Tuesday, December 28, 2010

The Fed's Dual Mandate

Here, Marc Sumerlin argues that the Fed's dual mandate is not really a problem.  He is right.  First, the Fed has a triple mandate.  Second, the Fed's so-called "dual" mandate is not a problem, because the real problem is that the Fed has a discretionary mandate at all.

Here are the Fed's official instructions from Congress:  "The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."

Anyone who can count will note that the specific words of Congress that authorize the Fed to do anything at all, stipulate three, not two, goals for the Fed.  (1) maximum employment, (2) stable prices, and (3) moderate long-term interest rates.  Yes, that's three, not two "mandates."

You may want to note that Congress also stipulated how the Fed is to pursue its three goals; notably, by "maintain(ing) long run growth of monetary and credit aggregates commensurate with the economy's long run potential to increase production."  Of course, the Fed ignores this particular set of instructions from Congress. Instead of keeping the growth rate of monetary aggregates about equal to the long-term growth rate of the economy, the Fed manipulates interest rates.

So why does Mr. Sumerlin talk about a dual mandate?  That's because the Fed itself has convinced lots of folks (including way too many card carrying economists) that the third goal is not really a goal.  Instead, interest rates are a monetary policy  "tool," according to the Fed and all its apologetic economist supporters.

You see, the Fed wants everyone to ignore that interest rates are really prices.  Most economists understand that interest rates are rental prices of using someone else's money.  The Fed wants us all to believe instead that interest rates are really nothing more than a monetary policy tool for the Fed to manipulate.

Students of ECON 101 understand the problems with government manipulating prices instead of leaving the determination of prices up to voluntary exchange in markets.  Let's not rehearse all that here and now, at the risk of putting most readers straight to sleep, but you could look it up easily enough, if you're interested.

Milton Friedman, who was arguably the brightest economist of the 20th Century (if not of all time out of mind), explained with clarity, logic, and history just why a Fed that pursues discretionary monetary policy of any sort at all --- never mind what the Fed's congressional "mandate" is said to be --- will end up destabilizing financial markets and the economy. Read a summary of the results of discretionary monetary policy here. Milton Friedman wrote much more on the topic, if you're interested; Google it.

Manipulating monetary aggregates and interest rates at will, which is exactly what the Fed does, is not the path to economic prosperity or stability.  Sadly enough, discretionary manipulation of monetary aggregates and interest rates causes economic booms and busts. Read about it here.

Do you really think that giving seven people (the board of governors of the Federal Reserve) discretionary control over how many U.S. dollars exist is a good idea?  Milton Friedman didn't think so, and neither do I. What I think isn't important, but to ignore Milton Friedman's analysis is arrogant lunacy.

Monday, December 20, 2010

And What of Gold?

Here, Manuel Hinds writes about the absurdity of 150 currencies around the world.  Mr. Hinds hints that a gold standard makes sense.

The biggest problem with a gold standard is that even if the world had one, the world would still have 150 currencies and most of them would still be manipulated by central banks and governments.

The Bretton-Woods system was an attempt at a gold standard.  It failed because in the end, people in power do what they want.  Central banks want to inflate the money supply, regardless of whether the money is supposed to be tied to gold or not. Just as in Jurassic Park life always finds a way, in this world central banks always find a way.

Mr. Hinds' assessment of the current mess we have with 150 floating currencies is correct.  But sadly enough, return to a gold standard isn't the answer.  The real answer is a banking system of 100% reserves.  Gold doesn't have to be reserve money, but something does.

Whatever is reserve money, it must not be susceptible to manipulation by central banks or the government for which they operate.  In the end, what that really means is no central banks.

How likely is that proposal?  Dead on arrival.  But make no mistake about it; central banks and governments that can create money at will are the bane of economic prosperity.  It's simple really.  You can't borrow what hasn't already been produced and saved by someone.  I know, I know; you've heard me say that before.

Saturday, December 18, 2010

The SSDI Scam

Here, Tad Dehaven explains the origins and present outcomes of the federal SSDI program, the disability insurance leg of what most folks just think of as Social Security.

Anyone who lives in the Virginia Highlands end of the state of Virginia, which is close to the eastern Tennessee and southeastern Kentucky borders with Virginia, knows much about the SSDI program and how flagrantly it is "gamed" by lawyers and some of the citizens of the region.  One can't travel north on highway U.S. 23 from Virginia, north through Kentucky toward Ohio without being inundated by billboards advertising the services of lawyers who specialize in securing SSDI payments for the citizenry.

Most residents of the region know at least one person drawing SSDI benefit payments.  I myself lived for 9 years next door to an SSDI recipient drawing benefits for heart problems reputed to be caused from working in the coal mines to the point of disability.  This same neighbor routinely performed all manner of physical labor in his back yard, including building an out building for his burgeoning tool collection one summer.

Entitlement programs --- Social Security, Medicare, Medicaid, and the various income support programs --- now comprise 60% of the federal budget.  That is to say, 60% of the federal budget --- a budget that requires deficit spending each and every year --- is annual transfer payments of income from those who earned it to those who did not earn it.

So what to do about it?  Whether you agree with the idea of transfer payments or not is quite beside the point.  The real issue is that the federal government has the ability and the will to spend money without limit.

Extension of the Bush era tax rates for another two years will add trillions to the already huge mountain of federal debt, which presently weighs in at about 100% of annual GDP, $14 trillion, give or take a few 100s of billions.

Federal deficit spending is without effective limit.  When the U.S. Treasury reaches the debt ceiling imposed by Congress, Congress just votes to raise the debt ceiling.  The federal government has no budget constraint like you and I.

If you or I want to spend more than our current annual income, we have to borrow or draw down previous years' saving.  But you and I can't borrow without limit, and you and I don't have an unlimited store of previous years' savings.

Uncle Sam has no previous years' savings whatsoever; the U.S. Treasury never saves.  Yes, the government reported a "budget surplus" for 1998-2001 during the second term of Bill Clinton's presidency.  But that surplus is mostly due to creative accounting with the Social Security Trust Fund.  Even during the years 1998-2001, the U.S. Treasury spent more than federal tax collections alone would have financed.  Read about it here.

So what to do about run away entitlements?  The answer is simple, really.  Give the Congress a budget constraint that can't be undone under any conditions.  I wrote about the idea here, so no need to repeat it.

To sum it up, we the people need to insist that Congress (or the legislatures of our various states --- take your pick) ratify a constitutional amendment that goes something like this:

"Congress is authorized to allocate annual spending that shall not exceed x% of the average of GDP for the most recent past three years, regardless of how that spending is financed."

As I wrote before, much debate and wrangling must precede filling in the "X" in x%, but let's get on with the debate and wrangling and then amend the constitution.  Historically, "X" has been somewhere in the neighborhood of 20 to 22.

Until we give Congress a budget constraint that Congress can't avoid, there will be no solution to the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) problem down the road.  Why do I bring up the PIIGS?  Isn't that a European problem?.  Yes, it is, but we will be the PIIGS in future if we don't shut off the spigot of federal spending.

By the way, giving Congress a definite budget constraint wouldn't mean no entitlement spending.  Our hard-working members of Congress can elect to spend the federal budget on whatever they like.  That's what the Constitution says.  If Congress wants to spend 100% of the federal budget on transfer payment, it could do that, even if we amended the Constitution to give Congress a definite budget constraint.

But Congress would have to do its job instead of spending without limit.  Just like you and me.

Thursday, December 9, 2010

Don't Worry about Inflation

Helicopter Ben is quite certain that we don't have to worry about inflation.  The Fed's got our backs, he says.

But of course, we're not supposed to include in our measures of inflation stuff like energy and food, since those prices are volatile.  Thank goodness.  I was worried there for a minute about rising energy and food prices.

But what about asset prices?  Here, the WSJ reports on rising farm land prices and ponders whether farm land might be the locale of the next Fed-induced asset bubble.

Just remember; all the dollars in existence must be held by someone.  Dollars created by the Fed will find a home, and it probably won't be under the bed in a coffee can.  Will banks start lending to land speculators, pumping up the next bubble?  Don't count'em out.

More Evidence: Go Away Keynes

Here, John Cogan and John Taylor provide still more evidence that massive federal spending financed by money creation (i.e., adding to federal debt) hasn't and won't result in economic growth.

Lots of economists understand why the Keynesian prescription is flawed.  If you want to understand, too, read this.  That's the logic of the thing.

Some people are persuaded by logic; some people are persuaded by data.  Take your pick.  When it comes to federal fiscal policy or monetary policy stimulating the economy, logic and data both say the same thing.  Forget about it.

If we want a growing economy, how to get it is explained here, here, and here.

Congress Demonsrtrates Why We Need To Dump The Incumbent Party

Here, the WSJ chronicles business-as-usual posturing, log rolling, and special pleading of members of the incumbent party and lobbyists in Washington over the "deal" struck between BHO and "Republican leaders."

To paraphrase John Godfrey Saxe,  laws are like sausages, it is better not to see them being made.  He should have said, "seeing laws being made should inspire us all to get rid of lawmakers."

How about we the people require the House and the Senate to pass a budget each and every year with no possibility of piling on, log rolling, special pleading, ear marks, side issues, and all the rest.

How about we the people require that Congress not spend more in any fiscal year than X% of the average of the most recent past three years of GDP.  Read more about that idea here.

Forget "deals."  How about members of Congress stepping up to the plate and behaving like statesmen instead of brokers for their favorite industry, lobbyist, or state?

How about we the people constrain the federal government to the powers authorized by the Constitution, as explained carefully in the Federalist Papers

Go Tea Party.

Wednesday, December 8, 2010

Becker's Explanation of Slow Job Growth

Here, Nobel Laurette, Gary Becker explains it in clear, concise terms.  As regular readers know, EconoBlast agrees with Prof. Becker entirely.

Do you suppose that professional economists like Gary Becker might just know something about economics that BHO and crew (not to mention the Republican members of the incumbent party) don't know?  Indeed; pretty much just like astrophysicists know something about space travel that the most of us don't know.

Tuesday, December 7, 2010

Republican Leaders Are Part of the Incumbent Party, Too

Here, the WSJ reports on the "deal" struck by "Republican leaders" with BHO to extend the Bush era tax cuts.

Problem is, the deal calls for more really lousy tax policy.  In other words, business as usual in Washington.  Lots of economists understand that temporary tax cuts are quite unlikely to lead to increased economic growth.  That's because people understand that their taxes will go up  in the future when the temporary tax cuts expire. 

Pay me now or pay me more later.  That's the real deal with temporary tax cuts. 

The Republican leaders are already starting back down the path to business as usual.  It's hard to imagine, but evidently, Republicans think the November vote was a mandate for Republicans.  It wasn't.  It was a vote against incumbent politicians.

The November vote reflects we the people telling the incumbent party that we've had enough.  Apparently, Republican leaders are already choosing to behave just as they always have --- as part of the incumbent party.

Here is a believable explanation of what's really going on.  Republicans and Democrats are getting ready to raise the federal debt ceiling once again.  It doesn't really matter whether Congress spends from taxes or from borrowing that creates new money via the Fed.  Congress has no budget constraint, and that is a serious problem, as I've explained before here.  

What really matters is that the federal government and its incumbent politicians will command real goods and services, instead of private households and businesses.  Members of the incumbent party are really quite dense, evidently.  They need to remember that November 2012 is on the way.

Go Tea Party.

Saturday, December 4, 2010

When Will There Be Jobs?

Here, Former Secretary of Labor Robert Reich laments that the unemployment rate is not falling.  He even admits that it might not fall anytime soon, if ever.  He's right, and the correct explanation for slow job growth can be found here and here.

Like any good liberal, Mr. Reich is upset that Washington isn't doing anything to help the problem.  What Mr. Reich doesn't say is just what it is he thinks the federal government should be doing.  But he doesn't have to; we already know what Mr. Reich would say.  He's said it before.

More stimulus spending financed by federal borrowing and raising taxes on the rich; that's what Mr. Reich would say.  Mr. Reich would push this prescription because he is a Keynesian, and he believes the federal government has both and obligation and the power to reduce unemployment by attempting to borrow what has not yet been produced.

Readers of this blog no doubt understand that you can't borrow what hasn't yet been produced, even if you are the United States Treasury.  Mr. Reich is no dummy; why does he think the federal government can deficit spend the economy back to the natural rate of unemployment --- which is probably somewhere in the neighborhood of 5%, based on history.

To believe that spending money newly created by the Fed will lower the rate of unemployment, one has to believe that the only reason so many people are unemployed is because producers are fearful that they won't be able to sell what they produce.  In the words of good old Keynesian economics, "aggregate demand is insufficient."  Solution (according to folks like Mr. Reich), get the federal government to spend borrowed money. 

The notion is that whoever has the money isn't spending it.  Since whoever has the money isn't spending it, the U.S. Treasury can borrow the money and  spend it.  That way, producers won't be worried that no one will buy what they produce.  That means producers will hire more workers, produce more goods, and unemployment will surely drop.

So what's wrong with this sort of thinking?  Hasn't federal deficit spending reduced unemployment in the past whenever we've had a recession?  Well, no, federal deficit spending hasn't reduced high unemployment in the past, and logically, all kinds of things are wrong with this sort of thinking.

In other words, the Keynesian prescription of Mr. Reich and others like him are wrong theoretically, and historical evidence also doesn't doesn't support the prescription.  Read this and this if you want data instead of just my say so.  Read here John Cochrane's explanation of why no thoughtful person should expect the Keynesian prescription to work.

So, when will the American economy generate sufficient new jobs to reduce the measured rate of unemployment?  To understand the cure, we must first understand the cause of the disease.

In my judgment, today's high and undiminishing unemployment has two fundamental and important causes.  One is structural and will require years, not months, to mitigate.  The second is political, which means it could be mitigated fairly quickly, if the 545 had the knowledge and will to do so.

The structural cause of high and undiminishing unemployment in America is a widening mismatch between the skills and knowledge available from the labor force, compared to the skills and knowledge producers need in today's high tech information-driven economy. As Mr. Reich noted in his lament, the unemployment rate among people with a college education is only 5%.  Surprise, surprise; employment is correlated with education.

The political cause of high and undiminishing unemployment is the powerful confluence of ever rising transfer payments of entitlement programs (social security, medicare, medicaid, and unemployment benefit payments), incredibly bad income tax policy, rising moral hazard in financial markets, and the growth-stifling hand of ever rising regulation in the American economy.

Liberals and so-called progressives (I prefer the term "socialists" in the interests of clarity and truth) cannot refute the first, structural cause with theory or data.  They can and do deny the second political cause, but they do so with neither theory nor data to buttress their rebuttal.

When will there be job growth again in America?  When individual people acquire skills and knowledge that are in demand in the labor market, and when politicians reverse the relentless march toward top-down, liberty-depriving, growth-stifling regulation and socialist public policy.

Forget about federal stimulus spending, Mr. Reich.  Forget about monetary policy, Mr. Bernanke.  Forget about both, Mr. Obama.  See the problem of high and undiminishing unemployment for what it really is.

Friday, December 3, 2010

Free Trade? Forgettaboudit

News Alert
from The Wall Street Journal

 "South Korea agreed to give the U.S. five years to phase out a 2.5% tariff it levies on Korean-built cars, rather than cutting the tariff immediately, clearing a key obstacle to a deal on the long-stalled U.S.-South Korea trade pact, say people familiar with the negotiations.

Details of the revised pact, which must still be ratified by both nations’ legislatures, are expected to be released later Friday, barring a last-minute snag. The proposed trade pact, if ratified, would be the largest bilateral trade deal the U.S. has completed since the 1994 North American Free Trade Agreement."

Would someone please explain just why it is that America has a 2.5% tariff against Korean-built cars in the first place?  Why can't American citizens buy a Korean-built car at whatever price Korean companies and American citizens would like to voluntarily negotiate?  Why is the government involved at all?

Oh, excuse me.  I must have forgotten for a minute that BHO and crew have to give benefits to labor unions to reimburse them for their votes.  The 2.5% tariff makes Korean-built cars more expensive to American consumers than American-built cars of similar quality.  In the end, the tariff helps unionized American auto workers insist on higher wages.  

Higher wages is certainly good for auto workers, but are they also good for all the rest of us Americans?  Not so much.  All the rest of us pay more for whatever car we decide to purchase.  We do so because BHO and crew think it is just fine to extort money from the many to reward  the few for their erstwhile support at the polls.

"But wait," you say.  Shouldn't we all be willing to pay more for our cars to protect the jobs of American auto workers?  This is a "people" issue, after all.  But that line of reasoning is ignoring the jobs of other American workers that will be lost instead as American consumers don't buy as many Korean-built cars.  

Jobs saved in the American auto industry due to the 2.5% tariff will come at the expense of other jobs lost in industries that export goods and services to Korean citizens. Remember, trade is always a two-way street. In the end, for every dollar American consumers don't spend on Korean-built cars, some Korean consumers will not spend that dollar on American-produced goods and services.

Don't you think it's time we the people insist that our politicians keep their hands out of voluntary exchange?  If they did, we would enjoy two immediate benefits.  First, American consumers could buy less expensive cars. Second, the right of American consumers to exchange voluntarily with whomever they want, on whatever terms they want would be restored.

While I would like both benefits, for me the second benefit is the more important of the two.  Can someone explain just why American auto workers should have the right to coerce higher prices from all other Americans using the force of the federal government?

Crime and Punishment

News Alert
from The Wall Street Journal

The U.S. House voted to censure Democratic Rep. Charles Rangel, who was found to have broken 11 different ethics rules.

The 80-year-old Harlem Democrat was found to have misused congressional perks, failed to pay taxes on some income for 17 years, failed to report assets properly for a decade, and misused a rent-stabilized apartment as a campaign office.

Rep. Rangel will be required to stand on the House floor as the Speaker of the House condemns his behavior in front of his fellow lawmakers.

Immediately following the horrible censure proceedings,  Mr. Rangel will be whipped severely across the back of his hand with a wet noodle (no fewer than three lashes).  

Is it really just ethics rules violations that Mr. Rangel is guilty of?  I thought tax fraud was an actual crime.  Oh, maybe that's just for people not in the government.

Thursday, December 2, 2010

What's Gone Wrong With Our Economy?

In a word, regulation.  Read here about how our good friends at the Food and Drug Administration now have even greater power to muck about and keep small businesses from competing with big businesses.

Isn't it fantastical that so many people seem to be perfectly happy with the proposition that a bunch of bureaucrats in Washington can and should tell everyone else what they can and can't do in matters economic?

Why does anyone think that some small set of bureaucrats (all of whom are just people, by the way) will have either the information necessary or the incentives to regulate voluntary exchange among consenting adults?

People who favor top-down regulation always have some ax to grind.  See if you can understand who is grinding what ax in the new regulatory powers Congress just gave to the FDA.

Could It Happen In America?

Here, John H. Cochrane brings his usual insight and sanity to the Euro crises.

Wednesday, December 1, 2010

What To Do About the Deficit, What To Do, (Much Hand Wringing), Oh, What To Do?

Frankly, no one should be surprised that massive deficit spending authorized by Congress doesn't have much effect on production of real stuff.  Congress authorized spending that would be financed by borrowed money newly created by the Fed.  But as readers of this blog surely know already, you can't borrow what hasn't yet been produced.  Not even if you are the United States Treasury, and not even if Congress said you could.

But what to do about the federal deficit; that's the question of the day, and quite probably the next several weeks. The federal debt and annual budget deficits will not be reduced unless our economy  returns to a long-term sustainable growth path.

Worse sill, until Congress gets the federal debt and annual deficits headed south, the economy is quite unlikely to return to a long-term sustainable growth path.  Congress seems unshakable in its pursuit of the path that the PIIGS have already pursued in Europe.  

Whatever else anyone recommends (notwithstanding the recent report offered by Mr. Simpson and Mr. Bowles), nothing will make a meaningful difference until Congress enacts a single, fundamental change.

Congress must give itself an ironclad budget constraint.

As everyone who's been paying any attention at all knows, for decades Congress has spent whatever it wanted to spend. Congress does so by annually raising the federal debt limit.  The result is that Congress has no budget constraint of any kind.

If we are serious about shrinking the federal debt and annual budget deficits, here's how to do it. Pass a Constitutional amendment that reads something like this:

"Congress is authorized to allocate annual spending that shall not exceed x% of the average of GDP for the most recent past three years, regardless of how that spending is financed."

We can have great political economy debates about what  "x%" should be.  Let's have them.  Based on history in the United States, something around 20% probably wouldn't cause too many people too much heartburn.

Faced with such a genuine budget constraint, members of Congress could debate long into the night each year about how to spend the money.  That's exactly what they're supposed to be doing for us.  But what Congress could not debate is how big the federal budget would be.  That would be fixed at x% of nominal GDP of the most recent past three years.

Over time, what would we expect to happen following amendment to the Constitution as I propose?  I would expect nominal GDP to grow.  I would expect real GDP to grow at about 2% per year, although important technological advances (e.g., computer technology) might accelerate that rate over some decades. 

I would also expect nominal GDP to grow because the Fed will almost certainly continue to grow the supply of money, and will probably do so at about 2% or 3% per year.  Taken together, inflation and real growth would give us something on the order of 5% - 6% growth in nominal GDP per year.  So, the federal budget could grow at something like 5% - 6% per year, too.

I would expect fewer wars.  I would expect fewer earmarks.  I would expect members of Congress to begin acting more like patriots and less like brokers between the federal budget and their electorates.

I would expect the federal debt and annual federal budget deficits to shrink.  The amendment I propose does not say Congress cannot borrow; it just says Congress cannot spend without limit.  Real growth in the economy, coupled with a real budget constraint for Congress, would result in budget surpluses over time, erasing annual deficits.

Imagine that; a federal budget surplus; an annual surplus of tax receipts over federal spending that could be used to pay down the federal debt standing now somewhere in the neighborhood of $14 trillion.

I can hear it now.  Any number of economists will say, "yes, but why should we do that?"  To them I say, "look around."  It really isn't rocket science.  It's really pretty simple.  If Congress hamstrings the economy with growth choking regulation and taxes, and the Fed continues to pump new credit money into the next asset bubble, how will that work out?  Look around.

I invite readers of Econoblast to pose objections to my simple proposal for solving the federal debt and deficit problem.  Comment also about expectations you would have if such an amendment were enacted by we the people.