, translates the intricate and subjective interests of ourselves into benefitting the interests of others and, when compounded, ultimately caters to the common interest.

Yet, there exists another invisible hand, in the realm of politics; one also predicated on voluntary exchange, yet moving opposite to the motion of the free market’s invisible hand. Understanding it is crucial to deciding just how far we should replace economic activity with political and bureaucratic control.

The Invisible Hand of Politics

Outside of the political process, self-interested individuals exchange and thereby benefit others in the pursuit of their own goals. Yet in the political process, politicians elected on the basis of representing the “general interest” ultimately must cater to much more specific causes. Economist Milton Friedman writes in his coauthored book Free to Choose, “There is, as it were, an invisible hand in politics that operates in precisely the opposite direction to Adam Smith's invisible hand. Individuals who intend only to promote the general interest are led by the invisible political hand to promote a special interest that they had no intention to promote.”

This is mainly due to the expansive role that the government has usurped over the years, writing and enforcing detailed legislation that directly threatens a small sum of citizens while negligibly affecting the rest. When the state has such a capability of writing specific laws, laws that greatly concern only a few number of individuals, those individuals will be incentivized to lobby government for favorable decisions.

Take Friedman’s example of the US’s policies regarding coastal traffic, which is greatly restricted to American flagships. He estimates the costs of such legislation to be, in 1980 costs, around $600 million a year, yet divided among the populace, costs the average taxpayer just $3 a year. His conclusion:

“Which of us will vote against a candidate for Congress because he imposed that cost on us? How many of us will deem it worth spending money to defeat such measures?”

The ones who will deem it worth spending money on such policies are the ones mostly affected by the legislation, that is, the 40,000 individuals actively involved in the industry, who have much more to win or lose than $3. Indeed, Friedman confirms, “they spend money lavishly for lobbying and political contributions.”

Thus, almost always, the activists and lobbyists that guide the activity of elected officials represent not the common interest, but the special interests that are much more financially contingent on their decisions. Company executives seek to limit foreign competition, farmers seek price floors on their products, and public sector unions seek to protect state monopolies. The incredible costs of these policies are widely dispersed among the people, and so the outcome of Congress doesn’t reflect the general interest, but the special interest that has the most to lose.

Market or State

Between these two invisible hands comes a choice: which one do we want to promote more? Should we promote a free market, where individuals voluntarily exchange and benefit a more general interest? Or should we want to expand the domain of politics, letting more aspects of the economy be dictated by special interests?

Hopefully, the answer is clear. In the market economy, producers will always have greater incentives to work in the people’s interests than do politicians. This is because producers can only obtain money through voluntary exchange, and so they must produce what the consumers want.

Similarly, we may think that politicians have a great incentive to work in our interests. We elect them, and so we think they work in the general interest of their constituents. Yet ultimately, the issues they are most pressed about don’t concern the majority of their constituents, but rather select interest groups that have much more to lose. Such groups are the reason why much of the issues politicians vote on concern special interests. The votes and money from these groups are why they support them.

Furthermore, as we expand either the domain of the free market or the grasp of government, either of the invisible hands become stronger. For example, if we were to privatize the postal service, this means that the agency, although assumed to be self-interested, would have greater incentive to cater to the interests of the people than if it were in government hands. This greater efficiency would put more pressure on politicians to actually work in the general interest.

Alternatively, if the state was expansive, intervening in the economy at will and catering to different interest groups, the more producers will pull away from the free market invisible hand, and lean more towards political handouts. And as the state expands in its role, the more companies will be compelled to look for government assistance, thus extremifying the political invisible hand. This phenomenon is known as crony capitalism.

The choice is ours over which invisible hand to favor, the market’s or the state’s. Will we judge the intentions behind them, or focus on the outcomes? As we build towards a freer society, the choice couldn’t be any more clear.

When commenting, please post a concise, civil, and informative comment. Full comment policy here

Thanks to Covid Stimulus, Employers Can’t Find Workers. Montana’s Governor Is Having None of It

05/07/2021Alice Salles

Montana governor Greg Gianforte has had enough of President Joe Biden’s covid relief bills. Instead of paying people to stay unemployed, he’s giving them a bonus for finding work.

After scrapping what he called the “impractical government mandates” imposed by former governor Steve Bullock in 2020, businesses in his state were still struggling.

We got rid of hours of operation, capacity limits. We got rid of our statewide mask mandate. We put lawsuit protection in place for businesses and nonprofits. And now, as we have opened up, employers can't find workers. It's across all industries. Restaurants are having to shut down for days because they can't find cooks or wait staff.

Addressing the media, Gianforte said that because the federal government extended unemployment benefits due to the pandemic, people have incentives to stay home. In order to change that scenario and get Montanans back to work, he drew out a new plan.

We made the decision to opt out of the federal supplemental unemployment benefits, and replace it with a back-to-work bonus.

Now, he is offering anyone who gets off unemployment benefits and finds a job a $1,200 bonus.

This is going to help employers. And, honestly, there's dignity in the work. And there's also satisfaction in being self-sufficient. We made that decision yesterday. And we're just getting a phenomenal response from our business community.

Isn’t that something! Who would have thought that forcefully locking down the country’s economy and then showering the unemployed with taxpayer-backed “free” money would produce anything but chaos.

While Gianforte's plan isn't ideal considering that government-backed incentives to get people back to work are unnecessary in a truly free market, his reasoning is correct. When you subsidize something, you always get more of it.

They Never Learn Their Lesson

In 2013, well into President Barack Obama’s second term, Congress extended long-term unemployment benefits. But the extension ended as 2014 rolled in. What we saw happen was a significant drop in unemployment rate.

As Mises associate scholar Randall G. Holcombe explains in this article, when the government pays people to remain unemployed, what we get in return is more unemployment.

The long-term unemployment rate skyrocketed during the recession because we paid people to be unemployed longer.

Needless to say, this lesson was lost on our overlords. Thankfully for the people of Montana, their governor isn’t waiting for a total economic collapse to revert course.

When commenting, please post a concise, civil, and informative comment. Full comment policy here
Shield icon power-market-v2