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I have a sure fire way not only to minimize but completely eliminate scandals over government subsidies. Eliminate the subsidies!
You are welcome,
You ask, where is a Volcker-like Fed chairman today? The answer is that no president would appoint one and no government really wants one! Governments want easy money and will appoint only a Fed chairman who will succumb to money printing. Frankly, I believe that it is impossible to make a fiat currency sound. Here’s why:
- As I stated above, no government really wants sound money, because governments are the main beneficiary of easy money.
- No one who works in the Federal Reserve System, as did Paul Volcker for many, many years before becoming chairman, is a true proponent of sound money. If Volcker were honest and really wanted sound money, he would not work for the Fed. Volcker was president of the NY Fed. He knew how the system worked and would have quit if he truly didn’t believe in it. In other words, anyone who works for the Fed is an inflationist. It’s only a matter of degree. Volcker did print money, only he didn’t print as much as either his predecessors or his successors.
- The political pressure to inflate is irresistible. No one can ignore it. Even if you or I were appointed Fed chairman, we would inflate. If we did not, we would be removed for some reason.
- If we really wanted sound money, we would abolish the Fed and force banks to abide by normal commercial law, which would require them to back their deposits with a commodity. Once an organization is given the power to inflate the currency, inflation is exactly what will happen. In other words, “A person or entity that CAN print money WILL print money.” So don’t give any person or entity the power to print money! It would require an act of Congress to eliminate the Fed anyway, which is not likely to happen.
- You ask why Paul Volcker didn’t peg the dollar to gold at some higher level. The answer is that he had no power to do so, even if he wanted to do that. Furthermore, Volcker was not chairman in 1971, when Nixon took the US off the gold exchange standard. This act by Nixon just proves that the real power over the currency is political.
- My conclusion is that only political action can restore the dollar, not administrative action. In other words, the American people must want sound money. Barring a complete collapse of the dollar, as happened to the French assignat, this is not likely to happen.
There is nothing that another nation can do to harm another through trade. If a nation foolishly chooses to manipulate its currency to spur exports, it gifts goods to its trading partners. If it restricts imports to spur domestic industries, it harms its own citizens while leaving potential trading partners in the same position as before, which is NOT a definition of harm. The only policies that our government need adopt are unilateral free trade externally and laissez faire economics internally. Our motto should be “We will mind our own business and set a good example to others.”
From today’s Open Europe news summary:
Ireland demands level playing field in any Brexit deal
Speaking at a meeting of the European People’s Party (EPP) in Helsinki yesterday, the Irish Taoiseach, Leo Varadkar, said that Ireland wants the future relationship between the EU and UK “to be as close as possible” but added that it “must provide a level playing field and the integrity of our single market must be upheld.”
Elsewhere, Reuters reports that the European Commission also stresses the importance of such a commitment, quoting one EU official explaining that “It is important that Britain would not undercut our own products on our own market in the all-UK Irish backstop.”
Meanwhile, Cabinet Brexiteers have reportedly warned Prime Minister Theresa May that obligations on a level playing field “would mean a single market through the backdoor.”
Here you have the EU position in a nutshell. The EU is to be a closed trading bloc in which its citizens will be forced to buy shoddy, overprices goods produced within the bloc. Why the rest of the sovereign nations of the EU have remained in this blatantly inhumane association for so long is mystifying, except that continental Europeans have experienced many centuries of governmental dictatorships under many forms rather than the Anglo-Saxon tradition of the common law and government being responsible to the people.
Fareed Zakaria’s review of the Adam Tooze book Crashed: How a Decade of Financial Crises Changed the World is a typical Keynesian whitewash of a deeply flawed monetary and regulatory system. Like Tooze, Zakaria sees the Federal Reserve Bank as the hero in “saving the financial system” that was going into free fall in 2008. But why was it going into free fall, and was the Fed’s massive, multi-trillion dollar bailout really the answer? To agree with Tooze and Zakaria is to condone monetary counterfeiting pre-2008 and even more monetary counterfeiting thereafter. One of the prime purposes of sound, as opposed to fiat, money is to allocate scarce resources. The Keynesians do not admit that resources are scarce. They equate the medium of exchange, in this case fiat dollars, with real capital. Yes, fiat dollars can be increased to unlimited amounts at the click of a Federal Reserve Bank computer, but real resources and real capital must be accumulated by hard-working people. Zakaria and Tooze–and the rest of the Keynesian dominated Main Stream Media like the New York Times–fail spectacularly to understand the distinction.
In a recent post I explained that China’s manipulations of its own currency hurt only herself and not her trading partners and, therefore, retaliatory tariffs were not warranted and would be self-defeating anyway. China harms herself by causing her own money supply to expand, which destroys capital through malinvestment and causes prices to rise domestically. Retaliatory tariffs cause American goods to rise in price, resulting in a recession and general lower standard of living. Few economists claim otherwise.
It seems that everyone is in favor of free trade, as long as it is the other guy who must compete with foreign products. When it comes to their own products, the most typical response from American manufacturers begins with the caveat that “although free trade is beneficial most of the time, it causes harm under certain circumstances.” There follows a convoluted chain of cause-and-effect purporting to prove that lower priced foreign goods would hollow out America’s key manufacturing industries and turn America into a second class nation.
The purpose of this brief response is to counter these claims and explain why understanding economic theory is vital to the argument in favor of free trade.
There are two books which address the fact that we cannot experiment with an economy the way that physical scientists do. We must use logic to form irrefutable conclusions of what MUST happen, even if we cannot see it! The first is Frederic Bastiat’s early nineteenth century classic That Which Is Seen, and That Which Is Not Seen. Henry Hazlitt’s updated the book a hundred years later in order to appeal to modern readers. His Economics in One Lesson employs a series of short stories to illustrate that one must always consider the economic effects of an intervention on all and not just a few actors, plus, that one must look to the long term effects of an intervention and not just the short term effects.
So, let’s use logic to consider the effects of China’s economic interventions on itself and its trading partners who do nothing to retaliate against China in any way.
- China uses its capital in an inefficient way. Outright subsidies to any industry must be paid by someone. The very fact that China believes that it cannot compete in certain industries to its own satisfaction without subsidies is an admission that these industries are inefficient. Therefore, Chinese internal subsidies are transfers of capital from more efficient industries to less efficient industries. Put another way, if the targeted industries already were very efficient, more capital would flow to these industries and subsidies wouldn’t be necessary.
- Monetary expansion to fund an industry causes overall higher prices and malinvestment. This is the classic Austrian Business Cycle Theory. China may very well expand its steel industry, for example, with monetary expansion, but such action will disrupt the time structure of production and result in a higher price level and a recession. Other factors of production that feed the Chinese steel industry will rise in price, necessitating another round of currency expansion, which will lead to even higher prices and another recession. It’s a vicious cycle that can end only with an end to currency expansion.
- China’s overall economy will be less developed, weakening the impact of subsidies to targeted industries. Because capital is stripped from more efficient industries, China’s ancillary industries will be less developed, harming the targeted steel industry indirectly. Public infrastructure may be less than it would be otherwise, for example. The many business-to-business goods and services that feed the steel industry will lack the capital to expand. The workforce may lack adequate education. The list is endless. China’s economy will lack coordinated growth, as was so apparent in the moribund economies of the old Soviet bloc. The point is that something must be sacrificed to aid the targeted industry. Of course, this is a classic Bastiat “Not Seen” scenario.
- American products get cheaper and gain market share. It may be true to some small extent that the steel industry, for example, may not be able to expand and may even contract in the face of equal quality Chinese steel that can be purchased at lower prices. But all the many American manufacturing firms that USE steel will have a lower cost of production and, therefore, will be able to expand their markets. Again, something has to give; i.e., the Chinese may be able to sell more steel to American manufacturers, but these manufacturers can sell more finished goods into the world market.
- American industries benefit from the general expansion of all levels of production. This is a corollary to number three above but opposite. Because the companies that use cheaper Chinese steel reduce their costs, passing along the savings to customers in the form of lower prices, passing along the increased profits in the form of dividends to shareholder, increased investment in their own firms, or a combination of above. The reason for this beneficial prospect is that America becomes more capital intensive, and that capital came in the form of a gift from China.
- Chinese subsidies actually become subsidies to Americans’ standard of living. The purpose of production is consumption. Although we may give lip service to how much we love our jobs, what we really mean is that we are satisfied with the life style that we can obtain through meaningful labor. I truly doubt that many of us would work if we were not paid. Chinese subsidies allow us the option to work less for the same standard of living or work as long yet enjoy a higher standard of living because our pay goes further. We workers have more options. For example, as we become richer through Chinese subsidies, mothers may opt for part time work instead of a full time job, or they may leave the workforce altogether. Fathers may decide to pursue lower paid but less stressful careers. Let us not forget that leisure is a valuable good in and of itself.
Finally, the idea that all subsidies can be eliminated worldwide and businesses can compete on a level playing field is a foolish idea. What is the definition of a subsidy? Is it government provided healthcare? How about a state or municipality forgiving business taxes in order to entice industries to expand or relocate? If the government builds a super highway near a plant, is this a subsidy? Likewise, industries in many developed economies decry the fact that undeveloped countries have lower environmental standards, worker safety requirements, and worker rights. Periodically one reads that the European Union is threatening a member for having taxes that are too low and, thus, provide an indirect subsidy.
Capitalists must accept all of these interventions by foreign governments as part of the unknown and uncontrollable factors of conducting business and not lobby their own governments to take self defeating economic reprisals. Unilateral free trade is the best and only real option.
Americans are being told that China’s currency manipulations are causing harm to its trading partners, America being the main victim. Nothing could be further from the truth. China’s currency manipulations certainly cause harm, but to China itself!
No country can cause harm to another by adopting any economic intervention. All economic interventions cause harm only to the country that adopts them. This applies to subsidies of home industries, quotas restricting import volumes, tariffs imposed on imports, and currency manipulations.
A nation typically manipulates its currency by giving more of its own currency in exchange for the currency of other countries. Thus foreign importers can buy more goods per unit of currency exchanged. In other words, if the free market exchange rate between the dollar and the yuan is six yuan per dollar, an importer would be able to buy goods costing six yuan by tendering one dollar. If the Bank of China arbitrarily decides to boost imports, it can give eight or ten yuan for each dollar presented. Chinese goods drop in price on the American market.
Protectionists such as President Trump view this as harm, but where exactly is the harm? A Chinese good that previously cost a dollar now may be purchased for sixty or eighty cents. Our American standard of living goes up at China’s expense! The extra money in Americans’ pockets may be used to consume or invest more. This is a very strange definition of harm.
The real harm occurs in China. The Bank of China sets off price inflation in its own country. It may try to mitigate this inflation by raising the interest rate on its own debt in order to withdraw the extra yuan from circulation. This is known as “sterilization”. It then appears as if China has achieved greater exports with no price inflation. However, China’s debt rises. Eventually holders of Chinese debt will desire to draw down their yuan-denominated debt. Demand for yuan for spending purposes will increase. At that point China will be faced with a dilemma. Either it can raise the interest rate high enough to entice enough marginal holders of debt to roll over their holdings or it can print yuan. The former causes a recession and the latter causes price inflation.
There is no such thing as a free lunch or an economic intervention that causes harm to others and not one’s own country.
My letter to the Mercatus Center:
Excellent points by Omar Ahmad Al-Ubaydli, but aren’t all forms of irrelevant discrimination self-correcting and self-penalizing? If a company hires only beautiful workers and ignores ugly ones who may be better qualified, won’t this company suffer in the market place? Same with height, etc. If the stockholders of a company accept lower dividends because they like the idea that their company employs lots of beautiful people, so what? They are the ones deciding to accept lower dividends. In other words, let the market work and leave people alone.
From today’s Open Europe news summary:
Removing tariffs post-Brexit could see prices fall up to 1.2%, suggests new study
According to a report by the Institute of Fiscal Studies, UK households could see prices fall by around 0.7-1.2% if the UK were to eliminate tariffs on all goods after Brexit. The report noted, “This compares with the estimated 2% increase in prices that followed the depreciation in Sterling in the wake of the referendum result. This suggests that the scale of ‘quick wins’ from running an independent trade policy is relatively small.” The report also argued that removing tariffs could “be very damaging for some UK industries in the short run.” The director of the IFS, Paul Johnson, said, “If we leave the customs union, we can come to our own trade deals with other countries, we can reduce tariffs. But even if we reduce that as much as possible, the effect on prices will be really quite small relative to what is still a big cost of leaving the customs union because it would make trade with the rest of Europe so much more expensive.”
Separately, UK inflation rate fell to 2.7% in February, down from 3% in January. This is also closer to the annual UK wage growth, which was estimated at 2.8% in December.
Despite the negative tone of this report, it illustrates that tariffs are harmful to the nation and merely transfer wealth from one’s own citizens to a few politically connected companies. By declaring unilateral free trade all UK citizens would get the equivalence of a 0.7 to 1.2% tax free pay increase. Sounds pretty good to me!
From Open Europe news summary of 14 March 2018 (my highlight):
Commenting on Prime Minister Theresa May’s Mansion House speech earlier this month, the EU’s chief Brexit negotiator Michel Barnier called it a “surprising idea” that the UK would be allowed to benefit from convergence with EU rules in some areas while “open[ing] up the possibility of divergence when there is the comparative advantage for it.” He stressed the importance of social and environmental standards to the EU’s regulatory framework, asking, “Does the UK also want to distance itself from this model which they have constructed gradually with us and engage in dumping against us?”
To answer Barnier’s question–emphatically YES! The UK should seek to benefit where it has a comparative advantage. In fact every person on earth should seek to so benefit. A comparative advantage means that people engage in the division of labor/specialization, and allow others to do the same, in order to produce more goods and services for the market. Note that no one needs to possess an absolute advantage, meaning that he can produce a good or service better or more cheaply than all others in the market. For example, a brilliant lawyer may be able to perform secretarial services better than anyone on the planet; nevertheless, it is to his and everyone else’s advantage for him to hire these services in order than he may perform his more highly rewarding legal services. Therefore, everyone is able to participate and succeed in the market economy. In short, Michel Barnier, and I’m sure others in the EU elite, are completely ignorant of economic science.