Tuesday, May 31, 2011

Economic Recovery Versus Financially Fragile

The Wall Street Journal reports that "nearly half of Americans are financially fragile." It cites an NBER study using data from the TNS Global Economic Crisis survey. It asked, among other things, how easy would it be to come up with $2,000 for an unexpected expense within the next 30 days. The survey indicated that "46.5% of all respondents are living very close to the financial edge." They include those who were certainly unable to get the money and those who could do so only by taking "extreme measures."

The story notes that it is not only lower income households that are on the precipice. Financial fragility is determined by more than income levels. It also has to do with indebtedness. Nevertheless, it is further evidence that, as I wrote almost two years ago,  Keynesian economic policy is a failure. Massive fiscal and monetary expansion has propped up the stock market, wall street investment firms, and large commercial banks, but has done little else except prolong the readjustment process necessary to right the tremendous amount of malinvestment still in our economy.

Monday, May 30, 2011

Is Economic Stagnation Fostered by Regime Uncertainty?

One entrepreneur thinks so. While on a plane, Yale law professor Stephen L. Carter recently struck up a conversation with a business owner who explained to him "why he refuses to hire anybody." His reason can be summed up in the word uncertainty. He is unsure about the regulatory environment and how changes in regulations will affect labor costs, investment returns, and capital gains he would reap if he merely sold his businesses. His response lends credence to Robert Higgs' theory of regime uncertainty contributing to economic recessions.

When asked what the property roll of government should be, the businessman responds,
“Invisible,” he says. “I know there are things the government has to do. But they need to find a way to do them without people like me having to bump into a new regulation every time we turn a corner.” He reflects for a moment, then finds the analogy he seeks. “Government should act like my assistant, not my boss."
Unfortunately, he does not elaborate what are the "things the government has to do." I imagine he means things like police, the military, roads and schools. That is not an uncommon opinion. Economic theory, however, teaches that even these are not things the government has to do.  His last sentence, moreover, implies he may mean something more. He may mean that the government should promote industry, provide protection against imports, give subsidies to small businesses, and ensure relatively low interest rates.  These things, of course, merely create more uncertainty.

The best thing for the state to do is to get out of the market altogether. Remove price controls and business regulation, lower government spending and taxes, and get out of the money production business. Such a path would of course change the current regime, but what follows would be a free society in which the division of labor could freely develop, making use capital accumulated and invested by entrepreneurs who could use economic calculation to make wise investment decisions. It would be the best possible environment for productive activity and for the employment and higher real wages that go with it. That is regime change we can believe in.

Saturday, May 28, 2011

The Biblical View of Poverty: What It Is

One of the primary intersections between Christian thought and economics is the issue of poverty. Proper responses to poverty we encounter requires an understanding of economic law as well as ethics.

The Scriptures are clear that God calls us to care for the poor. As I write in Foundations of Economics: A Christian View,

God does make it clear that we are to help the poor. We are to be imitators of God and he tells us that he cares for the poor (Ps. 35:10). God tells us that the poor and orphaned are to be defended from would-be oppressors (Ps. 82:3). We definitely should not turn a deaf ear to the cry of the poor. In fact, God tells us that whoever ignores the plight of the poor himself shall not be heard when he calls for help (Prov. 21:13). God tells us that in times of trouble, he will deliver the one who has consideration on the poor (Ps. 41:1). Whoever is charitable to the poor lends to the Lord and God will repay him for his generosity (Prov. 19:17). The mandate to minister to the poor even includes our poor enemies (Prov. 25:21).

We receive similar instruction in the New Testament. When the rich young ruler asked Jesus what last thing he needed to do to be perfect, Jesus told him to sell all his possessions and give the money to the poor (Matt 12:21). In the early chapters of Acts we find the Apostolic Church ministering faithfully to those in need. Additionally, James clearly teaches that it is not enough to feel compassion on the poor, but we are mandated to provide them with real material help when they are in need (Jas 2:15–16).
Because of this Biblical mandate, it is important to know just what the Bible means by poverty. This is very important because the conventional definition of poverty has changed over the course of the Twentieth Century. Before then, the predominant view of poverty was similar to that of Scripture. E. Calvin Beisner does an excellent service to all Christians by explaining the biblical view of poverty. In his excellent "Poverty: A Problem in Need of a Definition.” in Welfare Reformed, edited by David W. Hall, Beisner points out that, while the modern view of poverty characterizes it as a relative lack of what others have, when the Bible speaks of poverty, it refers to an absolute lack of bare necessities. The poor are those who do not have adequate food, clothing, or shelter to live.

The above is important to keep in mind when we seek to be good stewards with the wealth God gives us. We are not called to indiscriminately promote income equality, especially if it erects a perverse incentive structure. As I have noted before, there is very little biblical-scale poverty in the United States. The vast majority of what we call poverty in the US is the relative kind. That is not to say we should not be charitable toward those of lower incomes here in our country. It is to say, however, that we should recognize there is no biblical mandate to perpetuate a vast welfare state for the purpose of income redistribution.

It is also important to note that God's Word never calls us to minister to poverty or to solve the poverty problem. It calls us to love our poor neighbor. God wants us to minister to people, not conditions. This is another reason we should eschew the welfare state in favor of the ministry of the deacons who can personally interact with those people who need help.

Friday, May 27, 2011

James Grant on the Fed and Our Prospects for Inflation

As I've said before, I think James Grant is one of the best financial commentators working today. He is always full of insight, turns a phrase better than anyone in the business, and has a knack for using the fascinating historical anecdote in just the right way. He also tends to bring a proper sense of moral unction to issues of monetary policy. On top of that, you can count on his displaying proper neck wear.

He was recently interviewed by Consuela Mack of Wealthtrack and was as thought-provoking as usual. (Note: You'll have to wade through an opening commercial to get to the program).

Grant ably explains that real inflation is not rising prices, but an increasing money stock. He rightfully criticizes Fed Chairman, Ben Bernanke for seeking to prevent what every consumer wants: lower prices. He also notes that whenever the money supply increases, prices are higher then they otherwise would be somewhere. If not in housing, then in commodities, food, energy, or equity stocks.

Thursday, May 26, 2011

Thornton on The Lehman Brothers Plan: What to Do in a Recession

In chapter 13 my book Foundations of Economics, I discuss the issues of recession and inflation. Following Mises and Rothbard, I explain that recessions are the necessary consequence of inflationary booms. I also lay out what I believe to be the best policy for economic recovery possible. Economic theory teaches that in order to recover from a recession and quickly as possible, we should stop inflating, reduce government spending, cut taxes, and allow the market to freely operate.

In an excellent essay on Mises.org, Mark Thornton comes to the same conclusion. He does so in the context of the Lehman Brothers' bankruptcy and therefore designates his recovery prescription, "The Lehman Brothers Plan."
Government should balance its budget. There should be no new credit expansion by the Federal Reserve. Most importantly, government should not meddle in markets to try to soften the consequences of the correction. Specifically, that means no bailouts, stimulus packages, or new public-works projects. Do not prop up wages. Allow competition to lower the prices of land, labor, and capital. The only positive steps for government to take are implementing tax cuts and spending cuts, eliminating regulations, and allowing free trade.
He also does a masterful job concisely responding to claims that such a policy would hurl us into a deflationary death spiral. Treat yourself to Thornton's masterful economic commentary.

Wednesday, May 25, 2011

Trade is Mutally Beneficial: Long Ears and Fluffy Tail Edition

From time to time I read a story that simply fills me with righteous anger. My friend Timothy Terrell made me aware of a recent example: the case of the USDA tyrannizing John Dollarhite. Dollarhite is a man from Nixa, Missouri who has been fined over $90,643 for the crime of selling over $500 worth of bunny rabbits in one calendar year. If he does not pay the exorbitant fine in short order, he could be slapped with additional fines of almost $4 million!

According to this report, the Dollarhite bunny operation began as a family business operated by his son as a way for him to learn some entrepreneurial skills; a sort of advanced lemon-aid stand. The son was successful and the business grew until he sold it to his parents when he was 18 years old. In 2009 their sales revenue from the bunnies increased to $4,600. USDA officials got wind of their business and, after USDA inspections the Dollarhite's received a certified letter indicating that they were guilty of violating federal law 9 C.F.R. § 2.1 (a) (1): Selling more than $500 worth of rabbits in a calendar year. It was never alleged that they mistreated their animals or that their rabbits were ever in anything but the best of health.

Here we have a clear case of government regulation making life worse for everyone involved, except perhaps the bureaucrats at the USDA. That Dollarhite reaped $4,600 in a single year selling rabbits is a demonstration that he successfully served others. Those who bought the rabbits demonstrated this by voluntarily buying the rabbits with their own money. The Dollarhites valued the $4,600 more than the rabbits they sold. The rabbit buyers valued the rabbits more than the money. All parties were net beneficiaries. No one was a loser. Voluntary exchange is mutually beneficial.

It should go without saying that if we lived in a free society, such prosecutions would never occur.That a family could be facing potential fines of up to $4 million dollars as a result of selling $4,600 worth of rabbits is outrageous. THIS  is what I mean when I tell my students that government regulation of business is aggression against a person's property. The law says that John Dollarhite cannot use his property as he sees fit. He cannot sell his rabbits for money, if he sells them for more than a total of $500 in one calendar year. If he does use his property this way, more of his property will be taken from him in the form of fines and legal fees. Such laws are contrary to all economic wisdom and the Christian ethic of private property.

Monday, May 23, 2011

Foundations of Economics Wordle

Wordle: Foundations of Economics BlogClick on the thumbnail to the right to see a Wordle made from the content of this blog. Wordle is a toy to create word clouds from text provided by the use.

Mine is slightly revealing. It seems that recently I have discussed welfare and inflation quite a bit.

Friday, May 20, 2011

Welfare Breeds Corruption

I recently have commented on the trouble with welfare transfers to lower income earners as a remedy for poverty. Another problem I did not touch on has recently been making headlines. An important reason that government income transfer programs do not solve the poverty problem is that they are hotbeds for corruption.

In an excellent essay on the American welfare state, Garry Galles explains why it is impossible to stop people from using welfare payments to fund purchases "inconsistent with the intent" of welfare if they desire to do so. In California, for instance, millions of dollars in welfare payments on debit cards have been  withdrawn and used at casinos and strip clubs. Of course not every recipient of welfare spends their money that way, but the bottom line is that whoever receives more income can spend more on whatever they really, really want. Galles points out that designating that welfare payments must be spent on food does not stop the problem either, because the welfare payments merely frees up cash they can now spend on other things.

This problem of corruption is not merely an American phenomenon. India spends $28.6 billion, 2% of its GDP, on poverty reduction programs, but a World Bank report documents that, "despite recent progress, India is not getting the “bang for the rupee” that its significant expenditure would seem to warrant. . ." For example, only 40% of grain earmarked for the poor reaches its intended target. A main reason for this dismal performance is what the report calls "considerable leakage of subsidies to the non-poor." This is understood to mean that India's program is "beset by corruption."

Thursday, May 19, 2011

Ritenour on The Matter at Hand

Earlier this month I was a guest on WGRC's The Matter at Hand. WGRC is a Christian radio station that broadcasts over seven frequencies and reaches thirteen counties in central and eastern Pennsylvania. Don Casteline interviewed me about general economic conditions, price inflation, the CPI, our government budget woes, and our willingness to save. We discussed these issues within an economic and Christian ethical framework. They kindly have allowed me to post a recording of my segment on this blog. You can listen to it by clicking here.

Wednesday, May 18, 2011

The Core Inflation Fudge

Over at Forbes Brian Domitrovic has caught on to what I've been saying about inflation. He reports that Ben Bernanke's handlers have told the Fed Chairman to stop using the term "core inflation" (as opposed to overall inflation), and instead use "headline inflation" versus "underlying inflation."

Domitrovic then goes on to explain what verbal subterfuge it all is. He writes:

[T]he consumer price index for the first quarter of 2011 came in at an annual rate of 6%. This is a level last hit for the year in 1982 and was the very rate in 1976 and 1977: the bad old days of stagflation. And wouldn’t you know it, our GDP and employment growth stinks right now too. If they make a TV program about our day and age, they should call it “That ’70s Show.”
He is especially to be commended for identifying the cause of higher overall prices: increases in the stock of money.
Central bankers’ prodigality has caused this situation. Quantitative easing and such leads people to doubt the value of the dollar and makes producers mark prices up. Yet the Fed’s tactic in the face of this reality is to play word-games. Inflation is not beginning to ravage the land, the argument runs, in that “core” – ok, “underlying” – inflation isn’t so bad. If you take out food and energy, “headline” stuff, everything’s normal.

Well I guess so then. But nourishment and movement are precisely the two things that Aristotle said distinguish animals first from rocks and then plants. These are not trivial categories of goods, as nobody needs to be told. And it’s not just food and energy. Look at raw materials beyond those used for energy: all up in price. Gold leads the way at $1500 an ounce.

My only quibble would be to note that it is not only doubts about the future value of the dollar that causes producers to increase their minimum selling prices. It is also, primarily, actual increases in the demand for goods as people spend the new money that has been created.

Monday, May 16, 2011

Medicare Needs Surgery

That's the gist of this interview of Joseph Antos of the American Enterprise Institute.

Antos says that Medicare is already in the hole and is even in worse shape than generally believed. Obamacare has made things worse and unless there are serious real changes in Medicare we can expect the following:
  • Higher payroll and income taxes
  • Raised retirement age.
  • Cuts to benefits.

Friday, May 13, 2011

The Trouble with Welfare

My most recently published column, "What Would Jesus Cut?" has sparked some interesting debate. One reader reminded me that not only is the welfare state ineffective as well as a violation of the Christian ethic of property. It also contributes to the corruption of character. The welfare state strikes at the heart of the work ethic.

Suppose, for instance, that a person with little experience and few job skills finds low paying gainful employment that allows him to earn $900 per month. In a world without government welfare subsidies, if that person decides not to work after all, his income shrinks to $0. On the other hand, suppose we live in a welfare state when, if he does not work, he will receive a government check for $600. In the first case, a free market, he sacrifices $900 a month by not working. In the second case with the welfare state, the cost of not working is the difference between his foregone income and his welfare check. In this case it is $900 - $600 or $300.

By reducing the opportunity cost of not working, the welfare state encourages idleness. Idleness, it turns out, is one of the most important reason people who earn low incomes. That is the very thing the welfare system is supposed to ameliorate. In fact, welfare subsidies makes things worse.

This does not mean that everyone eligible will quit their jobs and try to live on the dole. It also does not mean that everyone who receives or has received welfare subsidies is lazy. It does imply, however, that some who are on the margin--perhaps those who would be willing to work for $900, but not for $300 have an incentive not to pursue productive labor choose for them what is optimal. Some are willing to pay $300 a month for complete leisure.

Wednesday, May 11, 2011

How Would We Deal with It without the Government?

That is a question often heard in discussions concerning economic policy. There is an assumption that there are a large number of economic goods that must be provided by the state. The list includes things like schooling, police, roads, and disaster relief. This is the first post in an irregular series examining how various problems can be and have been met by voluntary actions characteristic of a free society instead of by the state.

Let me first note, however, that there is no way to know exactly how in detail how a free society would provide services now assumed by the state. An existential fact of life is that the future is uncertain and that providing for future demand in the face of uncertain contingencies is the challenge of entrepreneurship. Because the future is uncertain, there is no way to know in advance the precise optimal response to future demand. One thing we do know, however, is that in a free society, entrepreneurs have the incentive to satisfy people better than anyone else in the most efficient way possible.

A recent example of people responding to a crisis voluntarily without state coercion or organization is the recent tornadoes that struck Tuscaloosa, Alabama. David T. Beito, professor of history at the University of Alabama, recounts how three Tuscaloosa radio stations went on the air with a simulcast from 8:00am to 8:00pm to provide information on relief efforts. People would call in with various needs, listeners would hear of the need and respond. Beito's point he wants to emphasize is that "the outpouring of volunteers and donations is not only inspiring and effective but extremely decentralized." No bureaucrat had to tell the radio stations of their listeners do to this. It happened as people voluntarily acted and organized themselves.  

Tuesday, May 10, 2011

Congratulations to Brittany Cobb!

One of our graduating economics majors, Brittany Cobb is wracking up the honors and awards this, her senior year at Grove City College. She recently was named Senior Woman of the Year, the most prestigious honor that can be granted to a student by her peers and professors. This makes the second year in a row either the Senior Man or Woman of the Year came out of our department. Last year business economics major Jordan Benis was named Senior Man of the Year.

Earlier this year Brittany's paper "The Gold or the Green?" was an award winner in the Atlas Foundation's sound money essay contest. She was also awarded the J. P. Hassler Prize, an award made each year to the senior economics major who writes the best essay on freedom. Congratulations to Brittany. We are all proud of her.

Monday, May 9, 2011

"What Would Jesus Cut?" on LewRockwell.com

My latest op-ed, "What Would Jesus Cut?" has just been published on LewRockwell.com. It examines the issues raised by the Sojourners' What Would Jesus Cut? campaign, attempting to foster what Jim Wallis call's a "moral budget." I come to very different conclusions than Wallis. God does not call us merely to pursue ends He deems worthy, but also to use morally lawful means. The bottom line is that God does not allow us to be charitable with other people's money. 

Sunday, May 8, 2011

When Charity Destroys Dignity

A recent book, When Charity Destroys Dignity: Overcoming Unhealthy Dependency in the Christian Movement sounds promising. It is written by Glenn J. Schwartz who served as a missionary to Africa for over thirty years.  Schwartz's theme is the dangers of charity. He specifically discusses how well-intentioned missionary efforts have fostered churches in Africa that are dependent on continued material and spiritual support from Western Christians instead of self-sufficient churches that are themselves sending out missionaries.

A provocative review of the book appeared in the Fall 2008 edition of Faith and the Academy. You can read the review by clicking here.

Friday, May 6, 2011

Socialized Assets Do Not Yield Profits for "Taxpayers"

One of the must frustrating misuses of language to come in the wake of the government's response to the Great Recession is the claim that government bailouts are providing positive returns for taxpayers. It has been claimed that TARP investments yielded a $7 billion profit for taxpayers and the General Motors take-over generated $13.5 billion in profits for taxpayers. Now the Financial Times reports that the U.S. Treasury is going to continue with plans to sell $20 billion in AIG stock even though, because of lower share prices, it will lead to smaller than expected profits for---you guessed it---taxpayers.

To the extent that there were any truly positive returns on any of these experiments in fascist economics, they did not revert back to the taxpayers. The money reverted back to the U.S. Treasury, which is not quite the same thing. The fact that this money went back to the Treasury shows that these were not profits earned by the taxpayers. They were profits extracted by our rulers.

In 2008 there were approximately 90 million people in the U.S. who paid income tax. Let us say that the TARP program and the General Motors takeover did clear a total sum of $20.5 billion as claimed plus a half a billion from the AIG sale. That would equal a sum of $21 billion in profits. If this money really is profit reaped by the taxpayers, then it should be divided up and remitted to the alleged claimants--the taxpayers. If it was divided equally, each taxpayer should get a check for $233. Of course it would be even more just to adjust the size of the dividend according to the size of a taxpayer's total bill. In any event, I would just as soon have my dividend check know.

Thursday, May 5, 2011

Playing the Ostrich on Inflation

Yesterday's post linked to Mark Brandly's essay highlighting the contribution of the Fed's monetary inflation to higher gasoline prices. My most recent op-ed  published by the Center for Vision and Values seeks to investigate the real price inflation picture. In it I peer behind the veil of CPI and demonstrate that, despite claims that "core" or "underlying" inflation is "subdued," in reality the prices of everything besides housing and apparel increased significantly during the month of March and the rate of increase is accelerating.

Wednesday, May 4, 2011

High Gas Prices: Another Reason to End the Fed

That's the conviction of Mark Brandly, professor of economics at Ferris State University. In an excellent essay on Mises.org he argues that if the dollar had merely retained its value since 2001 the average price of regular gasoline would be approximately $2.91 a gallon instead of $4.00. "Gasoline prices would be 27 percent lower today if the dollar had held its value relative to the euro over the last decade."

Gas Prices over the Past Year

Brandly is responding to comments Fed Chairman Ben Bernanke made at his recent press conference claiming innocence on higher gas prices and to President Obama's targeting oil speculators as the main villains in the higher gas price story. Brandly rightly pinpoints the culpability of monetary inflation instigated by the Fed.

As Brandly explains:
Bernanke's deceitfulness is appalling, although not unexpected. He knows that Federal Reserve monetary policy plays a significant role in gasoline prices. Expansionary monetary policy leads to more dollars being available in world currency markets and weakens the dollar. The weaker dollar results in higher import prices. More than half of the oil consumed in the United States comes from foreign producers, and because oil is the main input needed to produce gasoline, higher oil prices mean higher gasoline prices.

Tuesday, May 3, 2011

Economic Growth Slows As Inflation Surges

That's what I've been saying! The newer the numbers, the less positive things look for the economy. Recent news confirms that money can't buy prosperity. GDP growth slowed to 1.1% during the first quarter of 2011 while overall prices rose 3.8% for the quarter. That's at an annual rate of 15.2%! This has led some commentators to begin raising the possibility of the specter of stagflation, a stagnant economy with price inflation.

Sound economics teaches us that massive fiscal stimulus merely reallocates factors of production and consumes capital. Monetary inflation merely benefits those who receive the new money first at the expense of those who receive it later or not at all. It maintains previous and fosters new capital malinvestment, while leading to increased overall prices. It should not surprise us that bad macroeconomic policies have not fulfilled the promises of the policy makers.

Monday, May 2, 2011

Krugman's Inconsistency Trap

Thanks to a post from my friend, Bill Anderson, he alerts us to another regressive move by New York Times Columnist, Paul Krugman. Anderson notes that in his latest missive, Krugman blames Ron Paul and the rest of the "inflationistas" for Ben Bernanke shying away from even more money printing. "I’d say that the Fed’s policy is to do nothing about unemployment because Ron Paul is now the chairman of the House subcommittee on monetary policy." Krugman is critical of the Fed for not expanding the monetary base even more than he already has. 

Krugman is once more revealing his exit from serious economics. He is no longer even consistent with himself. His defense of Obama's fiscal stimulus plan is that we are caught in a liquidity trap (and can't walk out). Keynes argued that if at some low interest rate, people want to hold every additional dollar the central bank creates, further increases in the money supply will not further lower interest rates, so that no further borrowing or economic activity will be stimulated. In such a scenario, expansive monetary policy is ineffective in expanding the economy.

I am not conceding that the liquidity trap is a real possibility, nor that we are in one. You can read Murray Rothbard's dismantling of the liquidity trap theory in America's Great Depression. The point I am making is that Krugman, who very much believes in liquidity traps and indeed sees one behind almost every recent financial crisis, is demonstrating inconsistency for the sake of political points. If we needed the Obama stimulus because we are in a liquidity trap, Krugman should not care that Bernanke is not even more inflationary, because it would not help anyway.

Sunday, May 1, 2011

New Series Sponsored by Ligonier Looks Promising

Compass Cinema is producing a new video series about Christianity and economics. It is sponsored by Ligonier Ministries, and features R. C. Sproul, Jr., a Grove City College graduate and author of Biblical Economics: A Common Sense Guide to Our Daily Bread. The producer says that "The goal of the series is first to provide an overview of basic economic principles with their roots in the created order as well as specific revelation, then to provide some key applications of those principles in terms of real economic systems and policies." You can watch the trailer here:

Christianity and Economics | Trailer from Compass Cinema on Vimeo.