My letter to the Philadelphia Inquire re: Who benefits from labor laws?

Re: Where to Invade Next, directed by Michael Moore

Dear Sirs:
I look forward to watching Michael Moore’s recent film that purports to show how Europeans and Africans have passed laws, such as long maternity leaves that must be paid by employers, that benefit “society”. I doubt that Mr. Moore has ever asked himself who benefits from such laws. Big business is behind most of them. Such laws create barriers to low cost competitors and harm the very people whom the laws claim to help. For example, small business will refrain from hiring young women, if they might be forced to pay for generous maternity leave. Minimum wage laws were supported by labor unions in order to price minorities–immigrants, blacks, women–out of the labor markets. They still do. Mr. Moore needs to ask himself this question: If the benefits from labor laws are so wonderful, why is the police power of the state required to force employers to offer them? Wouldn’t companies who adopted such benefits, or even more generous ones, become more successful? I suspect that Mr. Moore has answered the question himself. According to Mr. Derakhshani’s review, Mr. Moore admits that he is showing only one side of each law–the beneficiary that he sees. This is akin to showing only the genteel lifestyle of antebellum, slave-holding Southern aristocrats.

Patrick Barron

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The Impact of Negative Interest Rates

Central banks the world over have lowered interest rates almost to zero– i.e., they have adopted a zero interest rate policy (ZIRP)– with the hope that cheap credit will revive moribund economies. Central banks have expanded their balance sheets by printing money to buy assets, which we Americans call an “open market operation”. If it buys the government’s own bonds, the process is called “monetizing the debt”. These are just fancy names for printing money out of thin air in order to buy something. Whether the central bank buys an asset from an individual or a government bond from the Treasury itself, the money winds up in someone’s bank account and the banking system’s reserves expand. (The seller’s checking account goes up, a liability for the banker, and the bank’s offsetting asset is an increase in reserves held at the Fed.)

 

Keynesians who support this practice believe that printing money and reducing the interest rate will increase the bank’s propensity to lend and public’s propensity to borrow and spend. This increase in aggregate demand will push the economy forward. Evidence of success would be a slow rise in inflation–i.e., prices–and a steady reduction in excess reserves. (When banks lend, they credit a checking account. Their “reservable liabilities” go up, which increases their required reserves and lowers their excess reserves. Total reserves remain the same, however.)

 

Despite ZIRP and multiple quantitative easing programs, whereby the central bank buys large quantities of assets while leaving interest rates at practically zero, the world’s economies are stuck in the doldrums. Their only accomplishment seems to be an increase in public and private debt. Therefore, the next step for the Keynesian economists who rule central banks everywhere  is to make interest rates negative; i.e., adopt NIRP. The process can be as simple as the central bank charging its member banks for holding excess reserves, although the same thing can be accomplished by more roundabout methods such as manipulating the reverse repo market. Remember, it was the central bank itself who created these excess reserves when it purchased assets with money created out of thin air. The reserves landed in bank reserve accounts at the central bank when the recipients of the asset purchases deposited their checks in their local banks. Now the banks have liabilities that are backed by depreciating assets; i.e., the banks still owe their customers the full amount in their checking accounts, but the central bank charges the banks for holding the reserves that back the deposits. In effect the banks are being extorted by the central banks to increase lending or lose money. The banks have no choice. If they can’t find worthy borrowers, they must charge their customers for the privilege of having money in their checking accounts or, as is happening in some European banks, the banks try to increase loan rates to current borrowers in order to cover the added cost.

 

In European countries where NIRP reigns, so far the banks are charging only  large account holders. These large account customers are scrambling to move their money out of banks and into assets that do  not depreciate. The scramble for high grade securities has resulted in some securities being sold at a premium; i.e., the customers will get back less than they invested. How can this be? Well, the premium amount is less than the charge by the banks, so the large account customer is slightly better off. He loses somewhat less money. But this really does not solve the problem; it just means that the excess reserves are moved somewhere else, creating the same problem for the bank of the asset seller. Once reserves are created by the central bank, they can be destroyed only by a reversing open market operation by the central bank itself; i.e., it sells an asset, and the reserves flow back into the central bank.

 

But that is not what the central banks want. They want to force the banks to lend money in order to avoid the excess reserve charge. They appear poised to increase the so far nominal cost of a half percent or less. If the central banks can charge a half percent, they can charge anything they wish and, given the Keynesian mindset that led to the insanity of negative rates in the first place, probably will do so.

 

Negative rates violate numerous tenets of Austrian economics. For example, the basis of Interest rates is consumer time preference, described by David Howden in an article written almost three years ago about the loss of Canadian manufacturing.

 

Time is a factor necessary for production, and unique in the sense that we cannot economically allocate it like other inputs. The choice of time is always “sooner or later” and never “more or less” (as is the case with other input factors). Interest rates help us determine how soon we should consume a good, or how long a production process should be. Low interest rates imply that the future is not heavily discounted. At a low rate you will be willing to wait a longer period of time to realise the enjoyment of consumption or the profits of an investment. High interest rates invoke the corollary – you will want to consume earlier, or employ production processes that pay off in as short a time as possible.

Dr. Howden goes even further to show how central bank production of money out of thin air in order to drive down the interest rate causes disequilibrium between borrowers/investors and savers (the very purpose of the interest rate in an unhampered economy is to create equilibrium between these two groups), disequilibrium in the time structure of production (primarily an overinvestment in longer term projects), and the inevitable boom/bust business cycle that results from the fact that real savings had not increased to provide the real goods necessary for the increased investments. First businesses go bankrupt, then the banks, then the population as a whole.

 

But can’t the central bank just print more helicopter money to save everyone? Unfortunately, no. More money cannot cure what too much money created; i.e., higher and higher prices and loss of production.

 

Of course, an economy that has been thrown into disequilibrium by negative interest rates may display many weird anomalies before succumbing to the “crack up boom”, as described by Ludwig von Mises. Alasdair Macleod of Gold Money dot com suggests that an early indication of loss of confidence in money is a commodity boom in precious metals. Prices rise faster and faster and production collapses. The public understands that the monetary authorities have no intention of reversing their negative interest rate policies and restoring sound money and banking. In a mad rush to save their wealth from total destruction, the public will start to buy what it hopes to be assets that will not depreciate. This sets off a huge boom in some asset categories; thus the “boom” portion of Mises’  “crackup boom” scenario. But the crackup follows on the boom’s heals.

 

The real pity is that falling prices eventually create the conditions for a normal economic revival. Deflation is not a death spiral as the Keynesian believe. The public’s demand to hold money will be satisfied when their reserves of money balances are sufficient in relation to the price level, they are once again confident of the future, and are willing to invest for the long term.

 

The suppression of interest rates has been unnecessary and harmful. Nevertheless, expect more central banks to follow the early leaders– Switzerland, Sweden, Denmark, and even upon occasion the European Central Bank itself–into negative interest rate territory. The crying shame is that it will not work and will cause great harm to hundreds of millions of people. It may even collapse Western civilization.

Patrick Barron

 

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More Eurozone integration will bankrupt Germany

From today’s Open Europe news summary:

Bundesbank and Bank of France Governors call for Eurozone finance ministry

In a joint article for Sueddeutsche Zeitung Bundesbank President Jens Weidmann and Bank of France Governor Francois Villeroy de Galhau argue, “The current asymmetry between national sovereignty and communal solidarity is posing a danger for the stability of our currency union…Stronger integration appears to be the obvious way to restore trust in the euro zone, for this would favour the development of joint strategies for state finances and reforms so as to promote growth.” The pair calls for a creation of a Eurozone finance ministry to achieve this end. The also warn that, while monetary policy has helped the Eurozone, “can’t create sustainable economic growth”.

Well, I used to think that Jens Weidmann and the Bundesbank were the only sane voices in the Euro Zone, but now it looks like Germany has tied its fate irrevocably to the inflationist and irresponsible EU countries. This is exactly what those countries want to hear–that Germany will continue to subsidize their irresponsible, profligate, and unsustainable socialist programs. Germany must know that there is no bottom to this pit. The end game is Germany insolvency along with the rest of Europe. Therefore, Germany is doing its neighbors a disservice by enabling them to continue to destroy their countries. Soon all Europe will look like the Soviet Union in 1989.

Patrick Barron

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Since when is $3 billion in cash relief NOT considered a bailout?

My letter to the NY Times:

Re: Senate Republicans Introduce Bill for Puerto Rico Relief

Dear Sirs:
Here’s another example of a government bill that will do exactly the opposite of its summary. Puerto Rico and bankrupt states, such as Illinois, will never reform their finances by their own volition. Allowing them to file for bankruptcy protection, as proposed by the Obama administration, would end their ability to tap the bond market and force them live within their means. It’s time to stop kicking the debt can down the road and get American government at all levels back on a sound footing.

Patrick Barron

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My letter to the NY Times re: An abuse of language

Re: Rubio Quietly Undermines Affordable Care Act

Dear Sirs:
Your reporter Robert Pear characterizes Marco Rubio’s amendment to the Affordable Care Act, which reduces the government’s subsidy to participating insurance companies, as a case of “quiet legislative sabotage”. Sabotage? Really? Aside from the fact that his colleagues passed the measure, which hardly constitutes sabotage, Rubio’s amendment illustrates that ObamaCare is NOT health insurance. Since the cooperating real insurance companies must pay claims on clients with pre-existing ailments, ObamaCare is nothing more than welfare on demand. Call things what they are and stop attempting to sway readers’ opinions with loaded and poorly chosen words. There’s enough of that on your Op Ed pages.

Patrick Barron

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My letter to the NY Times re: Safety net for regulators

Re: A Middle Ground Between Contract Worker and Employee

Dear Sirs:
Noam Scheiber’s report of how current labor laws cause unintended adverse consequences for new, digital companies should lead everyone to question the need for such regulations. Why not let employers and workers decide their own terms of employment? The safety net, so beloved of Labor Secretary Thomas E. Perez, seems designed to protect his own job, that of other labor regulators, and busy-body pundits who fret over other people’s business. Labor laws raise costs and uncertainty, destroying job creation and threatening current employment. All employment is the result of cooperative interaction between employer and worker. The employer values the employee’s services higher than the money and benefits he pays, and the employee values the money and benefits he receives higher than leisure or alternative employment options. Where is the need for a labor regulator in this transaction?

Patrick Barron

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Splendid Isolation: A sane foreign policy for America

A proper foreign policy for the US would be consistent with and recognize the limitations placed upon our country by the physical world in which we live.

First of all it would recognize that all countries, including the US, have limited resources. These resources are provided by the private economy; there is no other. All government spending, for whatever reason and however justified, weakens the private economy. Most importantly, the US must reject the myth of “war prosperity”. Military spending detracts from an economy’s productive capacity. It uses precious capital to produce non-consumable goods and robs the economy of some of its most productive citizens. A nation’s leaders must recognize that frugality in a nation’s military spending is as important for the nation’s long term welfare as is frugality in one’s personal household spending.

Secondly, a sane foreign policy would distinguish between what is in one’s true national interest and what is not. It would not embark on military adventures or commit the nation to future military action when national security is not threatened. Furthermore, a sane foreign policy would recognize that it is impossible for the US to judge disputes in foreign lands, as if it were an impartial jury deciding the guilt and innocence of the parties involved.

For the above reasons, the US would not intervene in the internal affairs of other nations, for it would not be able to understand the animosities which led to the conflict. Nor would it commit itself to an open-ended collective security treaty. Not only would such a treaty oblige the US to intervene militarily in long-standing foreign disputes, it would encourage new disputes to the degree that members of the alliance would feel less need to engage in difficult negotiations to find peaceful solutions to the inevitable frictions which arise among nations. Furthermore, collective security agreements suffer from moral hazard and the socialist tendency to consume the resources provided by others.

A proper foreign policy for the US is that of “Splendid Isolation“, a term that came to be synonymous with Britain’s late nineteenth century policy of eschewing both formal alliances with foreign nations and intervention in foreign affairs. Britain’s foreign secretary Edward Stanley, 15th Earl of Derby, articulated the policy succinctly in 1866:

“It is the duty of the Government of this country, placed as it is with regard to geographical position, to keep itself upon terms of goodwill with all surrounding nations, but not to entangle itself with any single of monopolising alliance with an one of them, above all to endeavor not to interfere needlessly and vexatiously with the internal affairs of an foreign country.”

Notice that the principle has two parts, both of which are necessary for either to become realized in practice–no formal alliances with a foreign power and non-intervention in the internal affairs of foreign nations. One is impossible to achieve without the other.

Alliances oblige members to intervene in matters that would not otherwise be viewed as necessary to the security of the nation, and interventions in the internal affairs of others almost always require at least the tacit cooperation of allies. An example of the former is the US’s intervention in Vietnam. It was triggered by its membership in the Southeast Asia Treaty Organization (SEATO). The US waged war in Vietnam for over a decade before abandoning the fight. Today the US and the communist regime there are on friendly terms, an astonishing development on which few supposed foreign affairs experts have commented. Were the deaths and disabilities on both sides and the expenditure of so much treasure even necessary, since the two nations exist harmoniously now? What are Gold Star Mothers to think?

An example of the second principle–that interventions require at least the tacit approval of allies–is the ultimate failure of the Anglo-French invasion of Suez in 1956. The US was not informed of the invasion and was placed in a difficult position when Russia threatened to intervene on behalf of the Egyptians. The US was forced to confront Russia, but it also demanded that the British and the French withdraw.

Some may consider the lack of formal alliances and nonintervention in the affairs of others to be a bad thing. If so, let them consider the relevant paragraph of George Washington’s famous 1796 Farewell Address:

36 The great rule of conduct for us, in regard to foreign nations, is, in extending our commercial relations, to have with them as little political connexion as possible. So far as we have already formed engagements, let them be fulfilled with perfect good faith. Here let us stop.

George Washington did not advise that the US never intervene in foreign affairs or that it never join an alliance. Later in his address he advised that the US conduct its foreign policy on an ad hoc basis “as our interest, guided by justice, shall counsel” and that “we may safely trust to temporary alliances for extraordinary emergencies.” Temporary alliances and interventions that serve our interest would require exceptional circumstances, a policy which is very similar to Edward Stanley’s dual dictum to eschew formal alliances and interfering in the internal affairs of others.

NATO is an example of an alliance that was formed to meet an exceptional circumstance. All Europe had been weakened by war, and an aggressive Soviet Union maintained a large military presence in the Eastern European countries that it liberated from Nazi rule. The Mitrokhin Archives reveal without a doubt that it had designs on the rest of Europe as well. America’s solemn treaty to defend Western Europe as if it were American soil created a stalemate and deterred Soviet designs until its economy collapsed and new leadership pulled its troops out of Eastern Europe. At this point NATO could and should have been disbanded. Western Europe’s economies had fully recovered. Two NATO nations outside the US, France and Britain, had nuclear weapons. Germany’s economy alone was greater than that of Russia, although it did not possess nuclear weapons.

The fallacy of the necessity of political control of natural resources

America’s current overseas bases and deployments are based to a large part on the great fallacy–one which has led to great conflicts–that a nation’s prosperity depends upon the political control of essential resources. This fallacy drove Nazi Germany, Shinto Japan, and the USSR to imperial overreach and eventual downfall. None of these empires realized anywhere near the pre-occupation production from their conquered lands, which probably were net liabilities from the need of onerous oversight and military protection. Just ask yourself whether it is better simply to buy Middle Eastern oil or to conquer the entire Middle East and attempt to operate the oil industry in what surely would be hostile territory. There is no reason for alarm that control of Middle Eastern oil or any other vital resource would allow America’s enemies to deprive it of essential resources. Whoever controls Middle Eastern oil, even ISIS, will sell it on the world market. Furthermore, the current oil glut is amply evidence that the so-called energy shortage was the result of decades of American price regulation and other governmental restrictions on American energy production. An oil boycott today would bankrupt even Saudi Arabia, who would lose customers to more reliable suppliers. For the same reason Western Europe need not fear undue influence from Russia as a provider of natural gas. Whatever temporary dependency that arises will be the outcome of foolish policies from Europe itself. Germany, especially, is making its economy dependent upon Russian energy supplies by practically outlawing coal and nuclear power production and relying upon wind and solar to take up the slack. The Poles know that this is a foolish policy. They are rebelling against European Union restrictions on electricity production from fossil fuels, of which Poland has ample supply.

The power of the consumer

Those who have personal concerns about foreign production methods or the intent of foreigners to use their export revenue to fund hostile groups may use the time-honored tactic of the consumer economic boycott. Examples include the “Boycott Grapes” movement, the demise of Venezuelan controlled Cities Services/Citgo retail gasoline chain following Venezuelan President Hugo Chavez’s criticism of America, and the fair trade coffee movement to raise grower incomes. (Citing these examples of the economic pressure that consumer wield is no endorsement that the movements were either just or based upon sound economics, only that consumer pressure can and does work in certain circumstances. Remember, Mises always cautioned that the consumer was king in that his preferences established the structure of the economy.)

In conclusion, pertaining to our overarching relations with others, we would do well to follow Barron’s dictum: “Mind your own business and set a good example.”

 

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My letter to the Philly Inquirer re: Learn Economic Nonsense from the Fed

Re: Fed to help teachers learn finance

Dear Sirs:
Here is what the Fed will teach about money and finance:

Lesson #1: Print money
Lesson #2: Print more money
Lesson #3: Print even more money

Here is a quote from Mr. Bill Martin, a high school teacher who has taken many Fed classes:

“We hook the students with questions about the $100,000 bill,” he said: “Where does money come from? It’s created by lending. You take some of that $100,000 bill, lend it at an interest rate, say, to 100 people, and they grow a business and it becomes $200,000. That’s how wealth is created. Growth doesn’t happen unless lenders lend. You borrow to grow, and then pay it back with interest.”

It’s magic! (Or is it?) If banks can create $100,000 of wealth at the stroke a pen (by lending), why can’t you or I do the same thing? We print $100,000 on our personal copiers and lend it at interest. Voila! Instant wealth!

Pardon me if I do not believe this nonsense. Wealth is created by hard, smart work, plus saving to build capital. It is not created at the stroke of a pen or from the rollers of a printing press.

Patrick Barron

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Another socialist EU proposal to reward irresponsibility

From today’s Open Europe news summary:

Commission eyes jointly funded Eurozone deposit guarantee scheme

The Financial Times reports that, according to leaked documents seen by the paper, the Commission is planning to create a Eurozone Deposit Guarantee Scheme, which would initially support national schemes but eventually replace them with a fully mutualised system by 2024. The move is strongly opposed by Germany, which is currently the only Eurozone state to have a fully funded deposit guarantee scheme, as required by EU law.

Source: The Financial Times

Despite the fact that centralization of money and banking regulation at the EU has led to nothing more than an increase in member state transfer payments funded by debt, the EU Commission continues business as usual. It is blind to the consequences of its actions and desires a steady march toward a European super state.

Germany must leave the European Monetary Union before these new laws come into existence. Its national wealth is being stolen by back door policies such as this. Furthermore, it is not in Europe’s long term interest to have Germany’s wealth destroyed. Germany needs to regain control of its own economy and can do so only by regaining control of its own money and banking system. This is not abandoning Europe but saving Europe from itself. Without German guarantees the rest of Europe would be forced to abandon the worst of their socialist policies. The best role for Germany is to set a good fiscal and monetary example for the rest of the EU (plus the US and the rest of the world) to emulate.

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The logic of sovereignty and unilateral free trade

From today’s Open Europe news summary:

FT: UK pushing for ‘emergency brake’ on EU laws to safeguard rights of non-Eurozone countries

The Financial Times reports that the UK is seeking to obtain an ‘emergency brake’ on future EU proposals in order to protect the rights of non-Eurozone countries. This new ‘emergency brake’ could be based on the so-called ‘Ioannina-bis mechanism’ – which already exists in the EU Treaties – and could allow non-euro countries to delay a vote on new EU legislation if it threatened their interests or the integrity of the single market, triggering additional consultations at the level of EU leaders. The ‘emergency brake’ is reportedly part of a set of UK demands to reform the relations between euro ‘ins’ and ‘outs’. Other proposals include recognising the EU as a ‘multi-currency union’ and ensuring that non-Eurozone countries will no longer have to contribute to Eurozone bail-outs. Another provision would establish the principle that non-euro countries would not be forced to take part in initiatives – such as the banking union – that are driven by the Eurozone’s integration needs.
The paper cites Open Europe’s proposals to strengthen non-Eurozone states’ rights, published last month, which argued that if three non-Eurozone countries oppose an EU proposal, EU governments should aim for consensus. If this cannot be reached within six months, the proposal should either be dropped or only be pursued by a smaller group of member states.

Source: Open Europe Intelligence The Financial Times The Financial Times 2

The logic escapes me that the UK should remain in the EU yet opt out of policies that are unfavorable to its interests. EU policies are in constant flux, which would require a UK bureaucracy just to keep track of them and somehow decide which ones are favorable and which ones are not, no easy task. Sovereign nations with free market economies have no such problem. Each sovereign nation makes its own policies based upon its own internal political situation. Every business evaluates for itself whether or not it wants to satisfy requirements of foreign trading partners. Some may and some may not.

The longer this referendum is delayed the more likely it is that UK citizens will realize that there is nothing to gain from belonging to the EU (or any trade bloc) that it cannot achieve at zero cost by adopting unilateral free trade.

Patrick Barron

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