Politics and Government « Citizen Economists

The Choice Is(n’t) Yours

By Simon Grey, on May 8th, 2012

It doesn’t get much clearer than this:

The first case—Obama triumphant—obviously makes it easiest to imagine America doing what it takes to restore full employment. In effect, the Obama administration would get an opportunity at a do-over, taking the strong steps it failed to take in 2009. Since Obama is unlikely to have a filibuster-proof majority in the Senate, taking these strong steps would require making use of reconciliation, the procedure that the Democrats used to pass health care reform and that Bush used to pass both of his tax cuts. So be it. If nervous advisers warn about the political fallout, Obama should remember the hard-learned lesson of his first term: the best economic strategy from a political point of view is the one that delivers tangible progress.

A Romney victory would naturally create a very different situation; if Romney adhered to Republican orthodoxy, he would of course reject any government action along the lines I’ve advocated. It’s not clear, however, whether Romney believes any of the things he is currently saying. His two chief economic advisers, Harvard’s N. Gregory Mankiw and Columbia’s Glenn Hubbard, are committed Republicans but also quite Keynesian in their views about macroeconomics. Indeed, early in the crisis Mankiw argued for a sharp rise in the Fed’s target for inflation, a proposal that was and is anathema to most of his party. His proposal caused the predictable uproar, and he went silent on the issue. But we can at least hope that Romney’s inner circle holds views that are much more realistic than anything the candidate says in his speeches, and that once in office he would rip off his mask, revealing his true pragmatic, Keynesian nature.

We have, to roughly quote Vox Day, a bi-factional ruling party, wherein the only difference between the factions is that one wants huge government and the other one wants giant government. That is, the difference is a matter of degree, not kind. Both sides are Keynesians, both sides will continue to extend and pretend until the system collapses, both sides are anti-liberty, both sides will ignore the constitution, both sides are corrupt, both sides will be ineffectual. There is no difference between the two “sides.” They are simply sideshows meant to distract the easily-fooled masses, and thus cause them to ignore the fact that democracy is dead. This false sense of choice causes the masses to spend their time and energy picking sides, which is a perniciously clever way of reinforcing support for a statist system. Basically, everyone who gets caught up in politics gets so caught up in supporting certain parties that they don’t even realize that by the mere act of voting they are simply casting a vote for bigger government and a more intrusive state. The silly fools think their votes matter.

Furthermore, I see no point in voting in this election if Romney wins the GOP nomination, because it’s not like there is actually going to be a difference Romney and Obama. They are one and the same, albeit with different skin colors. They are both statists with strong desires for power. They lack the humility to see that they (and, by extension, government) cannot fix the problems currently facing the nations. They both have a pretense of knowledge, and voting for one is no different than voting for the other. The only way to have real choice in this election is for Ron Paul to get the nomination. But if there were a real choice, how could the bi-factional ruling party stay in power?

My proposal to Congressman Joe Heck

By Mark Anderson, on March 29th, 2012

“The art of economics consists in looking not merely at the immediate, but at the longer effects of any act or policy; it consists in tracing consequences of that not merely for one group, but for all groups.” -Henry Hazlitt

Congressman Heck is trailing Mitt Romney in the valid solutions category. I felt compelled to offer a plan which he can weigh in on. Now I understand that people will disagree on ideas for a solution. That people disagree is axiomatic. We can disagree in a civil way, too.

That said, Aristotelian logic teaches us that A can’t be both A and non-A at the same time and in the same sense. In short, truth can’t contradict. If it’s true that artificially low interest rates are the problem, it can’t also be true that low interest rates are not the problem. It’s my sincere belief that Congressman Heck is wrong on housing. He would rather take an activist approach that directs resources towards undermining the price mechanism, rescuing some at the expense of the many.

MY PROPOSAL

Former Federal Reserve Chairman Paul Volcker, whom I have much respect for, pointed out that a 2% inflation rate means confiscating half of one generation’s wealth. In the end, he settled with price stability for the Fed’s mission. Far better than inflation targeting.

Federal Reserve Vice Chairman Donald Kohn promised that the Fed would turn off inflation if it happens (is the guy myopic, since it’s here already?). Ben Bernanke was talking about “green shoots” many months ago. Politicians were talking about a “glimmering of hope.” The Fed tells us it will stay loose until there’s an economic recovery, as though artificially low interest rates are therapeutic in nature. The parlance used engenders confusion, and it’s my purpose here to deconstruct a few fallacies.

Let’s start with this axiom: prevailing economic orthodoxy is wrong. If prevailing economic orthodoxy is so great, then how did the orthodox practitioners get us into this mess? Even I saw this one coming. See: http://www.webcommentary.com/php/ShowArticle.php?id=andersonm&date=060514

What is it that we are all pursuing and seeking? The betterment of our lives (i.e. economic growth). When government officials and politicians speak of economic growth, they should be able to define the phrase. If they can’t define it, then they have no business talking about economic growth. So what is economic growth?

Wealth is that which satisfies demands. Inasmuch as businesses satisfy consumer demands, they are being productive. Within the construct of the unhampered market, productivity can be measured by income, since income is earned by satisfying consumer demands. The government, on the other hand, does not sustain itself by satisfying consumer demands (i.e. earning its income). The government uses the threat of violence, or actual violence, to obtain its revenue (i.e. compulsory taxation). Thus the government can’t get away with saying that the more it taxes and spends the more productive it’s becoming.

The technocrats had to invent a different excuse for government: its spending is productive! So government spending – as well as private sector spending – has been placed into the GDP. The kleptocracy tries to camouflage itself with Keynesian formulas (e.g. the “multiplier effect”).

Nevermind the fact that if the “multiplier effect” held truth, so long as nobody saved anything – meaning zero-liquidity preference, in which case we would have hyperinflation – the “multiplier” would be infinity!

If you look at the textbook definitions of economic growth, objectively, it’s defined as a rising GDP. A rising GDP means we are having “economic growth,” because the GDP supposedly measures “economic growth,” and “economic growth” is defined as a rising GDP. Do you see any tautology here whatsoever? Even I noticed the tautology all on my own without anybody to point it out to me in any book. This is “Mark original” analysis.

Before economic growth can possibly be measured, it must be defined. Defining economic growth as a rise in the very indicator that supposedly measures economic growth is self-evidently flawed. Look at it another way. Measuring wealth in terms of a depreciating currency is akin to changing around the definitions of inches and feet in order to say that a person is changing in size. If the technocrats and politicians in Washington can’t figure this one out, then everything is hopeless.

The simplest definition of economic growth is a lessening of the unsatisfaction of wants or demands. We are diverse, and our wants, or demands, are subjective. Politicians and econometricians are not psychics. There is no way to quantitatively measure economic growth. Even Alan Greenspan wrote a piece – even while maintaining the fiction that the Fed is blameless – in which he claimed the Fed is blameless because it’s impossible to model malinvestment. See: http://us.ft.com/ftgateway/superpage.ft?news_id=fto031620081437534087 If it’s impossible to model malinvestment, then it’s impossible to model economic growth.

Prevailing economic orthodoxy tells us that there are two kinds of GDP growth: nominal and real. This is where thinking on the subject becomes dubious at best. Real GDP growth is defined as nominal GDP growth discounted for inflation, which is determined by the unreliable CPI (I won’t belabor the reasons why in this piece, but I have done so before and will do so again).

Let’s start with what should be a self-evident absolute: economic growth need not be discounted for inflation. Either we are having economic growth, or we aren’t. If the GDP must be discounted for an inflation component, then this means that some GDP growth is good, but other GDP growth is bad. But if the GDP is measuring the same thing(s) constantly, this makes little sense. Either the GDP measures economic growth and any rise in the GDP is good, or the GDP measures inflation and any rise in the GDP is bad. If the GDP can rise, but only in nominal terms, then this must mean that it can fall, but only in nominal terms.

When Fed officials and other D.C. technocrats speak of “economic growth,” they’re talking about rising prices in absolute terms, which is not inflation but the result of inflation (i.e. monetary expansion). If a person conflates rising prices with economic growth, they’re boxed into an awfully awkward position. The only way to have a fast economic recovery would be to have prices rise fast (i.e. hyperinflation).

Real economic growth engenders falling prices. Falling prices increases the ROR (rate of return) in real terms. I remember when I was growing up during the 1980s, and if I wanted to make a photocopy, I had to walk down to the drug store to use the big, bulky copy machine. If I had to send a fax, I went to Kinko’s, or another commercial location. At that time, nobody would have thought that the average household might have its very own fax/copy machine. Today, you can get an all-in-one for under $100. Who would have thought a century ago we would go from horses and buggies to automobiles?

Undoubtedly, this is a positive development. Albeit demand for the copy machine at Kinko’s and horses and buggies has dropped. But those things have been replaced by at-home copy machines and automobiles. This drop-off in demand for Kinko’s and horses and buggies would be detected by the GDP as economic decline. The political response would be to bailout Kinko’s and the horses and buggies industry, as though market share is supposed to remain static. One man’s loss of market share is another man’s gain of market share.

Conversely, if the western part of the United States went to war against the eastern part of the United States, the GDP could rise exponentially. But would that be a positive development for the economy? Hardly.

For the Fed to keep the price level the same in nominal terms requires inflation (i.e. an expansion of the money supply). Thus, even if prices were to remain stagnant, we can still be suffering from the effects of lost deflation. The question is: what would prices otherwise be absent central bank manipulation? We don’t know, but it’s safe to say prices would be a lot lower.

It’s the effort to prop up prices through stimulus that’s preventing the economic recovery. People are losing their homes because homes are unaffordable (not because they are too cheap). Thus deflation is the cure (not the problem). What sense does it make to provide somebody with a cheaper mortgage – by interest rate manipulation through loose monetary policy at the FOMC – on a more expensive house that costs more to maintain? But that is what present policy is aimed at pursuing. What sense does it make to stimulate more home building when housing isn’t clearing the market as is?

No matter which way the government inserts itself into the housing market, this diminishes the need for sellers to set prices pursuant to supply vs. demand (i.e. market-clearing prices). Whether the government buys up bad mortgages, bails out the homeowner or the bank, this interferes with the price mechanism. What Joe Heck advocates is subsidizing the purchase of homes for non military service members in order to assist the airmen. If we continue down the current policy path, one will have to be politically connected to get an “education,” get a job, get healthcare, and…get a house!

Suppose there’s a shop owner whose inventories are piling up because nobody can afford to pay for his prices. What does the shop owner have to do? Lower prices. But suppose the government inserts itself into the picture and subsidizes the shop owner. No longer is the shop owner’s sustenance dependent upon having to satisfy consumer demands, thus diminishing the need to set market-clearing prices. Within the construct of the unhampered free market there can’t be price gouging any more than there can be wage gouging, since vendors can’t short inventory at prices above what consumers are both willing and able to pay.

Let’s try another scenario. Suppose the government distributed “credits” or “vouchers” to this shop owner’s customers. This would be perceived as an “enlightened” form of welfare for the shop owner’s customers. However, this is yet a different way to subsidize the shop owner, by letting the shop owner sell at artificially high prices. A move like this prices the poorer, non-recipients of “credits” or “vouchers” out of the marketplace. No surprise that education and healthcare – two of the most government subsidized cartels – have also had the highest levels of price inflation. This begets the perception – erreonously – that the problem is a dollar shortage for the one who didn’t receive “stimulus.”

The mistaken conclusion is that we need these subsidies and stimulus rather than understanding that it’s the subsidies and stimulus pricing the little guy out of the marketplace. The poor person has been priced out of the marketplace. The problem isn’t a dollar shortage, but a dollar leakage thanks to promiscuous spending.

I’ve always said that, by rights, the impoverished belong to the free market movement. With the government as large as it is today, would it not be a fair assumption that many people who are poor are so precisely due to big government, whereas many people who are wealthy are so precisely due to big government? You see, big business uses big government to manipulate the marketplace on its behalf.

The flawed assumption made by some progressives is that big government is somehow less dangerous than big business. This begets the erroneous conclusion that the problem is an absence of regulation. It’s paramount to understand that we can’t regulate away insolvency. We can’t regulate away past mistakes. But we sure can regulate everybody except the big cartels out of existence.

Furthermore, it’s loose monetary policy that engenders speculation, as lenders/investors are compelled to hedge against a depreciating currency. Holding (i.e. investing in) dollars guarantees losses. Politicians have no right debasing the currency to then regulate away that behavior. The simple solution is to stop the printing press. Politicians have no right to punish us for their past transgressions through cumbersome regulations. The most efficient way to mitigate excessive risk taking is by letting the market set interest rates pursuant to the true supply of savings. Subsidizing risk taking while privatizing the profits is not a real free market. Size-capping should not be conflated with risk-capping.

Ludwig von Mises and Eugen von Bohm-Bawerk saliently articulated how labor can’t increase its share at the expense of capital. Nobody can argue against capital without arguing for a reduction in their own standard of living. Thus the problem for the progressive should not be with capital per se, but that capital is so inaccessible to the common person.

Why is capital so inaccessible to the common person? Every tax, every regulation, every government program drives up the cost of capital. Politicians love this, because they get power. Big business loves this, because it creates barriers to competition. Big government creates monopolies, as a monopoly is a state of imperfect competition, and imperfect competition is begotten by government interference in the marketplace.

The situation with housing is no different than that of the shop owner I described above. In a market unhampered by government, sellers are sustained by selling inventory. When the government inserts itself into the picture, sellers are no longer dependent upon having to satisfy consumer demands by selling inventory. Sustenance is disconnected from the satisfaction of consumer demands. In the case of housing, the government and the Fed are subsidizing the loan market to to hold back inventory. See: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/04/08/MNL516UG90.DTL&type=realestate

Meanwhile, people are simultaneously living in tents. The mission of Joe Heck is literally to keep people homeless. Do not let that kleptocrat masquerade as a philanthropist. It’s not his money he’s spending; it’s your money he’s spending – and on himself. So long as the government keeps trying to prop up prices, as it has done with healthcare and education, real estate won’t clear the market and we won’t have a recovery.

Economic recovery rests upon a smooth-functioning price mechanism, where the market can discover real prices. How is Ben Bernanke, Joe Heck, or anybody else supposed to know what prices of everything are supposed to be? Would Joe Heck mind telling me what housing prices are supposed to be? How is it good to stimulate home building when there are homes on the market not clearing?

The pursuit of price stability means the Fed will constantly be chasing its own tail. The Fed doesn’t want to allow deflation, so it deliberately tries to create inflation. But then the Fed also promises to intervene if inflation surpasses some level that central planners supposedly have the wisdom to know is wrong. This makes no sense. It’s impossible for the Fed to fight both deflation and inflation. If inflation is good, then bring it on Zimbabwe-style. If inflation is bad, and must be turned off after it starts, then why start the inflation to begin with? In other words: central planners have promised to do an intervention on their own intervention.

If prices fall, this isn’t a bad thing. If we had propped up the economy of, say, 1900, we would still be riding around in horses and buggies. While Paul Volcker is right that expanding the money supply by 2% every year wipes out at least half of one generation’s wealth, the Fed should not be pursuing price stability. We should, instead, be concerned with monetary stability.

Inflation is not economic growth. Just as inflation begets a negative RRR (i.e. real rate of return), deflation begets a positive RRR. Falling prices means rising real incomes. No nation has ever succeeded in substituting a printing press for income-generating investment.

Our only ticket out of this mess is to stop the printing press, which will bring false economic activity to an end, allowing for what remains of the productive and profitable elements of the economy to lead us into an economic recovery. The government is leading us over a cliff. There can’t be a systemic collapse without a systemic cause. Until systemic changes are made to Washington (not the private sector), there will be no economic recovery.

DEBUNKING MYTHS

Myth: The problem is “toxic” assets (e.g. mortgage-backed securities) which have created systemic risk

When a hospital can’t collect payment, the hospital sells this debt to a collection agency. This doesn’t create booms and busts. The risk is asystemic unless the government bails out every debtor and/or creditor.

Myth: Present problems were caused by bad lending (i.e. sub-prime loans)

Promiscuous lending is a symptom – not a cause – of economic conditions. Take bad lending to its own logical conclusion: creditors give away money as an act of charity, getting nothing in return. Does charity cause booms and busts? No. Promiscuous lending is a symptom of loose monetary policy at the Fed, which tricks the loan market into consummating unjustifiable loans.

It’s primarily through FOMC operations that interest rates are determined (until the Fed loses control, which will eventually happen). By expanding the money supply, this increases the supply of loanable funds without a genuine expansion of real savings. In doing so, the loan market appears to be more solvent than it truly is tricking the loan market into consummating unjustifiable loans. This artificially suppresses nominal interest rates below their natural level (i.e. where they should be pursuant to the true supply of savings). By expanding the money supply, this allows debtors/borrowers to pay lenders/creditors with devalued dollars, thus lowering the real rate of interest.

A credit transaction involves trading present goods for future goods. If there are no present goods (i.e. savings, which isn’t created on a printing press), then credit has to be curtailed. The problem isn’t a credit crunch, but a savings crunch. Investment can only come out of savings because producers must consume in order to sustain the process of production. In order for the baker to make more bread, the baker himself must eat. Thus somebody must forego present consumption in order to fund credit expansion.

The rate of interest is the discount rate of future goods as against present goods. An example would be what an investor pays for a printing press. Suppose the printing press will generate five-hundred thousand dollars in net income throughout a ten-year life. The entrepreneur will certaintly not bid up the price of the capital equipment to five-hundred thousand dollars. The entrepreneur is willing to invest, say, fifty-thousand dollars for the printing press and the vendor is willing to part ways with the printing press in exchange for an immediate fifty-thousand dollars. The entrepreneur and capital equipment vendor mutually settle upon fifty-thousand dollars – a sum far less than the five-hundred thousand dollars – in exchange for the printing press. How much present income (i.e. present goods) is an entrepreneur willing to invest in order to garner five-hundred thousand dollars in future net income (i.e. future goods) over a ten year period? Reflected in the transaction is the rate of interest as determined by time preferences. Interest rates represent an agio on present goods since present goods are more valuable than are future goods. A person would rather eat an apple today than eat an apple ten years from now. Interest rates must be set pursuant to the true supply of savings and are determined by time preferences. If everybody wants to consume without saving, then interest rates must rise to reflect time preferences.

There is no right way to extend credit at a level below the natural rate of interest (i.e. interest rates set pursuant to the true supply of savings). In that case, we are burning through job sustaining capital and savings. Any person, firm, or institution (e.g. government) that’s dependent upon inflationary credit expansion (as opposed to credit extended from the pool of real savings) is, by definition, insolvent (i.e. a non-income generator). Failure has to be an option for bad business decisions. That’s the check on excessive risk taking.

Artifically low interest rates engenders capital outflow. Capital goes racing overseas. The problem isn’t a dollar shortage, but a dollar leakage. The dollars are out there; they’re just piled up in foreign reserves. The way to repatriate these dollars is for the Fed to tighten, interest rates rise, prices collapse to reflect wages, which will then beget capital inflow thus lowering the natural rate of interest. If I give you $10 in exchange for a book and you turn around and give me that $10 in exchange for a DVD, the real means of purchase for the book was the DVD and the real means of purchase for the DVD was the book. So the issue here is not the quantity of dollars. See: http://www.webcommentary.com/php/ShowArticle.php?id=andersonm&date=110509

Myth: The FDIC is good for depositors

The FDIC offers deposit insurance for bank customers, which is really a backdoor way to bailout insolvent banks. Could you imagine being able to run a ponzi scheme (e.g. fractional-reserve banking), knowing that when your insolvency is exposed the government will pay off your customers (i.e. a de facto bailout of you)? This creates yet another layer of moral hazard on top of the central bank injecting “liquidity” into the loan market. Thus FDIC’s true purpose is designed to keep the unsustainable intact.

Needing to insure bank deposits should raise questions in and of itself. Unlike natural disasters, economic risk can’t be pooled. It’s one thing to guarantee one’s solvency should they get wiped out due to, say, a flood. It’s quite another thing to guarantee solvency, per se. It’s impossible to insure against economic miscalculation and loss. If I were to go into business and you offered to insure me against business failure, you become the true entrepreneur in the deal by underwriting/assuming risk.

The FDIC (insolvent) is backed by the Treasury (insolvent) which is backed by the Federal Reserve (insolvent). The Federal Reserve is backed by a printing press which is backed by the savings of Americans. Not only is the concept of insuring economic risk altogether chimerical, but there’s a reason why only a government-backed entity would offer insurance to banks. Inflationary (as opposed to non-inflationary) credit expansion makes banks inherently insolvent. Demand deposits are payable on demand, while banks are lent long. Thus the time structure of assets and liabilities does not match.

At the end of the day, the FDIC/Treasury/Federal Reserve (all three of which are insolvent) can guarantee depositors pull money out of their bank, but there’s no guarantee of the currency’s value. By guaranteeing solvency, this inherently places the currency’s value at risk. Deposits are guaranteed in nominal terms, but not in real terms.

When one scrutinzes the role of the FDIC more closely, they can see that its entire purpose is keeping the good ole’ boy network intact, leaving Americans with nothing. If the free market were allowed to function, the government’s role would be limited to enforcing contracts. If homeowners default, the bank would foreclose. But if the bank defaults, the bank’s creditors – i.e. its depositors – would become receiver for the failed bank’s assets. Thus, in the event of a bank run, depositors have the first legal claim to a bank’s housing inventory.

What does the insolvent FDIC do? If a bank fails, the FDIC sends in federal regulators to protect the bank’s assets from its depositors by becoming receiver for a failed bank’s assets. In many instances, the FDIC has arranged shotgun mergers with investment banks on Wall Street, turning investment banks into bank holding companies.

So we can see this sleight-of-hand trick – under the guise of protecting depositors – is designed to transfer real assets (i.e. housing inventories) from failed banks to Wall Street, while promising depositors nothing more than globs of Ben Bernanke’s “liquidity.”

There’s no way the FDIC/Fed can guarantee the solvency of the banking system or depositors, which will destroy the currency (measure purchasing power in terms of gold) thus destroying the very depositors (anybody holding dollars) those institutions are supposedly designed to protect.

The solution, then, is to put a failed bank’s assets into the receivership of its depositors. Any other efforts to prop up the housing and/or bond market will prevent the market from clearing and block those who have already lost homes from ever regaining possession. We are now doing to the housing market the same thing that has already been done to healthcare and education.

If you want to figure out how to get your homes back, then make an inquiry into where they’ve gone. The Fed is sitting on at least $1 trillion worth of Mortgage Backed Securities. We can go a long ways towards saving the dollar and getting people back into homes by having the Fed liquidate the MBS on its balance sheet.

In my estimation, any other plan will engender homeless people and peopleless homes. What does Congressman Heck say? Does he have a response? Any response?

Government Debt = Terrorism?

By Thomas Knapp, on February 20th, 2012

The US government’s post-9/11 “war on terror” breathed new life into its long, failed “war on drugs.” An American public showing signs of increasing disenchantment with the latter was told that drug money fueled and financed terrorism, and that the “war on drugs” was part and parcel of the war on al Qaeda.

Now this, via Reuters:

Italian police said on Friday they had seized about $6 trillion worth of fake U.S. Treasury bonds and other securities in Switzerland, and arrested eight Italians accused of international fraud and other financial crimes. … Potenza’s prosecutor Giovanni Colangelo said an international network “in many countries” was behind the forgeries. Italian daily Corriere della Sera said on its website that the criminal network was believed to be interested in acquiring plutonium, citing sources at the prosecutors’ office.

I can only think of a limited number of reasons why someone would want plutonium, and all of them except for use in atomic/nuclear weapons would more likely run through legal/”official” channels of securities fraud, theft, etc.

Or, to put it a different way, if the US government didn’t visibly run some serious debt, al Qaeda and so forth couldn’t try to finance its nuclear terror aspirations by faking instruments of that debt.

If heroin cultivation in Afghanistan is a “war on terror” concern, so is an unbalanced US government budget and $15 trillion + in US government debt. But I’d advise against holding your breath while you wait to see if Congress declares “war” on those things.

Today's Inquiry into English Usage and Basic Mathematics ...

By Thomas Knapp, on January 9th, 2012

This one’s from the New York Times …

And as the Pentagon confronts the prospect of cutting its budget by about 10 percent over the next decade …

… but you can probably find it in just about any newspaper article discussing the upcoming “budget cuts.”

So, just how deep are these horrendous, army-killing cuts?

Well, if “sequestration” goes as forecast, the federal government’s non-war military spending will only increase by 10% instead of by 18% between 2013 and 2021.

No, that is not a typo. The “cuts” are not cuts in actual spending, they’re cuts in the previously projected growth rate of that spending.

Most federal government spending proceeds on rails due to something called “baseline budgeting.” The “baseline” is the previous year’s spending. Under “baseline budgeting,” that previous year’s “baseline,” plus an increase based on a formula, happens automatically unless Congress decides to tinker with it.

This “sequestration” thing — triggered by Congress’s inability to agree on “deficit reduction” targets last year — imposes across-the-board reductions in that rate of automatic growth of spending, not in spending as such.

Neat trick, huh? Your congressman can brag to you that he’s cutting spending at this morning’s town hall, then — this afternoon, over cognac and cigars — brag to your local defense contractor or other corporate welfarist that he’s increasing that same spending.

Hint: He’s lying to one of you. And it’s not the guy pouring the cognac and lighting the cigars.

Thoughts On Ron Paul’s Budget Proposal

By Simon Grey, on October 31st, 2011

First, a summary from the WSJ:

GOP presidential candidate Rep. Ron Paul will unveil his economic plan Monday afternoon, calling for a lower corporate tax rate, cutting spending by $1 trillion during his first year in office and eliminating five cabinet-level agencies, including the Education Department, according to excerpts released to Washington Wire…

But Mr. Paul does get specific when he calls for a 10% reduction in the federal work force, while pledging to limit his presidential salary to $39,336, which his campaign says is “approximately equal to the median personal income of the American worker.” The current pay rate for commander in chief is $400,000 a year.

The Paul plan would also lower the corporate tax rate to 15% from 35%, though it is silent on personal income tax rates, which Mr. Paul would like to abolish. The congressman would end taxes on personal savings and extend “all Bush tax cuts.”

He would also allow U.S. firms to repatriate capital without additional taxes. Some lawmakers have recently proposed such legislation as a way to spur job growth. Its critics argue that a tax holiday for companies with money abroad has not historically led to domestic investment.

But the plan, at its heart, is libertarian. While promising to cut $1 trillion in spending during his first year, Mr. Paul would eliminate the Departments of Education, Commerce, Energy, Interior and Housing and Urban Development. When former Massachusetts Gov. MItt Romney unveiled his economic plan last month, he said he would submit legislation to reduce nonsecurity, discretionary spending by $20 billion.

Mr. Paul would also push for the repeal of the new health-care law, last year’s Wall Street regulations law and the Sarbanes-Oxley Act, the 2002 corporate governance law passed in response to a number of corporate scandals, including Enron.

I think this is a good start to addressing the problem. I also think this is the most serious proposal from any of the current candidates, Democrat and Republican alike.

Some may call for incremental changes. We’re past that point. We’re going to face an economic collapse. There’s no sense in strengthening federal power when this happens. And there is no point in continuing the policies that led to this problem.

Ultimately, Paul’s plan is the best out there, though it could certainly be improved upon. My proposal would be to cut all unconstitutional spending. I think that would solve a lot of problems in fell swoop.

On Patent Reform

By Simon Grey, on September 21st, 2011

The Smith Patent Reform Bill has become law:

President Obama today signed into law the Leahy-Smith America Invents Act (H.R. 1249) a bipartisan, bicameral bill that updates our patent system to encourage innovation, job creation and economic growth. Both Houses of Congress overwhelmingly supported the proposal, which was sponsored by House Judiciary Committee Chairman Lamar Smith (R-Texas). The House of Representatives passed H.R. 1249 by a vote of 304-117 earlier this year. The Senate passed the bill by a vote of 89-9. Senator Patrick Leahy (D-Vermont) partnered with Chairman Smith on the legislation. Congressman Smith led the House efforts on patent reform for more than six years.

Much-needed reforms to our patent system are long overdue. The last major patent reform was nearly 60 years ago. The House patent reform bill implements a first-inventor-to-file standard for patent approval, creates a post-grant review system to weed out bad patents, and helps the Patent and Trademark Office (PTO) address the backlog of patent applications. This bill is supported by local companies as well as many national organizations and businesses.

I’m not sure what to think of this.

On the one hand, this streamlines the patent system, which I begrudgingly support. The first-to-file standard makes resolving multiple claims dead simple: Who got to the patent office first. And weeding out bad patents is also good, especially in light of the standards (distinct, non-obvious, etc.).However, this legislation could very well increase the occurrences of patent-trolling. This would actually discourage invention and innovation in the long run because inventors would more than likely seek to avoid paying royalties to produce their own inventions, so they would have to create modifications to their own product in order to sell them. I imagine this effect would be more prominent among large corporations than among individual inventors because corporations tend to be more susceptible to industrial/commercial espionage.

At the end of the day, though, the simplest and most effective reform is to simply abolish the patent system altogether.There’s little evidence that the costs of the patent system outweigh the benefits thereof.

Ron Paul supports clean energy

By Mark Anderson, on August 16th, 2011

The key to an economic recovery does not rest in Washington. The key to an economic recovery is to put Washington through a recession. Any efforts by politicians to con you into believing they’re stimulating some kind of economic progress – again, bribing you with your own money – by promoting one form of energy or another should be detected as a ruse.

Some politicians have gone “green” in the name of curtailing “dependence on fossil fuels” and “foreign oil.” It’s a sham. Why not promote a certain type of underwear in the name of curtailing dependency on a foreign brand?

The fundamental problem is that most politicians and central planners view the economy as a blob to be manipulated, rather than a complex capital structure involving individuals making choices in exchanges, a process of production, and a price mechanism.

The reason why the United States is so dependent upon foreign oil is due to policies that have already been put in place. The solution, then, is to repeal and correct these policies – not creating new legislation.

Artificially low interest rates, brought on by loose monetary policy at the FOMC, drives capital overseas (by deploying unearned income from a printing press, disconnecting consumption from production, capital is also consumed). Capital naturally gravitates to cheaper, more efficient, higher-yielding economies. Rather than generating revenue and income, the nation spends beyond its means.

If a person, firm, or nation is dependent upon inflationary credit expansion (as opposed to credit expansion from savings), then that person, firm, or nation is insolvent and inefficient. We are spending beyond our means, which – yes – engenders dependence upon cheaper markets to supply us with production.

If you want to reduce dependence upon foreign “anything,” then the Fed has to lift interest rates and Washington has to abandon the spending orgy. Dollars that have been accumulating in foreign reserves will then come flowing back into the system.

I know “clean” energy sounds so nice, so attacking it is very “environmentally-incorrect.” I will put everything I possibly can into layman’s terms. Let’s start with the following axiom: we consume energy in everything we do. If you’re that environmentally-conscious, you shouldn’t be online reading this right now because you’re using electricity which is consuming energy.

Solar energy sounds so nice. After all, it comes from the sun. But let’s not forget that there is a process of production here. Take, for example, the solarization of a house. Solar energy requires panels, charge controllers, batteries, inverters, etc. And then let’s not forget capital asset depreciation. Energy is consumed during the process of production.

If “clean” energy has a positive yield, then it will be profitable and private enterprise will pony up the capital. The government need not encourage this. If “clean” energy has a negative yield, then this means that it is unprofitable and dependent on so-called “dirty” energy for its sustenance. It would be akin to consuming 1,000 blueberries for every 500 you’re growing – nobody in their right mind would pursue that course absent government subsidies. Somewhere, you have to make up the difference.

This leads me to the following axiom: the most profitable and economically-efficient form of energy, within the construct of the unhampered market, is also the cleanest form of energy.

The best ecological hygienist is the unhampered market. Suppose a logging company owns a forest. That logging company can clear-cut the forest, say, tripling immediate income. However, this must be weighed against diminishing future income, or the capital value of the forest as a whole. Suppose, however, this is government property. This calculation no longer needs to be made, and the objective is going to be rapid extraction of resources.

No shocker, then, that government is the biggest abuser of the environment and waster of resources. Look at the atomic weapons tests done in the Nevada desert – and right on top of our own military service members.

The government does not sustain itself by satisfying consumer demands, but through compulsory taxation. Government subsidies to, and control over, industry diminishes the need to set prices pursuant to supply vs. demand. Why? Because sustenance is no longer dependent upon having to satisfy consumer demands. Sustenance is disconnected from the satisfaction of consumer demands.

It’s the price mechanism that ensures resources are allocated and managed efficiently. The price mechanism can only function within the construct of the unhampered market, allowing for producers to set prices pursuant to supply vs. demand (i.e. market-clearing prices). The scarcer the supply, the greater the demand, the higher the price. Consumption runs inversely with prices.

Government subsidies distort prices, interfering with the price mechanism, and cause prices to be set above, or below, market-clearing prices. There is a paradox in government policy in that the government encourages consumption without production (in the name of economic stimulus), tells us that we should conserve resources, while simultaneously punishing “price gouging.” Within the construct of the unhampered market, there can’t be price gouging any more than there can be wage gouging, since vendors can’t short inventories at prices beyond what consumers are both willing and able to pay.

Prices send signals to entrepreneurs, telling them where to deploy capital. Prices tell consumers what to buy and what not to buy. The price mechanism can only function within the construct of an unhampered market. There’s no need for the government to encourage or discourage the use of any kind of energy. And let’s not forget that tax credits are subsidies camouflaged as tax cuts. A tax credit merely allows a person to use a portion of income for a specific purpose (i.e. indirect subsidy). (See: http://www.businesstaxrecovery.com/articleupdates/definition-tax-credit)

I write as a native-Minnesotan. Minnesota is one of the first states that employed the use of ethanol-blend fuels. Let me say that if I see anything with ethanol in it, I avoid it like the plague. It’s “cheap” for a reason; it’s inefficient.

Only can politicians get away with turning efficient food into inefficient fuel. If politicians keep at it, we will soon be filling our automobiles up with corn and drinking motor oil. Maybe after installing those solar panels, the government can begin shooting those pollution particles (See: http://www.telegraph.co.uk/earth/environment/climatechange/5128109/Shoot-pollution-particles-into-atmosphere-to-cool-Earth-says-Obama-adviser.html) – which supposedly ”clean energy” is designed to prevent – into the atmosphere in order to block the sun and “save” us from “global warming.” Sounds like the perfect plan. It’s a plan only a politician in D.C. could dream up.

Soon, we will not only be dependent upon foreign sources of “fossil fuels,” but also so-called “clean energy.” Unless you get out and support Ron Paul for president.

I'm with Senator Reid on brothels

By Mark Anderson, on August 15th, 2011

I’m with Senator Reid over Goodman on the issue of brothels. Unless somebody can show me how the use of prostitutes engenders a net economic benefit, I don’t see why such an activity should be legal. In my estimation, it’s immoral. It degrades women, turning them into objects to be bought and sold. Prostitution undermines society and the economy.

Here’s the only problem that we run into. Criminalizing prostitution will never make the activity go away. So do we treat the prostitute as a criminal, while simultaneously a sitting senator is capable of having sex with a staffer and then paying $90,000 to her spouse? If we reject the notion of treating prostitutes as criminals, then we run into an enforcement issue. Personally, I don’t like the idea of treating prostitutes as criminals myself. However, I do have a solution.

Let’s treat prostitution as mental illness. After all, we treat people who believe in sound money and economic liberty and even Biblical Christianity as mentally ill. Now, let me ask the reader something. Suppose you had a neighbor in, say, his sixties and you knew he was having sexual relations with women in their twenties. How would you feel about that? Would you let your kids go anywhere near his house? Ah. But if it’s done on camera, with money exchanging hands in the name of commerce, and participants accrue wealth and garner celebrity status, then it’s considered to be respectable.

Behavior that would otherwise be condemned is defended, protected and consumed so long as it turns people into celebrities and millionaires. Now that’s mental illness. I say place all participants into the looney bin and give them massive doses of Haldol. If they disagree, well then they suffer from paranoia and need to be drugged for that reason.

There’s really no excuse for not knowing…

By Thomas Knapp, on August 8th, 2011

… that if you don’t check in with the government before wiping your bum, some idiot may blow $9,000 on extra toilet paper and blame you for it.

I’ve looked and looked and looked, and I can’t find anything in the Constitution about the airspace around POTUS being “restricted.” Nor are bullshit security theater antics covered in Article I, Section 8.

Weekly wrap

By Bron Suchecki, on August 8th, 2011

Some blogs that caught my eye last week. First is The Burning Platform with Edward Gibbon’s five marks of Rome’s decaying culture from his book The Decline and Fall of the Roman Empire:

1. Concern with displaying affluence instead of building wealth.
2. Obsession with sex and perversions of sex.
3. Art becomes freakish and sensationalistic instead of creative and original.
4. Widening disparity between very rich and very poor.
5. Increased demand to live off the state

I think it would be fair to say we are close to ticking all of them. Second is Steve Keen on the RBA’s setting of the cash rate:

The graph shows an almost 100% correlation between the cash rate and the 90-day bank bill rates. However the data also shows that in almost every instance the RBA cash rate FOLLOWS the 90-day bank bill rate, rather than leads it. … This analysis raises a number of interesting questions:

1. Why do we have the RBA as an interest-rate setting body at all when all they do is follow the market?
2. Why does the RBA shroud itself in such mysticism when their actions are so transparent to all?
3. What is the quality of our economists, politicians and financial commentators that we have to go through the “Will They or Won’t They” pantomime each month?
4. How could any economist get their forecasts wrong, particularly on the up-side?

Very much Wizard of Oz man behind the curtain. Third is Mark Tier at economics.org.au with two takeways on small/no government, which speak for themselves:

“… when the income tax was introduced in 1913 no one in his right mind would have suggested a top rate of 90 percent. In fact, there was considerable support for capping the income tax at 4 percent. This was shot down by those who argued that specifying such a maximum rate would mean the income tax would rapidly rise to that (then) horrific level. Can you imagine living in a world where an income tax of 4 percent is unthinkable!?”

“On January 24, 1848, the California gold rush began. But it took eighteen years for the U.S. Congress to enact a mining law to regulate such discoveries. Meanwhile, gold production in California boomed. How could that have happened without a governmental framework to recognize mining claims, register titles, and regulate disputes?

The miners created their own. They established districts, registries, procedures for establishing and registering a claim and buying and selling claim titles, and a system for resolving disputes. Officers were usually elected, including the recorder of claims.”

Finally, we have a report by Mineweb that I think few PM commentators will pick up, but which I think is a good signal that gold is on the move into the mainstream. Mineweb reported on Thomson Reuters buying GFMS which “will enable Thomson Reuters to offer clients analysis of metals markets alongside its news and prices”. This is a sign to me that smart money is moving into gold, as they are the only ones who can afford a Reuters feed. The mass market (dumb?) money follows much later, which is when we’ll see a real bubble.